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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, 1999 333-46957
LIBERTY GROUP PUBLISHING, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-4197635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 DUNDEE ROAD, SUITE 203 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
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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 June 30, 1999
and December 31, 1998............................................... 1
Unaudited Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and June 30, 1998.................... 2
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and June 30, 1998............................... 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
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......... 10
PART II OTHER INFORMATION
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
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LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
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Assets
Current Assets:
Cash and cash equivalents $ 1,502 $ 1,025
Accounts receivable, net of allowance
for doubtful accounts of $980 and $1,182
in 1999 and 1998, respectively 16,349 15,021
Inventory 1,929 2,200
Prepaid expenses 894 240
Other current assets 158 144
-------- --------
Total current assets 20,832 18,630
Property, plant and equipment, net 34,451 29,283
Deferred financing costs, net 11,361 11,347
Intangible assets, net 379,852 350,754
Other assets - 54
-------- --------
Total assets $446,496 $410,068
======== ========
Liabilities and stockholders' equity (deficit) Current Liabilities:
Borrowings under revolving credit facility $ 75,350 $ 46,000
Current portion of long-term liabilities 17 388
Accounts payable 3,441 2,658
Accrued interest 7,515 7,459
Accrued expenses 7,478 7,023
Deferred revenue 6,424 5,777
-------- --------
Total current liabilities 100,225 69,305
Long-term liabilities:
Senior subordinated notes 180,000 180,000
Senior discount debentures, redemption value $89,000 59,363 56,102
Long-term liabilities, less current portion 1,992 1,446
Deferred income taxes 13,715 8,455
-------- --------
Total liabilities 355,295 315,308
Senior mandatory redeemable exchangeable cumulative preferred stock, $0.01 par
value, 21,000,000 shares authorized, 2,159,922 and 2,009,024 issued
and outstanding at June 30, 1999 and December 31, 1998 55,325 51,460
Aggregate involuntary liquidation preference
$25 plus accrued dividends - -
Junior mandatory redeemable cumulative
preferred stock, $0.01 par value, 175,000
shares authorized, 55,485 and 52,812 issued and
outstanding at June 30, 1999 and December 31, 1998 56,410 53,692
-------- --------
Total mandatory redeemable preferred stock 111,735 105,152
Stockholders' equity(deficit)
Common stock, $0.01 par value, 80,000 shares
authorized, issued and outstanding at June 30, 1999 and
December 31, 1998 1 1
Additional paid in capital 8,159 8,159
Subscriptions receivable (409) (501)
Accumulated deficit (28,285) (18,051)
Net assets - -
-------- --------
Total stockholders' equity (deficit) (20,534) (10,392)
-------- --------
Total liabilities and stockholders' equity (deficit) $446,496 $410,068
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</TABLE>
See accompanying notes to consolidated financial statements.
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LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30
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1999 1998 1999 1998
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REVENUES:
Advertising $29,334 $19,230 $54,957 $35,321
Circulation 6,774 5,466 13,350 10,787
Job printing and other 3,403 1,847 6,207 3,421
------- ------- ------- -------
Total revenues 39,511 26,543 74,514 49,529
OPERATING COSTS AND EXPENSES:
Operating costs 17,179 10,331 33,229 19,821
Selling, general and 11,425 8,624 22,396 15,930
administrative
Depreciation and amortization 3,678 2,717 7,346 5,800
------- ------- ------- -------
Income from operations 7,229 4,871 11,543 7,978
Interest expense 7,334 6,086 14,477 11,059
Amortization of debt issue costs 367 350 717 583
------- ------- ------- -------
Income (loss) before income taxes (472) (1,565) (3,651) (3,664)
Income taxes - - - -
------- ------- ------- -------
Net income (loss) (472) (1,565) (3,651) (3,664)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
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LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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1999 1998
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Cash flows from operating activities:
Net loss $ (3,651) $ (3,664)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 7,346 5,800
Amortization of debt issue costs 717 583
Accretion of senior discount notes 3,261 2,498
Non-cash compensation 92 --
Changes in assets and liabilities, net of acquisitions:
Working capital-net (1,547) 9,102
Other assets 54 (614)
-------- --------
Net cash flows provided by
operating activities: 6,272 13,705
-------- --------
Cash flows from investing activities:
Purchases of property, plant
and equipment (2,140) (325)
Acquisitions, net of cash acquired (33,180) (330,077)
-------- --------
Net cash flows used in investing activities: (35,320) (330,402)
-------- --------
Cash flows from financing activities:
Net proceeds from issuing long-term debt -- 221,217
Net borrowings (repayments) under revolving credit facility 29.350 --
Net proceeds from issuing preferred stock -- 91,750
Net proceeds from issuing common Stock -- 8,000
Net increase (decrease) in long-term liabilities 175 26
-------- --------
Net cash provided by financing activities 29,525 320,993
-------- --------
Net increase in cash and cash equivalents 477 4,296
Cash and cash equivalents, at beginning of period 1,025 0
-------- --------
Cash and cash equivalents, at end of period $ 1,502 $ 4,296
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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LIBERTY GROUP PUBLISHING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY, BASIS OF PRESENTATION AND ACQUISITION
Liberty Group Publishing, Inc. ("LGP") is a leading publisher of community
newspapers and related publications that are the dominant source of local news
and print advertising in their communities. 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").
