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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER: 333-46957
LIBERTY GROUP PUBLISHING, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4197635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 DUNDEE ROAD, SUITE 203 60062
NORTHBROOK, ILLINOIS
(Address of Principal Executive Offices) (Zip Code)
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: 2,158,833 shares.
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TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets at 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 ....... 9
Disclosure Regarding Forward-Looking Statements ............................................ 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk .................................. 15
Item 4 Controls and Procedures ..................................................................... 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ........................................................................... 15
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities ............ 16
Item 3 Defaults Upon Senior Securities ............................................................. 16
Item 4 Submission of Matters to a Vote of Security Holders ......................................... 16
Item 5 Other Information ........................................................................... 16
Item 6 Exhibits and Reports on Form 8-K ............................................................ 16
Signatures ......................................................................................... 17
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 ....................................................................... 1,353 1,432
Other current assets ........................................................................ 175 184
------------ ------------
Total current assets .......................................................................... 31,747 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 ............................................................... 5,421 5,877
Other assets ................................................................................ 432 466
------------ ------------
Total assets .................................................................................. $ 497,410 $ 492,349
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
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 ............................................................................ 11,894 14,987
Deferred revenue ............................................................................ 9,216 8,500
------------ ------------
Total current liabilities ..................................................................... 32,490 26,469
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
Senior discount debentures, redemption value $89,000 ........................................ 89,000 89,000
Senior debentures ........................................................................... 8,278 4,022
Accrued interest on senior discount debentures and senior debentures held by affiliates ..... 1,497 3,547
Deferred income taxes ....................................................................... 24,871 24,282
Series A 14 3/4% Senior Redeemable Exchangeable Cumulative Preferred Stock, $0.01 par
value, 21,000,000 shares authorized, 4,297,735 and 4,144,893 shares issued and
outstanding at March 31, 2004 and December 31, 2003, respectively. Aggregate involuntary
liquidation preference, $25 per share plus accrued interest ................................ 110,085 106,170
Series B 10% Junior Redeemable Cumulative Preferred Stock $0.01 par value, 250,000 shares
authorized, 121,120 and 118,166 shares issued and outstanding at March 31, 2004 and
December 31, 2003, respectively. Aggregate involuntary liquidation preference, $1,000 per
share plus accrued interest ................................................................ 123,138 120,135
------------ ------------
Total liabilities ............................................................................. 640,809 631,841
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value, 2,655,000 shares authorized, 2,185,177 shares issued and
2,158,833 shares outstanding at March 31, 2004 and December 31, 2003 ...................... 22 22
Additional paid-in capital .................................................................. 16,444 16,444
Notes receivable ............................................................................ (953) (953)
Accumulated deficit ......................................................................... (158,731) (154,824)
Treasury stock at cost, 26,344 shares at March 31, 2004 and December 31, 2003 ............... (181) (181)
------------ ------------
Total stockholders' deficit ................................................................... (143,399) (139,492)
------------ ------------
Total liabilities and stockholders' deficit ................................................... $ 497,410 $ 492,349
============ ============
See accompanying notes to unaudited interim consolidated financial statements
3
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
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 ................................................... 8,155 8,105
Interest expense - dividends on mandatorily redeemable preferred stock .... 6,917 --
Interest expense - amortization of deferred financing costs ............... 456 438
Write-off of deferred financing costs ..................................... -- 161
Write-off of deferred offering costs ...................................... -- 2,060
------------ ------------
Loss from continuing operations before income taxes ....................... (8,779) (4,726)
Income tax benefit ........................................................ (279) (1,547)
------------ ------------
Loss from continuing operations ........................................... (8,500) (3,179)
Income from discontinued operations, net of tax .......................... 4,593 67
