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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 JUNE 30, 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 Number)
3000 DUNDEE ROAD, SUITE 203 60062
NORTHBROOK, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 272-2244
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Company's common stock, par value
$0.01 per share, as of August 16, 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 June 30, 2004 (Unaudited) and December 31, 2003......................................... 3
Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2004 and June 30, 2003 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 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........................................................................ 13
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..................................... 15
Item 3 Defaults Upon Senior Securities...................................................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders.................................................................. 15
Item 5 Other Information.................................................................................................... 15
Item 6 Exhibits and Reports on Form 8-K..................................................................................... 15
Signatures.................................................................................................................. 15
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2004 2003
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 2,263 $ 2,036
Accounts receivable, net of allowance for doubtful accounts of $1,579 and
$1,600 at June 30, 2004 and December 31, 2003, respectively ......... 21,127 20,587
Inventory ............................................................... 2,938 2,850
Prepaid expenses ........................................................ 1,773 1,078
Deferred income taxes ................................................... 1,403 1,432
Other current assets .................................................... 225 184
-------- --------
Total current assets ...................................................... 29,729 28,167
Property, plant and equipment, net ...................................... 45,567 45,771
Goodwill ................................................................ 183,885 185,467
Intangible assets, net .................................................. 228,067 226,601
Deferred financing costs, net ........................................... 3,004 3,597
Other assets ............................................................ 433 466
-------- --------
Total assets .............................................................. $490,685 $490,069
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Borrowings under revolving credit facility .............................. $ 1,530 $ --
Current portion of Term Loan B .......................................... 8,903 744
Current portion of long-term liabilities ................................ 479 407
Accounts payable ........................................................ 1,859 1,747
Accrued expenses ........................................................ 13,939 14,111
Deferred revenue ........................................................ 8,863 8,500
-------- --------
Total current liabilities ................................................. 35,573 25,509
LONG-TERM LIABILITIES:
Borrowings under revolving credit facility .............................. -- 6,338
Term Loan B, less current portion ....................................... 57,482 71,013
Long-term liabilities, less current portion ............................. 670 865
Senior subordinated notes ............................................... 180,000 180,000
Deferred income taxes ................................................... 30,017 25,518
-------- --------
Total liabilities ......................................................... 303,742 309,243
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares
issued and outstanding at June 30, 2004 and December 31, 2003 ......... -- --
Additional paid-in capital .............................................. 176,879 176,879
Retained earnings ....................................................... 10,064 3,947
-------- --------
Total stockholder's equity ................................................ 186,943 180,826
-------- --------
Total liabilities and stockholder's equity ................................ $490,685 $490,069
======== ========
See accompanying notes to unaudited interim consolidated financial statements.
3
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
REVENUES:
Advertising ................................................... $38,733 $36,871 $72,007 $68,481
Circulation ................................................... 8,726 7,901 16,932 15,681
Job printing and other ........................................ 4,352 2,863 8,583 5,768
------- ------- ------- -------
Total revenues ............................................. 51,811 47,635 97,522 89,930
OPERATING COSTS AND EXPENSES:
Operating costs ............................................... 24,420 21,797 47,415 42,537
Selling, general and administrative ........................... 13,119 13,060 25,816 25,089
Depreciation and amortization ................................. 3,342 3,432 6,612 6,900
Loss on sale of assets ........................................ 26 -- 26 20
------- ------- ------- -------
Income from continuing operations ................................ 10,904 9,346 17,653 15,384
Interest expense - debt .......................................... 5,317 5,503 10,691 11,096
Interest expense - amortization of deferred financing costs....... 297 284 593 577
Write-off of deferred financing costs ............................ -- -- -- 161
------- ------- ------- -------
Income from continuing operations before income taxes ............ 5,290 3,559 6,369 3,550
Income tax expense ............................................... 3,188 1,406 3,694 1,511
------- ------- ------- -------
Income from continuing operations ................................ 2,102 2,153 2,675 2,039
Income from discontinued operations, net of tax .................. -- 150 4,593 217
------- ------- ------- -------
Net income ....................................................... $ 2,102 $ 2,303 $ 7,268 $ 2,256
======= ======= ======= =======
See accompanying notes to unaudited interim consolidated financial statements.
