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PROSPECTUS
LIBERTY GROUP OPERATING, INC.
OFFER TO EXCHANGE ITS 9 3/8% NEW SENIOR SUBORDINATED NOTES
DUE 2008 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS OUTSTANDING 9 3/8% SENIOR SUBORDINATED NOTES DUE 2008
PAYMENT IRREVOCABLY, FULLY AND UNCONDITIONALLY GUARANTEED ON A SUBORDINATED
BASIS BY EACH OF THE EXISTING AND FUTURE SUBSIDIARY GUARANTORS
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MAY 26,
1998, UNLESS EXTENDED
Liberty Group Operating, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal") to exchange (the "Exchange Offer") $1,000 principal
amount of its 9 3/8% New Senior Subordinated Notes due February 1, 2008 (the
"New Notes") which are irrevocably, fully and unconditionally guaranteed on a
subordinated basis by the Subsidiary Guarantors (as defined herein) and which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which this Prospectus
is a part, for each $1,000 principal amount at maturity of its outstanding
9 3/8% Senior Subordinated Notes due February 1, 2008 (the "Old Notes" and,
together with the New Notes, the "Notes") which are irrevocably, fully and
unconditionally guaranteed on a subordinated basis by the Subsidiary Guarantors
(the "Old Subsidiary Guarantees"). See "The Exchange Offer." The form and terms
of the New Notes are identical in all material respects to the form and terms of
the Old Notes except that the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof. The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits under the indenture governing the Old Notes (the
"Indenture"). Old Notes may be tendered only in integral multiples of $1,000.
The offering of the Old Notes is referred to herein as the "Debt Offering." See
"Description of New Notes" for a description of the material provisions of the
Indenture.
Concurrently with the Exchange Offer, Liberty Group Publishing, Inc.
("Holdings"), which owns 100% of the outstanding common stock of the Company is
offering to exchange, pursuant to a separate prospectus, $1,000 principal amount
of its 11 5/8% New Senior Discount Debentures due 2009 (the "New Senior Discount
Debentures") for each $1,000 principal amount of its outstanding 11 5/8% Senior
Discount Debentures due 2009 (the "Old Senior Discount Debentures") and one
share of 14 3/4% New Senior Redeemable Exchangeable Cumulative Preferred Stock,
liquidation preference $25 per share (the "New Senior Preferred Stock"), for
each outstanding share of its 14 3/4% Senior Redeemable Exchangeable Cumulative
Preferred Stock (the "Old Senior Preferred Stock"). The New Senior Discount
Debentures and the Old Senior Discount Debentures are collectively referred to
herein as the "Senior Discount Debentures." The New Senior Preferred Stock and
the Old Senior Preferred Stock are collectively referred to herein as the
"Senior Preferred Stock."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on May 26, 1998,
unless extended (the "Expiration Date"), such Expiration Date not to be later
than 30 business days from the date of this Prospectus. Tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer."
Interest on the New Notes will be payable semi-annually on February 1 and
August 1 of each year, commencing on August 1, 1998. The New Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 1, 2003 at the redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption. In addition, at any time on or
prior to February 1, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the New Notes originally issued with the net cash proceeds
of one or more Public Equity Offerings (as defined herein) at a redemption price
equal to 109.375% of the principal amount thereof plus accrued and unpaid
interest to the date of redemption; provided, that at least 65% of the original
aggregate principal amount of the New Notes remain outstanding after each such
redemption. In the event of a Change of Control (as defined herein), each Holder
of New Notes will have the right to require the Company to repurchase New Notes
at a cash price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. See "Description of New Notes" for a
description of the material provisions of the Indenture.
The New Notes will be general unsecured obligations of the Company and will
rank subordinate in right of payment to all existing and future Indebtedness (as
defined herein) of the Company that is senior to the New Notes, senior in right
of payment to all future subordinated Indebtedness of the Company and pari passu
in right of payment with all future senior subordinated Indebtedness of the
Company. The New Notes will be irrevocably, fully and unconditionally, jointly
and severally guaranteed (the "New Subsidiary Guarantees" and, together with the
Old Subsidiary Guarantees, the "Subsidiary Guarantees") on a subordinated basis
by each of the existing and future Subsidiary Guarantors (the "Subsidiary
Guarantors"). The New Subsidiary Guarantees will be general unsecured
obligations of the Subsidiary Guarantors and will rank subordinate in right of
payment to all existing and future Indebtedness of the Subsidiary Guarantors
that is senior to the New Subsidiary Guarantees, senior in right of payment to
all future subordinated Indebtedness of the Subsidiary Guarantors and pari passu
in right of payment with all future senior subordinated Indebtedness of the
Subsidiary Guarantors. As of April 3, 1998, the Company had no Indebtedness
ranking senior to the New Notes. The terms of the Indenture limit the ability of
the Company and the Subsidiary Guarantors to incur additional Indebtedness. The
Company currently is seeking a no-action letter from the Securities and Exchange
Commission (the "Commission") in response to the Company's request that the
Subsidiary Guarantors not be required to file separate periodic reports pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(Cover continued on following page)
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
AND/OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 27, 1998.
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(Continuation of cover page)
New Notes sold will initially be represented by a single permanent global
certificate in fully registered form and will be deposited with a custodian for,
and registered in the name of a nominee of, The Depository Trust Company, New
York, New York ("DTC").
Based on an interpretation by the staff of the Commission set forth in
several no-action letters to third parties, the Company believes that the New
Notes issued in exchange for Old Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by any Holder (as defined
herein) thereof (other than (i) a broker-dealer who purchases such New Notes
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) any such Holder that is an
"affiliate" of the Company, within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided, that the Holder is acquiring such
New Notes in its ordinary course of business and is not participating, and has
no arrangement or understanding with any person to participate, in any
distribution of the New Notes. See, e.g., Shearman & Sterling (available July 2,
1993), Morgan Stanley & Co. Incorporated (available June 5, 1991), Exxon Capital
Holdings Corporation (available May 13, 1988). Persons wishing to exchange Old
Notes in the Exchange Offer must represent to the Company that such conditions
have been met. However, any Holder who is an "affiliate" of the Company or who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the New Notes cannot rely on the
interpretation by the staff of the Commission set forth in the above-referenced
no-action letters, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Notes. See "The Exchange Offer--Consequences of Non-Tendering Holders of
Old Notes." In addition, each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus, meeting the requirements under the Securities Act, in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and not
acquired directly from the Company. The Company has agreed that for a period of
180 days after the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE
USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF NEW NOTES.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS, INCLUDING THE "SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
SECTIONS, 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,
EXPRESS OR IMPLIED, CONCERNING FUTURE OPERATING RESULTS OR THE ABILITY TO
GENERATE REVENUES, INCOME OR CASH FLOW TO SERVICE THE NEW NOTES ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY 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. THE COMPANY
DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS OR TO
PUBLICLY ANNOUNCE THE RESULTS OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROSPECTUS TO REFLECT FUTURE EVENTS OR
DEVELOPMENTS. ALL FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED BY SUCH
CAUTIONARY STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
INCLUDING "RISK FACTORS."
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, the term "Company" or "Liberty Group Operating"
refers to the assets, liabilities and operations of the 166 local newspapers and
related publications (the "Local Publications") previously owned by subsidiaries
of American Publishing Company ("APC"), a wholly-owned subsidiary of Hollinger
International Inc. ("Hollinger"). Capitalized terms not defined in this
"Summary" section have the meanings set forth elsewhere in this Prospectus.
THE COMPANY
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 owns and operates 166 publications in rural markets
in 11 states: Arizona, Arkansas, California, Illinois, Iowa, Kansas, Michigan,
Minnesota, Missouri, New York and Pennsylvania. The majority of the Company's
paid daily newspapers have been published for more than 100 years and are
typically the only paid daily newspapers of general circulation in their
respective rural markets. The Company's newspapers face limited competition as a
result of operating in markets that are distantly located from large
metropolitan areas and that can support only one primary newspaper. The Company
has increased revenues primarily by acquiring new publications and saturating
existing markets and has increased profitability by aggressively pursuing cost
reduction opportunities. Through a combination of these efforts, total revenues
have grown from $73.7 million in 1993 to $98.7 million in 1997, representing a
compounded annual growth rate of 7.6%. The Company's annual revenue growth rates
for the years 1994 through 1997 were 11.1% in 1994, 6.7% in 1995, 11.6% in 1996
and 1.2% in 1997. During the same period, EBITDA has increased from $20.0
million in 1993 to $30.2 million in 1997, and EBITDA margins have improved from
27.2% to 30.6%. Giving effect to the Acquisition, the Company's pro forma loss
for the year ended December 31, 1997 would have been $5.5 million and such loss
would have been insufficient to cover fixed charges by $5.5 million.
The Company's newspapers are comprised of 55 paid daily newspapers with
circulations ranging from approximately 1,100 to 12,500 and 34 paid non-daily
newspapers with circulations ranging from approximately 100 to 41,000. In
addition, the Company publishes 77 free circulation and "total market coverage"
("TMC") publications with limited or no news or editorial content. TMC
publications are distributed free of charge and generally provide 100%
penetration in their areas of distribution. The Company believes that its paid
newspapers, together with its free circulation and TMC publications, are an
effective medium for advertisers to reach substantially all of the households in
the markets served by the Company. All of the Local Publications are located in
small towns that are not suburbs of large cities and that typically have
populations of less than 20,000. The Company's publications focus on local
content, including coverage of local youth, high school and college sports, as
well as local business, politics, entertainment and cultural news. Each of the
Company's publications is specifically tailored to its market in order to
provide local content that radio, television and large metropolitan newspapers
are unable to provide on a cost-effective basis because of their broader
geographic coverage. The Local Publications also differentiate themselves from
other forms of media by providing a cost-effective medium for local advertisers
to target their customers.
The Company believes that its stable revenues and EBITDA are a result of
its geographic diversification, limited competition, low newsprint requirements
and cost of labor, strong base of local advertisers and lack of reliance on
volatile classified advertising. The regional clusters in which the Local
Publications are published are geographically diverse, with no single market
representing more than 3.5% of the Company's 1997 total revenues. The Local
Publications are well-positioned in their markets and face limited direct
competition for either local newspaper advertising or circulation revenue.
Start-ups of newspapers are rare and potential competitors face considerable
barriers to entry due to the Company's established franchises. The Company's
stable profitability is also a result of its favorable cost structure, which
includes low newsprint and labor cost as a percentage of total revenues. The
Company has relatively low exposure to fluctuations in newsprint prices due to
much lower page counts than large metropolitan newspapers, with newsprint
comprising 8.1% of the
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Company's 1997 total operating expenses, compared to approximately 25% for large
metropolitan newspapers. In addition, management of the Company believes based
upon its operating experience that advertising revenues at the Company's
publications tend to be more stable than the advertising revenues of large
metropolitan newspapers because the Company's publications rely primarily on
local advertising rather than national advertising, with national advertising
comprising 0.9% and local advertising comprising 41.3% of the Company's 1997
total revenues. Local advertising is more stable than national advertising
because local service providers generally have fewer effective advertising
vehicles from which to choose. The Company also relies less than large
metropolitan newspapers upon classified advertising, particularly "help wanted"
sections, which tend to be cyclical.
The Company is led by the same experienced management team that had primary
responsibility for the acquisition activities and operations of the Local
Publications prior to the Acquisition (as defined herein). The five members of
the senior management team have, in the aggregate, over 125 years of experience
in the newspaper industry. The management team has a long history of integrating
acquisitions and improving the operations of both existing and acquired
publications. In addition, the Company retained all of the newspaper publishers
at the Local Publications. The local market knowledge of each newspaper's
publisher and his standing in the community are important in maintaining each
newspaper's local identity and in effectively serving its readership and
advertisers.
BUSINESS STRATEGY
The Company's business strategy is to continue to increase the
profitability of existing and acquired newspaper publications through market
leadership, aggressive cost controls, geographic clustering and revenue
enhancements. The Company attributes its strong historical results and its
positive outlook for growth and profitability to management's ability to
identify and complete acquisitions to which it has successfully applied the
following initiatives:
Market Leadership. The Company's newspapers generally have the largest
local news gathering resources in their markets and differentiate themselves
from large metropolitan newspapers by focusing on local information. The
Company's publications serve as the dominant medium for local print advertisers
to reach a specific audience and for readers interested in local events. The
Company believes that by supplementing its paid newspapers with TMC
publications, which are distributed to either all households in a given area or
all households that do not otherwise receive the paid newspapers, it enables
advertisers to reach substantially all households in the markets that they
serve. The Company seeks to enhance reader loyalty through excellent editorial
content, including the proper mix of local and national news to serve its
markets effectively, and high-quality presentation. In addition, because the
Company's newspapers are generally produced on modern offset presses, the
Company has the ability to execute attractive layouts and color enhancements
that are designed to attract readers.
Aggressive Cost Controls. The Company implements uniform operating policies
and establishes strict cost controls at each of its publications. The Company
believes that operating margins are increased by implementing consistent
policies and standards, including specific guidelines for staffing levels,
employee productivity, automation of pre-press operations and regional
production operations. In addition, the Company utilizes specific guidelines
regarding product quality, distribution and customer service, marketing and
promotion, financial controls and purchasing. The Company establishes strict
cost controls to maintain low overhead expenses and continuously seeks to
identify lower cost alternatives for, and to improve utilization of, raw
materials, equipment and services, including newsprint, ink, office equipment
and supplies, production equipment and telecommunication services.
Geographic Clustering. The Company seeks to concentrate its ownership of
publications into regional clusters in order to realize operating efficiencies,
such as the consolidation and sharing of production and printing functions,
management personnel and other general and administrative costs. In addition,
clustering enables management to maximize revenues through cross-selling and
bundling advertising among contiguous newspaper markets. The Company believes
that its clustering strategy enables its publications to achieve higher
operating margins than they otherwise would achieve on a stand-alone basis. In
addition, clustering
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spreads fixed costs, such as salaries, across publications, which allows the
Company to employ high-quality management that is shared among contiguous
markets.
Revenue Enhancements. The Company seeks to saturate its markets through
market layering, which focuses on introducing new products to increase
readership and advertising revenues. New products have historically included
both paid newspapers and free circulation publications, including TMC
publications. Other new products have included more frequent publication of
non-daily newspapers; shopping guides; and niche publications covering subjects,
such as children and parenting, employment, health, seniors and real estate,
that are of interest to residents of particular geographic areas and members of
particular demographic groups. The Company believes that its market layering
strategy has successfully increased its penetration, strengthened its market
presence and protected its publications from encroachment by competitors.
Attractive Acquisition Opportunities. The Company's low-cost operating
model, broad geographic coverage and successful acquisition history provide a
platform for the acquisition of local newspapers. The Company has a proven track
record of significantly improving the profitability of acquired operations by
implementing the same cost control systems and revenue enhancements that are in
place at existing properties. Favorable acquisition candidates would have some
or all of the following characteristics: a long publishing history, strong
readership and advertiser loyalty, editorial independence and potential
opportunities for revenue enhancements and increases in profitability through
cost reductions and synergies with the Company's existing operations. The
Company believes that the newspaper publishing industry is highly fragmented,
with over 7,500 paid daily and non-daily publications with circulations of less
than 25,000 operating in the United States today. The Company further believes
that competition is abating for these smaller publications as the historical
acquirors of such publications have grown too large for publications of this
size to have a meaningful impact on operations and have diverted resources
toward the acquisition of metropolitan newspapers.
THE ACQUISITION
On January 27, 1998 (the "Closing Date"), the Company acquired from
wholly-owned subsidiaries of Hollinger virtually all of the assets that were
used primarily in the business of publishing, marketing and distributing the
Local Publications (the "Acquisition") pursuant to the Asset Purchase Agreements
(as defined herein).
In consideration of the transfer of such assets, the Company paid Hollinger
the contractual purchase price of $309.1 million, plus interest of $1.1 million
calculated pursuant to the Asset Purchase Agreements, and received from
Hollinger a cash adjustment of $3.0 million, which resulted in a net cash
payment of $307.2 million (the "Purchase Price"), and assumed certain
liabilities related to the Local Publications. Pursuant to the Asset Purchase
Agreements, on April 2, 1998, the Company paid Hollinger approximately $3.6
million as a working capital adjustment and received from Hollinger an
additional cash adjustment of approximately $0.2 million. Of the total Purchase
Price, approximately $31.0 million represented consideration in connection with
a Non-Competition Agreement (the "Non-Competition Agreement") whereby Hollinger
and its affiliates have agreed not to compete with the Company's acquired
newspaper business. Also in connection with the Acquisition, the Company and
American Publishing Management Services, Inc. ("APMS"), a wholly-owned
subsidiary of Hollinger, entered into a Transitional Services Agreement (the
"Transitional Services Agreement") pursuant to which APMS has agreed to provide
to the Company, at the Company's option, certain management and administrative
services at cost for a period of three years. See "The Acquisition--Other
Agreements Related to the Acquisition" for a description of the material
provisions of the Non-Competition Agreement and the Transitional Services
Agreement.
The Acquisition, including the payment of related fees and expenses, was
financed from: (i) proceeds of $180.0 million from the issuance and sale of the
Old Notes; (ii) proceeds of $50.5 million from the issuance and sale of the Old
Senior Discount Debentures; (iii) proceeds of $45.0 million from the issuance
and sale of the Old Senior Preferred Stock; (iv) proceeds of $49.0 million from
the issuance and sale of Holdings' Series B 10% Junior Redeemable Cumulative
Preferred Stock ("Holdings' Junior Preferred Stock"); and (v) proceeds of $8.0
million from the issuance and sale of shares of Holdings common stock (together
with
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the Acquisition and the establishment of the Revolving Credit Facility (as
defined herein), referred to herein as the "Transactions"). Management of the
Company believes that the financing used for the Acquisition provides the
Company with the least expensive and most flexible form of financing available
to successfully implement the Company's operating and acquisition strategies.
The Company is a wholly owned subsidiary of Holdings and was incorporated
under the laws of the State of Delaware in 1997 as part of the Acquisition. The
Company maintains its principal executive offices at 3000 Dundee Road, Suite
203, Northbrook, Illinois 60062, and its telephone number is (847) 272-2244.
RELATED TRANSACTIONS
On January 27, 1998, Holdings sold $89.0 million aggregate principal amount
of its Old Senior Discount Debentures (the "Holdings Old Debenture Offering")
which were issued pursuant to an indenture dated as of January 27, 1998 among
Holdings and State Street Bank and Trust Company, as Trustee (the "Debenture
Indenture"). Contemporaneously with the Exchange Offer, Holdings will commence
an offer to exchange an equal principal amount at maturity of its New Senior
Discount Debentures for any and all of its outstanding Old Senior Discount
Debentures.
On January 27, 1998, Holdings sold 1,800,000 shares of Holdings' Old Senior
Preferred Stock (the "Holdings Old Senior Preferred Stock Offering") for
aggregate consideration of $45.0 million. Contemporaneously with the Exchange
Offer, Holdings commenced an offer to exchange one share of its New Senior
Preferred Stock for each outstanding share of its Old Senior Preferred Stock.
The net proceeds of the Holdings Old Debenture Offering and Holdings Old
Senior Preferred Stock Offering were used, together with the proceeds from the
issuance and sale of the Old Notes, the Holdings Junior Preferred Stock and
shares of Holdings Common Stock, to finance the Acquisition and to pay related
fees and expenses.
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THE EXCHANGE OFFER
Registration Rights
Agreement.................. The Old Notes were sold by the Company on January
27, 1998 to Donaldson, Lufkin & Jenrette Securities
Corporation, Citicorp Securities, Inc., BT Alex.
Brown and Chase Securities Inc., as initial
purchasers (the "Initial Purchasers"), who sold the
Old Notes to institutional investors. In connection
therewith, the Company executed and delivered for
the benefit of the Holders of the Old Notes an
exchange and registration rights agreement (the
"Registration Rights Agreement") providing for the
Exchange Offer.
The Exchange Offer......... $1,000 principal amount at maturity of New Notes in
exchange for each $1,000 principal amount at
maturity of outstanding Old Notes. As of the date
hereof, $180.0 million aggregate principal amount
at maturity of Old Notes are outstanding. The
Company will issue the New Notes to Holders as
promptly as practicable after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued in exchange for Old Notes pursuant to the
Exchange Offer may be offered for resale, resold
and otherwise transferred by any Holder thereof
(other than (i) a broker-dealer who purchases such
New Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) any such
Holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act; provided, that the Holder is acquiring such
New Notes in its ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate, in
any distribution of the New Notes. See, e.g.,
Shearman & Sterling (available July 2, 1993),
Morgan Stanley & Co. Incorporated (available June
5, 1991), Exxon Capital Holdings Corporation
(available May 13, 1988). Persons wishing to
exchange Old Notes in the Exchange Offer must
represent to the Company that such conditions have
been met. However, any Holder who is an "affiliate"
of the Company or who tenders in the Exchange Offer
for the purpose of distributing the New Notes
cannot rely on the interpretation of the staff of
the Commission set forth in the above-referenced
no-action letters and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
or transfer of the Old Notes. See "The Exchange
Offer--Consequences to Non-Tendering Holders of Old
Notes."
Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities and not
acquired directly from the Company. The Company has
agreed that for a period of
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180 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan
of Distribution."
Expiration Date............ 5:00 p.m., New York City time, on May 26, 1998,
unless the Exchange Offer is extended (such
Expiration Date not to be later than 30 business
days from the date of this Prospectus), in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions which may be waived by the Company. See
"The Exchange Offer--Conditions."
Procedures for Tendering
Old Notes................ Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or (in
the case of a book-entry transfer) an Agent's
Message (as defined herein) in lieu of the Letter
of Transmittal, together with Old Notes and any
other required documentation to the Exchange Agent
(as defined herein) at the address set forth
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company that,
among other things, the New Notes acquired pursuant
to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such New Notes, whether or not such person is the
Holder, that neither the Holder nor any such other
person has an arrangement or understanding with any
person to participate in the distribution of such
New Notes and that neither the Holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. See
"The Exchange Offer--Procedures for Tendering."
Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such
New Notes. See "The Exchange Offer--Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered Holder
promptly and instruct such registered Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
See "The Exchange Offer--Procedures for Tendering."
