<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
SEPTEMBER 30, 1998 333-46957
------------------
LIBERTY GROUP PUBLISHING, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-4197635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 DUNDEE ROAD, NORTHBROOK, ILLINOIS 60062
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 272-2244
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS, AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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TABLE OF CONTENTS
<TABLE>
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Unaudited Interim Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at September 30,
1998 and December 31, 1997. . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 1998
and September 30, 1997 . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and
September 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 . . . . . . . . . . . 6
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 11
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor
30-Sep-98 31-Dec-97
---------------------------
(Unaudited)
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Assets
Cash and cash equivalents $ 4,438 $ 1,452
Accounts receivable, net 12,259 10,308
Inventory 2,086 1,947
Prepaid expenses 434 278
Other current assets 129 -
--------- ---------
Total current assets 19,346 13,985
Property, plant and equipment, net 24,146 20,503
Intangible assets, net 325,913 75,212
Other assets 399 -
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Total assets $ 369,804 $ 109,700
========= =========
Liabilities and Stockholder's equity (deficit)
Current portion of long-term liabilities $ - $ 338
Accounts payable 3,157 1,119
Accrued charges 8,979 2,223
Deferred revenue 5,225 4,411
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Total current liabilities 17,361 8,091
Long term liabilities
Senior subordinated note 180,000 -
Revolving credit facility 20,000 -
Senior discount debentures 54,547 -
Long-term liabilities, less current portion 1,135 706
Deferred income taxes - 1,764
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Total liabilities 273,043 10,561
Senior mandatory redeemable preferred stock 49,630 -
Junior mandatory redeemable preferred stock 52,382 -
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Total mandatory redeemable preferred stock 102,012 -
Common stock 1 -
Additional paid in capital 7,999
Accumulated deficit (13,251) -
Net assets - 99,139
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Total stockholders' equity (deficit) (5,251) 99,139
========= =========
Total liabilities and stockholders' equity
(deficit) $ 369,804 $ 109,700
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
Successor Predecessor Successor Predecessor
1998 1997 1998 1997
------------------------ ------------------------
(Unaudited) (Unaudited)
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Revenues
Advertising $ 21,530 $ 18,308 $ 56,851 $ 51,496
Circulation 5,897 5,472 16,684 15,978
Job printing and other 1,613 1,602 5,035 5,785
--------- --------- --------- ---------
Total revenues 29,040 25,382 78,570 73,259
Operating expenses
Operating costs 11,818 10,080 31,638 29,062
Selling, general and
administrative 9,212 7,481 25,142 21,669
Depreciation and
amortization 3,095 1,857 8,895 5,520
--------- --------- --------- ---------
Income from operations 4,915 5,964 12,895 17,008
Interest expense 6,142 2,679 17,201 7,955
Amortization of debt
issue costs 349 932
--------- --------- --------- ---------
Income (loss) before
income taxes (1,576) 3,285 (5,238) 9,053
Income taxes - 1,418 - 3,906
========= ========= ========= =========
Net income (loss) $ (1,576) $ 1,867 $ (5,238) $ 5,147
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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LIBERTY GROUP PUBLISHING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
Successor Predecessor
1998 1997
- - -------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,238) $ 5,147
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 8,895 5,520
Amortization of debt issue costs 932
Accretion of senior discount notes 4,025
Changes in assets and liabilities,
net of amounts arising from acquisitions
Working capital - net 6,081 573
Other assets (399) -
Deferred revenue 814 33
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Net cash flows provided by operating activities: 15,110 11,273
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Cash flows from investing activities:
Purchase of property, plant and equipment (1,502) (1,332)
Acquisitions (350,137) (1,467)
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Net cash flows used in investing activities: (351,639) (2,799)
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Cash flows from financing activities:
Proceeds from issuing long term debt 221,217 -
Proceeds from use of revolving credit facility 20,000 -
Proceeds from issuing preferred stock 91,750 -
Proceeds from issuing common stock 8,000 -
Payments on long-term liabilities - (480)
Intercompany with Hollinger/APC - (7,987)
-------- --------
Net cash provided by (used in) financing activities: 340,967 (8,467)
-------- --------
Net increase in cash and cash equivalents 4,438 7
Cash and cash equivalents, at beginning of period - 1,768
-------- --------
Cash and cash equivalents, at end of period $ 4,438 $ 1,775
======== ========
</TABLE>
See accompanying notes to consolidated 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
September 30, 1998 and for the three and nine months ended September 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 $323
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 nine months of 1998, the Company acquired certain
28 publications in 12 transactions for a total acquisition cost of $25.1
million.
Certain reclassifications have been made to the 1997 financial statements to
conform to the current year presentation.
<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 in the credit agreement) or the Eurodollar Rate (as
defined in the credit agreement) plus a margin that varies based upon a ratio
set forth in the credit agreement (the "Applicable Margin"). Under the terms of
the Revolving Credit Facility, the Company pays a fee equal to the Applicable
Margin for Eurodollar Rate Advances (as defined in the credit agreement) 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.