4
LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
-------- ---------
Cash flows from operating activities:
Net income ................................................................ $ 7,268 $ 2,256
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................. 6,612 6,900
Amortization of deferred financing costs .................................. 593 577
Non-cash compensation ..................................................... -- 8
Deferred taxes ............................................................ 3,469 1,370
Loss on sale of fixed assets .............................................. 26 20
Write-off of deferred financing costs ..................................... -- 161
Income from discontinued operations, net of tax ........................... (4,593) (217)
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, net .................................................. (594) (554)
Inventory ................................................................. (58) 315
Prepaid expenses and other assets ......................................... (716) (335)
Accounts payable .......................................................... 112 164
Accrued expenses .......................................................... (737) (1,154)
Deferred revenue .......................................................... (90) (34)
-------- --------
Net cash provided by operating activities ....................................... 11,292 9,477
-------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment ................................ (1,688) (945)
Payments for acquisitions.................................................. (32) --
Proceeds from exchange of publications and sales of other assets .......... 2,184 260
-------- --------
Net cash provided by (used in) investing activities ............................. 464 (685)
-------- --------
Cash flows from financing activities:
Repayments of Term Loan B ................................................. (5,372) --
Net borrowings under revolving credit facility ............................ (4,808) (6,549)
Dividends to Parent ....................................................... (1,151) (335)
Net payments on long-term liabilities ..................................... (198) (270)
-------- --------
Net cash used in financing activities ........................................... (11,529) (7,154)
-------- --------
Net increase in cash and cash equivalents ....................................... 227 1,638
Cash and cash equivalents, at beginning of period ............................... 2,036 1,696
-------- --------
Cash and cash equivalents, at end of period ..................................... $ 2,263 $ 3,334
======== ========
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 June 30, 2004, the Company owns and operates 289
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 64 paid daily
newspapers and 120 paid non-daily newspapers. In addition, the Company publishes
105 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 June 30, 2004 and for the three and six months ended
June 30, 2004 and June 30, 2003 should be read in conjunction with the audited
consolidated financial statements of the Company included in LGO's Annual Report
on 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.
6
(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 $1,994 (net of
amount due to Lee). 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. An 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 six months ended June 30, 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, less amount due to Lee ................ 1,994
--------
26,573
Net book value of newspaper businesses disposed ............................. (18,174)
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 June 30,.2004, properties
outside the metropolitan areas, also referred to as the community markets,
represented 87% of the Company's 289 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 $2.0 million (net of amount due to Lee). 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 SIX MONTHS ENDED
.............................................................. JUNE 30, JUNE 30,
-------------------- --------------------
.............................................................. 2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES:
Advertising............................................... 74.8% 77.4% 73.8% 76.2%
Circulation .............................................. 16.8 16.6 17.4 17.4
Job printing and other.................................... 8.4 6.0 8.8 6.4
----- ----- ----- -----
Total revenues......................................... 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Operating costs........................................... 47.1 45.7 48.6 47.3
Selling, general and administrative....................... 25.3 27.4 26.5 27.9
Depreciation and amortization............................. 6.4 7.2 6.8 7.7
Loss on sale of assets ................................... 0.1 -- -- --
----- ----- ----- -----
Income from continuing operations ........................... 21.1 19.7 18.1 17.1
Interest expense - debt ..................................... 10.3 11.6 11.0 12.3
Interest expense - amortization of deferred financing costs.. 0.6 0.6 0.6 0.6
Write-off of deferred financing costs........................ -- -- -- 0.2
----- ----- ----- -----
Income from continuing operations before income taxes........ 10.2 7.5 6.5 4.0
Income tax expense .......................................... 6.1 3.0 3.8 1.7
----- ----- ----- -----
Income from continuing operations............................ 4.1 4.5 2.7 2.3
Income from discontinued operations, net of tax.............. -- 0.3 4.7 0.2
----- ----- ----- -----
Net income .................................................. 4.1% 4.8% 7.4 2.5%
===== ===== ===== =====
8
THREE AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2003
Total Revenues. Total revenue for the quarter ended June 30, 2004 increased
by $4.2 million, or 8.8%, to $51.8 million from $47.6 million for the quarter
ended June 30, 2003. The increase in total revenue was comprised of a $1.9
million, or 5.1%, increase in advertising revenue, a $0.8 million, or 10.4%,
increase in circulation revenue, and a $1.5 million, or 52.0%, increase in job
printing and other revenue. The increase in advertising revenue was primarily
due to same property increases in the Company's community and Chicago suburban
markets of $0.3 million and $0.1 million, respectively, revenue from the
newspaper businesses acquired in the Lee Exchange of $1.6 million, partially
offset by a decrease in non-newspaper revenues of $0.2 million. The increase in
circulation revenue was primarily due to the Lee Exchange of $0.9 million and
higher circulation revenue in the Chicago suburban market of $0.1 million,
partially offset by lower circulation revenues in the Company's community
markets of $0.2 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.
