<PAGE> 1
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 QUARTER ENDED COMMISSION FILE NUMBER
JUNE 30, 1998 333-46957
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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, NORTHBROOK, ILLINOIS 60062
(Address of Principal Executive (Zip Code)
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
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
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Item 1. Unaudited Interim Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and June 30, 1997. . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and June 30, 1997. . . . . . . . . . . . . . . . . . . 3
Notes to the Unaudited Interim Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II OTHER INFORMATION
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Item 2. Changes in Securities and Use of Proceeds . . . . . . .. . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . .. . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURE PAGE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
30-Jun-98 31-Dec-97
------------------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 4,296 $ 1,452
Accounts receivable, net 11,090 10,308
Inventory 2,147 1,947
Prepaid expenses 328 278
Other current assets 38 -
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Total current assets 17,899 13,985
Property, plant and equipment, net 22,042 20,503
Intangible assets, net 310,744 75,212
Other assets 614 -
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Total assets $ 351,299 $ 109,700
========= =========
Current portion of long-term
liabilities $ - $ 338
Accounts payable 2,370 1,119
Accrued charges 11,515 2,223
Deferred revenue 4,987 4,411
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Total current liabilities 18,872 8,091
Long term debt
Senior subordinated note 180,000 -
Senior discount debentures 53,020 -
Long-term liabilities, less current
portion 1,070 706
Deferred income taxes - 1,764
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Total liabilities 252,962 10,561
Senior mandatory redeemable
preferred stock 47,865 -
Junior mandatory redeemable
preferred stock 51,105 -
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Total mandatory redeemable
preferred stock 98,970 -
Common stock - -
Additional paid in capital 8,000 -
Accumulated deficit (8,634) -
Net assets - 99,139
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Total stockholders' equity (deficit) (634) 99,139
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Total liabilities and stockholders'
equity $ 351,299 $ 109,700
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE> 4
LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
Successor Predecessor Successor Predecessor
1998 1997 1998 1997
----------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Advertising $ 19,230 $ 17,830 $ 35,321 $ 33,188
Circulation 5,466 5,268 10,787 10,506
Job printing and other 1,847 2,299 3,421 4,183
--------- -------- -------- --------
Total revenues 26,543 25,397 49,529 47,877
Operating expenses
Operating costs 10,331 9,666 19,821 18,982
Selling, general and
administrative 8,624 7,492 15,930 14,188
Depreciation and
amortization 2,717 1,844 5,800 3,663
--------- -------- -------- --------
Income from operations 4,871 6,395 7,978 11,044
Interest expense 6,086 2,638 11,059 5,276
Amortization of debt issue
costs 350 583
--------- -------- -------- --------
Income (loss) before
income taxes (1,565) 3,757 (3,664) 5,768
Income taxes - 1,620 - 2,488
--------- -------- -------- --------
Net income (loss) $ (1,565) $ 2,137 $ (3,664) $ 3,280
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
Successor Predecessor
1998 1997
- -------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,664) $ 3,280
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,800 3,663
Accretion of senior discount notes 2,498 -
Changes in assets and liabilities, net of amounts arising
from acquisitions
Working capital - net 9,135 7,602
Other assets (614) -
Deferred revenue 576 50
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Net cash provided by operating activities: 13,731 14,595
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Cash flows from investing activities:
Purchase of property, plant and equipment (325) (528)
Acquisitions (330,077) -
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Net cash used in investing activities (330,402) (528)
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Cash flows from financing activities:
Proceeds from issuing long term debt 221,217 -
Proceeds from issuing preferred stock 91,750 -
Proceeds from issuing common stock 8,000 -
Intercompany with Hollinger/APC - (13,558)
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Net cash provided by (used in) financing activities: 320,967 (13,558)
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Net increase in cash and cash equivalents 4,296 509
Cash and cash equivalents, at beginning of period - 1,768
--------- ---------
Cash and cash equivalents, at end of period $ 4,296 $ 2,277
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE> 6
LIBERTY GROUP PUBLISHING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY, BASIS OF PRESENTATION AND ACQUISITION
Liberty Group Publishing, Inc. ("LGP") was formed for purposes of acquiring a
portion of the daily and weekly newspapers owned by American Publishing Company
or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger
International Inc.("Hollinger"). LGP is a holding company for its wholly-owned
subsidiary Liberty Group Operating, Inc ("Operating Company"). The interim
consolidated financial statements include the accounts of LGP and Operating
Company and its consolidated subsidiaries (the "Company").