6
<PAGE> 9
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date, or who
cannot complete the procedure for book-entry
transfer on a timely basis and deliver an Agent's
Message, must tender their Old Notes according to
the guaranteed delivery procedures set forth in
"The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes.... Subject to certain conditions described under "The
Exchange Offer--Conditions," the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Consequences to
Non-Tendering Holders of
Old Notes................ Upon consummation of the Exchange Offer, the
Company will have no further obligation to register
the Old Notes. Thereafter, any Holder of Old Notes
who does not tender its Old Notes in the Exchange
Offer, including any Holder which is an "affiliate"
(as that term is defined in Rule 405 of the
Securities Act) of the Company which cannot tender
its Old Notes in the Exchange Offer, will continue
to hold restricted securities which may not be
offered, sold or otherwise transferred, pledged or
hypothecated except pursuant to Rule 144 and Rule
144A under the Securities Act or pursuant to any
other exemption from registration under the
Securities Act relating to the disposition of
securities. In addition, in connection with any
sale of Old Notes, an opinion of counsel must be
furnished to the Company that such an exemption is
available for such sale.
Certain Federal Income Tax
Consequences............. The exchange pursuant to the Exchange Offer should
not be treated as a taxable exchange for federal
income tax purposes. See "Certain Federal Income
Tax Consequences--Consequences of Exchange Offer to
Exchanging and Nonexchanging Holders."
Exchange Agent............. State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
Use of Proceeds............ The Company will not receive any proceeds from the
issuance of New Notes offered in the Exchange
Offer. See "Use of Proceeds."
7
<PAGE> 10
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer applies to $180.0 million aggregate principal amount at
maturity of Old Notes. The form and terms of the New Notes are identical in all
material respects to the form and terms of the Old Notes except that the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof. The New Notes will evidence the
same debt as the Old Notes and will be entitled to the benefits of the
Indenture. See "Description of New Notes" for a description of the material
provisions of the Indenture.
Issuer..................... Liberty Group Operating, Inc.
Securities Offered......... $180.0 million aggregate principal amount of
9 3/8% New Senior Subordinated Notes due 2008.
Subsidiary Guarantors...... The New Notes will be irrevocably, fully and
unconditionally guaranteed on an unsecured
subordinated basis by all of the Company's existing
and future Subsidiary Guarantors in accordance with
the Indenture. See "The Exchange Offer--General."
Maturity Date.............. February 1, 2008.
Interest Payment Dates..... February 1 and August 1 of each year, commencing on
August 1, 1998.
Ranking.................... The New Notes and the New Subsidiary Guarantees
will be general unsecured obligations of the
Company and the Subsidiary Guarantors,
respectively, and will rank subordinate in right of
payment to all existing and future Senior
Indebtedness, senior in right of payment to all
future subordinated Indebtedness and pari passu in
right of payment with all future senior
subordinated Indebtedness of the Company and the
Subsidiary Guarantors, respectively. As of April 3,
1998, the Company had no long-term Indebtedness
ranking senior to the New Notes.
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or
after February 1, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest
to the date of redemption. In addition, at any time
on or before February 1, 2001, the Company may
redeem, on one or more occasions, up to an
aggregate of 35% of the aggregate principal amount
of the New Notes originally issued with the net
cash proceeds of one or more Public Equity
Offerings (as defined herein) at a redemption price
equal to 109.375% of the principal amount thereof
plus accrued and unpaid interest to the date of
redemption; provided, that at least 65% of the
original aggregate principal amount of the New
Notes remain outstanding after each such
redemption. See "Description of New Notes--Optional
Redemption."
Change of Control.......... In the event of a Change of Control, each Holder of
New Notes will have the right to require the
Company to repurchase New Notes at a cash price
equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of
repurchase. See "Description of New Notes--Certain
Covenants--Repurchase of New Notes at the Option of
the Holder Upon a Change of Control."
Certain Covenants.......... The Indenture contains certain covenants that limit
the ability of the Company and its subsidiaries to,
among other things, (i) incur additional
Indebtedness and issue Disqualified Capital Stock,
(ii) pay dividends or make other distributions,
(iii) create certain liens, (iv) sell certain
assets and stock of subsidiaries, (v) enter into
certain transactions with affiliates, and (vi)
effect certain mergers and consolidations. See
"Description of New Notes--Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the New Notes.
8
<PAGE> 11
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary combined historical and pro forma
financial data of the Company. The summary historical financial data as of
December 31, 1997 and for the years ended December 31, 1995, 1996 and 1997 are
derived from the combined financial statements of the Company, which have been
audited by independent auditors. The summary historical financial data for the
years ended December 31, 1993 and 1994 have been derived from the unaudited
combined financial statements of the Company and include, in the opinion of the
Company, all adjustments necessary to present fairly the data for such periods.
The results for the year ended December 31, 1997 are not necessarily indicative
of the results to be expected for any future period. The pro forma combined
statement of operations data for the year ended December 31, 1997 gives effect
to the Transactions as if they had occurred on January 1, 1997. The pro forma
combined balance sheet data as of December 31, 1997 gives effect to the
Transactions as if they had occurred on December 31, 1997. The data presented
below should be read in conjunction with the combined financial statements,
including the notes thereto, "Unaudited Pro Forma Combined Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
YEAR END31,DECEMBER PRO FORMA
----------------------------------------------- YEAR ENDED
1993 1994 1995 1996 1997 DECEMBER 31, 1997
------- ------- ------- ------- ------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising..................... $50,252 $56,770 $60,255 $66,816 $68,712 $68,712
Circulation..................... 16,287 17,766 19,058 22,004 22,341 22,341
Job printing and other.......... 7,128 7,328 8,054 8,722 7,666 7,666
------- ------- ------- ------- ------- -------
Total revenues.................... 73,667 81,864 87,367 97,542 98,719 98,719
Operating costs................... 23,743 25,880 29,405 31,320 29,318 29,318
Selling, general and
administrative.................. 29,910 33,255 34,506 38,259 39,162 40,527
Depreciation and amortization..... 7,450 7,722 7,290 7,854 7,470 15,027
------- ------- ------- ------- ------- -------
Income from operations............ 12,564 15,007 16,166 20,109 22,769 13,847
Interest expense.................. 10,711 10,991 11,195 10,968 10,551 19,372
------- ------- ------- ------- ------- -------
Income before income taxes........ 1,853 4,016 4,971 9,141 12,218 (5,525)
Income taxes...................... 778 1,687 2,338 4,006 5,271 --
------- ------- ------- ------- ------- -------
Net income........................ $ 1,075 $ 2,329 $ 2,633 $ 5,135 $ 6,947 $(5,525)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS 31,D1997BER
------------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,452 $ 686
Total assets................................................ 109,700 343,083
Total debt.................................................. -- 180,000
Stockholders' equity........................................ 99,139 152,522
OTHER DATA:
Ratio of earnings to fixed
charges(1)...................... 1.2x 1.4x 1.4x 1.8x 2.2x --
Cash flow provided by (used in):
Operating activities............ $ N/A $10,169 $ 7,889 $14,303 $14,577 $10,875
Investing activities............ N/A 492 (14,906) (4,520) (3,370) (3,370)
Financing activities............ N/A (10,638) 7,203 (9,944) (11,523) (735)
EBITDA(2)......................... 20,014 22,729 23,456 27,963 30,239 28,874
EBITDA margin(3).................. 27.2% 27.8% 26.8% 28.7% 30.6% 29.2%
Capital expenditures.............. $ 1,813 $ 2,232 $ 2,255 $ 3,081 $ 1,713 $ 1,713
</TABLE>
(footnotes
on following page)
9
<PAGE> 12
NOTES TO SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(1) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income before income taxes plus fixed charges. "Fixed charges"
consist of interest on all indebtedness, amortization of deferred debt
financing costs and one-third of rental expense (the portion deemed
representative of the interest factor). The ratio of earnings to fixed
charges is helpful to investors as it provides a measure, generally
calculated consistently by all companies, of a company's ability to meet its
debt service requirements. On a pro forma basis for the year ended December
31, 1997, earnings were insufficient to cover fixed charges by $5.5 million.
(2) EBITDA represents net income before income taxes, interest expense and
depreciation and amortization. Management believes that the presentation of
EBITDA is helpful to investors as a measure of the Company's ability to meet
its working capital, capital expenditure and debt service requirements.
Management also believes that the presentation of EBITDA is helpful to
investors, because EBITDA will be used to determine compliance with certain
covenants contained in the Indenture. EBITDA, however, should not be
construed as an alternative to net income or cash flows from operating
activities, each as determined in accordance with generally accepted
accounting principles ("GAAP"), as a measure of operating performance or
liquidity. Further, EBITDA is not calculated consistently by all companies
and, accordingly, the presentation herein may not be comparable to other
similarly titled measures presented by other companies. Management believes
that the Company's financial stability can be depicted to investors by its
historical EBITDA, which during the period 1993 through 1997 has increased
generally in amounts and percentages equal to the Company's income from
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) EBITDA margin represents EBITDA divided by total revenues.
10
<PAGE> 13
RISK FACTORS
In addition to the other matters described in this Prospectus, prospective
investors should carefully consider the following risk factors before deciding
to make an investment in the New Notes. Prospective investors should also refer
to the "Disclosure Regarding Forward-Looking Statements" found on page i of this
Prospectus when evaluating this "Risk Factors" section and the Company's
business, financial condition and operations.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company is highly leveraged and has Indebtedness that is substantial in
relation to its stockholders' equity, tangible equity and cash flow. As of
December 31, 1997, on a pro forma basis after giving effect to the Transactions,
the Company would have had an aggregate of $180.0 million of outstanding
Indebtedness, $152.5 million of stockholders' equity and ($156.8) million of
tangible equity. As of December 31, 1997, on a pro forma basis after giving
effect to the Transactions, the ratio of outstanding Indebtedness to total
capitalization was 0.54 to 1.00. For the year ended December 31, 1997, on a pro
forma basis after giving effect to the Transactions, earnings were insufficient
to cover fixed charges by $5.5 million. The degree to which the Company is
leveraged could have important consequences to holders of the New Notes,
including the following: (i) during the fiscal year ending December 31, 1998,
approximately two-thirds of the Company's cash flow from operations must be
dedicated to the payment of interest on the New 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 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
conditions 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.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture and the Revolving Credit Facility impose upon the Company
certain restrictive financial and operating covenants, including, among others,
requirements that the Company maintain certain financial ratios and satisfy
certain financial tests, limitations on capital expenditures, and restrictions
on the ability of the Company to incur debt, pay dividends or take certain other
corporate actions, all of which may restrict the Company's ability to expand or
to pursue its business strategies. Certain of the covenants in the Revolving
Credit Facility are more restrictive than those in the Indenture. Changes in
economic or business conditions, results of operations or other factors could in
the future cause a violation of one or more covenants in the Company's debt
instruments, which could lead to such Indebtedness becoming immediately due and
payable. See "Description of New Notes--Certain Covenants" and "Description of
Revolving Credit Facility."
SECURED INDEBTEDNESS; SUBORDINATION
The New Notes will be subordinated in right of payment to all Indebtedness
of the Company that is senior to the New Notes, including Indebtedness under the
Revolving Credit Facility. Further, the Revolving Credit Facility is secured by
substantially all of the assets of the Company and its subsidiaries and will
become due prior to the time the principal on the New Notes will become due. In
addition, the New Subsidiary Guarantees will be subordinated in right of payment
to all Indebtedness of the Subsidiary Guarantors that is senior to the New
Subsidiary Guarantees, including the guarantee of Indebtedness under the
Revolving Credit Facility. In the event of the bankruptcy, liquidation,
dissolution, reorganization or other winding up of the Company or the Subsidiary
Guarantors, the assets of the Company and the Subsidiary Guarantors will be
available to pay obligations on the New Notes only after all Indebtedness that
is senior to the New Notes has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the New Notes
outstanding. As of December 31, 1997, on a pro forma basis after giving effect
to the Transactions, the
11
<PAGE> 14
Company had no Indebtedness ranking senior to the New Notes. See "Description of
Revolving Credit Facility" and "Description of New Notes--Subordination."
POSSIBLE INABILITY TO FUND CHANGE OF CONTROL OFFER
In the event of a Change of Control, each Holder of New Notes will have the
right to require the Company to repurchase all or any part of the outstanding
New Notes at a cash price equal to 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. However, there can be no
assurance that sufficient funds will be available at the time of any Change of
Control to make any required repurchases of New Notes tendered or that
restrictions in the Revolving Credit Facility will allow the Company to make
such required repurchases. In addition, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of New Notes--Certain Covenants--Repurchase of New Notes
at the Option of the Holder Upon a Change of Control."
CONTROL BY PRINCIPAL STOCKHOLDER
Green Equity Investors II, L.P. ("GEI"), an investment partnership managed
by Leonard Green & Partners, L.P. ("LGP"), owns approximately 90% of Holdings
Common Stock and all of the Holdings Junior Preferred Stock. Holdings, in turn,
owns 100% of the outstanding common stock of the Company. Accordingly GEI is
able to elect all of the members of the Board of Directors of Holdings and to
exercise control over Holdings' and the Company's business and affairs. See
"Principal Stockholders."
ABSENCE OF A PUBLIC MARKET
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes were issued on January 27, 1998 to a small number of institutional
investors and are eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screen-based, automated market for trading of securities
eligible for resale under Rule 144A. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for the remaining
untendered Old Notes could be adversely affected. There is no existing trading
market for the New Notes, and there can be no assurance regarding the future
development of a market for the New Notes, or the ability of holders of the New
Notes to sell their New Notes or the price at which such holders may be able to
sell their New Notes. Although the Initial Purchasers of the Old Notes have
informed the Company that they currently intend to make a market in the New
Notes, they are not obligated to do so and any such market making may be
discontinued at any time without notice. As a result, the market price of the
New Notes could be adversely affected. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market.
FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the Company
or any Subsidiary Guarantor, at the time it incurred the Indebtedness evidenced
by the Notes or the Subsidiary Guarantees, (i) (a) was or is insolvent or was
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or any
Subsidiary Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond its
ability to pay such debts as they mature, and (ii) received or receives less
than reasonably equivalent value or fair consideration for the incurrence of
such Indebtedness, then the Notes or the Subsidiary Guarantees could be voided,
or claims in respect of the Notes or the Subsidiary Guarantees could be
subordinated to all other debts of the Company or any Subsidiary Guarantor. In
addition, the payment of interest and principal by the Company pursuant to the
Notes could be voided and required to be returned to the person making such
payment, or to a fund for the benefit of the creditors of the Company or any
Subsidiary Guarantor.
12
<PAGE> 15
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or any Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature or
(ii) it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company believes that, after giving effect to the
Indebtedness incurred in connection with the Debt Offering and the establishment
of the Revolving Credit Facility, it is not insolvent, does not have
unreasonably small capital for the business in which it is engaged and has not
incurred debts beyond its ability to pay such debts as they mature. There can be
no assurance, however, as to what standard a court would apply in making such
determinations or that a court would agree with the Company's conclusions in
this regard.
NEWSPAPER INDUSTRY COMPETITION
The Company's business is concentrated in newspapers and other publications
located primarily in rural markets in the United States. Revenues in the
newspaper industry primarily consist of advertising and paid circulation.
Competition for advertising expenditures and paid circulation comes from local,
regional and national newspapers, shoppers, television, radio, direct mail,
electronic media and other forms of communication and advertising media.
Competition for newspaper advertising expenditures is based largely upon
advertiser results, readership, advertising rates, demographics and circulation
levels, while competition for circulation and readership is based largely upon
the content of the newspaper, its price and the effectiveness of its
distribution. The Company's local and regional newspaper competitors are
typically unique to each market and many of the Company's competitors,
particularly publishers of large metropolitan newspapers, are larger and have
greater financial and distribution resources than the Company. See
"Business--Competition."
DEPENDENCE ON LOCAL ECONOMIES
The Company's advertising revenues and, to a lesser extent, circulation
revenues, are dependent on a variety of factors specific to the communities that
the Company's publications serve. These factors include, among others, the size
and demographic characteristics of the local population, local economic
conditions in general, and the related retail segments in particular. If the
local economy, population or prevailing retail environment of a community served
by the Company were to experience a downturn, the Company's publications in that
market would be adversely affected, which in turn could have an adverse impact
on the Company's business, financial condition or results of operations.
ACQUISITION STRATEGY
The Company anticipates that it will grow through acquisitions of paid
daily and non-daily newspapers and free circulation publications. Acquisitions
may expose the Company to particular risks, including, without limitation,
diversion of management's attention and assumption of liabilities, either of
which could have a material adverse effect on the business, financial condition
or results of operations of the Company. Moreover, there can be no assurance
that the Company will be successful in identifying acquisition opportunities,
assessing the value, strengths and weaknesses of such opportunities or
integrating its acquisitions into the Company. In addition, the Company may
compete for certain acquisition targets with companies having greater financial
resources than the Company. The Company anticipates that it will finance
acquisitions through cash provided by operating activities and borrowings under
its Revolving Credit Facility, which would reduce the Company's cash available
for other purposes, including the repayment of Indebtedness, or increase the
Company's leverage ratio and the amount of Indebtedness ranking senior to the
New Notes. See "Business--Business Strategy."
PRICE AND AVAILABILITY OF NEWSPRINT
The basic raw material for newspapers is newsprint. The Company's newsprint
consumption totaled approximately $6.1 million in 1997, which was 6.2% of the
Company's total revenues. In 1997, the Company consumed approximately 14,750
metric tons of newsprint. The Company has no long-term contracts to
13
<PAGE> 16
purchase newsprint. Although the Company is not dependent on its current sources
for newsprint, the inability of the Company to obtain an adequate supply of
newsprint in the future could have a material adverse effect on the business,
financial condition or results of operations of the Company. Historically, the
price of newsprint has been cyclical and volatile, dropping to almost $400 per
metric ton in 1992 and reaching approximately $770 per metric ton in 1996.
Significant increases in newsprint costs could have a material adverse effect on
the business, financial condition or results of operations of the Company.
Although the Company will seek to manage the effects of increases in prices of
newsprint through a combination of, among other things, technology improvements,
including web width reductions, inventory management and advertising and
circulation price increases, there can be no assurance that such actions will
mitigate any newsprint price increases. See "Business--Newsprint."
LACK OF STAND-ALONE OPERATING HISTORY
The Company's success depends to a great extent on the management and other
skills of its officers and on its ability to recruit and retain other key
personnel. In addition, on a pro forma basis after giving effect to the
Transactions, the Company had losses of $5.5 million. Pursuant to the
Acquisition, the Company allocated management and administrative
responsibilities to certain retained employees which exceed the responsibilities
these employees had with Hollinger. The Company has the option pursuant to the
Transitional Services Agreement to obtain certain services in order to
facilitate the transition of the Company to a stand-alone operation. See "The
Acquisition--Other Agreements Related to the Acquisition" for a description of
the material provisions of the Transitional Services Agreement. Any failure of
the Company to implement management and operating systems that will allow it to
operate effectively as a stand-alone operation upon termination of the
Transitional Services Agreement could have a material adverse effect on the
Company's business, financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and regulations pertaining to air and water quality, storage
tanks and the management and disposal of wastes at its facilities. The Company
cannot predict with any certainty whether future events, such as changes in
existing laws and regulations or the discovery of conditions not currently known
to the Company, may give rise to additional costs that could be material.
Furthermore, actions of federal, state and local governments concerning
environmental matters could result in laws or regulations that could have a
material adverse effect on the business, financial condition or results of
operations of the Company. The Company is not aware of any pending legislation
by federal, state or local governments relating to environmental matters that,
if enacted, would reasonably be expected to have a material adverse effect on
the business, financial condition or results of operations of the Company.
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts its operations through
direct and indirect subsidiaries. The Company's available cash will depend upon
the cash flow of its subsidiaries and the ability of such subsidiaries to make
funds available to the Company in the form of loans, dividends or otherwise. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to make funds available to the Company, whether in the
form of loans, dividends or otherwise. However, each of the existing and future
Subsidiary Guarantors has irrevocably, fully and unconditionally guaranteed the
Notes. The Revolving Credit Facility restricts the ability of any future
subsidiary of the Company, which is not wholly-owned by the Company, to pay
dividends to its shareholders in the event a default has occurred and is
continuing or would result from the payment of such dividend. The Revolving
Credit Facility is secured by the common stock and certain assets of the
Company's operating subsidiaries. In addition, the Company's subsidiaries may,
subject to limitations contained in the Revolving Credit Facility, become
parties to financing arrangements that may contain limitations on the ability of
such subsidiaries to pay dividends or to make loans or advances to the Company.
In the event of any insolvency, bankruptcy or similar proceedings of a
subsidiary, creditors of such subsidiary would generally be entitled to priority
over the Company with respect to assets of the affected subsidiary.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds of the Debt Offering, the Holdings Old Debenture Offering
and the Holdings Old Senior Preferred Stock Offering were used, together with
the proceeds from the issuance and sale of the Holdings' Junior Preferred Stock
and shares of Holdings Common Stock, to finance the Acquisition and to pay
related fees and expenses. The Exchange Offer is intended to satisfy certain
obligations of the Company under the Registration Rights Agreement. The Company
will not receive any proceeds from the issuance of the New Notes offered in the
Exchange Offer.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on January 27, 1998 to the Initial
Purchasers, which placed the Old Notes with institutional investors. In
connection therewith, the Company entered into the Registration Rights
Agreement, which required that, within 90 days following the issuance of the Old
Notes, the Company file with the Commission a registration statement under the
Securities Act with respect to an issue of new notes of the Company identical in
all material respects to the Old Notes, use its best efforts to cause such
registration statement to become effective under the Securities Act and, upon
the effectiveness of that registration statement, offer to the Holders of the
Old Notes the opportunity to exchange their Old Notes for a like principal
amount of New Notes, which will be issued without a restrictive legend and may
be reoffered and resold by such Holders without restrictions or limitations
under the Securities Act. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The term "Holder" with respect to the Exchange Offer means any person (i)
in whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
Holder or (ii) whose Old Notes are held of record by DTC who desires to deliver
such Old Notes by book-entry transfer at DTC.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any Holder thereof (other than
(i) a broker-dealer who purchases such New Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act;
provided, that the Holder is acquiring such New Notes in its ordinary course of
business and is not participating, and has no arrangement or understanding with
any person to participate, in the distribution of the New Notes. See, e.g.,
Shearman & Sterling (available July 2, 1993), Morgan Stanley & Co. Incorporated
(available June 5, 1991), Exxon Capital Holdings Corporation (available May 13,
1988). Persons wishing to exchange Old Notes in the Exchange Offer must
represent to the Company that such conditions have been met. Any Holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Notes could not rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. In addition, any such resale transaction should be covered by an
effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K of the Securities Act.