------------ ------------
Net loss .................................................................. (3,907) (3,112)
Dividends on mandatorily redeemable preferred stock ....................... -- 6,108
------------ ------------
Net loss available to common stockholders ................................. $ (3,907) $ (9,220)
============ ============
Earnings (loss) per share:
Weighted-average shares outstanding-basic and diluted ................... 2,158,833 2,158,833
Basic and diluted earnings (loss) per share:
Loss from continuing operations ......................................... (3.94) (4.30)
Discontinued operations, net of tax ..................................... 2.13 0.03
------------ ------------
Net loss available to common stockholders ............................... $ (1.81) $ (4.27)
============ ============
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
(UNAUDITED)
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss .............................................................. $ (3,907) $ (3,112)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ......................................... 3,270 3,468
Amortization of deferred financing costs .............................. 456 438
Accretion of senior discount debentures ............................... -- 840
Interest expense on senior discount debentures and senior debentures
held by affiliates.................................................... 2,206 --
Non-cash compensation ................................................. -- 4
Deferred taxes ........................................................ (392) (1,653)
Loss on sale of assets ................................................ -- 20
Write-off of deferred financing costs ................................. -- 161
Write-off of deferred offering costs .................................. -- 2,060
Income from discontinued operations, net of tax ....................... (4,593) (67)
Dividends on mandatorily redeemable preferred stock ................... 6,917 --
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)
Deferred offering costs ............................................. -- (264)
Accounts payable .................................................... 240 45
Accrued expenses .................................................... (3,658) (2,784)
Deferred revenue .................................................... 263 217
------------ ------------
Net cash provided by operating activities ................................. 841 159
------------ ------------
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 other 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
Net payments on long-term liabilities ................................. (56) (60)
------------ ------------
Net cash provided by financing activities ................................ 1,319 1,263
------------ ------------
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 PUBLISHING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) THE COMPANY AND BASIS OF PRESENTATION
Liberty Group Publishing, Inc. ("LGP" 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"). LGP is a holding company for its wholly owned subsidiary, Liberty
Group Operating, Inc. ("Operating Company" or "LGO"). The unaudited interim
consolidated financial statements include the accounts of LGP and 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 LGP'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) STOCK-BASED EMPLOYEE COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these unaudited interim consolidated financial statements.
At March 31, 2004, LGP had one stock-based employee compensation plan,
which is more fully described in Note 17 of LGP's Form 10-K for the year ended
December 31, 2003. LGP accounts for its stock options under the provisions of
SFAS No. 123. SFAS No. 123 permits entities to recognize the fair value of all
stock-based awards on the date of grant as expense over the vesting period.
Alternatively, SFAS No. 123 also allows entities to apply the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and provide pro forma net income (loss) disclosures for employee
stock option grants made as if the fair-value-based method defined in SFAS No.
123 had been applied. Under APB No. 25, compensation expense would be recorded
on the date of the grant only if the current market price of the underlying
stock exceeded the exercise price. LGP has elected to apply the provisions of
APB No. 25 and provide the pro forma disclosures of SFAS No. 123. The following
table illustrates the effect on net loss available to common stockholders and
loss per share if LGP had applied the fair-value-based method to all outstanding
and unvested awards in each period:
6
THREE MONTHS
ENDED MARCH 31,
2004 2003
---------- ----------
Net loss available to common stockholders, as reported ............................................. $ (3,907) $ (9,220)
Add: Stock-based employee compensation expense included in reported net loss available to common
stockholders ..................................................................................... -- --
Deduct: Stock-based employee compensation expense determined under fair-value-based method ......... (2) (2)
---------- ----------
Pro forma net loss available to common stockholders ................................................ $ (3,909) $ (9,222)
========== ==========
Loss per share:
Basic and diluted - as reported .................................................................. $ (1.81) $ (4.27)
Basic and diluted - pro forma .................................................................... (1.81) (4.27)
Under the plan, the exercise price of each option equals the fair value of
LGP's common stock, par value $0.01 per share (the "Common Stock"), on the date
of grant. There were no stock option grants during the three months ended March
31, 2004 and 2003.
(3) RECLASSIFICATIONS
Certain amounts in the prior year's unaudited interim consolidated
financial statements have been reclassified to conform to the 2004 presentation.
(4) 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.