At September 30, 1998 the Operating Company has utilized $20.0 million 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 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.
(5) SUBSEQUENT EVENTS
The Company acquired the following newspapers subsequent to September 30, 1998.
The Newton Press, located in Newton, IL, having a paid circulation of 4,000.
The Teutopolis Press, located in Teutopolis, IL, having a paid circulation of
2,000. The Springfield Shopper, located in Springfield, IL, having a free
circulation of 30,000. Press Publications, a group of 37 community newspapers,
located in the western suburbs of Chicago, IL, having a combined circulation of
over 100,000. Mainstream Publications, a group of 10 community newspapers,
located in southwestern Minnesota, having a combined circulation of over 60,000.
After making these acquisitions the Company has acquired 78 publications for an
aggregate acquisition cost of $57.0 million.
<PAGE> 9
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 has 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> 10
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Total Revenues. Total revenues for the quarter ended September 30, 1998
increased by $3.7 million, or 14.4%, to $29.0 million from $25.4 million for the
quarter ended September 30, 1997. The increase in total revenues for the quarter
was primarily due to acquisitions and was comprised of a $3.2 million increase
in advertising revenue and a$0.4 million increase in circulation revenue, while
job printing and other revenue was up 1% to $1.6 million.
Total revenues for the nine months ended September 30, 1998 increased by $5.3
million, or 7.2%, to $78.6 million, primarily due to acquisitions. The increase
in total revenues for the nine months ended September 30, 1998 was comprised of
a $5.4 million increase in advertising revenue and a $0.7 million increase in
circulation revenue, offset by a $0.8 decrease in job printing and other
revenue.
Operating Costs. Operating costs for the quarter ended September 30,
1998 were $11.8 million which was an increase of $1.7 million over the quarter
ended September 30, 1997. This increase was primarily driven by acquisitions as
well as higher newsprint prices, and the increase in the minimum wage that went
into effect in September of 1997.
Operating costs for the nine months ended September 30, 1998 were $31.6 million
which was an increase of $2.6 million over the nine months ended September 30,
1997. This increase was primarily driven by acquisitions as well as higher
newsprint prices, and 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 September 30, 1998 increased by
$1.7 million, to $9.2 million from $7.5 million for the quarter ended September
30, 1997. The increase in selling, general and administrative expenses during
the quarter ended September 30, 1998 was primarily due to acquisitions as well
as increases in management costs associated with becoming an independent company
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 nine months ended September
30, 1998 increased by $3.5 million, to $25.1 million from $21.7 million for the
nine months ended September 30, 1997. The increase in selling, general and
administrative expenses for the nine months ended September 30, 1998 was
primarily due to acquisitions as well as increases in management costs
associated with becoming an independent company 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 September 30, 1998 increased by $1.2 million, to $3.1
million from $1.9 million for the quarter ended September 30, 1997, as a result
of the write-up in basis of assets acquired in the initial Acquisition as well
as subsequent acquisitions.
Depreciation and amortization expense for the nine months ended September 30,
1998 increased by $3.4 million, to $8.9 million from $5.5 million for the nine
months ended September 30, 1997, as a result of the write-up in basis of assets
acquired.
EBITDA. EBITDA for the quarter ended September 30, 1998 increased by
$0.2 million, to $8.0 million from $7.8 million for the quarter ended September
30, 1997. The increase in EBITDA during the quarter ended September 30, 1998 was
primarily due to operating income generated by acquisitions, offset by higher
newsprint cost and higher wages due to the increase in the minimum wage.
<PAGE> 11
EBITDA for the nine months ended September 30, 1998 decreased by $0.7 million,
to $21.8 million from $22.5 million for the nine months ended September 30,
1997. The decrease in EBITDA during the nine months ended September 30, 1998 was
primarily due to higher administrative expenses, increased newsprint costs, and
the effect of the increase in the minimum wage.
EBITDA includes income from operations adjusted to exclude depreciation
and amortization expenses. The Company believes that EBITDA provides additional
information for determining its ability to meet future debt service
requirements. However, EBITDA is not a defined term under Generally Accepted
Accounting Principles ("GAAP") and is not indicative of operating income or
cash flow from operations as determined under GAAP.
Net Income (Loss). The Company incurred a net loss of $1.6 million for
the quarter ended September 30, 1998, which is not directly comparable to the
prior year due to higher depreciation and amortization expenses, increased
interest expense, and higher administrative expenses associated the Acquisition.
For the nine months ended September 30, 1998, the Company incurred a net loss of
$5.2 million which is not directly comparable to the prior year due primarily to
higher depreciation and amortization expenses, increased interest expense, and
higher administrative expenses associated the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities. Net cash provided by operating
activities for the nine months ended September 30, 1998 increased by $3.8
million to $15.1 million compared with $11.3 million for the nine months ended
September 30, 1997. The increase in net working capital is due to increases in
accounts receivable and inventory offset by increases in account payable and
accrued charges.