In the accompanying unaudited interim consolidated financial statements the
terms "Liberty Group Publishing" or the "Company" when used with respect to
periods prior to January 1, 1998 refer to the combined group of newspapers sold
by APC and when used with respect to periods subsequent to January 1, 1998
refers to Liberty Group Publishing, Inc. and its consolidated subsidiaries.
The combined historical financial information of the newspapers acquired from
APC prior to the acquisition on January 1, 1998 is referred to as "Predecessor"
while the consolidated financial information of the Company subsequent to the
date of the acquisition is referred to as "Successor."
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 footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying interim consolidated financial statements as of
June 30, 1998 and for the three and six months ended June 30, 1998 and 1997
should be read in conjunction with the December 31, 1997 audited combined
financial statements of the Company included in the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission (File
No. 333-46957).
On January 27, 1998, the Company acquired from Hollinger virtually all of the
assets and assumed certain liabilities that were used primarily in the business
of publishing, marketing and distributing certain local newspapers (the
"Acquisition"). The initial purchase price including fees and expenses was $317
million. The effective date of the Acquisition was January 1, 1998.
The Company has accounted for the Acquisition using the purchase method of
accounting. Accordingly, the costs of the Acquisition have been allocated to
the assets acquired and liabilities assumed based upon their respective fair
values using independent valuations. The costs of certain intangible assets
acquired of $290 million are being amortized over periods ranging from 5 to 40
years. Because of the purchase price allocation, the accompanying financial
statements of Successor are not directly comparable to those of Predecessor.
The results of operations and cash flows of the Predecessor have been
consolidated with those of the Company from January 1, 1998, the effective date
upon which the Company and APC agreed as to the change of control of the
newspapers to the Company.
In addition, during the first six months of 1998, the Company acquired certain
other newspapers. The purchase price of such newspapers as well as the results
of their operations were not material to the Company financial statements.
<PAGE> 7
(2) BORROWINGS
The Acquisition, including the payment of related fees and expenses, was
financed in part from the proceeds of $180.0 million from the issuance and sale
by the Operating Company of $180.0 million aggregate principal amount of 9.375%
Senior Subordinated Notes (the "Notes") due February 1, 2008 and the proceeds
of $50.5 million from the issuance and sale by LGP of $89.0 million aggregate
principal amount of 11.625% Senior Discount Debentures (the "Debentures") due
February 1, 2009.
The Notes were issued by the Operating Company and are general unsecured
obligations of the Operating Company. The Notes are irrevocably and
unconditionally joint and severally guaranteed by each of the Operating
Company's existing and future subsidiaries. The Notes are redeemable for cash
at the option of the Operating Company anytime after February 1, 2003 at
stipulated redemption amounts or, in certain limited circumstances, are
partially redeemable on or prior to February 1, 2001 at a redemption amount of
109.375% of their principal amount. In the event of a change in control of the
Operating Company or the Company, the Company must offer to repurchase the
Notes at 101% of their principal amount.
The Debentures issued by LGP are general unsecured obligations and pay no cash
interest until February 1, 2003. The Debentures will, however, accrete on a
semi-annual equivalent bonds basis to a full principal amount of $89.0 million
on February 1, 2003. Thereafter, cash interest on the Debentures will accrue
and be payable semi-annually on February 1 and August 1 of each year. The
Debentures are redeemable for cash at the option of LGP any time after February
1, 2003 at stipulated redemption amounts or, in certain limited circumstances,
are partially redeemable on or prior to February 1, 2001 at a redemption amount
of 111.625% of their accreted value. In the event of a change in control of
LGP, LGP must offer to repurchase the Debentures at 101% of their accreted
value.