Further, any Holder who may be deemed an "affiliate" of the Company cannot rely
on the interpretation by the staff of the Commission set forth in the
above-referenced no-action letters with respect to resales of the New Notes
without compliance with the registration and prospectus delivery requirements of
the Securities Act.
In addition, each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. See "Plan of Distribution."
15
<PAGE> 18
As a result of the filing and the effectiveness of the Registration
Statement and the consummation of the Exchange Offer, the Company's obligation
to make certain semi-annual payments with respect to the Old Notes will be
terminated. The Old Notes were issued to a small number of sophisticated
investors on January 27, 1998. To the extent Old Notes are tendered and accepted
in the exchange, the principal amount of outstanding Old Notes will decrease
with a resulting decrease in the liquidity in the market therefor. Following the
Exchange Offer, Holders of Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for the Old
Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date.
The Company will issue $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer. However, Old Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that the New Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture.
As of April 24, 1998, $180.0 million aggregate principal amount at maturity
of the Old Notes were outstanding and there was one registered Holder of the Old
Notes. This Prospectus, together with the Letter of Transmittal, are being sent
to such registered Holder as of April 24, 1998.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on May
26, 1998, unless the Company, in its sole discretion, extends the Exchange Offer
(such Expiration Date not to be later than 30 business days from the date of
this Prospectus), in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
16
<PAGE> 19
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof. If the Exchange Offer is amended in a manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered Holders and the Company will extend the Exchange Offer for a
period of five (5) to ten (10) business days, depending upon the significance of
the amendment and the manner of disclosure to the registered Holders, if the
Exchange Offer would otherwise expire during such five (5) to ten (10) business
day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
PROCEDURES FOR TENDERING
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or (in the case of a
book-entry transfer) an Agent's Message in lieu of the Letter of Transmittal,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. To be
tendered effectively, the Old Notes, Letter of Transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the
Expiration Date. The Term "Agent's Message" means a message, transmitted by DTC
to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment from
the tendering participant, which acknowledgment states that such participant has
received and agrees to be bound by the Letter of Transmittal and that the
Company may enforce such Letter of Transmittal against such participant.
Book-Entry Delivery of the Old Notes. Within two business days after the
date of this Prospectus, the Exchange Agent will establish an account with
respect to the Old Notes at DTC for purposes of the Exchange Offer. Any
financial institution that is a participant in the DTC system may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into
the Exchange Agent's account in accordance with DTC's procedure for such
transfer. Although delivery of Old Notes may be effected through book-entry at
DTC, the Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, or (in the case of a book-entry transfer through the DTC
Automatic Tender Offer Program ("ATOP")) an Agent's Message in lieu of the
Letter of Transmittal, and any other required documents, must be transmitted to
and received by the Exchange Agent at or prior to 5:00 p.m., New York City time,
on the Expiration Date at one of its addresses set forth in "--Exchange Agent."
DELIVERY OF SUCH DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Holder. Instead of delivery by mail, it is recommended that Holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the Exchange Agent before the Expiration Date. No
Letter of Transmittal or Old Notes should be sent to the Company. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the above transactions for such Holders.
17
<PAGE> 20
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered Holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond power are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
Holders of defects or irregularities with respect to tenders of Old Notes, none
of the Company, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth below under "--Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the Holder, that neither the Holder nor any such
other person has an arrangement or understanding with any person to participate
in the distribution of such New Notes and that neither the Holder nor any such
other person is an "affiliate," as defined under Rule 405 of the Securities Act,
of the Company. If the Holder is a broker-dealer that will receive New Notes for
its own
18
<PAGE> 21
account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, such Holder by tendering
will acknowledge that it will deliver a Prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis and deliver an Agent's Message, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
(3) New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer (or a confirmation of a book-transfer into the Exchange Agent's
account at DTC with an Agent's Message) and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of a book-transfer
into the Exchange Agent's account at DTC of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three (3) New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must: (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) be signed by the Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender, and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Properly
withdrawn Old Notes may be retendered by following the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without cost
to such Holder.
19
<PAGE> 22
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Old Notes for, any New Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to the Company, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may: (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering Holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of Holders to withdraw such
Old Notes (see "--Withdrawal of Tenders"), or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
Holders and the Company will extend the Exchange Offer for a period of five (5)
to ten (10) business days, depending upon the significance of the waiver and the
manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five (5) to ten (10) business day period.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent
for the exchange of New Notes for Old Notes, pursuant to the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Mail (registered or certified mail recommended): By Hand or Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department, 4th Floor
P.O. Box 778 Two International Place
Boston, Massachusetts 02102-0078 Boston, Massachusetts 02110
</TABLE>
By Facsimile:
(617) 664-5290
Confirmation by Phone:
Kellie Mullen
(617) 664-5587
20
<PAGE> 23
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith and will
pay the reasonable fees and expenses of one firm acting as counsel for the
Holders of Old Notes should such Holders deem it advisable to appoint such
counsel.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$150,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized upon
consummation of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the New Notes.
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Old Notes. Thereafter, any Holder of Old Notes who
does not tender its Old Notes in the Exchange Offer, including any Holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its Old Notes in the Exchange Offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities.
In addition, in connection with any sale of Old Notes, an opinion of counsel
must be furnished to the Company that such an exemption is available for such
sale.
21
<PAGE> 24
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of December 31, 1997 and its capitalization on a pro forma basis after giving
effect to the Transactions. This table should be read in conjunction with
"Unaudited Pro Forma Combined Financial Data" and the financial statements of
the Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS 31,D1997BER
--------------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Revolving Credit Facility................................. $ -- $ --
Notes..................................................... -- 180,000
-------- --------
Total long-term debt................................... -- 180,000
Stockholders' equity........................................ 99,139 152,522
-------- --------
Total capitalization................................... $ 99,139 $332,522
======== ========
</TABLE>
22
<PAGE> 25
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data has been prepared
by the Company's management from the financial statements of the Company and the
notes thereto included elsewhere in this Prospectus. For purposes of the
following unaudited pro forma combined financial data, the column entitled
"Company" refers to the historical financial position and results of operations
of the Local Newspaper Group of American Publishing Company. Liberty Group
Operating, Inc. was formed for the purpose of acquiring the Local Publications
and, accordingly, as of December 31, 1997, had no assets, liabilities, revenues
or expenses. The unaudited pro forma combined statements of operations for the
year ended December 31, 1997 reflect adjustments as if the Transactions had
occurred on January 1, 1997. The unaudited pro forma combined balance sheet as
of December 31, 1997 gives effect to the Transactions as if they had occurred on
December 31, 1997. See "The Acquisition."
The financial effects of the Transactions as presented in the pro forma
financial data are not necessarily indicative of either the Company's financial
position or the results of its operations that would have been obtained had the
Transactions actually occurred on the dates set forth above, nor are they
necessarily indicative of the results of future operations. The pro forma
financial data should be read in conjunction with the notes thereto, which are
an integral part thereof, and with the financial statements of the Company and
the notes thereto included elsewhere in this Prospectus.
23
<PAGE> 26
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMPANY ADJUSTMENTS PRO FORMA
------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Advertising.............................................. $68,712 $ -- $68,712
Circulation.............................................. 22,341 -- 22,341
Job printing and other................................... 7,666 -- 7,666
------- -------- -------
Total revenues............................................. 98,719 -- 98,719
Operating costs............................................ 29,318 -- 29,318
Selling, general and administrative........................ 39,162 (1,697)(a) 40,527
3,062(b)
Depreciation and amortization.............................. 7,470 7,557(c) 15,027
------- -------- -------
Income from operations..................................... 22,769 (8,922) 13,847
Interest expense........................................... 10,551 8,821(d) 19,372
------- -------- -------
Income (loss) before income taxes.......................... 12,218 (17,743) (5,525)
Income taxes............................................... 5,271 (5,271)(e) --
------- -------- -------
Net income (loss).......................................... $ 6,947 $(12,472) $(5,525)
======= ======== =======
EBITDA(f).................................................. $30,239 $28,874
</TABLE>
24
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(a) Represents elimination of a portion of the intercompany management fees
charged by APC.
(b) Represents establishment of estimated costs of the Company operating on a
stand-alone basis, consisting principally of corporate office facilities,
salaries and wages of corporate staff personnel and a subordinated
management fee to LGP.
(c) Represents adjustment necessary to amortize intangible assets over a
weighted-average life of 25 years. The Company plans to amortize
identifiable intangible assets over their estimated useful lives (presently
estimated for covenants-not-to-compete over 5 years, advertiser lists over
40 years and subscriber lists over 27 years and mastheads over 40 years) and
goodwill over 40 years. Finalization of the value of specific intangible
assets and their useful lives is subject to completion of independent
valuations which are being undertaken. In the opinion of management of the
Company, completion of the independent valuations will not materially impact
the Company's estimate of the fair value of the intangible assets or their
useful lives and, therefore, will not materially impact the unaudited pro
forma combined income statement.
(d) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
31,E1997
-----------------
<S> <C>
Interest and fees on Revolving
Credit Facility and Notes................................. $ 17,500
Other....................................................... 1,872
--------
19,372
Less: amounts in historical statements of operations........ (10,551)
--------
Adjustment to interest expense.............................. $ 8,821
========
</TABLE>
(e) Represents adjustment to eliminate historical income tax expense. Subsequent
to the Acquisition, the Company anticipates that it will, for the
foreseeable future, be in a tax loss position. Given 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.
(f) EBITDA represents net income before income taxes, interest expense and
depreciation and amortization. Management believes that the presentation of
EBITDA is helpful to investors as a measure of the Company's ability to meet
its working capital, capital expenditure and debt service requirements.
Management also believes that the presentation of EBITDA is helpful to
investors, because EBITDA will be used to determine compliance with certain
covenants contained in the Indenture. EBITDA, however, should not be
construed as an alternative to net income or cash flows from operating
activities, each as determined in accordance with GAAP, as a measure of
operating performance or liquidity. Further, EBITDA is not calculated
consistently by all companies and, accordingly, the presentation herein may
not be comparable to other similarly titled measures presented by other
companies. Management believes that the Company's financial stability can be
depicted to investors by its historical EBITDA, which during the period 1993
through 1997 has increased generally in amounts and percentages equal to the
Company's income from operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
25
<PAGE> 28
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS 31,D1997BER
--------------------------------------------
COMPANY ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 1,452 $ (766)(a) $ 686
Accounts receivable, net......................... 10,308 -- 10,308
Inventory........................................ 1,947 -- 1,947
Prepaid expenses and other current assets........ 278 -- 278
-------- --------- --------
Total current assets.......................... 13,985 (766) 13,219
Property, plant and equipment, net................. 20,503 -- 20,503
Intangible assets, net............................. 75,212 219,964(b) 295,176
Other assets....................................... -- 14,185(c) 14,185
-------- --------- --------
Total assets.................................. $109,700 $ 233,383 $343,083
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term liabilities......... $ 338 $ -- $ 338
Accounts payable................................. 1,119 -- 1,119
Accrued expenses................................. 2,223 -- 2,223
Deferred revenue................................. 4,411 -- 4,411
-------- --------- --------
Total current liabilities..................... 8,091 -- 8,091
Revolving Credit Facility.......................... -- -- --
Notes.............................................. -- 180,000(d) 180,000
Long-term liabilities, less current portion........ 706 -- 706
Deferred income taxes.............................. 1,764 -- 1,764
-------- --------- --------
Total liabilities............................. 10,561 180,000 190,561
STOCKHOLDERS' EQUITY:
Net assets....................................... 99,139 (1,452)(a) --
(97,687)(b)
Common stock..................................... -- -- --
Additional paid-in-capital....................... -- 317,651(b) 152,522
(165,129)(c)(d)
Subscription receivable.......................... -- -- --
-------- --------- --------
Total stockholders' equity.................... 99,139 53,383 152,522
-------- --------- --------
Total liabilities and stockholders' equity.... $109,700 $ 233,383 $343,083
======== ========= ========
</TABLE>
26
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Represents elimination of cash not acquired in the Acquisition and cash and
cash equivalents remaining after consummation of the Acquisition and the
payment of fees and expenses.
(b) Represents recording of excess of purchase price of acquisition over fair
value of net assets acquired, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Purchase price.............................................. $309,100
Purchase price adjustment................................... 2,736
Acquisition fees and expenses............................... 5,815
--------
Total purchase price................................... 317,651
Historical tangible net assets acquired..................... (22,475)
--------
Excess purchase price.................................. $295,176
========
</TABLE>
In the opinion of management of the Company, the book value of the tangible
assets and liabilities of the Local Publications approximates their fair
value. Accordingly, the entire excess purchase price of the Acquisition has
been allocated to intangible assets. The Company is having independent
valuations of the intangible assets of the Company performed to allocate the
value of intangible assets between specific intangibles and goodwill.
Subject to completion of the independent valuations, management believes
that the specific intangibles and estimated fair values to which the excess
purchase price will be allocated include: covenants-not-to-compete for
between $25 and $35 million, advertiser lists for between $115 and $140
million, subscriber lists for between $30 and $50 million, mastheads between
$4 and $10 million and the remainder representing goodwill. In the opinion
of management of the Company, completion of the independent valuations will
not materially impact the Company's estimate of the fair value of the
intangible assets or their useful lives and, therefore, will not have a
material impact on the unaudited pro forma combined balance sheet.
(c) Represents capitalized fees and expenses in connection with the Notes and
the Revolving Credit Facility.
(d) Represents the recording of the Notes.
27
<PAGE> 30
SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth selected combined historical and pro forma
financial data of the Company. The selected historical statement of operations
and balance sheet data as of and for each of the years ended December 31, 1995,
1996 and 1997 are derived from the combined financial statements of the Company,
which have been audited by independent auditors. The selected historical
statement of operations and balance sheet data as of and for the years ended
December 31, 1993 and 1994 have been derived from the unaudited combined
financial statements of the Company, and include, in the opinion of management,
all adjustments necessary to present fairly the data for such periods. The
results for the year ended December 31, 1997 are not necessarily indicative of
the results to be expected for any future period. The pro forma combined
statement of operations data for the year ended December 31, 1997 gives effect
to the Transactions as if they had occurred on January 1, 1997. The pro forma
combined balance sheet data as of December 31, 1997 gives effect to the
Transactions as if they had occurred on December 31, 1997. The data presented
below should be read in conjunction with the combined financial statements, and
including the notes thereto, "Unaudited Pro Forma Combined Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
YEAR END31,DECEMBER PRO FORMA
----------------------------------------------- YEAR ENDED
1993 1994 1995 1996 1997 DECEMBER 31, 1997
------- ------- ------- ------- ------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising....................... $50,252 $56,770 $60,255 $66,816 $68,712 $68,712
Circulation....................... 16,287 17,766 19,058 22,004 22,341 22,341
Job printing and other............ 7,128 7,328 8,054 8,722 7,666 7,666
------- ------- ------- ------- ------- -------
Total revenues...................... 73,667 81,864 87,367 97,542 98,719 98,719
Operating costs..................... 23,743 25,880 29,405 31,320 29,318 29,318
Selling, general and
administrative.................... 29,910 33,255 34,506 38,259 39,162 40,527
Depreciation and amortization....... 7,450 7,722 7,290 7,854 7,470 15,027
------- ------- ------- ------- ------- -------
Income from operations.............. 12,564 15,007 16,166 20,109 22,769 13,847
Interest expense.................... 10,711 10,991 11,195 10,968 10,551 19,372
------- ------- ------- ------- ------- -------
Income before income taxes.......... 1,853 4,016 4,971 9,141 12,218 (5,525)
Income taxes........................ 778 1,687 2,338 4,006 5,271 --
------- ------- ------- ------- ------- -------
Net income.......................... $ 1,075 $ 2,329 $ 2,633 $ 5,135 $ 6,947 $(5,525)
======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents........... $ 1,723 $ 1,746 $ 1,929 $ 1,768 $ 1,452 $ 686
Total assets........................ 119,081 111,256 120,170 112,974 109,700 343,083
Total debt.......................... -- -- -- -- -- 180,000
Stockholders' equity................ 105,965 98,626 106,945 102,980 99,139 152,522
OTHER DATA:
Ratio of earnings to fixed
charges(1)........................ 1.2x 1.4x 1.4x 1.8x 2.2x --
Cash flow provided by (used in):
Operating activities.............. $ N/A $10,169 $ 7,889 $14,303 $14,577 $10,875
Investing activities.............. N/A 492 (14,906) (4,520) (3,370) (3,370)
Financing activities.............. N/A (10,638) 7,203 (9,944) (11,523) (735)
EBITDA(2)........................... 20,014 22,729 23,456 27,963 30,239 28,874
EBITDA margin(3).................... 27.2% 27.8% 26.8% 28.7% 30.6% 29.2%
Capital expenditures................ $ 1,813 $ 2,232 $ 2,255 $ 3,081 $ 1,713 $ 1,713
</TABLE>
(footnotes on following page)
28
<PAGE> 31
NOTES TO SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL DATA
(1) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of income before income taxes plus fixed charges. "Fixed charges"
consist of interest on all indebtedness, amortization of deferred debt
financing costs and one-third of rental expense (the portion deemed
representative of the interest factor). The ratio of earnings to fixed
charges is helpful to investors as it provides a measure, generally
calculated consistently by all companies, of a company's ability to meet its
debt service requirements. On a pro forma basis for the year ended December
31, 1997, earnings were insufficient to cover fixed charges by $5.5 million.
(2) EBITDA represents net income before income taxes, interest expense and
depreciation and amortization. Management believes that the presentation of
EBITDA is helpful to investors as a measure of the Company's ability to meet
its working capital, capital expenditure and debt service requirements.
Management also believes that the presentation of EBITDA is helpful to
investors, because EBITDA will be used to determine compliance with certain
covenants contained in the Indenture. EBITDA, however, should not be
construed as an alternative to net income or cash flows from operating
activities, each as determined in accordance with GAAP, as a measure of
operating performance or liquidity. Further, EBITDA is not calculated
consistently by all companies and, accordingly, the presentation herein may
not be comparable to other similarly titled measures presented by other
companies. Management believes that the Company's financial stability can be
depicted to investors by its historical EBITDA, which during the period 1993
through 1997 has increased generally in amounts and percentages equal to the
Company's income from operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(3) EBITDA margin represents EBITDA divided by total revenues.
29
<PAGE> 32
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, appearing
elsewhere in this Prospectus. As used herein, with respect to the historical
financial data, references to the Company means the Local Publications. Certain
information in this section includes forward-looking statements. Such
forward-looking statements relate to the Company's financial condition, results
of operations, expansion plans and business. Actual results could differ
materially from the forward-looking statements due to, among other things, the
risks and uncertainties noted under the heading "Disclosure Regarding
Forward-Looking Statements" on page i and "Risk Factors" in this Prospectus. For
information regarding the pro forma financial condition and results of
operations of the Company, see "Unaudited Pro Forma Combined Financial Data."
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, have historically been
performed for the Company by APC. The Company was charged directly by APC for
certain of such services and also paid to APC a management fee that was based
upon a percentage of total revenues. The management fee to APC was discontinued
after the Acquisition. In addition, the Company has in place a Transitional
Services Agreement that allows for certain administrative services to be
provided by APMS until the Company can establish capabilities to provide its
administrative services in-house. The Company believes that the cost of any
services utilized under the Transitional Services Agreement will approximate the
management fees it was being charged by APC.
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, the operations of the Company were historically financed through APC.
The Company has a capital structure different than that set forth in the
Company's combined financial statements for periods preceding the Transactions
and, accordingly, historical interest expense is not indicative of the interest
expense that the Company incurs as a separate company.
30
<PAGE> 33
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of total revenues for the years ended December 31,
1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR END31,DECEMBER
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Advertising............................................... 69.0% 68.5% 69.6%
Circulation............................................... 21.8 22.6 22.6
Job printing and other.................................... 9.2 8.9 7.8
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Operating costs............................................. 33.7 32.1 29.7
Selling, general and administrative......................... 39.5 39.2 39.7
Depreciation and amortization............................... 8.3 8.1 7.6
----- ----- -----
Income from operations...................................... 18.5 20.6 23.1
EBITDA...................................................... 26.8% 28.7% 30.6%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total Revenues. Total revenues for the year ended December 31, 1997
increased by $1.2 million, or 1.2%, to $98.7 million from $97.5 million for the
year ended December 31, 1996. The increase in total revenues was comprised of a
$1.9 million increase in advertising revenue and a $0.3 million increase in
circulation revenue offset by a $1.1 million decrease in job printing and other
revenue. During the year ended December 31, 1997, the Company acquired
publications in two markets. The publications acquired during the year ended
December 31, 1997 contributed $0.8 million to total revenues for such period.
The increase in advertising revenue during the year ended December 31, 1997 was
primarily due to general continued strength in demand for advertising in the
Company's markets. The increase in circulation revenue during the year ended
December 31, 1997 was primarily due to increases in the cover prices of selected
newspaper publications. The decrease in job printing and other revenue during
the year ended December 31, 1997 was primarily due to the Company pursuing fewer
opportunities for commercial printing than in the prior year.
Operating Costs. Operating costs for the year ended December 31, 1997
decreased by $2.0 million, or 6.4%, to $29.3 million from $31.3 million for the
year ended December 31, 1996. Operating costs decreased as a percentage of total
revenues to 29.7% for the year ended December 31, 1997 from 32.1% for the year
ended December 31, 1996. Approximately $1.3 million of the decrease in operating
costs as a percentage of total revenues during the year ended December 31, 1997
was due to declines in newsprint prices and approximately $0.7 million of the
decrease was due to the continued successful implementation of cost controls at
the Company's publications.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 1997 increased by $0.9 million, or
2.4%, to $39.2 million from $38.3 million for the year ended December 31, 1996.