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 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, 1999 and for the three and six months ended June 30, 1999 and 1998
should be read in conjunction with the December 31, 1998 audited consolidated
financial statements of the Company included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
The Company began operations on January 27, 1998, upon the acquisition of
virtually all of the assets and certain liabilities that were used primarily in
the business of publishing, marketing and distributing a total of 166 community
newspapers and related publications. The effective date of the initial
acquisition was January 1, 1998. Since that time, the Company has
purchased an additional 103 publications, for a total of 269 publications in 15
states across the United States.
The Company has accounted for these acquisitions using the purchase method of
accounting. Accordingly, the costs of each acquisition has been allocated to the
assets acquired and liabilities assumed based upon their respective fair values
using independent valuations where appropriate. The costs of certain intangible
assets acquired are being amortized over periods ranging from 5 to 40 years.
(2) BORROWINGS
The acquisitions, 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.
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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.
The Operating Company has in place a $175.0 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. No principal payments are due
on the Revolving Credit Facility until the maturity date January 27, 2003. At
June 30, 1999, the Operating Company has utilized $75.4 million of the Revolving
Credit Facility.
(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, par value $0.01 per
share. The Company's initial capitalization consisted of (i) $45.0 million from
the issuance and sale of 1.8 million shares of 14.75% Senior Mandatory
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 Mandatory 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 Senior 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.
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To date, the Company has elected to pay all of its Senior Preferred Dividends in
additional shares of Senior Preferred Stock. At June 30, 1999, the Company had
accumulated but undeclared dividends of $1,327.
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
mandatory 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.
To date, the Company has elected to pay all of its Junior Preferred Dividends in
additional shares of Junior Preferred Stock. At June 30, 1999, the Company had
accumulated but undeclared dividends of $925.
(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) RECLASSIFICATIONS
Certain amounts in prior year's financial statements have been reclassified to
conform to the 1999 presentation.
(6) SUBSEQUENT EVENTS
On July 1, 1999 the Operating Company consummated an exchange of assets with
Newspaper Holdings, Inc. The Operating Company transferred to Newspaper Holdings
substantially all the assets used in, and the liabilities related to, the
publication, marketing and distribution of seven newspaper businesses operated
in the following communities in Pennsylvania: Corry; Kane; Punxsutawney;
Ridgway; Saint Mary's; Titusville; and Warren County. In exchange, the
liabilities related to, the publication, marketing and distribution of seven
newspaper businesses operated in the following communities: Moberly, Missouri;
Joplin, Missouri; Oswego, New York; Beatrice, Nebraska; Donaldsonville,
Louisiana; Bestrop, Louisiana; and Pratt, Kansas. The Operating Company
believes that the assets transferred to Newspaper Holdings by the Operating
Company had an approximate value of $45 million and the assets transferred to
the Operating Company by Newspaper Holdings had an approximate value of $45
million.
Prior to this transaction, no material relationship existed between the
Operating Company and Newspaper Holdings, or between any affiliates of such
entities.