On January 27, 1998 the Operating Company entered into a five-year $125.0
million revolving credit facility (the "Revolving Credit Facility"). The
Revolving Credit Facility is secured by substantially all of the tangible and
intangible assets of the Operating Company. Borrowings under the revolving
credit facility bear interest at an annual rate, at the Company's option equal
to the Base Rate (as defined therein) or the Eurodollar Rate (as defined
therein) plus a margin that varies based upon a ratio set forth therein (the
"Applicable Margin"). For the first six months the interest rate for
borrowings under the Revolving Credit Facility will be no lower than the Base
Rate plus 0.75% or the Eurodollar Rate plus 2.0%. Under the terms of the
Revolving Credit Facility, the Company pays a fee equal to the Applicable
Margin for Eurodollar Rate Advances (as defined therein) per annum on the
aggregate amount of outstanding letters of credit. The Operating Company also
pays a fee on the unused portion of the Revolving Credit Facility.
<PAGE> 8
(3) STOCKHOLDERS' EQUITY
LGP has the authority to issue up to 21,255,000 shares of capital stock, of
which 21,175,000 shares are designated as Preferred Stock, par value $0.01 per
share, and 80,000 shares are designated as Common Stock, $0.01 per share. The
Acquisition, including the payment of related fees and expenses, was financed
in part from the proceeds of (i) $45.0 million from the issuance and sale of
1.8 million shares of 14.75% Senior Redeemable Exchangeable Cumulative
Preferred Stock (the "Senior Preferred Stock"), (ii) $49.0 million from the
issuance and sale of 49,000 shares of 10% Series B Junior Redeemable Cumulative
Preferred Stock (the "Junior Preferred Stock"), and (iii) $8.0 million from the
issuance and sale of 80,000 shares of Common Stock. 10% of the Common Stock is
owned by the Company's senior management team.
The Senior Preferred Stock issued by LGP Company is senior to the Common Stock
and Junior Preferred Stock of the Company, with respect to dividend
distributions and distributions upon the liquidation, winding up or dissolution
of the Company. Dividends may be paid, at the Company's option, at any
dividend payment date in cash or in additional shares of Junior Preferred Stock
having a liquidation preference equal to the dividend amount. The liquidation
preference of the Senior Preferred Stock is $25 per share. The Senior
Preferred Stock is redeemable at the option of the Company any time after
February 1, 1999 at stipulated redemption amounts and is mandatorily
redeemable, subject to certain conditions, on February 1, 2010 at a price equal
to 100% of its liquidation preference per share. In the event of a change in
control of the Company, the Company must offer to repurchase the Senior
Preferred Stock at 100% of its liquidation preference per share. Except as
required by law, the holders of shares of Senior Preferred Stock are generally
not entitled or permitted to vote on any matters voted upon by the stockholders
of the Company. Subject to certain conditions, the Senior Preferred Stock is
exchangeable, on any dividend payment date, in whole, but not in part, at the
option of the Company for 14.375% Senior Subordinated Debentures (the "Exchange
Debentures") of the Company maturing February 1, 2010. The Exchange Debentures
are redeemable prior to maturity on substantially the same terms as the Senior
Preferred Stock.
The Junior Preferred Stock issued by LGP is senior to the Common Stock of LGP,
with respect to dividend distributions and distributions upon the liquidation,
winding up or dissolution of the Company. Dividends may be paid, at the
Company's option, at any dividend payment date in cash or in additional shares
of Junior Preferred Stock having a liquidation preference equal to the dividend
amount. The Junior Preferred Stock is redeemable at the option of the Company
in 2010 at a price equal to 100% of its liquidation preference per share and is
mandatorily redeemable on February 1, 2010 at a price equal to 100% of its
liquidation preference per share. In the event of a change in control of the
Company, the Company must offer to repurchase the Junior Preferred Stock at
100% of its liquidation preference per share. Except as required by law, the
holders of shares of Junior Preferred Stock are generally not entitled or
permitted to vote on any matters voted upon by the stockholders of the Company.