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
========
7
(5) LOSS PER SHARE
Loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." Basic loss per share is computed based on the weighted-average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is included in the calculation of diluted earnings per
share only when the effect of their inclusion would be dilutive. Because LGP
reported a net loss available to common stockholders for the three months ended
March 31, 2004 and 2003, potentially dilutive securities have not been included
in the shares used to compute net loss available to common stockholders per
share.
Had LGP reported net income for the three months ended March 31, 2004, the
weighted-average number of shares outstanding for that period would have
potentially been diluted by 23,425 stock options outstanding, and had LGP
reported net income for the three months ended March 31, 2003, the
weighted-average number of shares outstanding for that period would have
potentially been diluted by 25,700 stock options outstanding.
A reconciliation of the amounts used in the basic and diluted loss per
share computations is as follows (in thousands, except share and per share
data):
THREE MONTHS ENDED MARCH 31 ,
--------------------------------------------------------------------------
2004 2003
---------------------------------- -------------------------------------
PER PER
LOSS SHARES SHARE LOSS SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ---------
Loss from continuing
operations.................. $ (8,500) $ (3,179)
Less: mandatorily redeemable
preferred stock dividends... -- $ (6,108)
Basic and diluted loss from
continuing operations
available to common
stockholders................ $ (8,500) 2,158,833 $(3.94) $ (9,287) 2,158,833 $ (4.30)
========= ========= ====== ======== ========= ========
(6) WRITE-OFF OF DEFERRED OFFERING AND FINANCING COSTS
On June 3, 2002, LGP filed a registration statement with the Securities
and Exchange Commission on Form S-2 with respect to an initial public offering
of Common Stock. As of March 31, 2003, LGP had incurred $2,060 in legal and
other professional fees associated with its proposed initial public offering
that had been capitalized as deferred offering costs. On March 31, 2003, LGP
wrote off these costs because LGP decided to postpone its proposed initial
public offering.
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) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003.
Accordingly, the Company's mandatorily redeemable preferred stock has been
classified as a liability on the balance sheet as of March 31, 2004 and December
31, 2003. Dividends on the mandatorily redeemable preferred stock for the three
months ended March 31, 2004 have been included in operations as additional
interest expense. Dividends on mandatorily redeemable preferred stock for the
three months ended March 31, 2003 were reported as an adjustment to net loss to
arrive at net loss available to common stockholders.
8
(8) SENIOR DEBENTURES TO AFFILIATES
On July 25, 2003, the Operating Company and LGP entered into an amendment
to the Amended Credit Facility. The amendment permits LGP to issue debt in lieu
of paying cash for the interest due on the 11 5/8% Senior Discount Debentures
(the "Senior Discount Debentures") due February 1, 2009, and to issue debt in
lieu of paying cash interest due on any additional debt to be issued in lieu of
paying cash interest on the Senior Discount Debentures.
On July 30, 2003, LGP entered into an agreement, effective August 1, 2003,
with Green Equity Investors II, L.P. ("GEI II") and Green Equity Investors III,
L.P. ("GEI III"), whereby LGP may, at its option, issue 11 5/8% senior
debentures (the "Senior Debentures") to GEI II and GEI III on each interest
payment date of the Senior Discount Debentures, in lieu of paying cash interest
on the Senior Discount Debentures that are owned by GEI II and GEI III, with an
aggregate initial principal amount equal to the amount of cash interest
otherwise payable on such interest payment date under the terms of the Senior
Discount Debentures. In addition, LGP may, at its option, issue additional
Senior Debentures to GEI II and GEI III on each interest payment date of the
Senior Debentures, in lieu of paying cash interest on the Senior Debentures that
are owned by GEI II and GEI III, with an aggregate initial principal amount
equal to the amount of cash interest otherwise payable on such interest payment
date under the terms of the Senior Debentures. This agreement may be terminated
by GEI II and GEI III at any time upon delivery of written notice to LGP at
least 30 days prior to the next interest payment date.