Selling, general and administrative expenses increased as a percentage of total
revenues to 39.7% for the year ended December 31, 1997 from 39.2% for the year
ended December 31, 1996. The increase in selling, general and administrative
expenses during the year ended December 31, 1997 was primarily due to the effect
of increases in the federal minimum wage requirements.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 decreased by $0.4 million, or 4.9%, to $7.5 million from
$7.9 million for the year ended December 31, 1996. As a percentage of revenues,
depreciation and amortization was 8.1% in 1996 compared to 7.6% in 1997. The
decline was due to certain fixed assets and goodwill being fully depreciated or
amortized in 1996.
Income from Operations. Income from operations for the year ended December
31, 1997 increased by $2.7 million, or 13.2%, to $22.8 million from $20.1
million for the year ended December 31, 1996. Income from operations as a
percentage of total revenues increased to 23.1% for the year ended December 31,
1997
31
<PAGE> 34
from 20.6% for the year ended December 31, 1996. The increase in income from
operations was primarily due to higher total revenues and lower operating costs
described above.
EBITDA. EBITDA for the year ended December 31, 1997 increased by $2.3
million, or 8.1%, to $30.2 million from $28.0 million for the year ended
December 31, 1996. EBITDA margin increased to 30.6% for the year ended December
31, 1997 from 28.7% for the year ended December 31, 1996. The increase in EBITDA
and EBITDA margin during the year ended December 31, 1997 was primarily due to
higher total revenues and lower operating costs described above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total Revenues. Total revenues for the year ended December 31, 1996
increased by $10.2 million, or 11.6%, to $97.5 million from $87.4 million for
the year ended December 31, 1995. The increase in total revenues was comprised
of a $6.6 million increase in advertising revenue, a $2.9 million increase in
circulation revenue and a $0.7 million increase in job printing and other
revenue. During the year ended December 31, 1996, the Company acquired
publications in three markets. The publications acquired during the year ended
December 31, 1996 contributed $2.5 million to total revenues for such period.
The increase in advertising revenue during the year ended December 31, 1996 was
primarily due to a favorable economic environment, which promoted increased
spending by advertisers in the Company's markets. The increase in circulation
revenue during the year ended December 31, 1996 was primarily due to increases
in the cover prices of selected newspaper publications. The increase in job
printing and other revenue during the year ended December 31, 1996 was primarily
due to strong demand for commercial printing services in the Company's markets
and the Company's success in identifying and capturing such business.
Operating Costs. Operating costs for the year ended December 31, 1996
increased by $1.9 million, or 6.5%, to $31.3 million from $29.4 million for the
year ended December 31, 1995. Operating costs decreased as a percentage of total
revenues to 32.1% for the year ended December 31, 1996 from 33.7% for the year
ended December 31, 1995. The increase in operating costs during the year ended
December 31, 1996 was primarily due to increases in the price of newsprint and
increased costs associated with the higher total revenues described above.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 1996 increased by $3.8 million, or
10.9%, to $38.3 million from $34.5 million for the year ended December 31, 1995.
Selling, general and administrative expenses decreased as a percentage of total
revenues to 39.2% for the year ended December 31, 1996 from 39.5% for the year
ended December 31, 1995. The increase in selling, general and administrative
expenses during the year ended December 31, 1996 was primarily due to expenses
associated with the growth of the Company's operations, including an increase in
the number of publications operated by the Company.
Income from Operations. Income from operations for the year ended December
31, 1996 increased by $3.9 million, or 24.4%, to $20.1 million from $16.2
million for the year ended December 31, 1995. Income from operations as a
percentage of total revenues increased to 20.6% for the year ended December 31,
1996 from 18.5% for the year ended December 31, 1995. The increase in income
from operations was primarily due to higher total revenues, partially offset by
higher operating costs, selling, general and administrative expenses and
depreciation and amortization.
EBITDA. EBITDA for the year ended December 31, 1996 increased by $4.5
million, or 19.2%, to $28.0 million from $23.5 million for the year ended
December 31, 1995. EBITDA margin increased to 28.7% for the year ended December
31, 1996 from 26.8% for the year ended December 31, 1995. The increase in EBITDA
and EBITDA margin during the year ended December 31, 1996 was primarily due to
higher total revenues, partially offset by higher operating costs and selling,
general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash Provided by Operating Activities. Cash provided by operating
activities for the year ended December 31, 1997 increased $0.3 million to $14.6
million from $14.3 million for the year ended
32
<PAGE> 35
December 31, 1996. The increase in cash provided by operating activities was
primarily due to an increase in the Company's net earnings and a decrease in
working capital requirements. Cash provided by operating activities for the year
ended December 31, 1996 increased $6.4 million to $14.3 million from $7.9
million for the year ended December 31, 1995. The increase in cash provided by
operating activities for the year ended December 31, 1996 was primarily due to
an increase in the Company's net earnings and a decline in working capital
requirements.
Cash Used in Investing Activities. Cash used in investing activities for
the year ended December 31, 1997 decreased $1.2 million to $3.4 million from
$4.5 million for the year ended December 31, 1996. The decrease in cash used in
investing activities for the year ended December 31, 1997 was primarily due to a
decrease in capital expenditures. Cash used in investing activities for the year
ended December 31, 1996 decreased $10.4 million to $4.5 million from $14.9
million for the year ended December 31, 1995. The decrease in cash used in
investing activities for the year ended December 31, 1996 was primarily due to a
decline in the number of newspaper acquisitions completed, partially offset by
an increase in capital expenditures. 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 most significant investing activities contemplated over the
next five years will be to pursue the Company's acquisition program 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. The
Company has a proven track record of significantly improving the revenues and
profitability of local newspaper acquisitions and the Company believes that it
will continue to be successful at integrating and improving future newspaper
acquisitions.
Cash Used in Financing Activities. Cash used in financing activities for
the year ended December 31, 1997 increased $1.6 million to $11.5 million from
$9.9 million for the year ended December 31, 1996. Cash used in financing
activities for the year ended December 31, 1996 increased $17.1 million to $9.9
million from $7.2 million of cash provided by financing activities for the year
ended December 31, 1995. The Company has historically relied upon Hollinger for
financing of its operations and has maintained its own cash balances only for
certain daily expenses. Subsequent to the Acquisition, the Company will be
financed independently of Hollinger.
Liquidity. The Company's principal sources of funds will be cash provided
by operating activities and borrowings under the Revolving Credit Facility (as
defined). As of April 3, 1998, there were no borrowings outstanding under the
Revolving Credit Facility. The Company believes that such funds will provide the
Company with sufficient liquidity and capital resources to meet its current and
future financial obligations.
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. For the first six months following the Closing Date,
the interest rate for borrowings under the Revolving Credit Facility will have a
floor of the Base Rate plus 0.75% or the Eurodollar Rate plus 2.0%. Applicable
interest rates will be increased 2.0% per annum during the continuance of any
Event of Default (as defined therein) under the Revolving Credit Facility. In
addition to customary letters of credit fronting fees and other fees, 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 Company also pays a fee on the unused portion of the Revolving
Credit Facility. See "Description of Revolving Credit Facility" for a
description of the material provisions of the Revolving Credit Facility.
The Company is highly leveraged and has Indebtedness that is substantial in
relation to its stockholders' equity, tangible equity and cash flow. As of
December 31, 1997, on a pro forma basis after giving effect to the Transactions,
the Company would have had an aggregate of $180.0 million of outstanding
Indebtedness, $152.5 million of stockholders' equity and ($156.8) million of
tangible equity. As of December 31, 1997, on a pro forma basis after giving
effect to the Transactions, the ratio of outstanding Indebtedness to total
capitalization was 0.54 to 1.00. For the year ended December 31, 1997, on a pro
forma basis after giving effect to the Transactions, earnings were insufficient
to cover fixed charges by $5.5 million. The degree to which the Company is
leveraged could have important consequences to holders of the New Notes,
including the
33
<PAGE> 36
following: (i) for the fiscal year ending December 31, 1998, approximately
two-thirds of the Company's cash flow from operations must be dedicated to the
payment of interest on the New 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 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 conditions 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.
In the future, as a result of the substantial Indebtedness incurred in
connection with the Transactions, the Company will incur substantially higher
interest costs which will reduce the Company's liquidity. In addition, the
Company anticipates incurring approximately $1.4 million of additional costs
annually as a result of operating as a stand-alone company.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the years ended December 31, 1997, 1996 and 1995.
34
<PAGE> 37
BUSINESS
GENERAL
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 owns and operates 166 publications in rural markets
in 11 states: Arizona, Arkansas, California, Illinois, Iowa, Kansas, Michigan,
Minnesota, Missouri, New York and Pennsylvania. The majority of the Company's
paid daily newspapers have been published for more than 100 years and are
typically the only paid daily newspapers of general circulation in their
respective rural markets. The Company's newspapers face limited competition as a
result of operating in markets that are distantly located from large
metropolitan areas and that can support only one primary newspaper. The Company
has increased revenues primarily by acquiring new publications and saturating
existing markets and has increased profitability by aggressively pursuing cost
reduction opportunities. Through a combination of these efforts, total revenues
have grown from $73.7 million in 1993 to $98.7 million for the year ended
December 31, 1997, representing a compounded annual growth rate of 7.6%. The
Company's annual revenue growth rates for the years 1994 through 1997 were 11.1%
in 1994, 6.7% in 1995, 11.6% in 1996 and 1.2% in 1997. During the same period,
EBITDA has increased from $20.0 million in 1993 to $30.2 million for the year
ended December 31, 1997, and EBITDA margins have improved from 27.2% to 30.6%.
Giving effect to the Acquisition, the Company's pro forma loss for the year
ended December 31, 1997 would have been $5.5 million and such loss would have
been insufficient to cover fixed charges by $5.5 million.
The Company's newspapers are comprised of 55 paid daily newspapers with
circulations ranging from approximately 1,100 to 12,500 and 34 paid non-daily
newspapers with circulations ranging from approximately 100 to 41,000. In
addition, the Company publishes 77 free circulation and TMC publications with
limited or no news or editorial content. TMC publications are distributed free
of charge and generally provide 100% penetration in their areas of distribution.
The Company believes that its paid newspapers, together with its free
circulation and TMC publications, are an effective medium for advertisers to
reach substantially all of the households in the markets served by the Company.
All of the Local Publications are located in small towns that are not suburbs of
large cities and that typically have populations of less than 20,000. The
Company's publications focus on local content, including coverage of local
youth, high school and college sports, as well as local business, politics,
entertainment and cultural news. Each of the Company's publications is
specifically tailored to its market in order to provide local content that
radio, television and large metropolitan newspapers are unable to provide on a
cost-effective basis because of their broader geographic coverage. The Local
Publications also differentiate themselves from other forms of media by
providing a cost-effective medium for local advertisers to target their
customers.
The Company believes that its stable revenues and EBITDA are a result of
its geographic diversification, limited competition, low newsprint requirements
and cost of labor, strong base of local advertisers and lack of reliance on
volatile classified advertising. The regional clusters in which the Local
Publications are published are geographically diverse, with no single market
representing more than 3.5% of the Company's 1997 total revenues. The Local
Publications are well-positioned in their markets and face limited direct
competition for either local newspaper advertising or circulation revenue.
Start-ups of newspapers are rare and potential competitors face considerable
barriers to entry due to the Company's established franchises. The Company's
stable profitability is also a result of its favorable cost structure, which
includes low newsprint and labor cost as a percent of total revenues. The
Company has relatively low exposure to fluctuations in newsprint prices due to
much lower page counts than large metropolitan newspapers, with newsprint
comprising 8.1% of the Company's 1997 total operating expenses, compared to
approximately 25% for large metropolitan newspapers. In addition, management of
the Company believes based upon its operating experience that advertising
revenues at the Company's publications tend to be more stable than the
advertising revenues of large metropolitan newspapers because the Company's
publications rely primarily on local advertising rather than national
advertising, with national advertising comprising 0.9% and local advertising
comprising 41.3% of the Company's 1997 total revenues. Local advertising is more
stable than national advertising because local service providers generally have
fewer effective advertising vehicles from which to choose. The Company also
35
<PAGE> 38
relies less than large metropolitan newspapers upon classified advertising,
particularly "help wanted" sections, which tend to be cyclical.
The Company is led by the same experienced management team that had primary
responsibility for the acquisition activities and operations of the Local
Publications prior to the Acquisition. The five members of the senior management
team have, in the aggregate, over 125 years of experience in the newspaper
industry. The management team has a long history of integrating acquisitions and
improving the operations of both existing and acquired publications. In
addition, the Company retained all of the newspaper publishers at the Local
Publications. The local market knowledge of each newspaper's publisher and his
standing in the community are important in maintaining each newspaper's local
identity and in effectively serving its readership and advertisers.
BUSINESS STRATEGY
The Company's business strategy is to continue to increase the
profitability of existing and acquired newspaper publications through market
leadership, aggressive cost controls, geographic clustering and revenue
enhancements. The Company attributes its strong historical results and its
positive outlook for growth and profitability to management's ability to
identify and complete acquisitions to which it has successfully applied the
following initiatives:
Market Leadership. The Company's newspapers generally have the largest
local news gathering resources in their markets and differentiate themselves
from large metropolitan newspapers by focusing on local information. The
Company's publications serve as the dominant medium for local print advertisers
to reach a specific audience and for readers interested in local events. The
Company believes that by supplementing its paid newspapers with TMC
publications, which are distributed to either all households in a given area or
all households that do not otherwise receive paid newspapers, it enables
advertisers to reach substantially all households in the markets that they
serve. The Company seeks to enhance reader loyalty through excellent editorial
content, including the proper mix of local and national news to serve its
markets effectively, and high-quality presentation. In addition, because the
Company's newspapers are generally produced on modern offset presses, the
Company has the ability to execute attractive layouts and color enhancements
that are designed to attract readers.
Aggressive Cost Controls. The Company implements uniform operating policies
and establishes strict cost controls at each of its publications. The Company
believes that operating margins are increased by implementing consistent
policies and standards, including specific guidelines for staffing levels,
employee productivity, automation of pre-press operations and regional
production operations. In addition, the Company utilizes specific guidelines
regarding product quality, distribution and customer service, marketing and
promotion, financial controls and purchasing. The Company establishes strict
cost controls to maintain low overhead expenses and continuously seeks to
identify lower cost alternatives for, and to improve utilization of, raw
materials, equipment and services, including newsprint, ink, office equipment
and supplies, production equipment and telecommunication services.
Geographic Clustering. The Company seeks to concentrate its ownership of
publications into regional clusters in order to realize operating efficiencies,
such as the consolidation and sharing of production and printing functions,
management personnel and other general and administrative costs. In addition,
clustering enables management to maximize revenues through cross-selling and
bundling advertising among contiguous newspaper markets. The Company believes
that its clustering strategy enables its publications to achieve higher
operating margins than they otherwise would achieve on a stand-alone basis. In
addition, clustering spreads fixed costs, such as salaries, across publications,
which allows the Company to employ high-quality management that is shared among
contiguous markets.
Revenue Enhancements. The Company seeks to saturate its markets through
market layering, which focuses on introducing new products to increase
readership and advertising revenues. New products have historically included
both paid newspapers and free circulation publications, including TMC
publications.
36
<PAGE> 39
Other new products have included more frequent publication of non-daily
newspapers; shopping guides; and niche publications covering subjects, such as
children and parenting, employment, health, seniors and real estate, that are of
interest to residents of particular geographic areas and members of particular
demographic groups. The Company believes that its market layering strategy has
successfully increased its penetration, strengthened its market presence and
protected its publications from encroachment by competitors.
Attractive Acquisition Opportunities. The Company's low-cost operating
model, broad geographic coverage and successful acquisition history provide a
platform for the acquisition of local newspapers. The Company has a proven track
record of significantly improving the profitability of acquired operations by
implementing the same cost control systems and revenue enhancements that are in
place at existing properties. Favorable acquisition candidates would have some
or all of the following characteristics: a long publishing history, strong
readership and advertiser loyalty, editorial independence and potential
opportunities for revenue enhancements and increases in profitability through
cost reductions and synergies with the Company's existing operations. The
Company believes that the newspaper publishing industry is highly fragmented,
with over 7,500 paid daily and non-daily publications with circulations of less
than 25,000 operating in the United States today. The Company further believes
that competition is abating for these smaller publications as the historical
acquirors of such publications have grown too large for publications of this
size to have a meaningful impact on operations and have diverted resources
toward the acquisition of metropolitan newspapers.
INDUSTRY OVERVIEW
Newspaper publishing is the oldest and largest segment of the media
industry. Due to a focus on local news, newspapers remain the dominant medium
for local advertising and, in calendar year 1996, accounted for more than 47.6%
of all local media advertising expenditures in the United States. In addition,
in calendar year 1996, U.S. newspaper advertising expenditures reached an
all-time high of approximately $38.2 billion, representing a compounded annual
growth rate of 6.1% since 1980. The Company believes that newspapers continue to
be the best medium for retail advertising, which emphasizes the price of goods,
in contrast to television, which is generally used for image advertising.
The number of adult readers of daily and Sunday newspapers is reported to
have increased from 106.0 million and 106.7 million in 1980 to 112.1 million and
128.6 million in 1996, respectively, representing compounded annual growth rates
of 0.4% and 1.2%, respectively. Readers of daily and Sunday newspapers tend to
be more highly educated and have higher incomes than non-newspaper readers. For
instance, 71% of college graduates and 66% of households with incomes greater
than $40,000 are reported to read a daily newspaper, compared to 61% of high
school graduates and 52% of households with incomes less than $40,000. The
Company believes that newspapers continue to be the most cost-effective means
for advertisers to reach this highly targeted demographic group. Reliable
circulation statistics for non-daily newspapers are not available.
Newspaper advertising revenues are cyclical and are generally affected by
changes in national and regional economic conditions. Classified advertising,
which typically makes up approximately one-third of newspaper advertising
revenues, is the most sensitive to economic improvements or slowdowns as it is
primarily affected by the demand for employment, real estate transactions and
automotive sales. However, management believes that the profitability of the
Company's publications is significantly more stable than the overall newspaper
industry due to a reduced dependence on classified advertising. In 1997,
classified advertising represented only 15.1% of the Company's total revenues.
Growth in newspaper advertising has exceeded growth in Gross Domestic
Product ("GDP") in every calendar year since 1993 and, in calendar year 1996,
newspaper advertising spending grew 5.8% while GDP grew by only 4.5%.
37
<PAGE> 40
OVERVIEW OF OPERATIONS
The Company's operations consist of 166 local newspapers and publications
strategically positioned in rural markets in 11 states. The Company's
publications are comprised of 55 paid daily and 34 paid non-daily newspapers
with average circulations of 4,372 and 3,194, respectively. In addition, the
Company publishes 77 free circulation publications with limited or no news or
editorial content.
The following chart sets forth information for the Company's publications
by state as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NEWSPAPERS AND PUBLICATIONS AVERAGE CIRCULATION
------------------------------------------------ -------------------
PAID PAID FREE PAID PAID
STATE DAILY NON-DAILY CIRCULATION TOTAL DAILY NON-DAILY
----- ----- --------- ----------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona................................. 0 2 1 3 0 3,562
Arkansas................................ 3 1 3 7 3,053 3,896
California.............................. 2 3 3 8 4,985 2,231
Illinois................................ 12 16 15 43 3,810 3,784
Iowa.................................... 1 0 2 3 2,843 0
Kansas.................................. 6 2 7 15 4,103 220
Michigan................................ 3 0 3 6 4,196 0
Minnesota............................... 1 0 1 2 2,234 0
Missouri................................ 11 6 16 33 4,577 1,487(1)
New York................................ 5 4 15 24 6,833 4,816
Pennsylvania............................ 11 0 11 22 4,438 0
-- -- -- --- ----- -----
Total......................... 55 34 77 166 4,372 3,194
</TABLE>
- ---------------
(1) Excludes circulation of Mid-South Trader, as such paper was closed as of
December 31, 1997.
In 1997, no single market within such states contributed more than 3.5% of
the Company's total revenues.
38
<PAGE> 41
The following is a list of the states and communities served by the
Company's paid daily newspapers, paid non-daily newspapers, and free circulation
publications and the mastheads of all 166 publications as of December 31, 1997:
ARIZONA
Globe
Arizona Silver Belt
Gila County Advantage
Moccasin
ARKANSAS
Heber Springs
The Sun Times
Helena
The Daily World
Daily World "TMC"
Newport
Newport Daily Independent
Newport Daily Independent "TMC"
Stuttgart
Stuttgart Daily Leader
The Stuttgart Daily "TMC"
CALIFORNIA
Mount Shasta
Dunsmuir News
Mount Shasta Herald
Supersaver Advertiser
Voice of the Mountain
Weed Press
Taft
Daily Midway Driller
Yreka
Siskiyou Daily News
Siskiyou Daily News "Extra"
ILLINOIS
Albion
Albion Journal Register
Prairie Post
Benton
Benton Evening News
The Benton Standard
Franklin Press
Canton
Daily Ledger
Little Giant Advertiser
Carmi
The Carmi Times
The Weekly Times
White County Shopper News
Chester
Chester Herald Tribune
Monday Herald
Christopher
Christopher Progress
DuQuoin
The Ashley News
DuQuoin Evening Call
Perry County Extra
Fairbury
The Blade
Flora
Ccap Special
Daily Advocate Press
Galatia
Money Stretcher
Galesburg
Pennysaver Press
Harrisburg
Eldorado Daily Journal
Harrisburg Daily Register
Herrin
The Spokesman
The Spokesman Sunday
Marion
Marion Daily Republican
Marion Daily Extra
Monmouth
Daily Review Atlas
Oquawka Current
Pennysaver
Murphysboro
American Monday
Murphysboro American
Norris City
Norris City Banner
Olney
Jasper County News Eagle, Advantage
The Olney Daily Mail
The Weekly Mail
Pontiac
Daily Leader
Home Times
Livingston Shopping News
Shawneetown
Gallatin Democrat
Ridgway News
West Frankfort
Daily American
Trader
IOWA
Charles City
Charles City Press
The Extra
Six County Shopper
KANSAS
Atchison
The Atchison Daily Globe
Globe Extra
Augusta
Augusta Advertiser
Augusta Daily Gazette
Derby
Daily Reporter
The Record
The Weekly Shopper
The Wichita Journal
El Dorado
The El Dorado Times
El Dorado Times Weekly
Shoppers Guide
Leavenworth
The Leavenworth Times
River Bend Journal
McPherson
McPherson Sentinel
The Sentinel Ad-Viser
MICHIGAN
Cheboygan
Cheboygan Daily Tribune
Shoppers Fair
Ionia
Sentinel-Standard
Sentinel-Standard "TMC"
Sault Ste. Marie
The Evening News
Tri County Buyers Guide
MINNESOTA
Crookston
Crookston Daily Times
Crookston Valley Shopper
MISSOURI
Boonville
Boonville Daily News
The Record
Brookfield
Daily News Bulletin
Camdenton
Lake Sun Leader
Carthage
The Carthage Press
The Carthage Press "TMC"
Chillicothe
C.T. Extra
Constitution Tribune
Greenfield
Lake Stockton Shopper
Miller Press
The Vedette
Kirksville
Kirksville Crier
Kirksville Daily Express & News
The Market Place
Macon
Chronicle Herald
Macon Journal
Marceline
Marceline Press/Chariton Courier
Sho-Me Shopper
Mexico
The Mexico Ledger
The Mexico Ledger "TMC"
Monroe City
Mark Twain Regional News
Monroe City News
Neosho
Neosho Daily News
Neosho Daily News "Etc."