(4) RELATED PARTY TRANSACTIONS
On January 27, 1998 the Company entered into a Management Agreement with
Leonard Green & Partners, L.P. ("Green"), the principal stockholder of LGP,
whereby Green will provide management, consulting and financial planning
<PAGE> 9
services to the Company for an annual management fee of $1.0 million. Green
owns 100% of the Junior Preferred Stock and 90% of the Common Stock.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of the Company, including the notes thereto which have been
summarized in the Company's Registration Statement on Form S-4, SEC file number
333-46957. The historical financial data of the Company for the period before
January 1, 1998 refers to the operations of the Company when it was owned by
American Publishing Company ("APC"), a wholly owned subsidiary of Hollinger
International, Inc. Effective January 1, 1998 the Company purchased
substantially all of the assets and assumed certain liabilities that were used
in the business of publishing and distributing certain local newspapers ("the
Acquisition"). Certain information in this section includes forward-looking
statements pertaining to, among other things, competition in its markets,
availability of adequate acquisition opportunities, price and availability of
newsprint, significant use of leverage, general economic conditions, and
environmental matters.
OVERVIEW
The Company is a leading U.S. publisher of local newspapers and related
publications that are the dominant source of local news and print advertising in
their markets. The Company's total revenues are derived from advertising (69.6%
of 1997 total revenues), circulation (22.6%) and job printing and other (7.8%).
The Company's primary operating costs and expenses are comprised of
operating costs and selling, general and administrative expenses, which include,
prior to the Acquisition, a management fee paid to APC that was based upon a
percentage of total revenues. Salaries and employee benefits are the Company's
largest operating costs. The Company has been able to control salaries and
employee benefit expenses by realizing efficiencies from the implementation of
new technologies and the achievement of synergies from its strategy of
clustering its newspaper operations.
Certain administrative services, including accounting, payroll,
administration, tax services and financial reporting, were historically
performed for the Company by APC. The Company was charged directly by APC for
certain of such services and also paid a management fee to APC that was based
upon a percentage of total revenues. At the end of January 1998, the management
fee to APC was replaced by a Transitional Services Agreement that allows for
certain administrative services to be provided by APC at cost until the Company
can establish capabilities to provide its administrative services in-house.
Prior to the Acquisition, the Company operated as a business unit of APC
and as such did not file separate tax returns. The income tax provision included
in the Company's combined financial statements was computed as if the Company
were a separate company. Subsequent to the Acquisition, the Company has been and
anticipates that it will be, for the foreseeable future, in a tax loss position.
Given the uncertainty as to the timing of the Company's ability to utilize such
losses to offset future taxable income, the Company does not presently
anticipate recording any tax benefit associated with its pre-tax losses. In
addition, due to the acquisition of the Company's assets from APC, the Company's
asset values and capital structure are materially different than those set forth
in the Company's combined financial statements for periods preceding the
Acquisition and, accordingly, historical interest expense is not indicative of
the interest expense that the Company incurs as a separate company.
<PAGE> 11
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED
TO THREE AND SIX MONTHS ENDED JUNE 30, 1997
Total Revenues. Total revenues for the quarter ended June 30, 1998
increased by $1.1 million, or 4.5%, to $26.5 million from $25.4 million for the
quarter ended June 30, 1997. The increase in total revenues for the quarter was
comprised of a $1.4 million increase in advertising revenue and a $0.2 million
increase in circulation revenue, offset by a $0.5 decrease in job printing and
other revenue.