Subsequent to the closing of the asset exchange, Newspaper Holdings paid to the
Operating Company approximately $209,000 in cash which is the amount by which
the net working capital of the working capital of the newspaper groups
transferred to Newspaper Holdings exceeded the net working capital of the
newspaper groups transferred to the Operating Company.
The Company also acquired the following newspapers subsequent to June 30, 1999:
TITLE LOCATION TYPE OF PAPER CIRCULATION
- ----- -------- ------------- -----------
Lake Area News Focus Lake Ozark, MO Shopper 11,500
Tube Tab Lake Ozark, MO Shopper 16,500
Lake of the Ozarks Boats Lake Ozark, MO Shopper 9,500
Lake of the Ozarks Real Estate Lake Ozark, MO Shopper 9,500
Batavia Republican Batavia, IL Weekly 1,400
Geneva Republican Geneva, IL Weekly 3,500
St. Charles Republican St. Charles, IL Weekly 16,000
Winfield Press Winfield, IL Weekly 3,500
Warrenville Free Press Warrenville, IL Weekly 1,100
Wayne Countryside Press Wayne, IL Weekly 215
West Chicago Press West Chicago, IL Weekly 3,600
Glen Ellyn News Glen Ellyn, IL Weekly 5,200
Warrenville Post Warrenville, IL Weekly 3,600
Wheaton Leader Wheaton, IL Weekly 7,500
Winfield Estate Winfield, IL Weekly 2,600
Maryville Daily Forum Maryville, MO Daily 3,500
Weekly Bargain Shopper Maryville, MO Shopper 10,500
The aggregate acquisition cost of the above newspapers was $13.1 million.
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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 Annual Report on Form 10-K, SEC file number
333-46957. 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 publisher of community newspapers and related
publications that are the dominant source of local news and print advertising in
their markets. As of June 30, 1999 the Company owned 269 publications, including
65 daily newspapers and 121 paid weekly newspapers, in 15 states. Revenues are
derived from advertising (73% of 1998 total revenues), circulation (20%) and job
printing and other (7%).
The Company's primary operating costs and expenses are comprised of
operating costs and selling, general and administrative expenses. 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.
The Company began operations on January 27, 1998, upon the acquisition of
virtually all of the assets and certain liabilities that were used primarily in
the business of publishing, marketing and distributing a total of 166 community
newspapers and related publications. The effective date of the initial
acquisition was January 1, 1998. Since that time, the Company has purchased an
additional 103 publications, for a total of 269 publications in 15 states across
the United States.
The Company has accounted for these acquisitions using the purchase method
of accounting. Accordingly, the cost of each acquisition has been allocated to
the assets acquired and liabilities assumed based upon their respective fair
values using independent valuations where appropriate. The costs of certain
intangible assets acquired are being amortized over periods ranging from 5 to 40
years.
As a result of the depreciation, amortization, and interest expense related
to these acquisitions, 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.
7
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RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED
TO THREE AND SIX MONTHS ENDED JUNE 30, 1998
Total Revenues. Total revenues for the quarter ended June 30, 1999 increased by
$13.0 million, or 49%, to $39.5 million from $26.5 million for the quarter ended
June 30, 1998. The increase in total revenues for the quarter was comprised of a
$10.1 million increase in advertising revenue, a $1.3 million increase in
circulation revenue, and a $1.6 million increase in job printing and other
revenue. Total revenues for the six months ended June 30, 1999 increased by
$25.0 million, or 50%, to $74.5 million from $49.5 million as of June 30, 1998.
The increase in total revenues for the six months ended June 30, 1999 was
primarily due to acquisitions and was comprised of a $19.6 million increase in
advertising revenue and a $2.6 million increase in circulation revenue, while
job printing and other revenue increased by $2.8 million.
Operating Costs. Operating costs for the quarter ended June 30, 1999 were
$17.2 million which was an increase of $6.9 million over the quarter ended June
30, 1998. Total Operating costs, for the six months ended June 30, 1999
increased by $13.4 million, to $33.2 million from $19.8 million as of June 30,
1998. This increase was primarily driven by acquisitions. As a percentage of
revenue, for the quarter ended June 30, 1999, operating costs increased from
38.9% to 43.5%, primarily because properties acquired subsequent to June 30,
1998 had a higher cost structure than existing properties.