Osage Beach
Vacation News
Rolla
Rolla Daily News
Rolla Daily News "Plus"
Saint James
Advertiser
St. James Leader Journal
Waynesville
The Daily Guide
Daily Guide Extra
Fort Wood Constitution
NEW YORK
Bath
Steuben Courier Advocate
Canajoharie
Mohawk Valley Pennysaver
Canisteo
Hornell Canisteo Penn-E-Saver
Dansville
Genesee County Express
Geneseeway Shopper
Herkimer
The Evening Telegram
Images
Hornell
Evening Tribune
The Spectator (Sunday)
The Tribune Extra
Little Falls
The Evening Times
Times-Saver
North Tonawanda
Grand Island Record
Record Advertiser
Tonawanda News
Tonawanda News Extra
Penn Yan
Chronicle Ad-Viser
The Chronicle-Express
Saugerties
Mountain Pennysaver
Saugerties Pennysaver
Saugerties Post Star
Wellsville
Allegany Co. Pennysaver
Wellsville Daily Reporter
Wellsville Daily "TMC"
PENNSYLVANIA
Corry
Corry Journal
Corry Journal "TMC"
Honesdale
The Independent Extra
The Wayne Independent
Kane
Kane Republican
Milton
Lewisburg Daily Journal
Milton Daily Standard
The Standard-Journal
Punxsutawney
Country Neighbors
The Punxsutawney Spirit
The Punxsutawney Spirit "TMC"
Ridgway
The Ridgway Record
Shop-Right
Saint Mary's
The Daily Press
The Daily Press "TMC"
Sayre
The Evening Times
The Times Extra
Titusville
Titusville Herald
Titusville Herald "TMC"
Warren
Warren County Guide
Waynesboro
The Record Herald
Record Herald Shoppers Express
39
<PAGE> 42
ADVERTISING
Advertising revenues are the largest component of a newspaper's revenues
followed by circulation revenues. The Company's advertising rate structures vary
among its publications and are a function of various factors, including results
achieved for advertisers, local market conditions and competition, as well as
circulation, readership, demographics and the type of advertising (whether
classified or display).
Substantially all of the Company's advertising revenues are derived from a
diverse group of local retailers and classified advertisers. Management of the
Company believes based upon its operating experience that the Company's
advertising revenues tend to be more stable than the advertising revenues of
large metropolitan newspapers because its publications rely on local advertising
rather than national advertising, with national advertising comprising 0.9% and
local advertising comprising 41.3% of the Company's 1997 total revenues. Local
advertising is more stable than national advertising because residents' ongoing
needs for local services provide a stable base of local businesses and local
advertisers generally have fewer effective advertising vehicles from which to
choose. Moreover, the Company relies less than large metropolitan newspapers
upon classified advertising revenues, particularly "help wanted" sections, which
tend to be cyclical. Classified advertising accounted for 15.1% of the Company's
1997 total revenues. The following table represents the breakdown of advertising
revenue components for the Company as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR END31,DECEMBER
--------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Local advertising........................................... 41.8% 41.5% 41.3%
National advertising........................................ 0.8 0.9 0.9
Preprints................................................... 12.4 11.3 11.7
Classified.................................................. 13.8 14.4 15.1
Non-traditional............................................. 0.2 0.4 0.7
---- ---- ----
Total advertising revenue.............................. 69.0% 68.5% 69.6%
</TABLE>
The Company's advertising revenues are not reliant upon any one company or
industry but rather are supported by a variety of companies and industries. The
Company's corporate management works with its local newspaper management to
approve advertising rates and to establish goals for each year during a detailed
budget process. Corporate management also works with the advertising staff of
each local newspaper to develop marketing kits and presentations. A portion of
the compensation for the Company's publishers is based upon increasing
advertising revenues. In addition, corporate management facilitates the sharing
of advertising resources and information across the Company's publications.
CIRCULATION
While circulation revenue is not as significant as advertising revenue,
circulation trends impact the decisions of advertisers and advertising rates.
Substantially all of the Company's circulation revenues are derived from home
delivery sales of publications to subscribers and single copy sales made through
retailers and vending racks. The Company continuously seeks to improve its
publications in order to attract new readers and to engage existing readers more
fully. Quality enhancements implemented by management have included: converting
selected newspapers from afternoon to morning publication; upgrading and
expanding printing facilities and printing presses; increasing the use of color
and color photographs; improving graphic design and, when appropriate,
implementing complete redesigns; and developing creative and interactive
promotional campaigns.
Circulation accounted for approximately 22.6% of the Company's total
revenues in 1997. Approximately 78.4% of 1997 circulation revenues were derived
from subscription sales and approximately 21.6% were derived from single copy
sales. Single copy sales rates currently range from $0.35 to $0.50 per daily
copy. The Company owns and operates 55 paid daily publications that range in
circulations from approximately 1,100 to 12,500 and 34 paid non-daily
publications that range in circulations from approximately 100 to 41,000. The
Company's corporate management works with its local newspaper management to
establish subscription and single copy rates. The Company also implements
creative and interactive programs and promotions to increase readership through
both subscription and single copy sales.
40
<PAGE> 43
NEWSPRINT
The Company's typical local paid daily or non-daily local newspaper has 8
to 14 broadsheet pages. Newsprint represents the largest raw material expense of
the Company, but is not the most significant operating expense. The Company has
relatively low exposure to fluctuations in newsprint prices due to much lower
page counts than large metropolitan newspapers, with newsprint comprising 8.1%
of the Company's total 1997 operating expenses compared to approximately 25% for
large metropolitan newspapers. Newsprint expense increased significantly in 1995
on an industry-wide basis, peaking at $770 per metric ton in the first quarter
of 1996 (based on average East Coast transaction prices), as reported by the
trade publication Pulp and Paper Weekly. Prices began to decrease in the second
quarter of 1996, and by December 1996, had decreased to $500 per metric ton
(based on East Coast transaction prices). At December 31, 1997, newsprint prices
were $595 per metric ton (based on East Coast transaction prices). The Company
seeks to manage the effects of increases in prices of newsprint through a
combination of, among other things, technology improvements, including web width
reduction, inventory management and advertising and circulation price increases.
For example, the Company has been able to successfully pass on some of its
historical newsprint increases to consumers through increases in the cover
prices of its newspapers and reduced page counts. The Company has no long-term
contracts to purchase newsprint. The Company's newspapers purchase a portion of
their newsprint direct from paper mills and also make opportunistic spot market
purchases within their geographic regions. The Company believes that its
purchasing policies have resulted in the Company's publications obtaining
favorable newsprint prices.
EMPLOYEES
The Company employs approximately 1,900 employees in 11 states and has
agreements with 6 local collective bargaining agents representing, in the
aggregate, approximately 30 employees. One such collective bargaining agreement
expired in February 1998, but a tentative agreement has been reached by the
parties and the Company anticipates signing a new agreement in April 1998, which
would expire in April 2002. The other collective bargaining agreements are
scheduled to expire, from time to time, between April 1998 and June 2000. The
Company has not experienced any strikes or general work stoppages in the past
ten years and believes that its relations with its employees are excellent.
SEASONALITY
Newspaper companies tend to follow a distinct and recurring seasonal
pattern. The first quarter of the year tends to be the weakest quarter in terms
of revenues because advertising volume is then at its lowest level. Conversely,
the fourth quarter includes the effects of holiday season advertising. However,
the Company believes that seasonality has not had a material impact on the
Company's historical results of operations.
COMPETITION
Each of the Company's newspapers competes to varying degrees with
magazines, radio, television and cable television, as well as with some weekly
publications and other advertising media, including electronic media, for
advertising and circulation revenue. Competition for newspaper advertising is
largely based upon circulation, price and content of the newspaper. The
Company's paid daily newspapers are the dominant local news and information
source, with strong name recognition in their markets and virtually no direct
competition from similar daily newspapers published in their markets. In certain
of the Company's markets, some circulation competition exists from larger daily
newspapers that are published in metropolitan areas. However, the Company
believes that local newspaper publications such as the Company's newspapers have
several advantages over metropolitan newspaper publications, including a lower
cost structure, the ability to publish only on their most profitable days (i.e.,
paid non-daily newspapers), the ability to offer local advertisements more
effectively and the ability to avoid expensive investments in wire services and
syndicated feature material. The Company's advertising permits small merchants,
individual classified and other advertisers to advertise solely in their own
local areas at a cost lower than that of a full-run metropolitan newspaper
publication. Thus, the typical local newspaper has a broader advertiser base
than, and does not rely to the same degree as a metropolitan newspaper
publication on, major retailers for advertising revenues. In addition, the
Company believes advertisers generally
41
<PAGE> 44
regard newspaper advertising as the most effective method of advertising
promotions and pricing as compared to television, which is generally used to
advertise image.
PROPERTIES AND FACILITIES
The Company has 91 operating and production facilities for its community
publications in the United States. Of the 91 operating and production
facilities, 71 are owned and the remaining 20 are leased for terms ranging from
one to five years. These facilities range in size from approximately 800 to
23,000 square feet. The Company uses modern data processing equipment in its
business management operations and in its typesetting. The Company believes that
all of its properties are in generally good condition, are well maintained and
are adequate for their current operations.
42
<PAGE> 45
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of individuals
who serve as directors of Holdings and executive officers of Holdings and the
Company. The Company is a wholly owned subsidiary of Holdings which elects the
Company's two directors. Each director of Holdings will hold office until the
next annual meeting of the stockholders or until his successor has been elected.
Qualified officers of Holdings and the Company are elected by their respective
Boards of Directors and serve at the discretion of such Boards.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth L. Serota......................... 36 President and Chief Executive Officer and Director
Kenneth W. Cope........................... 62 Executive Vice President and Director
George R. Sample.......................... 73 Executive Vice President
Kevin B. O'Shea........................... 38 Senior Vice President and Chief Financial Officer
Scott T. Champion......................... 36 Senior Vice President
Gene A. Hall.............................. 46 Senior Vice President
Joseph C. Piccirillo...................... 62 Senior Vice President
Leonard I. Green.......................... 64 Chairman of the Board of Directors
Gregory J. Annick......................... 34 Director
John G. Danhakl........................... 42 Director
Peter J. Nolan............................ 39 Director
</TABLE>
Kenneth L. Serota is President and Chief Executive Officer. Mr. Serota is
also a director of Holdings and the Company. He served as Vice President -- Law
& Finance and Secretary of Hollinger from May 1995 to December 1997 and as a
director of APC from 1996 to 1997. Prior thereto, Mr. Serota served as Senior
Vice President of a privately held frozen food manufacturer from June 1992
through March 1995. Previously, Mr. Serota served as an attorney and a certified
public accountant in private practice. Mr. Serota has significant experience
negotiating and closing acquisitions of newspaper publications and primarily
focuses his efforts on executing the Company's acquisition program and
overseeing all administrative functions of the Company.
Kenneth W. Cope is an Executive Vice President and has primary
responsibility for newspaper publications in the western region of the United
States. Mr. Cope is also a director of Holdings and the Company. He served as
Deputy Chairman of APC from August 1996 to January 1998. Prior thereto, he
served as Executive Vice President and a member of APC's Board of Directors from
1989 to 1996. Mr. Cope had been employed at APC since 1987 and had completed
more than 50 acquisitions of local publications during his tenure at APC. Prior
to his employment at APC, Mr. Cope was an owner of the Neosho Daily News in
Neosho, Missouri, which is a publication acquired by the Company in the
Acquisition. Mr. Cope has more than 38 years' experience in the newspaper
industry. Mr. Cope is also a director of Community Bank & Trust.
George R. Sample is an Executive Vice President. Mr. Sample has 51 years of
experience as an editor and publisher. He served as a member of the Board of
Directors of APC and was Vice Chairman of the Board of Directors of APC from
1991 to 1998. Mr. Sample has served as a Vice Chairman of certain of APC's
United States subsidiaries, as a regional manager of APC and as publisher of the
Corry Journal, which is a publication acquired by the Company in the
Acquisition.
Kevin B. O'Shea is a Senior Vice President and Chief Financial Officer.
Mr. O'Shea served as Vice President and Corporate Treasurer of Bell & Howell
from February 1996 to March 1998. From 1989 to 1996, Mr. O'Shea served as Vice
President and Corporate Treasurer of Spencer Stuart, a global consulting firm.
Prior thereto, Mr. O'Shea served as a Vice President and treasurer/group
controller for The Pritzker Organization, a large and diversified family holding
company.
Scott T. Champion is a Senior Vice President and has primary responsibility
for newspaper publications in the central region of the United States. He served
as a Senior Vice President of APC from 1996 to 1998. Prior thereto, he served as
a regional manager and district manager of APC and has been employed at APC
43
<PAGE> 46
since 1988. Prior to his employment at APC, Mr. Champion served as the publisher
of a group of privately owned newspaper publications. Mr. Champion currently
serves as the publisher of the Daily Review Atlas and Pennysaver in Monmouth,
Illinois, which publications were acquired by the Company in the Acquisition,
and has served in such position since 1984. Mr. Champion has more than 18 years'
experience in the newspaper industry.
Gene A. Hall is a Senior Vice President and has primary responsibility for
newspaper publications in the midwestern region of the United States. He served
as a Senior Vice President of APC from 1992 to 1998. Prior thereto, he served as
a regional manager of APC and had been employed at APC since 1988. Prior to his
employment at APC, Mr. Hall was the owner and publisher of the Charles City
Press, Six County Shopper and The Extra in Charles City, Iowa. Mr. Hall
currently serves as the publisher of the Charles City Press, Six County Shopper
and The Extra, which publications were acquired by the Company in the
Acquisition, and has served in such positions since 1986. Mr. Hall has more than
28 years' experience in the newspaper industry. Mr. Hall is also a director of
First Security Bank & Trust.
Joseph C. Piccirillo is a Senior Vice President and has primary
responsibility for newspaper publications in the eastern region of the United
States. He served as a Senior Vice President of APC from 1994 to 1998. Prior
thereto, he served as a regional manager of APC and had been employed at APC
since 1987. Prior to his employment at APC, Mr. Piccirillo served as regional
manager for the Bradford, Pennsylvania newspaper group that formed the core
group of APC. Mr. Piccirillo currently serves as the publisher of The Ridgway
Record and Shop-Right in Ridgway, Pennsylvania, which publications were acquired
by the Company in the Acquisition, and has served in such position since 1971.
Mr. Piccirillo has more than 40 years' experience in the newspaper industry.
Leonard I. Green is the Chairman of the Board of Directors of Holdings. He
has been an executive officer and an equity owner of LGP, a merchant banking
firm that manages GEI, since the formation of LGP and GEI in 1994 by the
principals of Leonard Green & Associates, L.P. ("LGA"). Mr. Green has also been,
individually or through a corporation, a partner in LGA, a merchant banking
firm, since its inception in 1989. Prior to forming LGA, Mr. Green had been a
partner of Gibbons, Green, van Amerongen for more than five years. Mr. Green is
also a director of Rite Aid Corporation, Carr-Gottstein Foods Co.,
Communications & Power Industries, Inc. and Hechinger Company.
Gregory J. Annick is a director of Holdings. He has been an executive
officer and an equity owner, through a trust, of LGP, a merchant banking firm
that manages GEI, since the formation of LGP and GEI in 1994 by the principals
of LGA. He joined LGA as an associate in 1989, became a principal in 1993, and
through a corporation became a partner of LGA in 1994. From 1988 to 1989, Mr.
Annick was an associate with the merchant banking firm of Gibbons, Green, van
Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and
acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of
Carr-Gottstein Foods Co., Communications & Power Industries, Inc., Leslie's
Poolmart, Inc. and Hechinger Company.
John G. Danhakl is a director of Holdings. He has been an executive officer
and an equity owner of LGP, a merchant banking firm that manages GEI, since
1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior
to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert
Incorporated ("Drexel"). Mr. Danhakl is also a director of Big 5 Corp.,
Communications & Power Industries, Inc., Leslie's Poolmart, Inc., Hechinger
Company, Twinlab Corporation and The Arden Group, Inc.
Peter J. Nolan is a director of Holdings. He has been an executive officer
and an equity owner of LGP, a merchant banking firm that manages GEI, since
April 1997. Mr. Nolan had previously been a Managing Director of DLJ and Co-Head
of DLJ's Los Angeles Investment Banking Division and had been with DLJ since
1990. Prior to joining DLJ, Mr. Nolan was a First Vice President at Drexel. Mr.
Nolan is also a member of the Supervisory Board of adidas AG and a director of
Wavetek Corporation.
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<PAGE> 47
EXECUTIVE COMPENSATION
The information set forth in this section relates to Mr. Serota, who serves
as President and Chief Executive Officer of Holdings and the Company, and the
four next most highly compensated employees of Holdings and the Company who
serve as executive officers of Holdings and the Company and whose total
compensation for services rendered for 1997 exceeded $100,000 (collectively, the
"Named Executive Officers").
The following table summarizes the compensation received by the Named
Executive Officers from Hollinger or its wholly owned subsidiaries for the year
ended December 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARD
-------------------------------------- ------------------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) AWARDS($) SARS(#) PAYOUTS($) COMPENSATION($)
- --------------------------- --------- -------- --------------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth L. Serota........ 239,652 44,000 -- -- 30,000 -- 29,833(1)
Chief Executive Officer
and President
Kenneth W. Cope.......... 187,500 10,000 -- -- 10,000 -- 31,000(2)
Executive Vice President
Scott T. Champion........ 56,160 106,898 6,000(3) -- -- -- 5,000(4)
Senior Vice President
Gene A. Hall............. 47,960 68,990 11,000(3) -- -- -- 5,000(4)
Senior Vice President
Joseph C. Piccirillo..... 80,800 53,400 -- -- -- -- 5,000(4)
Senior Vice President
</TABLE>
- ---------------
(1) Represents fees paid of $24,333 to Mr. Serota for services as a director of
APC and a car allowance of $5,500.
(2) Represents fees paid of $26,000 to Mr. Cope for services as a director of
APC and $5,000 as a deferred compensation contribution.
(3) Amounts based on a payment of $1,000 per operating facility in the region
managed.
(4) Amounts paid as deferred compensation contribution.
EMPLOYMENT CONTRACTS, CHANGE IN CONTROL ARRANGEMENTS AND OTHER PAYMENTS
The Company, Holdings and Kenneth Serota have entered into an employment
agreement, dated as of November 21, 1997 (the "Employment Agreement"), whereby
Mr. Serota has agreed to serve as President and Chief Executive Officer of the
Company for a period of three years commencing January 1, 1998 and for
additional successive one-year periods thereafter, unless either party gives
timely notice to the other that the employment term shall not be so extended.
The Employment Agreement provides for a base salary of $350,000, $375,000 and
$400,000 for the years 1998, 1999 and 2000, respectively, and those benefits
generally available to the employees of the Company, including life insurance,
health insurance, deferred compensation and profit sharing. In addition to
receiving a base salary, Mr. Serota is eligible to receive a bonus based on the
attainment of applicable performance standards agreeable to the Company and Mr.
Serota, including standards based on annual revenue growth, EBITDA growth,
completion of reasonably acceptable acquisitions and growth of acquired
properties. The Employment Agreement also provides, subject to certain
exceptions, that upon a termination of Mr. Serota's employment during the term
thereof (other than for "cause" as defined therein or voluntary resignation),
the Company is generally obligated to pay Mr. Serota the greater of one year's
salary or an amount equal to his base salary for the remaining term under the
Employment Agreement plus, in either case, a portion of his bonus for the year
of termination. The Company has also loaned to Mr. Serota $250,000 pursuant to
an Unsecured Promissory Note dated January 27, 1998. The amount of the loan will
be forgiven by the Company pro rata on a daily basis during the initial
three-year term
45
<PAGE> 48
of the Employment Agreement and shall be forgiven in its entirety if Mr. Serota
is terminated by the Company without cause, if Mr. Serota terminates his
employment for good reason (as defined therein), death or disability, or upon
the consummation of an initial public offering of securities of the Company or
Holdings.
On January 27, 1998, in satisfaction of Holdings' and the Company's
obligations under the terms of the Employment Agreement, GEI transferred to Mr.
Serota 2% of the fully-diluted equity of Holdings and, in addition, Mr. Serota
purchased from GEI an additional 2% of the fully-diluted equity of Holdings for
the price and on the terms and conditions such equity was purchased by GEI. The
Company loaned to Mr. Serota 50% of the purchase price of such shares pursuant
to a Secured Recourse Promissory Note dated January 27, 1998. Such loan bears
interest at a rate equal to the applicable federal rate for loans of the same
maturity as of the date of the loan. The outstanding principal amount of the
loan, together with all interest accrued thereon, will be due and payable in
full upon the earlier of (i) a change in control (as defined in the Employment
Agreement) or (ii) January 1, 2001. The Employment Agreement provides certain
"call" rights to Holdings, which are generally exercisable upon Mr. Serota's
termination of employment with the Company.
Subsequent to the purchase of such shares by Mr. Serota and the Management
Investors (as defined), GEI owned approximately 90% of Holdings Common Stock.
Holdings, in turn, owns 100% of the outstanding common stock of the Company. See
"Management--Directors and Executive Officers," "--Compensation of Directors"
and "Principal Stockholders."