Total revenues for the six months ended June 30, 1998 increased by $1.7
million, or 3.5%, to $49.5 million. The increase in total revenues for the six
months ended June 30, 1998 was comprised of a $2.1 million increase in
advertising revenue and a $0.3 increase in circulation revenue, offset by a $0.7
decrease in job printing and other revenue.
Operating Costs. Operating costs for the quarter ended June 30, 1998 were
$10.3 million which was an increase of $0.7 million over the quarter ended June
30, 1997. This increase was primarily driven by higher newsprint prices, and by
the increase in the minimum wage that went into effect in September of 1997.
Operating costs for the six months ended June 30, 1998 were $19.8 million which
was an increase of $0.8 million over the six months ended June 30, 1997. This
increase was primarily driven by higher newsprint prices, and by the increase in
the minimum wage that went into effect in September of 1997.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended June 30, 1998 increased by $1.1 million, to $8.6
million from $7.5 million for the quarter ended June 30, 1997. The increase in
selling, general and administrative expenses during the quarter ended June 30,
1998 was primarily due to increases in management costs associated with becoming
an independent company of $0.4 million, including management fees paid to the
controlling stockholder, and by the increase in the minimum wage that went into
effect in September of 1997.
Selling, general and administrative expenses for the six months ended June 30,
1998 increased by $1.7 million, to $15.9 million from $14.2 million for the six
months ended June 30, 1997. The increase in selling, general and administrative
expenses for the six months ended June 30, 1998 was primarily due to increases
in management costs associated with becoming an independent company of $0.8
million, including management fees paid to the controlling stockholder, and by
the increase in the minimum wage that went into effect in September of 1997.
Depreciation and Amortization. Depreciation and amortization expense for
the quarter ended June 30, 1998 increased by $0.9 million, to $2.7 million from
$1.8 million for the quarter ended June 30, 1997, as a result of the Acquisition
and subsequent write-up in basis of assets acquired.
Depreciation and amortization expense for the six months ended June 30, 1998
increased by $2.1 million, to $5.8 million from $3.7 million for the six months
ended June 30, 1997, as a result of the Acquisition and subsequent write-up in
basis of assets acquired.
EBITDA. EBITDA for the quarter ended June 30, 1998 decreased by $0.6
million, to $7.6 million from $8.2 million for the quarter ended June 30, 1997.
The decrease in EBITDA during the quarter ended June 30, 1998 was primarily due
to higher administrative expenses, and the effect of the increase in the minimum
wage.
EBITDA for the six months ended June 30, 1998 decreased by $0.9 million, to
$13.8 million from $14.7 million for the six months ended June 30, 1997. The
decrease in EBITDA during the six months ended June 30, 1998 was primarily due
to higher administrative expenses, increased newsprint costs, and the effect of
the increase in the minimum wage.
Net Income (Loss). The Company incurred a net loss of $1.5 million for the
quarter ended June 30, 1998, due primarily to higher depreciation and
<PAGE> 12
amortization expenses, increased interest expense, and higher administrative
expenses associated with becoming a stand alone company.
For the six months ended June 30, 1998, the Company incurred a net loss of $3.6
million due primarily to higher depreciation and amortization expenses,
increased interest expense, and higher administrative expenses associated with
becoming a stand alone company.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities. Net cash provided by operating
activities for the six months ended June 30, 1998 decreased by $0.9 million to
$13.8 million compared with $14.7 million for the six months ended June 30,
1997. The decrease in net working capital was caused by higher expenses
associated with becoming an independent company.
Cash Flows From Investing Activities. Net cash used in investing
activities for the six months ended June 30, 1998 reflect the acquisition of
substantially all of the Company's tangible and intangible assets, plus
associated fees and expenses and is not comparable to the prior period. The
Company's capital expenditures consist of the purchase of machinery, equipment,
furniture and fixtures relating to its publishing operations. The Company has no
material commitments for capital expenditures, but will continue to pursue its
strategy of opportunistically purchasing local newspapers in contiguous markets
and clusters of local newspapers in new markets. The Company will only pursue
acquisitions that it believes would contribute to the Company's overall cash
flow growth.