Total revenue for the six months ended June 30, 2004 increased by $7.6
million, or 8.4%, to $97.5 million from $89.9 million for the six months ended
June 30, 2003. The increase in total revenue was comprised of a $3.5 million, or
5.1%, increase in advertising revenue, a $1.3 million, or 8.0%, increase in
circulation revenue, and a $2.8 million, or 48.8%, increase in job printing and
other revenue. The increase in advertising revenue was primarily due to same
property increases in the Company's community and Chicago suburban markets of
$1.3 million and $0.2 million, respectively, and revenue from the newspaper
businesses acquired in the Lee Exchange of $2.6 million, partially offset by a
decrease in non-newspaper revenue of $0.5 million. The increase in circulation
revenue was primarily due to the Lee Exchange of $1.5 million and higher
circulation revenue in the Chicago suburban market of $0.1 million, partially
offset by lower circulation revenues in the Company's community markets of $0.3
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 June 30, 2004
increased by $2.6 million, or 12.0%, to $24.4 million from $21.8 million for the
quarter ended June, 30, 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 $2.5 million and higher
newsprint costs of $0.2 million. Operating costs for the six months ended June
30, 2004 increased by $4.9 million, or 11.5%, to $47.4 million from $42.5
million for the six months ended June 30, 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 $4.4
million and higher newsprint costs of $0.4 million.
Selling, General and Administrative. Selling, general and administrative
expense for the quarter ended June 30, 2004 was $13.1 million, the same as the
quarter ended June, 30, 2003. For the quarter, selling, general and
administrative expenses increased by $0.6 million as a result of the newspaper
businesses acquired in the Lee Exchange and the print facility acquired in
December 2003, which was offset by lower communication costs of $0.1 million and
reductions in labor costs of $0.5 million, resulting primarily from lower
headcount and insurance costs. Selling, general and administrative expenses for
the six months ended June 30, 2004 increased by $0.7 million, or 2.9%, to $25.8
million from $25.1 million for the six months ended June 30, 2003. The increase
in selling, general and administrative expenses of $1.0 million 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, partially offset by a reduction in labor costs of $0.2 million,
resulting primarily from lower insurance costs.
Depreciation and Amortization. Depreciation and amortization expense for the
quarter ended June 30, 2004 decreased by $0.1 million, or 2.6%, to $3.3 million
from $3.4 million for the quarter ended June, 30, 2003. During the quarter ended
June 30, 2004, the Company recorded $2.2 million in amortization of intangible
assets, compared with $2.3 million for the quarter ended June 30, 2003. The
decrease in amortization is primarily due to a decrease in non-compete
intangible amortization resulting from certain non-compete assets that are now
fully amortized partially offset by depreciation and amortization from the Lee
Exchange and the print facility acquired in December. Depreciation and
amortization expense for the six months ended June 30, 2004 decreased by $0.3
million, or 4.2%, to $6.6 million from $6.9 million for the six months ended
June 30, 2003. During the six months ended June 30, 2004, the Company recorded
$4.3 million in amortization of intangible assets, compared with $4.7 million
for the six months ended June 30, 2003. The decrease in amortization is
primarily due to a decrease in non-compete intangible amortization resulting
from certain non-compete assets that are now fully amortized partially offset by
depreciation and amortization from the Lee Exchange and the print facility
acquired in December.