Selling, General and Administrative. Selling, general and administrative
expenses for the quarter ended June 30, 1999 increased by $2.8 million, to $11.4
million from $8.6 million for the quarter ended June 30, 1998. For the six
months ended June 30, 1999 selling, general and administrative expenses
increased by $6.5 million to $22.4 million from $15.9 million as of June 30,
1998. The increase in selling, general and administrative expenses during the
quarter ended June 30, 1999 was primarily due to acquisitions. As a percentage
of revenue, selling, general and administrative expenses increased from 28.9% to
32.5%, primarily because properties acquired subsequent to June 30, 1998 had a
higher cost structure than existing properties.
Depreciation and Amortization. Depreciation and amortization expense for
the quarter ended June 30, 1999 increased by $1.0 million, to $3.7 million from
$2.7 million for the quarter ended June 30, 1998, as a result of the
depreciation and amortization of fixed assets and intangible assets acquired
subsequent to June 30, 1998. For the six months ended June 30, 1999 depreciation
and amortization expense increased by $1.5 million to $7.3 million from $5.8
million as of June 30, 1998 primarily because of properties acquired subsequent
to June 30, 1998.
Interest Expense. Interest expense for the quarter ended June 30, 1999
increased by $1.2 million to $7.3 million from $6.1 million for the quarter
ended June 30, 1998. For the six months ended June 30, 1999, interest expense
increased $3.4 million to $14.5 million from $11.1 million as of June 30, 1998.
The increase in interest expense was primarily due to interest on borrowings
used to fund acquisitions subsequent to June 30, 1998.
EBITDA. EBITDA (which is defined as operating income before interest,
taxes, depreciation and amortization) for the quarter ended June 30, 1999
increased by $3.3 million, to $10.9 million from $7.6 million for the quarter
ended June 30, 1998. For the six months ended June 30, 1999, EBITDA increased
$5.1 million, to $18.9 million from $13.8 million as of June 30, 1998. The
increase in EBITDA during the quarter ended June 30, 1999 was primarily due to
operating income generated by acquisitions, higher sales volume, and lower
newsprint costs.
Net Income (Loss). The Company incurred a net loss of $0.5 million for the
quarter ended June 30, 1999, compared to a net loss of $1.6 million for the
quarter ended June 30, 1998. The $1.1 million decrease in the net loss is
attributable to higher sales volume, lower newsprint costs, and earnings from
the companies acquired. For the six month periods ended June 30, 1999 and 1998,
The Company incurred a net loss of $37 million. As a percentage of revenue, the
net loss decreased from 7.4 to 4.9% primarily due to higher sales volume, lower
newsprint costs, and earnings from the companies acquired.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities. Net cash from operating activities
for the six months ended June 30, 1999 decreased by $7.3 million to $6.4 million
compared with cash provided of $13.7 million for the six months ended June 30,
1998. The decrease is due to the timing of the payment of semiannual interest on
Operating Company's 9.375% subordinated notes.
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Cash Flows From Investing Activities. Net cash used in investing activities
for the six months ended June 30, 1999 reflects the acquisitions of Life
Printing & Publishing, Inc. and the Halstad Shopper. 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. The Company will continue to pursue its
strategy of opportunistically purchasing community newspapers in contiguous
markets and clusters of community 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, 1999 reflects borrowings made under
the Company's Revolving Credit Facility to fund acquisition costs. 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 three months ended June 30, 1999 was $7.3 million
including non-cash interest of $1.6 million and amortization of debt issuance
costs of $0.4 million. The degree to which LGP is leveraged could have important
consequences, including the following: (i) for the fiscal year ending December
31, 1999, 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 its 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, 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 $0.3 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
attempt to assess and monitor its suppliers, vendors, service providers and
customers Year 2000 remediation efforts.
9
<PAGE> 12
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.