Cash Flows From Financing Activities. Net cash flows from financing
activities for the six months ended June 30, 1998 reflect the initial
capitalization of the Company through the issuance of Common Stock, Junior
Preferred Stock, Senior Preferred Stock, Senior Discount Debentures, and Senior
Subordinated Notes, all net of associated fees, and is not directly comparable
to the prior year. The Company accrues paid in kind dividends on both its
Senior and Junior Preferred Stock and does not expect to pay cash dividends in
the foreseeable future.
Liquidity. The Company's principal sources of funds will be cash provided
by operating activities and borrowings under its Revolving Credit Facility. The
Company believes that such funds will provide the Company with sufficient
liquidity and capital resources to meet its current and financial obligations
for the foreseeable future. See Note 2 to the Unaudited Consolidated Financial
Statements included herein for a summary of the terms of the Revolving Credit
Facility.
LGP is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' deficit, tangible equity and cash flow. Total
interest expense for the six months ended June 30, 1998 was $11 million
including non-cash interest of $2.5 million, in addition, amortization of
financing costs was $0.6 million. As of June 30, 1998, LGP had $228.7 million
(net of cash) of outstanding indebtedness, $99.0. million of mandatory
redeemable preferred stock and a stockholder's deficit of 0.6 million. As of
June 30, 1998, the ratio of outstanding indebtedness to total capitalization of
LGP was .70 to 1. The degree to which LGP is leveraged could have important
consequences, including the following: (i) for the fiscal year ending December
31, 1998, a substantial portion of the Company's cash flow from operations must
be dedicated to the payment of interest on the Notes and interest and principal
on its other indebtedness, thereby reducing the funds available to the Company
for other purposes; (ii) indebtedness under the Revolving Credit Facility is at
variable rates of interest, which causes the Company to be vulnerable to
increases in interest rates; (iii) the Company is substantially more leveraged
than certain of it competitors, which might place the Company at a competitive
disadvantage; (iv) the Company may be hindered in its ability to adjust rapidly
to changing market conditions; (v) the Company's substantial degree of leverage
could make it more vulnerable in the event of a downturn in general economic
condition or other adverse events in its business; and (vi) the Company's
<PAGE> 13
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired.
Year 2000. The Company had evaluated its internal software and computer
systems and believes its costs associated with addressing, and risk of
operational disruption from internal software systems failures relating to it,
Year 2000 issues will be minimal.
Recent Acquisitions. In pursuit of its strategy of acquiring local
publications, the Company consummated several acquisitions during the six months
ended June 30, 1998, including; the Carbondale News, a weekly newspaper in
Carbondale, Pennsylvania with a circulation of approximately 5,000 and the
Moscow/Hamlin Villager, a 6,000 circulation weekly newspaper in Hamlin,
Pennsylvania. The Kansas City Kansan, a daily newspaper in Wynadotte County,
Kansas with a paid circulation of approximately 12,500, and the Journal-Herald,
a weekly publication in Shawnee, Kansas with a circulation of approximately
19,000. The Dwight Star and Herald, Emington Joker, Gardner Chronicle, Courier
Press, and the Odell Times, weekly newspapers with average circulation of about
5,500 and The Register, a 9,000 circulation shopper, all located in and around
Dwight, Illinois, The Business Record, a 15,000 circulation business journal in
Syracuse, New York. The Gridley Herald a 3,500 circulation weekly and The
Gridley Shopping News, a 11,500 circulation shopper in Gridley, California. The
Corning-Elmira Pennysaver, a 34,500 circulation shopper in Painted Post, New
York. Each of these purchases will be accounted for using the purchase method of
accounting.
Safe Harbor Provision. This Form 10-Q contains "forward-looking
statements," which can be identified by the use of forward-looking terminology,
such as "may," "intend," "will," "expect," "anticipate," "estimate," "seek," or
"continue" or the negative thereof or other variations thereon or comparable
terminology. In particular, any statements, expressed or implied, concerning
the future operating results or the ability to generate revenues, income or
cash flow are forward-looking statements. Although LGP believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been accurate.