9
EBITDA. The Company recorded net income of $2.1 million for the quarter
ended June 30, 2004, compared to net income of $2.3 million for the quarter
ended June 30, 2003. EBITDA (which is defined as earnings before interest,
taxes, depreciation and amortization) for the quarter ended June 30, 2004
increased by $1.1 million, or 8.0%, to $14.2 million from $13.2 million for the
quarter ended June 30, 2003. The increase was primarily due to higher revenues
of $4.2 million, partially offset by higher operating costs of $2.6 million and
higher selling, general and administrative costs of $0.1 million. In addition,
the quarter ended June 30, 2003 included income from discontinued operations
before taxes, depreciation and amortization of $0.4 million from the disposed
publications in the Lee Exchange. The Company recorded net income of $7.3
million for the six months ended June 30, 2004, compared to net income of $2.3
million for the six months ended June 30, 2003. EBITDA for the six months ended
June 30, 2004 increased by $9.2 million, or 40.6%, to $32.0 million from $22.7
million for the six months ended June 30, 2003. The increase was primarily due
to higher revenues of $7.6 million, partially offset by higher operating costs
of $4.9 million and higher selling, general and administrative costs of $0.7
million. In addition, the six months ended June 30, 2004 included a gain of $7.7
million, before taxes, from the exchange of publications in the Lee Exchange,
partially offset by the income from discontinued operations before taxes,
depreciation and amortization of $0.6 million for the six months ended June 30,
2003. The six months ended June 30, 2003 also included a write-off 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, 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 income is the financial measure calculated and
presented in accordance with GAAP that is most directly comparable to EBITDA.
The following table reconciles net income to EBITDA for the three and six months
ended June 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
--------- ------------- ---------- ----------
Net income ............................ $ 2,102 $ 2,303 $ 7,268 $ 2,256
Depreciation and amortization (1) ... 3,342 3,554 6,657 7,163
Interest expense .................... 5,614 5,787 11,284 11,673
Income tax expense (2)............... 3,188 1,551 6,764 1,656
------- ------- ------- -------
EBITDA ................................ $14,246 $13,195 $31,973 $22,748
======= ======= ======= =======
(1) Depreciation and amortization expense for the three months ended June 30,
2003 includes $122 related to the newspaper businesses disposed of as part
of the Lee Exchange. Depreciation and amortization expense for the six
months ended June 30, 2004 and 2003 includes $45 and $263, respectively,
related to the newspaper businesses disposed of as part of the Lee Exchange.
(2) Income tax expense for the six months ended June 30, 2004 consists of $3,070
of income tax expense related to the gain recorded on the Lee Exchange and
$3,694 of income tax expense related to the income from continuing
operations. Income tax expense for the three months ended June 30, 2003
consists of $1,406 related to continuing operations and $145 related to
discontinued operations. Income tax expense for the six months ended June
30, 2003 consists of $1,511 related to continuing operations and $145
related to discontinued operations.
Interest Expense. Interest expense for the quarter ended June 30, 2004
decreased by $0.2 million, or 3.0%, to $5.6 million from $5.8 million for the
quarter ended June 30, 2003. Interest expense for the six months ended June 30,
2004 decreased by $0.4 million, or 3.3%, to $11.3 million from $11.7 million for
the six months ended June 30, 2003.
10
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 June 30, 2004
increased by $1.8 million, or 126.7%, to $3.2 million from $1.4 million for the
quarter ended June 30, 2003. Income tax expense for the six months ended June
30, 2004 was $3.7 million compared to $1.5 million for the six months ended June
30, 2003. The increase of $2.2 million for the six months ended June 30, 2004
was primarily due to an increase in deferred federal income tax expense
recognized by the Company for the three months ended June 30, 2004
Income from Discontinued Operations. Income from discontinued operations,
net of tax, for the quarter ended June 30, 2004 decreased by $0.2 million, or
100%, from $0.2 million for the quarter ended June 30, 2003. Income from
discontinued operations was $4.6 million for the six months ended June 30, 2004
compared to $0.2 million for the six months ended June 30, 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.