On August 1, 2003, LGP elected to issue Senior Debentures in lieu of
paying cash interest on the Senior Discount Debentures that are owned by GEI II
and GEI III. In conjunction with its election, LGP issued Senior Debentures to
GEI II and III in the amount of $687 and $3,335, respectively, which will accrue
interest at an annual rate of 11 5/8% and become payable on February 1, 2009. On
February 1, 2004, LGP again issued Senior Debentures to GEI II and GEI III in
the amount of $727 and $3,529, respectively, in lieu of paying cash interest on
the Senior Discount Debentures and the Senior Debentures that are owned by GEI
II and GEI III. As a result of these agreements, interest due to GEI II and GEI
III on the Senior Discount Debentures and the additional Senior Debentures, as
of March 31, 2004 has been reflected as a long-term liability on the Company's
consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
Exchange"). 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 4 to the unaudited
interim consolidated financial statements included herein.
9
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 .............................. 17.9 19.2
Interest expense - dividends on mandatorily redeemable
preferred stock .................................... 15.1 --
Interest expense - amortization of deferred financing
costs .............................................. 1.0 1.0
Write-off of deferred financing costs ................ -- 0.4
Write-off of deferred offering costs ................. -- 4.9
----- -----
Loss from continuing operations before income taxes .. (19.2) (11.2)
Income tax benefit ................................... (0.6) (3.7)
----- -----
Loss from continuing operations ...................... (18.6) (7.5)
Income from discontinued operations, net of tax ...... 10.1 0.1
----- -----
Net loss ............................................. (8.5)% (7.4)%
===== =====
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.
10
EBITDA. The Company recorded a net loss of $3.9 million for the quarter ended
March 31, 2004, compared to a net loss of $3.1 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
$10.2 million, or 136.8%, to $17.7 million from $7.5 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 Exchange. The quarter ended March 31, 2003 included
write offs of deferred offering costs and deferred financing costs of $2.0
million and $0.2 million, respectively. 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
---------- ----------
(in thousands)
Net loss............................. $ (3,907) $ (3,112)
Depreciation and amortization(1).. 3,320 3,604
Interest expense.................. 15,529 8,543
Income tax expense (benefit)(2)... 2,791 (1,547)
---------- ----------
EBITDA............................... $ 17,733 $ 7,488
========== ==========
- -----------------
(1) Depreciation and amortization expense for the three months ended March 31,
2004 and 2003 includes $50 and $136, respectively, related to the newspaper
businesses disposed of as part of the Lee Exchange.
(2) Income tax expense for the three months ended March 31, 2004 consists of
$3,070 of income tax expense related to the gain recorded on the Lee
Exchange and a $279 income tax benefit related to the loss from continuing
operations. Income tax benefit for the three months ended March 31, 2003 is
attributable solely to the loss from continuing operations.
Interest Expense. Interest expense for the quarter ended March 31, 2004
increased by $7.0 million to $15.5 million from $8.5 million for the quarter
ended March 31, 2003. The increase in interest expense was due primarily to the
classification of $6.9 million of dividends on mandatorily redeemable preferred
stock as additional interest expense during the quarter ended March 31, 2004 in
accordance with SFAS No. 150.
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.
Write-off of Deferred Offering Costs. On June 3, 2002, LGP filed a
registration statement with the Securities and Exchange Commission on Form S-2
with respect to an initial public offering of Common Stock. As of March 31,
2003, LGP had incurred $2.1 million in legal and other professional fees
associated with its proposed initial public offering that had been capitalized
as deferred offering costs. On March 31, 2003, LGP wrote off theses costs
because LGP decided to postpone its proposed initial public offering.
Income Tax Benefit. Income tax benefit for the quarter ended March 31,
2004 was $0.3 million compared to an income tax benefit of $1.5 million for the
quarter ended March 31, 2003. The decrease of $1.3 million for the quarter ended
March 31, 2004 was primarily due to a decrease in deferred federal income tax
benefit recognized by the Company 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.
11
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.
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.
LGP has no operations of its own and accordingly has no independent means
of generating revenue. As a holding company, LGP's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its subsidiaries, in particular from Operating Company.