LGP disclaims any obligation to update any such forward-looking statements or
to publicly announce results of any revisions to any of the forward-looking
statements contained in this Form 10-Q to reflect future events or
developments. All forward-looking statements are expressly qualified by such
cautionary statements. Actual results could differ materially and adversely
from the forward-looking statements as a result of, among other things,
competition in the Company's markets, availability of attractive acquisition
opportunities, price and availability of newsprint, the Company's significant
use of leverage, general economic conditions and environmental matters.
<PAGE> 14
Part II
ITEM 2. Changes in Securities and Use of Proceeds.
On January 27, 1998, LGP issued (i) 80,000 shares of its Common Stock to
Green Equity Investors II, L.P., an investment partnership managed by Leonard
Green & Partners, L.P., for $8,000,000. Leonard Green & Partners, L.P. then
sold 8,000 shares, or 10%, of its Common Stock to members of management of the
Company. These shares were issued in reliance upon the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
since, to the knowledge of the Company, Green is an "accredited investor"
(within the meaning of Rule 501 promulgated under the Securities Act), and the
other persons who purchased securities were executives of the Company.
ITEM 4. Submission of Matters to a Vote of Securities Holders.
None
<PAGE> 15
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Purchase Agreement, dated January 15, 1998, among Liberty Group
Publishing, Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Citicorp Securities, Inc., BT Alex. Brown and Chase Securities, Inc.
1.2* Purchase Agreement, dated January 20, 1998, between Liberty Group
Publishing, Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation.
2.5* Amendment to Asset Purchase Agreement, dated as of January 14, 1998,
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P.
(as guarantor), Liberty Group Operating, Inc., Hollinger International
Inc., APAC-90 Inc., American Publishing (1991) Inc. and APAC-95 Inc.
2.6* Amendment to Asset Purchase Agreement, dated as of January 14, 1998,
among Liberty Group Publishing, Inc., Green Equity Investors II, L.P.
(as guarantor), Liberty Group Operating, Inc., Hollinger International
Inc., American Publishing Company of Illinois, APAC-90 Inc., American
Publishing (1991) Inc. and APAC-95 Inc.
2.7* Amendment to Exchange Agreement, dated as of January 14, 1998, between
American Publishing Company of Illinois and Chicago Deferred Exchange
Corporation.
2.8* Amendment to Qualified Exchange Trust Agreement, dated as of January
14, 1998, among The Chicago Trust Company, as Trustee under Trust No.
38347501, Chicago Deferred Exchange Corporation and American Publishing
Company of Illinois.
2.9* Agreement, dated January 15, 1998, among Liberty Group Publishing,
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group
Operating, Inc., Hollinger International Inc., American Publishing
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc. and
APAC-95 Inc.
2.10* Agreement, dated January 23, 1998, among American Publishing Company of
Illinois, Chicago Deferred Exchange Corporation and The Chicago Trust
Company.
2.11* Agreement, dated January 26, 1998, among Liberty Group Publishing,
Inc., Green Equity Investors II, L.P. (as guarantor), Liberty Group
Operating, Inc., Hollinger International Inc., American Publishing
Company of Illinois, APAC-90 Inc., American Publishing (1991) Inc. and
APAC-95 Inc.
3.1* Amended and Restated Certificate of Incorporation of Liberty Group
Publishing, Inc.
3.2* By-Laws of Liberty Group Publishing, Inc.
4.1* Indenture, dated as of January 27, 1998, among Liberty Group
Publishing, Inc. and State Street Bank and Trust Company, as Trustee,
including form of 11 5/8% Senior Discount Debentures due 2009.
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.3* Indenture, dated as of January 27, 1998, among Liberty Group
Publishing, Inc. and State Street Bank and Trust Company, as Trustee,
including form of 14 3/4% Senior Subordinated Debentures due 2010.