Cash Flows From Investing Activities. Net cash used in investing
activities for the nine months ended September 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 nine months ended September 30, 1998 reflect the initial
capitalization of the Company through the issuance of Common Stock and Senior
Subordinated Notes, net of associated fees, and is not directly comparable to
the prior year. The Company is subject to certain covenants that limit its
ability to pay dividends and make other restricted payments 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 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 nine months ended September 30, 1998 was $17.2 million
including non-cash interest of $4.0 million, in addition, amortization of
debt issue costs was $0.9 million. As of September 30, 1998, LGP had $250.1
million (net of cash) of outstanding indebtedness, $102.0. million of mandatory
redeemable preferred stock and a stockholder's deficit of 5.1 million. As of
September 30, 1998, the ratio of outstanding indebtedness to total
capitalization of LGP was .71 to 1. The degree to which LGP is leveraged could
have important consequences, including the following: (i) for the fiscal year
<PAGE> 12
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 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 ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired.
Year 2000. The Company has implemented a program to assess, remediate
and mitigate the potential impact of the Year 2000 problem throughout the
Company. A Year 2000 problem will occur where date-sensitive software uses two
digit year date fields, the sorting the Year 2000 ("00") before the year 1999
("99"). The Year 2000 problem can arise in software, technology equipment, or
any other equipment or process that uses embedded software, resulting in data
corruption and processing errors.
The Company has evaluated its internal software and computer systems
and believes its costs associated with addressing, the risk of operational
disruption from internal software systems failures relating to Year 2000 issues,
will be approximately $0.5 million in 1998 and approximately $0.2 million in
1999.
Management believes that the Company's systems will be substantially
Year 2000 ready prior to the commencement of the Year 2000. The Company should
not have a material business risk from such Year 2000 issues provided the
Company's suppliers, vendors, service providers and customers, over which the
Company has no control, successfully address their own Year 2000 issues. The
Company will assess and monitor its suppliers, vendors, service providers and
customers Year 2000 remediation efforts.
Recent Acquisitions. In pursuit of its strategy of acquiring local
publications, the Company consummated a number of acquisitions during the nine
months ended September 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, NY. The Gridley Herald a 3,500 circulation weekly and The Gridley
Shopping News, a 11,500 circulation shopper in Gridley, Ca. The Corning-Elmira
Pennysaver, a 34,500 circulation shopper in Painted Post, NY. The Wellington
Daily News, a daily newspaper with paid circulation of approximately 4,000
located in Wellington KS. The Macomb Journal, a daily newspaper with paid
circulation of 8,000 located in Macomb, IL. The South Idaho Press, a daily
newspaper with paid circulation of 6,000, located in Burley, ID. The Beauregard
Daily News, The Leesville Daily Leader and The Southwest Daily News all paid
daily newspapers with an average circulation of 7,000, located in Sulpher, LA.
The Minidoka County News, a weekly newspaper with paid circulation of 2000,
located in Minidoka, ID. The Iowa News, The Mossbluff News, The Vinton News and
The Westlake News all paid weekly newspapers with an average circulation of
2,000 located in Sulpher, LA. The Mac Shopper, a shopper with circulation of
13,000, located in McPherson, KS. The Shopper, a shopper with circulation of
30,000, located in Horseheads, NY. Each of these purchases have been 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.
Subsequent Events. The Company acquired the following newspapers
subsequent to September 30, 1998. The Newton Press, located in Newton, IL,
having a paid circulation of 4,000. The Teutopolis Press, located in
Teutopolis, IL, having a paid circulation of 2,000. The Springfield Shopper,
located in Springfield, IL, having a free circulation of 30,000. Press
Publications, a group of 37 community newspapers, located in the western suburbs
of Chicago, IL, having a combined circulation of over 100,000. Mainstream
Publications, a group of 10 group of community newspapers, located in and around
southwestern Minnesota, having a combined circulation of over 60,000. After
making these acquisitions the Company has acquired 78 publications for an
aggregate acquisition cost of $57.0 million.
<PAGE> 13
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> 14
ITEM 6. Exhibits and Reports on Form 8-K.
- - ------- ---------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT INDEX
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> 15
<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 nine months ended
September 30, 1998.
</TABLE>
<PAGE> 16
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to by 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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AS
OF SEPTEMBER 30, 1998 AND THE STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,438
<SECURITIES> 0
<RECEIVABLES> 13,219
<ALLOWANCES> (960)
<INVENTORY> 2,086
<CURRENT-ASSETS> 19,346
<PP&E> 26,116
<DEPRECIATION> (1,970)
<TOTAL-ASSETS> 369,804
<CURRENT-LIABILITIES> 17,361
<BONDS> 255,682
49,630
52,382
<COMMON> 1
<OTHER-SE> (5,252)
<TOTAL-LIABILITY-AND-EQUITY> 369,804
<SALES> 78,570
<TOTAL-REVENUES> 78,570
<CGS> 56,297
<TOTAL-COSTS> 56,297
<OTHER-EXPENSES> 2,943
<LOSS-PROVISION> 483
<INTEREST-EXPENSE> 18,133
<INCOME-PRETAX> (5,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,238)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