MANAGEMENT SHARES
On January 27, 1998, GEI transferred an aggregate of 3,200 shares of
Holdings Common Stock ("Management Shares") to the Chief Executive Officer of
the Company, Mr. Serota, pursuant to a management stockholders agreement (the
"Management Stockholders Agreement"). The Management Stockholders Agreement
contains a "call" option exercisable by Holdings upon termination of Mr.
Serota's employment with Holdings or the Company, a right of first refusal in
favor of Mr. Serota, certain "piggyback" registration rights, "tag-along" sale
rights and "drag-along" sale obligations consistent with the terms of the
Employment Agreement. In addition, the Company or GEI may sell shares of
Holdings Common Stock to other current or prospective officers and employees of
the Company (together with the Senior Management Investors, the "Management
Investors"). As of the date hereof, a total of 4,800 Management Shares have been
transferred to employees other than Mr. Serota at a price of $100 per share, for
total consideration of $480,000.
Shares of Holdings Common Stock were sold to Management Investors pursuant
to Management Subscription and Stockholders Agreements among Holdings, GEI and
the respective Management Investor (each such agreement, a "Management Share
Agreement"). Pursuant to the Management Share Agreements, transfers of the
Management Shares (other than transfers to certain related transferees) are
subject to various restrictions, including a right of first refusal in favor of
Holdings. Each Management Share Agreement also contains a "call" option
exercisable by Holdings upon termination of the Management Investor's employment
with Holdings, the Company and their subsidiaries. Each Management Share
Agreement contains a noncompetition provision which prohibits a Management
Investor from competing, directly or indirectly, with the Company's publications
located within certain designated communities for a period of three years from
the termination date of such Management Investor's employment with the Company
or its subsidiaries. The Management Share Agreements also contain certain
"piggyback" registration rights, "tag-along" sale rights and "drag-along" sale
obligations. These rights and obligations lapse upon the occurrence of certain
events.
COMPENSATION OF DIRECTORS
Individuals who are officers of the Company and Holdings, as well as
Messrs. Green, Annick, Danhakl and Nolan, do not receive any compensation
directly for their service on Holdings' and the Company's Boards of Directors.
The Company has agreed, however, to pay LGP certain fees for various management,
consulting and financial planning services, including assistance in strategic
planning, providing market and financial analyses, negotiating and structuring
financing and exploring expansion opportunities. See "Certain Relationships and
Related Transactions."
46
<PAGE> 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the consummation of the Acquisition, LGP received a fee of $6.8
million for its services in arranging and structuring the Transactions. LGP is
an affiliate of GEI, an investment partnership which owns approximately 90% of
Holdings Common Stock and all outstanding shares of Holdings' Junior Preferred
Stock. Holdings, in turn, owns 100% of the outstanding common stock of the
Company.
In connection with the Acquisition, the Company entered into a Management
Agreement with LGP pursuant to which the Company agreed to pay LGP an annual
management fee of $1.0 million. Such fee is payable in equal monthly
installments, but is subordinated in right of payment to the New Notes. See
"Principal Stockholders," "Management--Directors and Executive Officers" and
"--Compensation of Directors."
47
<PAGE> 50
THE ACQUISITION
GENERAL
On January 27, 1998, the Acquisition was consummated pursuant to an Asset
Purchase Agreement, dated as of November 21, 1997, by and among the Company,
Holdings, GEI, Hollinger and certain of Hollinger's subsidiaries and an Asset
Purchase Agreement, dated as of November 21 , 1997, by and among the Company,
Holdings, GEI, Hollinger and certain of Hollinger's subsidiaries, and American
Publishing Company of Illinois, a wholly-owned subsidiary of Hollinger
(collectively, the "Asset Purchase Agreements"). The Asset Purchase Agreements
provided for the Company to acquire (in the manner described below) all of the
assets that were used primarily in the business of publishing, marketing and
distributing the Local Publications. In consideration of the transfer of such
assets, the Company paid Hollinger (including its affiliates) the contractual
purchase price of $309.1 million, plus interest of $1.1 million, calculated
pursuant to the Asset Purchase Agreements, and received from Hollinger a cash
adjustment of $3.0 million, which resulted in a net Purchase Price of $307.2
million. In addition, the Company assumed certain specified liabilities of the
Local Publications. Pursuant to the Asset Purchase Agreements, on April 2, 1998,
the Company paid Hollinger approximately $3.6 million as a working capital
adjustment and received from Hollinger an additional cash adjustment of
approximately $0.2 million.
The liabilities of the Local Publications assumed (collectively, the
"Assumed Liabilities") include: (i) liabilities reflected on the balance sheet
included in the financial statements dated as of September 30, 1997, (ii) other
liabilities incurred by the Local Publications since September 30, 1997 not in
breach of the Asset Purchase Agreements and in the ordinary course of business
that were of the type that would be reflected in a balance sheet prepared in
conformity with generally accepted accounting principles and consistent with the
financial statements referred to above, and (iii) certain other limited types of
liabilities specified in the Asset Purchase Agreements. Except for the Assumed
Liabilities, Hollinger and its affiliates retained all liabilities relating to
the operation of the Local Publications prior to the Closing Date, including,
among other things, liabilities relating to litigation, governmental claims and
environmental claims relating to the pre-closing operation of the Local
Publications (collectively, the "Retained Liabilities"). See "--Indemnification
Provisions."
The Acquisition, including the payment of related fees and expenses, was
financed from: (i) proceeds of $180.0 million from the issuance and sale of the
Old Notes; (ii) proceeds of $50.5 million from the issuance and sale of the Old
Senior Discount Debentures; (iii) proceeds of $45.0 million from the issuance
and sale of the Old Senior Preferred Stock; (iv) proceeds of $49.0 million from
the issuance and sale of Holdings Junior Preferred Stock; and (v) proceeds of
$8.0 million from the issuance and sale of shares of Holdings Common Stock. See
"Description of Revolving Credit Facility" and "Description of Holdings'
Indebtedness and Preferred Stock." Management of the Company believes that the
financing used for the Acquisition provides the Company with the least expensive
and most flexible form of financing available to successfully implement the
Company's operating and acquisition strategies.
INDEMNIFICATION PROVISIONS
The Asset Purchase Agreements contain provisions customary for transactions
of similar size and type, including representations and warranties and certain
covenants, which generally will expire at the end of the eighteenth month
following the consummation of the Acquisition.
In addition, pursuant to the terms of the Asset Purchase Agreements,
Hollinger agreed to indemnify and reimburse the Company for all losses arising
from breaches of certain covenants and agreements of Hollinger in the Asset
Purchase Agreements, all Retained Liabilities, including environmental claims
arising from the pre-closing operation of the Local Publications, and certain
other matters as specified in the Asset Purchase Agreements. In turn, the
Company agreed to indemnify and reimburse Hollinger for all losses arising from
breaches of covenants and agreements of the Company and Holdings in the Asset
Purchase Agreements, liabilities and obligations of the Company or Holdings
relating to or arising out of the conduct of the business
48
<PAGE> 51
or the use of the assets following the Acquisition or the Assumed Liabilities.
As to such indemnification obligations of Hollinger and the Company, there are
no time limitations or deductibles.
OTHER AGREEMENTS RELATED TO THE ACQUISITION
Non-Competition Agreement. On January 27, 1998, the Company and Hollinger
entered into the Non-Competition Agreement, whereby Hollinger agreed not to
compete, directly or indirectly, with the Company's acquired publications. The
Non-Competition Agreement is for a term of five years from the Closing Date and
its scope includes all postal zip codes in which any publication owned by the
Company as of the Closing Date is distributed. Of the total Purchase Price of
the Acquisition, approximately $30.9 million represented consideration in
connection with the Non-Competition Agreement.
Transitional Services Agreement. On January 27, 1998, the Company and APMS
entered into the Transitional Services Agreement which requires APMS to, at the
Company's option, provide certain services to the Company in order to facilitate
the transition of the Company to a stand-alone operation. Such services include,
among others: (i) accounting and finance-related information systems and
administrative processing support, (ii) employee benefits and insurance
coverage, administrative and information processing support, and (iii) treasury
and advertising services. APMS will provide such services to the Company at cost
for a period of up to three years after the Closing Date.
49
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The information in the following table sets forth the ownership of Holdings
Common Stock by (i) each person who beneficially owns more than 5% of the
outstanding shares of Holdings Common Stock, (ii) each executive officer of the
Company, (iii) each director of the Company, and (iv) all directors and
executive officers of the Company as a group. Except as noted below, each person
or entity has sole voting and investment power with respect to the shares shown.
All shares of common stock of the Company are owned by Holdings.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
--------- -------
<S> <C> <C>
Green Equity Investors II, L.P.(1).......................... 72,000 90.0%
Leonard I. Green(1)(2)...................................... 72,000 90.0
Gregory J. Annick(1)(2)..................................... 72,000 90.0
John G. Danhakl(1)(2)....................................... 72,000 90.0
Peter J. Nolan(1)(2)........................................ 72,000 90.0
Kenneth L. Serota........................................... 3,200 4.0
Kenneth W. Cope............................................. 800 1.0
George R. Sample............................................ 0 0.0
Kevin B. O'Shea............................................. 800 1.0
Scott T. Champion........................................... 800 1.0
Gene A. Hall................................................ 800 1.0
Joseph C. Piccirillo........................................ 800 1.0
All directors and executive officers as a group (11
persons)(3)............................................... 79,200 99.0
</TABLE>
- ---------------
(1) The address of Green Equity Investors II, L.P. and Messrs. Green, Annick,
Danhakl and Nolan is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles,
California 90025.
(2) The shares shown as beneficially owned by Messrs. Green, Annick, Danhakl and
Nolan represent 72,000 shares owned of record by GEI. GEI is a Delaware
limited partnership managed by LGP, which is an affiliate of the general
partner of GEI. Each of Leonard I. Green, Jonathan D. Sokoloff, John G.
Danhakl, Gregory J. Annick, Peter J. Nolan and Jennifer Holden Dunbar,
either directly (whether through ownership interest or position) or through
one or more intermediaries, may be deemed to control LGP and such general
partner. LGP and such general partner may be deemed to control the voting
and disposition of the shares of Holdings Common Stock owned by GEI. As
such, Messrs. Green, Annick, Danhakl and Nolan may be deemed to have shared
voting and investment power with respect to all shares held by GEI. However,
such individuals disclaim beneficial ownership of the securities held by
GEI, except to the extent of their respective pecuniary interests therein.
(3) Includes the shares referred to in Note 2 above.
REGISTRATION AND OTHER CONTRACTUAL RIGHTS OF CERTAIN STOCKHOLDERS OF HOLDINGS
The Management Investors will be granted certain registration rights and
"tag-along" rights and will be subject to certain "drag-along" obligations. See
"Management--Management Shares."
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<PAGE> 53
DESCRIPTION OF NEW NOTES
Set forth below is a summary of the material provisions of the Indenture,
dated as of January 27, 1998, by and between the Company and State Street Bank
and Trust Company, as trustee (the "Trustee"), pursuant to which the Old Notes
were, and the New Notes will be, issued, a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
them in the Indenture.
GENERAL
The Old Notes were, and the New Notes will be, general unsecured
obligations of the Company, limited in aggregate principal amount to $180.0
million, and will be subordinated in right of payment to all existing and future
Senior Indebtedness of the Company, including certain Indebtedness of the
Company that currently is and may in the future be secured by assets held by the
Company, subject to certain restrictions described herein. As of April 3, 1998,
the Company had $180.0 million Indebtedness ranking Senior to the New Notes. The
New Notes will be jointly and severally irrevocably, fully and unconditionally
guaranteed on a senior subordinated basis by the Subsidiary Guarantors. The New
Subsidiary Guarantees will be general unsecured obligations of the Subsidiary
Guarantors and will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Subsidiary Guarantors, including certain
Indebtedness of the Subsidiary Guarantors that currently is and may in the
future be secured by assets held by Subsidiary Guarantors, subject to certain
restrictions described herein. The obligations of each Subsidiary Guarantor
under its New Subsidiary Guarantees, however, will be limited in a manner
intended to avoid it being deemed a fraudulent conveyance under applicable law.
See "--Certain Bankruptcy Limitations" and "Risk Factors--Fraudulent Transfer
Considerations." The term "Subsidiaries" as used herein does not include
Unrestricted Subsidiaries. As of the date of the Indenture and as of the date
hereof, none of the Company's Subsidiaries were Unrestricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries generally will not be subject to the restrictive covenants set
forth in the Indenture.
The New Notes will mature on February 1, 2008. The New Notes will bear
interest at the rate of 9 3/8% per annum from the date of issuance or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semi-annually on February 1 and August 1 of each year, commencing
on August 1, 1998, to the persons in whose names such New Notes are registered
at the close of business on the January 15 or July 15 immediately preceding such
Interest Payment Date. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Principal, premium, if any, and interest on the New Notes will be payable,
and the New Notes may be presented for registration of transfer or exchange, at
the office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York.
Except as set forth below, at the option of the Company, payment of interest may
be made by check mailed to the holders of the New Notes (the "Holders") at the
addresses set forth upon the registry books of the Company. No service charge
will be made for any registration of transfer or exchange of New Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by the Company, the Company's office or agency will be the corporate trust
office of the Trustee presently located at the office of the Trustee in the
Borough of Manhattan, The City of New York. The Old Notes were, and the New
Notes will be, issued only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The New Notes and the New Subsidiary Guarantees will be general, unsecured
obligations of the Company and the Subsidiary Guarantors, respectively,
subordinated in right of payment to all Senior Indebtedness of the Company and
the Subsidiary Guarantors, as applicable. On a pro forma basis, as of December
31, 1997, after giving effect to the Transactions, the Company would have had no
long-term Senior Indebtedness.
51
<PAGE> 54
The Indenture provides that no payment (by set-off or otherwise) may be
made by or on behalf of the Company or a Subsidiary Guarantor, as applicable, on
account of the principal of, premium, if any, or interest on the New Notes
(including any repurchases of New Notes), or on account of the redemption
provisions of the New Notes or any Obligation in respect of the New Notes, for
cash or property, (i) upon the maturity of any Senior Indebtedness of the
Company or such Subsidiary Guarantor, as applicable, by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of,
premium, if any, and the interest on and fees in respect of such Senior
Indebtedness are paid in full in cash or Cash Equivalents, or (ii) in the event
of default in the payment of any principal of, premium, if any, or interest on
or fee in respect of Senior Indebtedness of the Company or such Subsidiary
Guarantor, as applicable, when it becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration or otherwise (a "Payment
Default"), unless and until such Payment Default has been cured or waived or
otherwise has ceased to exist.
Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness to declare such Senior
Indebtedness to be due and payable and (ii) written notice of such event of
default is given to the Company and the Trustee by the Senior Bank
Representative or the holders of an aggregate of at least $25.0 million
principal amount outstanding of any other Senior Indebtedness or their
representative (a "Payment Notice"), then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment
(by set-off or otherwise) may be made by or on behalf of the Company, if the
Company is an obligor on such Senior Indebtedness, or any Subsidiary Guarantor
which is an obligor under such Senior Indebtedness on account of the principal
of, premium, if any, or interest on the New Notes (including any repurchases of
any of the New Notes), or on account of the redemption provisions of the New
Notes or any Obligation in respect of the New Notes, in any such case.
Notwithstanding the foregoing, unless the Senior Indebtedness in respect of
which such event of default exists has been declared due and payable in its
entirety within 179 days after the Payment Notice is delivered as set forth
above (the "Payment Blockage Period") (and such declaration has not been
rescinded or waived), at the end of the Payment Blockage Period, the Company and
the Subsidiary Guarantors shall be required to pay all sums not paid to the
Holders of the New Notes during the Payment Blockage Period due to the foregoing
prohibitions and to resume all other payments as and when due on the New Notes.
Any number of Payment Notices may be given; provided, however, that (i) not more
than one Payment Notice shall be given within a period of any 360 consecutive
days, and (ii) no default that existed upon the date of such Payment Notice or
the commencement of such Payment Blockage Period (whether or not such event of
default is on the same issue of Senior Indebtedness) shall be made the basis for
the commencement of any other Payment Blockage Period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Subsidiary Guarantor shall be
received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of such
Senior Indebtedness and shall be paid or delivered by the Trustee or such
Holders, as the case may be, to the holders of such Senior Indebtedness
remaining unpaid or unprovided for or to their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness may have been
issued, ratably according to the aggregate principal amounts remaining unpaid on
account of such Senior Indebtedness held or represented by each, for application
to the payment of all such Senior Indebtedness remaining unpaid, to the extent
necessary to pay or to provide for the payment of all such Senior Indebtedness
in full in cash or Cash Equivalents after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness.
Upon any distribution of assets of the Company or any Subsidiary Guarantor
upon any dissolution, winding up, total or partial liquidation or reorganization
of the Company or a Subsidiary Guarantor, whether voluntary or involuntary, in
bankruptcy, insolvency, receivership or a similar proceeding or upon assignment
for the benefit of creditors or any marshaling of assets or liabilities, (i) the
holders of all Senior Indebtedness of the Company or such Subsidiary Guarantor,
as applicable, will first be entitled to receive payment of such Senior
Indebtedness in full in cash or Cash Equivalents before the Holders are entitled
to receive any payment on account of the principal of, premium, if any, and
interest on the New Notes or any Obligation in respect of the New Notes (other
than Junior Securities) and (ii) any payment or distribution of assets of the
Company
52
<PAGE> 55
or such Subsidiary Guarantor of any kind or character from any source, whether
in cash, property or securities (other than Junior Securities) to which the
Holders or the Trustee on behalf of the Holders would be entitled (by set-off or
otherwise), except for the subordination provisions contained in the Indenture,
will be paid by the liquidating trustee or agent or other person making such a
payment or distribution directly to the holders of such Senior Indebtedness or
their representative to the extent necessary to make payment in full of all such
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness.
No provision contained in the Indenture or the New Notes will affect the
obligation of the Company and the Subsidiary Guarantors, which is absolute and
unconditional, to pay in full, when due, principal of, premium, if any, and
interest on the New Notes. The subordination provisions of the Indenture and the
New Notes will not prevent the occurrence of any Default or Event of Default
under the Indenture or otherwise limit the rights of the Trustee or any Holder,
subject to the four immediately preceding paragraphs.
As a result of the subordination provisions contained in the Indenture, in
the event of the liquidation, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or an assignment for the benefit of the
creditors of the Company or a marshaling of assets or liabilities of the
Company, Holders of the New Notes may receive less, ratably, and holders of
Senior Indebtedness may receive more, ratably, than other creditors of the
Company or the Subsidiary Guarantors.
CERTAIN BANKRUPTCY LIMITATIONS
Each current and future Subsidiary Guarantor will guarantee the Company's
obligations with respect to the New Notes, as provided under "--Certain
Covenants--Future Subsidiary Guarantors." Holders of the New Notes will be
direct creditors of each Subsidiary Guarantor by virtue of its New Subsidiary
Guarantee. Nonetheless, in the event of the bankruptcy or financial difficulty
of a Subsidiary Guarantor, such Subsidiary Guarantor's obligations under its New
Subsidiary Guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Subsidiary
Guarantor was insolvent, was rendered insolvent, or was left with inadequate
capital to conduct its business. A court would likely conclude that a Subsidiary
Guarantor did not receive reasonably equivalent value or fair consideration to
the extent that the aggregate amount of its liability on its New Subsidiary
Guarantee exceeds the economic benefits it receives in the Exchange Offer. The
obligations of each Subsidiary Guarantor under its New Subsidiary Guarantee will
be limited in a manner intended to cause it not to be a fraudulent conveyance
under applicable law, although no assurance can be given that a court would give
the Holder the benefit of such provision. See "Risk Factors--Fraudulent Transfer
Considerations."
If the obligations of a Subsidiary Guarantor under its New Subsidiary
Guarantee were avoided, Holders of New Notes would have to look to the assets of
any remaining Subsidiary Guarantors and the Company for payment. There can be no
assurance in that event that such assets would suffice to pay the outstanding
principal and interest on the New Notes.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any New Notes prior to
February 1, 2003 (other than out of the Net Cash Proceeds of a Public Equity
Offering, as described in the next paragraph). The New Notes will be redeemable
for cash at the option of the Company, in whole or in part, at any time on or
after February 1, 2003, upon not less than 30 days nor more than 60 days notice
to each Holder of New Notes, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing February 1 of the years indicated below, in each case (subject to the
right of Holders of record on a Record Date to receive the corresponding
interest due on an Interest Payment Date
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corresponding to such Record Date that is on or prior to such Redemption Date)
together with accrued and unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 104.688%
2004...................................................... 103.125%
2005...................................................... 101.563%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to February 1, 2001,
the Company may redeem, on one or more occasions, up to an aggregate of 35% of
the aggregate principal amount of the New Notes originally outstanding at a
redemption price equal to 109.375% of the principal amount thereof (subject to
the right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) plus accrued
and unpaid interest to the date of redemption, with cash from the Net Cash
Proceeds to the Company of one or more Public Equity Offerings; provided, that
at least 65% of the aggregate principal amount of the New Notes originally
outstanding remain outstanding immediately after the occurrence of each such
redemption; provided, further, that such notice of redemption shall be sent
within 30 days after the date of closing of any such Public Equity Offering, and
such redemption shall occur within 60 days after the date such notice is sent.
In the case of a partial redemption, the Trustee shall select the New Notes
or portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The New Notes may be redeemed in part in
multiples of $1,000 only.
The New Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each New Note to be redeemed to such Holder's last address as then
shown upon the registry books of the Registrar. Any notice which relates to a
New Note to be redeemed in part only must state the portion of the principal
amount equal to the unredeemed portion thereof and must state that on and after
the date of redemption, upon surrender of such New Note, a new New Note or New
Notes in a principal amount equal to the unredeemed portion thereof will be
issued. On and after the date of redemption, interest will cease to accrue on
the New Notes or portions thereof called for redemption, unless the Company
defaults in the payment thereof.
CERTAIN COVENANTS
REPURCHASE OF NEW NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of New Notes will have the right, at such Holder's option,
pursuant to an offer (subject only to conditions required by applicable law, if
any) by the Company (the "Change of Control Offer"), to require the Company to
repurchase all or any part of such Holder's New Notes (provided, that the
principal amount of such New Notes must be $1,000 or an integral multiple
thereof) on a date (the "Change of Control Purchase Date") that is no later than
45 Business Days after the occurrence of such Change of Control, at a cash price
equal to 101% of the principal amount thereof (the "Change of Control Purchase
Price") plus accrued and unpaid interest to the Change of Control Purchase Date.