10.2* Management Stockholders Agreement, dated as of January 27, 1998, among
Liberty Group Publishing, Inc., Green Equity Investors II, L.P. and
Kenneth L. Serota.
10.3* Non-Competition Agreement, dated as of January 27, 1998, between
Liberty Group Operating, Inc. and Hollinger International Inc.
10.4* Transitional Services Agreement, dated as of January 27, 1998, between
American Publishing Management Services Inc. and Liberty Group
Operating, Inc.
10.5* Credit Agreement, dated as of January 27, 1998, among Liberty Group
Operating, Inc. (as borrower), Liberty Group Publishing, Inc. (as
parent guarantor), the Subsidiary Guarantors named therein, Citicorp
USA, Inc. (as administrative agent and swingline lender), Citibank,
N.A. (as issuing bank), Wells Fargo Bank, N.A. (as documentation
agent), BT Alex. Brown Incorporated (as syndication agent), Bank of
America, NT & SA and Citicorp Securities, Inc. (as arranger).
10.6* Pledge Agreement, dated as of January 27, 1998, from Liberty Group
Publishing, Inc., Liberty Group Arizona Holdings, Inc., Liberty Group
Arkansas Holdings, Inc., Liberty Group California Holdings, Inc.,
Liberty Group Illinois Holdings, Inc., Liberty Group Iowa Holdings,
Inc., Liberty Group Kansas Holdings, Inc., Liberty Group Michigan
Holdings, Inc., Liberty Group Minnesota Holdings, Inc., Liberty Group
Missouri Holdings, Inc., Liberty Group New York Holdings, Inc., Liberty
Group Pennsylvania Holdings, Inc., Liberty Group Management Services,
Inc. to the lenders under the Credit Agreement.
10.7* Pledge Agreement, dated as of January 27, 1998, from Liberty Group
Operating, Inc. to the lenders under the Credit Agreement.
10.8* Registration Rights Agreement, dated as of January 27, 1998, among
Liberty Group Publishing, Inc., the Subsidiary Guarantors named
therein, Donaldson, Lufkin & Jenrette Securities Corporation, Citicorp
Securities, Inc. BT Alex. Brown and Chase Securities, Inc.
10.9* Registration Rights Agreement, dated as of January 27, 1998, between
Liberty Group Publishing, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation.
10.10* Revolving Credit Agreement.
27 Financial Data Schedule
* Incorporated by reference to the exhibits included in the
Company's Registration Statement on Form S-4 (Registration No.:
333-46957)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the six months ended June 30,
1998.
</TABLE>
<PAGE> 17
SIGNATURES
Pursuant to the requirement 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: LIBERTY GROUP PUBLISHING, INC.
-------------------
/s/ Kenneth L. Serota
-----------------------------------
Kenneth L. Serota
President and Chief Executive
Officer
/s/ Kevin O'Shea
-----------------------------------
Kevin O'Shea
Senior Vice President and
Chief Financial Officer
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,296
<SECURITIES> 0
<RECEIVABLES> 11,820
<ALLOWANCES> (730)
<INVENTORY> 2,147
<CURRENT-ASSETS> 17,899
<PP&E> 23,053
<DEPRECIATION> (1,011)
<TOTAL-ASSETS> 351,299
<CURRENT-LIABILITIES> 18,872
<BONDS> 234,090
98,970
0
<COMMON> 8,000
<OTHER-SE> (8,633)
<TOTAL-LIABILITY-AND-EQUITY> 351,299
<SALES> 49,530
<TOTAL-REVENUES> 49,530
<CGS> 35,750
<TOTAL-COSTS> 35,750
<OTHER-EXPENSES> 6,140
<LOSS-PROVISION> (454)
<INTEREST-EXPENSE> 11,642
<INCOME-PRETAX> (3,664)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,664)
<EPS-PRIMARY> (.458)
<EPS-DILUTED> (.458)
</TABLE>