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 intends to 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.
11
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 six months ended June 30, 2004 was $11.3 million compared
with net cash provided by operating activities of $9.5 million for the six
months ended June 30, 2003. The increase is primarily due to an increase in
income from continuing operations before depreciation and amortization of $2.0
million, partially offset by an increase in working capital requirements for the
six months ended June 30, 2004.
Cash flows from investing activities. Net cash provided by investing
activities was $0.5 million for the six months ended June 30, 2004 compared to
net cash used in investing activities of $0.7 million for the six months ended
June 30, 2003. The increase 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, partially offset by an increase in capital expenditures of $0.7
million. The $2.2 million of cash proceeds from the exchange of publications and
sales of other assets for the six months ended June 30, 2004 are proceeds from
the Lee Exchange. The Company's capital expenditures consisted of the purchase
of machinery, equipment, furniture and fixtures relating to its publishing
operations and amounted to 1.7% of revenues.
Cash flows from financing activities. Net cash used in financing activities
was $11.5 million for the six months ended June 30, 2004 compared to net cash
used in financing activities of $7.2 million for the six months ended June 30,
2003. The Company's financing activities for the six months ended June 30, 2004
reflects increased dividend payments to Parent and repayments of the Term Loan B
and the revolving credit facility 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 and six months ended June 30, 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 June
30, 2004, the Term Loan B requires principal payments of $0.3 million in 2004,
$25.0 million in 2005, $32.8 million in 2006 and $8.2 million in 2007. The
Amended Credit Facility contains financial covenants that require LGO and LGP to
satisfy specified quarterly financial tests, including a maximum senior leverage
ratio, a minimum cash interest coverage ratio and a maximum leverage ratio. The
Amended Credit Facility also contains affirmative and negative covenants
customarily found in loan agreements for similar transactions.
The Company is highly leveraged and has indebtedness that is substantial in
relation to its stockholder's equity, tangible equity and cash flow. Interest
expense for the three and six months ended June 30, 2004 was $5.6 and $11.3
million, respectively, including amortization of deferred financing costs of
$0.3 million and $0.6 million, respectively. The degree to which the Company is
leveraged could have important consequences, including the following: (1) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on Operating Company's $180.0 million aggregate
principal amount of 9 3/8% Senior Subordinated Notes (the "Notes") due February
1, 2008 and interest on other indebtedness, thereby reducing the funds available
to the Company for other purposes; (2) indebtedness under the Amended Credit
Facility is at variable rates of interest, which causes the Company to be
vulnerable to increases in interest rates; (3) the Company is more leveraged
than certain competitors in its industry,
12
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 June 30, 2004, approximately $67.9 million was outstanding under the
Amended Credit Facility (without giving effect to $2.2 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 June 30, 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 ...................... 66,385 346 24,982 32,848 8,209 -- --
Revolving credit facility ........ 1,530 -- 1,530 -- -- -- --
Operating leases:
Real estate lease payments ....... 1,296 238 435 427 123 71 2
Other contractual obligations:
Non-compete payments ............. 952 84 282 177 177 121 111
Finder fee payments .............. 125 125 -- -- -- -- --
Other ............................ 72 72 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
$250,360 $ 865 $ 27,229 $ 33,452 $ 8,509 $180,192 $ 113
======== ======== ======== ======== ======== ======== ========
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
June 30, 2004 and 2003 to Leonard Green & Partners, L.P. The Company paid
$740,000 in management fees for each of the six month periods ended June 30,
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 June 30, 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 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
13
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 June 30, 2004, Operating Company had borrowings
outstanding of $1.5 million under the revolving credit facility (without giving
effect to $2.2 million of outstanding letters of credit as of such date) and
$66.4 million under the Term Loan B. The weighted average interest rate for the
Amended Credit Facility for the three and six months ended June 30, 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 June 30, 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 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 June 30, 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 control 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
control over financial reporting.
14
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.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 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