The Change of Control Offer shall be made within 15 Business Days following a
Change of Control and shall remain open for 20 Business Days following its
commencement (the "Change of Control Offer Period"). Upon expiration of the
Change of Control Offer Period, the Company promptly shall purchase all New
Notes properly tendered in response to the Change of Control Offer.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company or Holdings with or into any person or any sale, transfer or
other conveyance, whether direct or indirect, of all or substantially all of the
assets of the Company or Holdings on a consolidated basis, in one transaction or
a series of related transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not
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<PAGE> 57
applicable), other than any Excluded Person or Excluded Persons or Holdings, is
or becomes the Beneficial Owner, directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in the election of
directors, managers or trustees, as applicable, of the transferee(s) or
surviving entity or entities, (ii) any "person" or "group," other than any
Excluded Person or Excluded Persons or Holdings, becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the total voting power in the
aggregate of all classes of Capital Stock of the Company then outstanding
normally entitled to vote in elections of directors, provided that any "person"
or "group" will be deemed to be the Beneficial Owner of any Capital Stock of the
Company held by Holdings so long as such person or group is the Beneficial Owner
of, directly or indirectly, in the aggregate a majority of the Capital Stock of
Holdings then outstanding normally entitled to vote in elections of directors,
or (iii) during any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of any such 12-month period constituted the
Board of Directors of either the Company or Holdings (together, in each case,
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company or Holdings was
approved by LGP or a Related Party of LGP or by the Excluded Persons or by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company or Holdings then in office, as
applicable.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment New Notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient
to pay the Change of Control Purchase Price (together with accrued and unpaid
interest) of all New Notes so tendered, and (iii) deliver to the Trustee New
Notes so accepted together with an Officers' Certificate listing the New Notes
or portions thereof being purchased by the Company. The Paying Agent promptly
will pay the Holders of New Notes so accepted an amount equal to the Change of
Control Purchase Price (together with accrued and unpaid interest) and the
Trustee promptly will authenticate and deliver to such Holders a new New Note
equal in principal amount to any unpurchased portion of the New Note
surrendered. Any New Notes not so accepted will be delivered promptly by the
Company to the Holder thereof. The Company publicly will announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Purchase Date.
The indenture governing the terms of the New Senior Discount Debentures
provides that, prior to making an offer to purchase the New Senior Discount
Debentures upon a change of control as defined under such indenture, but in any
event within 90 days following such a change of control, Holdings will either
repay all outstanding Indebtedness of its subsidiaries (including the Company
and any Subsidiary Guarantors) or obtain the requisite consents, if any, under
the Credit Agreement and the New Notes to permit the repurchase of the New
Senior Discount Debentures as required by the Debenture indenture.
The obligations with respect to a Change of Control Offer shall be
satisfied to the extent actually performed by a third party in accordance with
the terms of the Indenture.
The Change of Control purchase feature of the New Notes may make more
difficult or discourage a takeover of the Company and the removal of incumbent
management. The phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire New Notes tendered upon the
occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws and any provisions of the Indenture which conflict with such
laws shall be deemed to be superseded by the provisions of such laws.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest due on such Interest Payment Date will be paid to
the person in whose name a New Note is registered at the close of business on
such
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<PAGE> 58
Record Date, and such interest will not be payable to Holders who tender the New
Notes pursuant to such Change of Control Offer.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth in this covenant, the
Company and the Subsidiary Guarantors will not, and will not permit any of their
Subsidiaries to, directly or indirectly, issue, assume, guaranty, incur, become
directly or indirectly liable with respect to (including as a result of an
Acquisition), or otherwise become responsible for, contingently or otherwise
(individually and collectively, to "incur" or, as appropriate, an "incurrence"),
any Indebtedness (including Acquired Indebtedness), other than Permitted
Indebtedness. Notwithstanding the foregoing, if (i) no Default or Event of
Default shall have occurred and be continuing at the time of, or would occur
after giving effect on a pro forma basis to, such incurrence of Indebtedness
(including, without duplication, guarantees of Indebtedness of the Company and
the Subsidiary Guarantors otherwise permitted by the Indenture) or Disqualified
Capital Stock and (ii) on the date of such incurrence (the "Incurrence Date"),
after giving effect on a pro forma basis to such incurrence of such Indebtedness
or Disqualified Capital Stock and the use of proceeds thereof, the Leverage
Ratio shall not exceed 7.0 to 1 (the "Debt Incurrence Ratio"), then the Company
and the Subsidiary Guarantors may incur such Indebtedness or Disqualified
Capital Stock.
In addition, the foregoing limitations will not apply to:
(a) the incurrence by the Company or any Subsidiary Guarantor of
Purchase Money Indebtedness on or after the Issue Date; provided, that (i)
the aggregate principal amount of such Indebtedness incurred on or after
the Issue Date and outstanding at any time pursuant to this paragraph (a)
(including any Indebtedness issued to refinance, replace or refund such
Indebtedness) shall not exceed $15.0 million, and (ii) in each case, such
Indebtedness as originally incurred shall not constitute more than 100% of
the cost (determined in accordance with GAAP) to the Company or such
Subsidiary Guarantor, as applicable, of the property so purchased or
leased;
(b) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness in an aggregate principal amount outstanding at any time
(including Indebtedness incurred to refinance, replace or refund such
Indebtedness) of up to $10.0 million (which may be incurred pursuant to the
Credit Agreement); and
(c) the incurrence by the Company or any Subsidiary Guarantor of
Indebtedness, pursuant to the Credit Agreement, up to an aggregate
principal amount outstanding at any time (including any Indebtedness
incurred to refinance, replace or refund such Indebtedness) of $175.0
million, minus the amount of any such Indebtedness retired with the Net
Cash Proceeds from any Asset Sale or assumed by a transferee in an Asset
Sale.
Indebtedness or Disqualified Capital Stock of any person which is
outstanding at the time such person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company, shall be deemed to have been incurred at the time such person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
Notwithstanding anything to the contrary contained in the Indenture, (i)
the Subsidiary Guarantors each may guaranty Indebtedness of the Company or any
other Subsidiary Guarantor that is permitted to be incurred under the Indenture,
either at the time such Subsidiary Guarantor becomes a Guarantor of the New
Notes or, if later, the time the Company or such other Subsidiary Guarantor
incurs such Indebtedness, and (ii) the Company may guaranty Indebtedness of any
Subsidiary Guarantor permitted to be incurred under the Indenture.
Notwithstanding anything to the contrary contained in the Indenture, the
Company and the Subsidiary Guarantors will not, and will not permit any of their
Subsidiaries to, incur any Indebtedness that is
56
<PAGE> 59
contractually subordinate to any other Indebtedness of the Company or any
Subsidiary Guarantor unless such Indebtedness is at least as subordinate to the
New Notes and the New Subsidiary Guarantees, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
make any Restricted Payment if, after giving effect to such Restricted Payment
on a pro forma basis, (1) a Default or an Event of Default shall have occurred
and be continuing, (2) the Company is not permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (3) the aggregate amount of all Restricted Payments made by the
Company and its Subsidiaries, including, after giving effect to such proposed
Restricted Payment from and after the Issue Date, would exceed the sum of (a)
(i) Consolidated EBITDA of the Company for the period (taken as one accounting
period), commencing on the first day of the first fiscal quarter commencing on
or prior to the Issue Date, to and including the last day of the fiscal quarter
ended immediately prior to the date of each such calculation (or, in the event
Consolidated EBITDA for such period is a deficit, then minus 100% of such
deficit) less (ii) 150% of Consolidated Fixed Charges for such period, plus (b)
the aggregate Net Cash Proceeds received by the Company as a Capital
Contribution or from the sale of the Company's Qualified Capital Stock (other
than in each case (i) to a Subsidiary of the Company, (ii) to the extent applied
in connection with a Qualified Exchange, (iii) to the extent applied to
repurchase Capital Stock pursuant to clause (f) of the definition of Permitted
Payments and (iv) to the extent received by the Company or any Subsidiary
Guarantor pursuant to clause (c) or (d) of the definition of Permitted Payments)
after the Issue Date.
The provisions of the immediately preceding paragraph will not prohibit or
be violated by (A) a Qualified Exchange; (B) the payment or making of any
Restricted Payment within 60 days after the date of declaration thereof or the
making of any binding commitment in respect thereof, if at said date of
declaration or commitment, such Restricted Payment would have complied with the
provisions contained in clauses (1), (2) and (3) of the immediately preceding
paragraph; and (C) Permitted Payments. The full amount of any Restricted Payment
made pursuant to the foregoing clause (B) (but not pursuant to clauses (A) or
(C)) of the immediately preceding sentence, however, will be deducted in the
calculation of the aggregate amount of Restricted Payments available to be made
referred to in clause (3) of the immediately preceding paragraph.
Additionally, the foregoing clause (3) of the first paragraph of this
covenant will not prohibit any payment of cash dividends to Holdings on or after
February 1, 2003, in each case (i) made not less than two Business Days nor more
than 15 Business Days after the then most recent Interest Payment Date, provided
the Company shall have first paid to the Holders all interest due and owing on
the New Notes on or prior to such Interest Payment Date, and (ii) the proceeds
of which are used by Holdings concurrently with such payment to make a scheduled
interest payment on the New Senior Discount Debentures as required by the terms
of the New Senior Discount Debentures in effect on the Issue Date. The full
amount of any Restricted Payment made pursuant to this paragraph, however, will
be deducted in the calculation of the aggregate amount of Restricted Payments
available to be made referred to in clause (3) of the first paragraph of this
covenant.
For purposes of this covenant, the amount of any Restricted Payment, if
other than in cash, shall be the fair market value thereof, as determined in the
good faith reasonable judgment of the Board of Directors of the Company.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
create, assume or suffer to exist any consensual restriction on the ability of
any Subsidiary of the Company to pay dividends or make other distributions to or
on behalf of, or to pay any obligation to or on behalf of, or otherwise to
transfer assets or property to or on behalf of, or make or pay loans or advances
to or on behalf of, the Company or any Subsidiary of the Company, except
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(a) restrictions imposed by the New Notes or the Indenture or by other
Indebtedness of the Company (which may also be guaranteed by the Subsidiary
Guarantors) ranking senior to or pari passu with the New Notes or the New
Subsidiary Guarantees, as applicable, provided such restrictions are not
materially more restrictive than those imposed by the Indenture and the New
Notes, (b) restrictions imposed by applicable law, (c) existing restrictions
under Indebtedness outstanding on the Issue Date, (d) restrictions under any
Acquired Indebtedness not incurred in violation of the Indenture or any
agreement relating to any property, asset, or business acquired by the Company
or any of its Subsidiaries, which restrictions in each case existed at the time
of Acquisition, were not put in place in connection with or in anticipation of
such Acquisition and are not applicable to any person, other than the person
acquired, or to any property, asset or business, other than the property, assets
and business so acquired, (e) any such restriction or requirement imposed by
Indebtedness incurred under the Credit Agreement, in accordance with the
Indenture, provided such restriction or requirement is not materially more
restrictive than that imposed by the Revolving Credit Facility as of the Issue
Date, (f) restrictions with respect solely to a Subsidiary of the Company
imposed pursuant to a binding agreement which has been entered into for the sale
or disposition of all or substantially all of the Equity Interests or assets of
such Subsidiary, provided such restrictions apply solely to the Equity Interests
or assets of such Subsidiary which are being sold, (g) restrictions on transfer
contained in Purchase Money Indebtedness incurred pursuant to paragraph (a) of
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," provided such restrictions relate only to the
transfer of the property acquired with the proceeds of such Purchase Money
Indebtedness, and (h) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (a), (c), (d), (e) or
(g) of this paragraph that are not materially more restrictive than those being
replaced and do not apply to any other person or assets than those that would
have been covered by the restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, neither (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice, nor (b) Liens permitted under the
terms of the Indenture shall in and of themselves be considered a restriction on
the ability of the applicable Subsidiary to transfer such agreement or assets,
as the case may be.
LIMITATION ON LIENS SECURING INDEBTEDNESS
The Company and the Subsidiary Guarantors will not, and will not permit any
of their Subsidiaries to, create, incur, assume or suffer to exist, to secure
any Indebtedness, any Lien of any kind, other than Permitted Liens, upon any of
their respective assets now owned or acquired on or after the date of the
Indenture or upon any income or profits therefrom unless the Company provides,
and causes its Subsidiaries to provide, concurrently therewith or immediately
thereafter, that the New Notes and the New Subsidiary Guarantees, as applicable,
are equally and ratably so secured for so long as such Indebtedness so secured
remains outstanding; provided that, if such Indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the New Notes with the same relative
priority as such Subordinated Indebtedness shall have with respect to the New
Notes; provided, further, that, in the case of Indebtedness of a Subsidiary
Guarantor, if such Subsidiary Guarantor shall cease to be a Subsidiary Guarantor
in accordance with the provisions of the Indenture, such equal and ratable Lien
to secure the New Notes shall, without any further action, cease to exist.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, in one or a series of
related transactions, convey, sell, transfer, assign or otherwise dispose of,
directly or indirectly, any of its property, business or assets (other than cash
or Cash Equivalents), including by merger or consolidation (in the case of a
Subsidiary Guarantor), and including any sale or other transfer or issuance of
any Equity Interests (other than directors' qualifying shares) of any Subsidiary
of the Company, whether by the Company or a Subsidiary of the Company, and
including (except as provided in clause (vi) of the third paragraph of this
covenant) any Sale and Leaseback Transaction (any of the foregoing, an "Asset
Sale"), unless (1) (a) within 360 days after the date of such Asset Sale, the
Net Cash Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the
optional redemption of the New Notes in accordance with the terms of the
Indenture and other Indebtedness of the Company ranking on a
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<PAGE> 61
parity with the New Notes from time to time outstanding with similar provisions
requiring the Company to make an offer to purchase or to redeem such
Indebtedness with the proceeds from asset sales, pro rata in proportion to the
respective principal amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the New Notes and such other
Indebtedness then outstanding or to the repurchase of the New Notes and such
other Indebtedness pursuant to a cash offer (subject only to conditions required
by applicable law, if any (pro rata in proportion to the respective principal
amounts (or accreted values in the case of Indebtedness issued with an original
issue discount) of the New Notes and such other Indebtedness then outstanding))
(the "Asset Sale Offer") at a purchase price of 100% of principal amount (or
accreted value in the case of Indebtedness issued with an original issue
discount) (the "Asset Sale Offer Price") together with accrued and unpaid
interest to the date of payment, made within 360 days of such Asset Sale, or
(b) within 360 days following such Asset Sale, the Asset Sale Offer Amount is
used (i) to make one or more Acquisitions or invested in assets and property
(other than notes, bonds, obligations and securities) which in the good faith
reasonable judgment of the Board of Directors of the Company will constitute or
be a part of a Related Business of the Company or such Subsidiary (if it
continues to be a Subsidiary) immediately following such transaction or (ii) to
retire permanently Indebtedness incurred under the Credit Agreement pursuant to
paragraph (c) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" (including that in the case of a
revolver or similar arrangement that makes credit available, such commitment is
so permanently reduced by such amount) or other Senior Indebtedness incurred
pursuant to paragraph (b) of such covenant, (2) at least 75% of the
consideration for such Asset Sale or series of related Asset Sales consists of
cash or Cash Equivalents; provided that (x) the amount of any liabilities (as
shown on the Company's most recent consolidated balance sheet) of the Company or
any Subsidiary (other than Subordinated Indebtedness) that are assumed by the
transferee in such Asset Sale (provided that the Company and its Subsidiaries
are released from all obligations in respect thereof) and (y) any notes or other
obligations received by the Company or any such Subsidiary Guarantor from such
transferee that are promptly (but in no event more than 90 days after receipt)
converted by the Company or such Subsidiary Guarantor into cash or Cash
Equivalents (to the extent of the cash or Cash Equivalents, as the case may be,
received), shall be deemed to be cash or Cash Equivalents, as the case may be,
for purposes of this provision, and such cash and Cash Equivalents shall be
deemed to be Net Cash Proceeds received from the Asset Sale of the related
property sold for such notes or other obligations, for purposes of this covenant
and; provided, further, this clause (2) shall not apply to the sale or
disposition of assets as a result of a foreclosure (or a secured party taking
ownership of such assets in lieu of foreclosure) or as a result of an
involuntary proceeding in which the Company cannot, directly or through its
Subsidiaries, direct the type of proceeds received, and (3) with respect to any
Asset Sale or series of related Asset Sales, Net Cash Proceeds of which exceed
$2.0 million, the Board of Directors of the Company determines in good faith
that the Company or such Subsidiary, as applicable, receives fair market value
for such Asset Sale.
The Indenture provides that an acquisition of New Notes pursuant to an
Asset Sale Offer may be deferred until the accumulated Net Cash Proceeds from
Asset Sales not applied to the uses set forth in clause 1(b) above (the "Excess
Proceeds") exceeds $10.0 million and that each Asset Sale Offer shall remain
open for 20 Business Days following its commencement (the "Asset Sale Offer
Period"). Upon expiration of the Asset Sale Offer Period, the Company shall
apply the Asset Sale Offer Amount plus an amount equal to accrued and unpaid
interest to the purchase of all Indebtedness properly tendered (on a pro rata
basis if the Asset Sale Offer Amount is insufficient to purchase all
Indebtedness so tendered) at the Asset Sale Offer Price (together with accrued
interest). To the extent that the aggregate amount of Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Asset Sale Offer Amount, the
Company may use any remaining Net Cash Proceeds for general corporate purposes
as otherwise permitted by the Indenture and following each Asset Sale Offer the
Excess Proceeds amount shall be reset to zero.
Notwithstanding the foregoing provisions of this covenant, the following
transactions shall not be deemed Asset Sales:
(i) the Company and the Subsidiary Guarantors may convey, sell, lease,
transfer, assign or otherwise dispose of property in the ordinary course of
business;
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(ii) the Company and the Subsidiary Guarantors may (x) convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the limitation on mergers, sales or consolidations
provisions in the Indenture, (y) make Restricted Payments permitted by the
covenant "Limitation on Restricted Payments," and (z) engage in Exempted
Affiliate Transactions;
(iii) the Company and the Subsidiary Guarantors may convey, sell,
transfer, assign or otherwise dispose of assets or issue Capital Stock to
the Company or any of the Subsidiary Guarantors;
(iv) the Company and the Subsidiary Guarantors may sell or dispose of
damaged, worn out or other obsolete property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary Guarantor, as
applicable;
(v) the Company and the Subsidiary Guarantors may exchange assets held
by the Company or a Subsidiary Guarantor for assets held by any person or
entity; provided that (A) the assets received by the Company or a
Subsidiary Guarantor in any such exchange in the good faith reasonable
judgment of the Board of Directors of the Company will immediately
constitute, be a part of, or be used in, a Related Business, (B) the Board
of Directors of the Company has determined that the terms of any exchange
are fair and reasonable, and (C) any such exchange shall be deemed to be an
Asset Sale to the extent that the Company or any Subsidiary Guarantor
receive cash or Cash Equivalents in such exchange;
(vi) the Company and each of the Subsidiary Guarantors may engage in
Sale and Leaseback Transactions with respect to property acquired after the
Issue Date (other than property acquired in exchange for or with the
proceeds from the sale or other disposition of property held by the Company
or any Subsidiary Guarantor on the Issue Date);
(vii) the Company and each of the Subsidiary Guarantors may liquidate
Cash Equivalents in the ordinary course of business;
(viii) the Company and each of the Subsidiary Guarantors may create or
assume Liens (or permit any foreclosure thereon) not prohibited by the
Indenture;
(ix) the Company and each of the Subsidiary Guarantors may surrender
or waive contract rights or the settlement, release or surrender of
contract, tort or other claims of any kind; and
(x) the Company and the Subsidiary Guarantors, collectively, may
convey, sell, transfer, assign or otherwise dispose of assets having an
aggregate fair market value not exceeding $2.0 million in any fiscal year.
All Net Cash Proceeds from an Event of Loss (other than the proceeds of any
business interruption insurance) shall be invested or otherwise used as provided
in clause 1 of the first paragraph of this covenant, all within 18 months from
the occurrence of such Event of Loss.
Any Asset Sale Offer will be made in compliance with all applicable laws,
rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws and any provisions of the Indenture which conflict with such
laws shall be deemed to be superseded by the provisions of such laws.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest will be paid to the
person in whose name a Note is registered at the close of business on such
Record Date, and such interest will not be payable to Holders who tender New
Notes pursuant to such Asset Sale Offer.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of the Subsidiary
Guarantors will be permitted after the Issue Date to enter into any contract,
agreement, arrangement or transaction with any Affiliate (an "Affiliate
Transaction"), or any series of related Affiliate Transactions (other than
Exempted Affiliate Transactions), unless the terms of such Affiliate Transaction
are fair and reasonable to the Company or such Subsidiary Guarantor, as the case
may be, and are at least as favorable as the terms which could reasonably be
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expected to be obtained by the Company or such Subsidiary Guarantor, as the case
may be, in a comparable transaction made on an arm's-length basis with persons
who are not Affiliates.