The indentures relating to the Notes, Senior Discount Debentures and the Amended
Credit Facility and the terms of the Senior Debentures impose upon the Company
certain financial and operating covenants, including, among others, requirements
that the Company satisfy certain quarterly financial tests, including a maximum
senior leverage ratio, a minimum cash interest coverage ratio and a maximum
leverage ratio, limitations on capital expenditures and restrictions on the
Company's ability to incur debt, pay dividends or take certain other corporate
actions.
12
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 was $0.8 million compared
with net cash provided by operating activities of $0.2 million for the three
months ended March 31, 2003. The increase is primarily due to an increase in
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 an increase of $1.9 million in cash proceeds from the exchange of
publications and sales of other assets. The $2.2 million of cash flow for the
three months ended March 31, 2004 is the proceeds from the exchange of newspaper
businesses with Lee Enterprises, Inc. 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 $1.3 million for each of the three month periods ended March 31,
2004 and March 31, 2003. The Company's financing activities for the three months
ended March 31, 2004 reflects increased 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"). The Company is
subject to certain covenants that limit its ability to pay cash dividends and
make other restricted payments and does not expect to pay cash dividends in the
foreseeable future.
Amended Credit Facility. The Amended Credit Facility provides for a $100.0
million principal amount Term Loan B that matures in March 2007 and a revolving
credit facility with a $135.0 million aggregate commitment amount available,
including a $10.0 million sub-facility for letters of credit, that matures in
March 2005. The Amended Credit Facility is secured by a first-priority security
interest in substantially all of the tangible and intangible assets of LGO, LGP
and LGP's other present and future direct and indirect subsidiaries.
Additionally, the loans under the Amended Credit Facility are guaranteed,
subject to specified limitations, by LGP and all of the future direct and
indirect subsidiaries of LGO and LGP. The Company is required to permanently
reduce the Term Loan B and/or revolving commitment amount with disposition
proceeds in excess of $1.5 million if the proceeds are not reinvested in
Permitted Acquisitions (as defined under the Amended Credit Facility) within 300
days of receipt of such proceeds.
The Term Loan B and the revolving credit facility bear interest, at LGO's
option, equal to the Alternate Base Rate for an ABR loan (as defined in the
Amended Credit Facility) or the Adjusted LIBO Rate for a eurodollar loan (as
defined in the Amended Credit Facility) plus an applicable margin. The
applicable margin is based on: (1) whether the loan is an ABR loan or eurodollar
loan; and (2) the ratio of (a) indebtedness of LGO and its subsidiaries that
requires interest to be paid in cash to (b) pro forma EBITDA for the 12-month
period then ended. 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.
The Company is highly leveraged and has indebtedness that is substantial
in relation to its stockholders' deficit, tangible equity and cash flow.
Interest expense for the three months ended March 31, 2004 was $15.5 million
including non-cash interest of $2.2 million with respect to the Senior Discount
Debentures and Senior Debentures (each defined below) held by affiliates,
amortization of deferred financing costs of $0.5 million and dividends on
mandatorily redeemable preferred stock of $6.9 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.
13
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), the aggregate principal amount
of the Notes outstanding was $180.0 million, the aggregate principal amount of
the Senior Discount Debentures due February 1, 2009 (the "Senior Discount
Debentures") was $89.0 million and the aggregate principal amount of the Senior
Debentures was $8.3 million.
On July 25, 2003, the Operating Company and LGP entered into an amendment
to the Amended Credit Facility. The amendment permits LGP to issue debt in lieu
of paying cash for the interest due on the 11 5/8% Senior Discount Debentures
(the "Senior Discount Debentures") due February 1, 2009, and to issue debt in
lieu of paying cash interest due on any additional debt to be issued in lieu of
paying cash interest on the Senior Discount Debentures.