On July 1, 1999 the Operating Company consummated an exchange of assets with
Newspaper Holdings, Inc. The Operating Company transferred to Newspaper Holdings
substantially all the assets used in, and the liabilities related to, the
publication, marketing and distribution of seven newspaper businesses operated
in the following communities in Pennsylvania: Corry; Kane; Punxsutawney;
Ridgway; Saint Mary's; Titusville; and Warren County. In exchange, the
liabilities related to, the publication, marketing and distribution of seven
newspaper businesses operated in the following communities: Moberly, Missouri;
Joplin, Missouri; Oswego, New York; Beatrice, Nebraska; Donaldsonville,
Louisiana; Bestrop, Louisiana; and Pratt, Kansas. The Operating Company
believes that the assets transferred to Newspaper Holdings by the Operating
Company had an approximate value of $45 million and the assets transferred to
the Operating Company by Newspaper Holdings had an approximate value of $45
million.
Prior to this transaction, no material relationship existed between the
Operating Company and Newspaper Holdings, or between any affiliates of such
entities.
Subsequent to the closing of the asset exchange, Newspaper Holdings paid to the
Operating Company approximately $209,000 in cash which is the amount by which
the net working capital of the working capital of the newspaper groups
transferred to Newspaper Holdings exceeded the net working capital of the
newspaper groups transferred to the Operating Company.
The Company also acquired the following newspapers subsequent to June 30, 1999:
TITLE LOCATION TYPE OF PAPER CIRCULATION
- ----- -------- ------------- -----------
Lake Area News Focus Lake Ozark, MO Shopper 11,500
Tube Tab Lake Ozark, MO Shopper 16,500
Lake of the Ozarks Boats Lake Ozark, MO Shopper 9,500
Lake of the Ozarks Real Estate Lake Ozark, MO Shopper 9,500
Batavia Republican Batavia, IL Weekly 1,400
Geneva Republican Geneva, IL Weekly 3,500
St. Charles Republican St. Charles, IL Weekly 16,000
Winfield Press Winfield, IL Weekly 3,500
Warrenville Free Press Warrenville, IL Weekly 1,100
Wayne Countryside Press Wayne, IL Weekly 215
West Chicago Press West Chicago, IL Weekly 3,600
Glen Ellyn News Glen Ellyn, IL Weekly 5,200
Warrenville Post Warrenville, IL Weekly 3,600
Wheaton Leader Wheaton, IL Weekly 7,500
Winfield Estate Winfield, IL Weekly 2,600
Maryville Daily Forum Maryville, MO Daily 3,500
Weekly Bargain Shopper Maryville, MO Shopper 10,500
The aggregate acquisition cost of the above newspapers was $13.1 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's subsidiary, Liberty Group Operating, Inc. has a $175.0 million
Revolving Credit Facility that matures in January of 2003. 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. As a result, the Company's
interest expense will be affected by changes in the Base Rate or in the
Eurodollar Rate. At June 30, 1999, the Company had borrowed $75.4 million under
this Revolving Credit Facility.
10
<PAGE> 13
Part II
ITEM 2. Changes in Securities and Use of Proceeds.
None
ITEM 4. Submission of Matters to a Vote of Securities Holders.
None
11
<PAGE> 14
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2) Financial Data Schedule
(b) Reports on Form 8-K
On July 16, 1999, the Company filed a Form 8-K with respect to its
exchange of newspapers with Newspapers Holdings, Inc.
12
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
[FN]
* None
</FN>
13
<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.
August 16, 1999 /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
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,502
<SECURITIES> 0
<RECEIVABLES> 17,309
<ALLOWANCES> (960)
<INVENTORY> 1,929
<CURRENT-ASSETS> 20,832
<PP&E> 35,542
<DEPRECIATION> (1,091)
<TOTAL-ASSETS> 446,496
<CURRENT-LIABILITIES> 100,225
<BONDS> 316,705
55,325
56,410
<COMMON> 1
<OTHER-SE> (409)
<TOTAL-LIABILITY-AND-EQUITY> 446,496
<SALES> 74,514
<TOTAL-REVENUES> 74,514
<CGS> 55,142
<TOTAL-COSTS> 55,142
<OTHER-EXPENSES> 2,943
<LOSS-PROVISION> 483
<INTEREST-EXPENSE> 14,477
<INCOME-PRETAX> (3,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,651)
<EPS-BASIC> (45.63)
<EPS-DILUTED> (45.63)
</TABLE>