On July 30, 2003, LGP entered into an agreement, effective August 1, 2003,
with Green Equity Investors II, L.P. ("GEI II") and Green Equity Investors III,
L.P. ("GEI III"), whereby LGP may, at its option, issue 11 5/8% Senior
Debentures (the "Senior Debentures") to GEI II and GEI III on each interest
payment date of the Senior Discount Debentures, in lieu of paying cash interest
on the Senior Discount Debentures that are owned by GEI II and GEI III, with an
aggregate initial principal amount equal to the amount of cash interest
otherwise payable on such interest payment date under the terms of the Senior
Discount Debentures. In addition, LGP may, at its option, issue additional
Senior Debentures to GEI II and GEI III on each interest payment date of the
Senior Debentures, in lieu of paying cash interest on the Senior Debentures that
are owned by GEI II and GEI III, with an aggregate initial principal amount
equal to the amount of cash interest otherwise payable on such interest payment
date under the terms of the Senior Debentures. This agreement may be terminated
by GEI II and GEI III at any time upon delivery of written notice to LGP at
least 30 days prior to the next interest payment date.
On August 1, 2003, LGP elected to issue Senior Debentures in lieu of
paying cash interest on the Senior Discount Debentures that were owned by GEI II
and GEI III. In conjunction with its election, LGP issued Senior Debentures to
GEI II and III in the amount of $0.7 million and $3.3 million, respectively,
which will accrue interest at an annual rate of 11 5/8% and become payable on
February 1, 2009. On February 1, 2004, LGP again issued Senior Debentures in
lieu of paying cash interest on the Senior Discount Debentures that were owned
by GEI II and GEI III, this time in the amount of $0.7 million and $3.5 million,
respectively. As a result of these agreements, interest due to GEI II and GEI
III on the Senior Discount Debentures and Senior Debentures as of March 31, 2004
has been reflected as a long-term liability on the Company's consolidated
balance sheet.
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 $ --
11 5/8% senior discount debentures ......... 89,000 -- -- -- -- -- 89,000
11 5/8% senior debentures .................. 8,278 -- -- -- -- -- 8,278
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:
Senior preferred stock (excludes future
dividends) ................................ 110,085 -- -- -- -- -- 110,085
Junior preferred stock (excludes future
dividends) ................................ 123,138 -- -- -- -- -- 123,138
Non-compete payments ....................... 1,091 226 282 177 177 121 108
Finder fee payments ........................ 125 125 -- -- -- -- --
Accrued interest on senior discount
debentures and senior debentures held by
affiliates ................................ 1,497 -- -- -- -- -- 1,497
Other ...................................... 73 73 -- -- -- -- --
-------- -------- -------- -------- -------- -------- ----------
$594,172 $ 1,153 $ 35,664 $ 35,925 $ 9,130 $180,192 $ 332,108
======== ======== ======== ======== ======== ======== ==========
14
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.
On February 1, 2004, LGP elected to issue Senior Debentures in lieu of
paying cash interest on the Senior Discount Debentures that were owned by GEI II
and GEI III, affiliates of Leonard Green & Partners, L.P. In conjunction with
its election, LGP issued Senior Debentures to GEI II and GEI III in the amount
of $726,940 and $3,529,006, respectively, which will each accrue interest at an
annual rate of 11 5/8% and become payable on February 1, 2009. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" for further discussion.
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 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 20 of our 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 the LGP'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.
15
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.
LGP is subject to certain covenants that limit its ability to pay
dividends and make other restricted payments. LGP has never paid a cash dividend
and does not expect to pay cash dividends in the foreseeable future. See Part 1,
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:
The Company furnished a Current Report on Form 8-K, dated January 20,
2004, under Items 5 and 7 in reference to a press release, dated January 16,
2004, announcing that the Company had entered into a definitive agreement with
Lee Enterprises, Incorporated to exchange daily newspapers and other
publications.
16
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 PUBLISHING, INC.
/s/ KENNETH L. SEROTA
---------------------------------------
Kenneth L. Serota
President, Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
/s/ DANIEL D. LEWIS
---------------------------------------
Daniel D. Lewis
Chief Financial Officer
(principal financial and accounting
officer)
17