Without limiting the foregoing, in connection with any Affiliate
Transaction or series of related Affiliate Transactions (other than Exempted
Affiliate Transactions) (1) involving consideration to either party in excess of
$1.5 million, the Company must deliver an Officers' Certificate to the Trustee,
stating that the terms of such Affiliate Transaction are fair and reasonable to
the Company, and no less favorable to the Company than could reasonably be
expected to have been obtained in an arm's length transaction with a
non-Affiliate, and (2) involving consideration to either party in excess of
$7.5 million, the Company must also, prior to consummation thereof, obtain a
favorable written opinion as to the fairness of such transaction to the Company
from a financial point of view from an independent investment banking firm of
national reputation or, if pertaining to a matter for which such investment
banking firms do not customarily render such opinions, an appraisal or valuation
firm of national reputation; provided, that this sentence shall not apply to the
sale or purchase of products or services by the Company or its Subsidiaries to
or from any Affiliate of LGP or any Related Party thereof, which sale or
purchase is in the ordinary course of business and in accordance with industry
practice.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not consolidate with or merge
with or into another person or, directly or indirectly, sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another person or group of affiliated persons or adopt a plan of liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a plan of liquidation, the
entity which receives the greatest value from such plan of liquidation is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the New Notes and the
Indenture; (ii) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Consolidated Net Worth of the consolidated, resulting, surviving or transferee
entity or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation is at least equal to the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(iv) immediately after giving effect to such transaction on a pro forma basis,
the consolidated, resulting, surviving or transferee entity or, in the case of a
plan of liquidation, the entity which receives the greatest value from such plan
of liquidation would immediately thereafter be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or consummation of a plan of liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a plan of liquidation, the entity which receives the
greatest value from such plan of liquidation shall succeed to and (except in the
case of a lease) be substituted for, and may exercise every right and power of,
the Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the New Notes
and the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
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LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
RESTRICTION ON SALE AND ISSUANCE OF SUBSIDIARY STOCK
The Indenture provides that the Company will not sell, and the Subsidiary
Guarantors will not issue or sell, any shares of Capital Stock (other than
directors' qualifying shares) of any Subsidiary of the Company to any person
other than the Company or a wholly owned Subsidiary of the Company, except for
shares of common stock with no preferences or special rights or privileges and
with no redemption or prepayment provisions. Notwithstanding the foregoing, (a)
the Company and the Subsidiary Guarantors may consummate an Asset Sale of all of
the Capital Stock owned by the Company and the Subsidiary Guarantors of any
Subsidiary and (b) the Company or any Subsidiary Guarantor may pledge,
hypothecate or otherwise grant a Lien on any Capital Stock of any Subsidiary to
the extent not prohibited under the covenant "Limitation on Liens Securing
Indebtedness."
SUBSIDIARY GUARANTORS
The Indenture provides that all existing and future Subsidiaries of the
Company jointly and severally will guaranty irrevocably, fully and
unconditionally all principal, premium, if any, and interest on the New Notes on
a senior subordinated basis to all existing and future Senior Indebtedness of
such Subsidiaries. The term Subsidiary does not include Unrestricted
Subsidiaries.
LIMITATION ON LAYERING DEBT
The Indenture provides that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness of the
Company and senior in any respect in right of payment to the New Notes. In
addition, the Indenture provides that the Subsidiary Guarantors will not incur,
create, issue, assume, guarantee or otherwise become liable for any Indebtedness
that is subordinate or junior in right of payment to any Senior Indebtedness of
the Subsidiary Guarantor and senior in any respect in right of payment to the
New Subsidiary Guarantees.
LIMITATION ON MERGER OF SUBSIDIARY GUARANTORS AND RELEASE OF SUBSIDIARY
GUARANTORS
The Indenture provides that no Subsidiary Guarantor shall consolidate or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
person) another person unless (i) subject to the provisions of the following
paragraph and certain other provisions of the Indenture, the person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to
a supplemental indenture in form reasonably satisfactory to the Trustee,
pursuant to which such person shall unconditionally guarantee on a senior
subordinated basis all of such Subsidiary Guarantor's obligations under such
Subsidiary Guarantor's New Subsidiary Guarantee and the Indenture on the terms
set forth in the Indenture; and (ii) immediately before and immediately after
giving effect to such transaction on a pro forma basis, no Default or Event of
Default shall have occurred or be continuing.
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor (or all or substantially all of the
assets of any such Subsidiary Guarantor or 50% or more of the Equity Interests
of any such Subsidiary Guarantor) to an entity which is not a Subsidiary
Guarantor or the designation of a Subsidiary to become an Unrestricted
Subsidiary, which transaction is otherwise in compliance with the Indenture
(including, without limitation, the provisions of the covenant "Limitations on
Sale of Assets and Subsidiary Stock"), such Subsidiary Guarantor will be deemed
released from its obligations under its New Subsidiary Guarantee of the New
Notes; provided, however, that any such termination shall occur only to the
extent that all obligations of such Subsidiary Guarantor under all of its
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guarantees of, and under all of its pledges of assets or other security
interests which secure, any Indebtedness of the Company or any other Subsidiary
of the Company shall also terminate upon such release, sale or transfer.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirement of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder and to prospective purchasers of
New Notes identified to the Company, within 15 days after it is or would have
been (if it were subject to such reporting obligations) required to file such
with the Commission, annual and quarterly financial statements substantially
equivalent to financial statements that would have been included in reports
filed with the Commission, if the Company were subject to the requirements of
Section 13 or 15(d) of the Exchange Act, including, with respect to annual
information only, a report thereon by the Company's certified independent public
accountants as such would be required in such reports to the Commission, and, in
each case, together with a management's discussion and analysis of financial
condition and results of operations which would be so required and, unless the
Commission will not accept such reports, file with the Commission the annual,
quarterly and other reports which it is or would have been required to file with
the Commission.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the New Notes as and when the same becomes
due and payable and the continuance of any such failure for 30 days, (ii) the
failure by the Company to pay all or any part of principal, or premium, if any,
on the New Notes when and as the same becomes due and payable at maturity,
redemption, by acceleration or otherwise, including, without limitation, payment
of the Change of Control Purchase Price or the Asset Sale Offer Price, or
otherwise, (iii) the failure by the Company or any Subsidiary of the Company to
observe or perform any other covenant or agreement contained in the New Notes or
the Indenture and the continuance of such failure for a period of 30 days after
written notice is given to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in aggregate principal amount of the New
Notes outstanding, specifying such Default, (iv) certain events of bankruptcy,
insolvency or reorganization in respect of the Company or any of its Significant
Subsidiaries, (v) a default in any Indebtedness of the Company or any of its
Subsidiaries, with an aggregate principal amount in excess of $15.0 million (a)
resulting from the failure to pay principal at maturity or (b) as a result of
which the maturity of such Indebtedness has been accelerated prior to its stated
maturity, and (vi) final unsatisfied judgments not covered by insurance
aggregating in excess of $15.0 million, at any one time rendered against the
Company or any of its Subsidiaries and not stayed, bonded or discharged within
60 days. The Indenture provides that if an Event of Default occurs and is
continuing, the Trustee must, within 90 days after the occurrence of such Event
of Default, give to the Holders notice of such Event of Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above, relating to the Company or any of its
Significant Subsidiaries), then in every such case, unless the principal of all
of the New Notes shall have already become due and payable, either the Trustee
or the Holders of at least 25% in aggregate principal amount of the New Notes
then outstanding, by notice in writing to the Company (and to the Trustee if
given by Holders) (an "Acceleration Notice"), may declare all principal,
determined as set forth below, and accrued interest thereon to be due and
payable immediately. If an Event of Default specified in clause (iv) above
relating to the Company or any of its Significant Subsidiaries occurs, all
principal and accrued interest thereon will be immediately due and payable on
all outstanding New Notes without any declaration or other act on the part of
Trustee or the Holders. The
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Holders of a majority in aggregate principal amount of New Notes generally are
authorized to rescind such acceleration if all existing Events of Default, other
than the non-payment of the principal of, premium, if any, and interest on the
New Notes which have become due solely by such acceleration and except on
default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, have been cured
or waived.
The Holders of a majority in aggregate principal amount of the New Notes at
the time outstanding may waive on behalf of all the Holders any default, except
a default with respect to any provision requiring a supermajority approval to
amend, which default may only be waived by such a supermajority, and except a
default in the payment of principal of or interest on any New Note not yet cured
or a default with respect to any covenant or provision which cannot be modified
or amended without the consent of the Holder of each outstanding New Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the New Notes at
the time outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option, elect to have
its obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding New Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented, and the Indenture shall cease to be of further effect
as to all outstanding New Notes and New Subsidiary Guarantees, except as to (i)
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on such New Notes when such payments are due from the trust
funds; (ii) the Company's obligations with respect to such New Notes concerning
issuing temporary New Notes, registration of New Notes, mutilated, destroyed,
lost or stolen New Notes, and the maintenance of an office or agency for payment
and money for security payments held in trust; (iii) the rights, powers, trust,
duties, and immunities of the Trustee, and the Company's obligations in
connection therewith; and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and the Subsidiary Guarantors released with respect
to certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with such obligations shall not constitute
a Default or Event of Default with respect to the New Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
guarantees, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the New Notes, U.S. legal tender, U.S. Government Obligations
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such New Notes on the stated date
for payment thereof or on the redemption date of such principal or installment
of principal of, premium, if any, or interest on such New Notes, and the Holders
of New Notes must have a valid, perfected, exclusive security interest in such
trust; (ii) in the case of Legal Defeasance before the date that is one year
prior to the Stated Maturity, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by the Internal Revenue Service, a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders of such New Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of
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Covenant Defeasance before the date that is one year prior to the Stated
Maturity, the Company shall have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to such Trustee confirming that the
Holders of such New Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at same times
as would have been the case if such Covenant Defeasance had not occurred; (iv)
no Default or Event of Default shall have occurred and be continuing on the date
of such deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, the Indenture
or any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
interest of preferring the Holders of such New Notes over any other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Company or others; and (vii) the Company shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that the conditions precedent provided for in, in the case of the
Officers' Certificate, (i) through (vi) and, in the case of the opinion of
counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii), (iii) and (v) of this paragraph have been complied
with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions which permit the Company, the Subsidiary
Guarantors and the Trustee to enter into a supplemental indenture for certain
limited purposes without the consent of the Holders. With the consent of the
Holders of not less than a majority in aggregate principal amount of the New
Notes at the time outstanding, the Company, the Subsidiary Guarantors and the
Trustee are permitted to amend or supplement the Indenture or any supplemental
indenture or modify the rights of the Holders; provided that no such
modification may, without the consent of Holders of at least 66 2/3% in
aggregate principal amount of New Notes at the time outstanding, modify the
provisions (including the defined terms used therein) of the covenant
"Repurchase of New Notes at the Option of the Holder Upon a Change of Control"
or the guarantee or subordination provisions of the Indenture in a manner
adverse to the Holders; and provided, that no such modification may, without the
consent of each Holder affected thereby: (i) change the Stated Maturity on any
New Note, or reduce the principal amount thereof or the rate (or extend the time
for payment) of interest thereon or any premium payable upon the redemption at
the option of the Company thereof, or change the place of payment where, or the
coin or currency in which, any New Note or any premium or the interest thereon
is payable, or impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof (or, in the case of
redemption at the option of the Company, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the provisions (including the defined terms used therein) regarding the
right of the Company to redeem the New Notes at its option in a manner adverse
to Holders, or (ii) reduce the percentage in principal amount of the outstanding
New Notes, the consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indenture, or (iii) modify
any of the waiver provisions, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each outstanding New Note affected
thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS OR DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Subsidiary Guarantors or any successor entity shall have any personal liability
in connection with the Indenture or the New Notes solely by reason of his or its
status as such stockholder, employee, officer or director. Each Holder of New
Notes by accepting a New Note waives and releases all such liability, and
acknowledges and consents to the transactions described under "The Acquisition."
The waiver and release are part of the consideration for the issuance of the New
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy. Notwithstanding the foregoing, nothing in this paragraph
shall in any way limit the obligation of any Subsidiary Guarantor pursuant to
any New Subsidiary Guarantee of the New Notes.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company,
including by designation, or is merged or consolidated into or with the Company
or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of, or combination
with, any person (including, without limitation, the acquisition of more than
50% of the Equity Interests of any person) or all or substantially all the
assets of any person by any other person, whether by purchase, stock purchase,
merger, consolidation, or other transfer, and whether or not for consideration.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided, that, with respect to ownership interest in the Company
and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting
power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products (a) of the number of months from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable.
"Board of Directors" means, with respect to any person, the Board of
Directors of such person or any committee of the Board of Directors of such
person authorized, with respect to any particular matter, to exercise the power
of the Board of Directors of such person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Contribution" means a contribution of cash or Cash Equivalents by
Holdings to the consolidated stockholders' equity of the Company solely in
exchange for, if anything, shares of the Company's common stock with no
preferences or special rights or privileges and with no redemption or prepayment
provisions or shares of the Company's preferred stock not redeemable or
prepayable prior to the maturity of the New Notes.
"Capitalized Lease Obligation" means, as to any person, the obligations of
such person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means (a) securities issued or directly and fully
guaranteed or insured by the United States Government, or any agency or
instrumentality thereof, having maturities of not more than one year from the
date of acquisition thereof; (b) marketable general obligations issued by any
state of the United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within one year from the
date of acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.;
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(c) certificates of deposit, time deposits, eurodollar time deposits, overnight
bank deposits or bankers' acceptances having maturities of not more than one
year from the date of acquisition thereof of any domestic commercial bank, the
long-term debt of which is rated at the time of acquisition thereof at least "A"
or the equivalent thereof by either Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. and having capital and surplus in excess of
$500,000,000; (d) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (a), (b) and (c)
above entered into with any bank meeting the qualifications specified in clause
(c) above; (e) commercial paper rated at the time of acquisition thereof at
least A-2 or the equivalent thereof by Standard & Poor's Ratings Group or P-2 or
the equivalent thereof by Moody's Investors Service, Inc., or carrying an
equivalent rating by a nationally recognized rating agency, if both of the two
named rating agencies cease publishing ratings of investments, and in either
case maturing within 270 days after the date of acquisition thereof; and (f)
interests in any investment company which invests solely in instruments of the
type specified in clauses (a) through (e) above.
"Consolidated EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of (i) consolidated income taxes,
(ii) consolidated depreciation and amortization (including amortization of debt
issuance costs in connection with any Indebtedness of such person and its
Subsidiaries), (iii) Consolidated Fixed Charges and (iv) all other non-cash
charges; provided that consolidated income taxes, depreciation and amortization
of a Subsidiary of such person that is less than wholly owned shall only be
added to the extent of the equity interest of such person in such Subsidiary.
"Consolidated Fixed Charges" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, excluding amortization of debt
issuance costs incurred in connection with the New Notes or the Credit Agreement
but including (i) original issue discount and non-cash interest payments or
accruals on any Indebtedness, (ii) the interest portion of all deferred payment
obligations, and (iii) all commissions, discounts and other fees and charges
owed with respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to the extent
attributable to such period, and (b) the amount of cash dividends paid by such
person or any of its Consolidated Subsidiaries in respect of Preferred Stock
(other than by Subsidiaries of such person to such person or such person's
wholly owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) to the extent such
expense would result in a liability upon the consolidated balance sheet of such
person in accordance with GAAP, interest expense attributable to any
Indebtedness represented by the guaranty by such person or a Subsidiary of such
person of an obligation of another person shall be deemed to be the interest
expense attributable to the Indebtedness guaranteed. Notwithstanding the
foregoing, Consolidated Fixed Charges shall not include costs, fees and expenses
incurred in connection with the Transactions, and any non-cash charge or expense
associated with the write-off of deferred debt issuance costs associated with
the Credit Agreement or the New Notes.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains and losses which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain from the sale or other disposition of assets
outside the ordinary course of business or from the issuance or sale of any
Capital Stock), (b) the net income, if positive, of any person, other than a
Consolidated Subsidiary, in which such person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such person or a
Consolidated Subsidiary of such person during such period, but in any case (i)
not in excess of such person's pro rata share of such person's net income for
such
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period and (ii) excluding any such payments made to the Company or any
Subsidiary Guarantor pursuant to clause (c) or (d) of the definition of
Permitted Payments, (c) the net income or loss of any person acquired in a
pooling of interests transaction for any period prior to the date of such
Acquisition, (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries in the event and solely to the extent that the
declaration or payment of dividends or similar distributions is not at the time
permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary, (e) the effects of
changes in accounting principles, (f) any non-cash compensation expense in
connection with the exercise of, grant to or repurchase from officers, directors
and employees of stock, stock options or stock equivalents, (g) any non-cash
charge or expense associated with the write-off of deferred debt issuance costs
associated with the Credit Agreement or the New Notes, and (h) costs, fees and
expenses incurred in connection with the Transactions.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such person or a Consolidated Subsidiary of such person
subsequent to the Issue Date, and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"consolidated" means, with respect to the Company, the consolidated
accounts of its Subsidiaries with those of the Company, all in accordance with
GAAP; provided that "consolidated" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of the Company.
"Credit Agreement" means the one or more credit agreements (including,
without limitation, the Revolving Credit Facility) entered into by and among the
Company, certain of its subsidiaries (if any) and certain financial
institutions, which provide for in the aggregate one or more term loans and/or
revolving credit and letter of credit facilities, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, as such credit agreement and/or related documents may be
amended, restated, supplemented, renewed, replaced or otherwise modified from
time to time whether or not with the same agent, trustee, representative lenders
or holders, and, subject to the proviso to the next succeeding sentence
irrespective of any changes in the terms and conditions thereof. Without
limiting the generality of foregoing, the term "Credit Agreement" shall include
any amendment, amendment and restatement, renewal, extension, restructuring,
supplement or modification to any such credit agreement and all refundings,
refinancings and replacements of any such credit agreement, including any
agreement (i) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding or deleting borrowers or guarantors
thereunder, so long as borrowers and issuers include one or more of the Company
and its Subsidiaries and their respective successors and assigns, (iii)
increasing the amount of Indebtedness incurred thereunder or available to be
borrowed thereunder, provided that on the date such Indebtedness is incurred it
would not be prohibited by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," or (iv) otherwise altering the
terms and conditions thereof in a manner not prohibited by the terms hereof.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, any Equity Interest of such person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the New Notes and (b) with respect
to any Subsidiary of such person (including with respect to any Subsidiary of
the Company), any Equity
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Interests other than any common equity with no preference, privileges, or
redemption or repayment provisions and preferred equity owned by the Company or
one of its Subsidiaries.
"Equity Interest" of any person means any shares, interests, participations
or other equivalents (however designated) in such person's equity, and shall in
any event include any Capital Stock issued by, or partnership or membership
interests in, such person.
"Event of Loss" means, with respect to any property or asset, (i) any loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Excluded Person" means GEI and its Related Parties.
"Exempted Affiliate Transaction" means (a) compensation, indemnification
and other benefits paid or made available (x) pursuant to the employment
agreements between the Company and members of its senior management, or (y) for
or in connection with services actually rendered to the Company and comparable
to those generally paid or made available by entities engaged in the same or
similar businesses (including reimbursement or advancement of reasonable
out-of-pocket expenses, directors' and officers' liability insurance and loans
to officers, directors and employees (i) in the ordinary course of business and
(ii) to purchase Holdings Common Stock in an amount not to exceed $1.0
million),(b) transactions, expenses and payments in connection with the
Transactions, (c) any Restricted Payments or other payments or transactions
expressly permitted under the covenant "Limitation on Restricted Payments," (d)
payments to LGP for management services under the Management Services Agreement
in an amount not to exceed $1.5 million in any fiscal year, plus reimbursement
of reasonable out-of-pocket costs and expenses, (e) payments to LGP for
reasonable and customary fees and expenses for financial advisory and investment
banking services provided to the Company in connection with major financial
transactions, and (f) transactions between or among the Company and its
Subsidiaries or between or among Subsidiaries of the Company, provided that any
ownership interest in any such Subsidiary which is not beneficially owned
directly or indirectly by the Company or any of its Subsidiaries is not
beneficially owned by an Affiliate of the Company or Holdings other than by
virtue of the direct or indirect ownership interest in such Subsidiary held (in
the aggregate) by the Company and/or one or more of its Subsidiaries.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"GEI" means Green Equity Investors II, L.P.
"Indebtedness" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of any such person, to the
extent such liabilities and obligations would appear as a liability upon the
consolidated balance sheet of such person in accordance with GAAP, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such person or only to a portion thereof), (ii) evidenced
by bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable to trade creditors; (b) all liabilities
and obligations, contingent or otherwise, of such person (i) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks, (ii)
relating to any Capitalized Lease Obligation, or (iii) evidenced by a letter of
credit or a reimbursement obligation of such person with respect to any letter
of credit; (c) all net obligations of such person under Interest Swap and
Hedging Obligations; (d) all liabilities and obligations of others of the kind
described in the preceding clauses (a), (b) or (c) that such person has
guaranteed or that is otherwise its legal liability or which are secured by one
or more Liens on any assets or property of such person; provided that if the
liabilities or obligations which are secured by a Lien have not been assumed in
full by such person or are not such person's legal liability in full, the amount
of such Indebtedness for the purposes of this definition shall be limited to the
lesser of the amount of such Indebtedness secured by such Lien or the
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fair market value of the assets or property securing such Lien; (e) any and all
deferrals, renewals, extensions, refinancing and refundings of, (whether direct
or indirect) or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (a), (b), (c) or (d), or this
clause (e), whether or not between or among the same parties; and (f) all
Disqualified Capital Stock of such person (measured at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends). For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
Board of Directors of the issuer (or managing general partner of the issuer) of
such Disqualified Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of any person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person or any agreement to make any such acquisition; (b) the making by such
person of any deposit with, or advance, loan or other extension of credit to,
such other person (including the purchase of property from another person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable, endorsements for
collection or deposits arising in the ordinary course of business); (c) other
than guarantees of Indebtedness of the Company or any Subsidiary Guarantor to
the extent permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such person
of any guarantee of, or other credit support or contingent obligation with
respect to, Indebtedness or other liability of such other person; (d) the making
of any capital contribution by such person to such other person; and (e) the
designation by the Board of Directors of the Company of any person to be an
Unrestricted Subsidiary. The Company shall be deemed to make an Investment in an
amount equal to the fair market value of the net assets of any subsidiary (or,
if neither the Company nor any of its Subsidiaries has theretofore made an
Investment in such subsidiary, in an amount equal to the Investments being
made), at the time that such subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from the
Company or a Subsidiary of the Company shall be deemed an Investment valued at
its fair market value at the time of such transfer. The amount of any such
Investment shall be reduced by any liabilities or obligations of the Company or
any of its Subsidiaries to be assumed or discharged in connection with such
Investment by an entity other than the Company or any of its Subsidiaries. For
purposes of clarification and greater certainty, the designation of a newly
formed subsidiary as an Unrestricted Subsidiary and the initial capitalization
thereof under clause (d) of the definition of Permitted Payments shall not
constitute an Investment.
"Issue Date" means January 27, 1998.
"Junior Security" means, so long as the effect of any exclusion employing
this definition is not to cause the New Notes to be treated in any bankruptcy
case or proceeding or similar event as part of the same class of claims as
Senior Indebtedness or any class of claims pari passu with, or senior to, the
Senior Indebtedness, for any payment or distribution, debt or equity securities
of the Company or any successor corporation provided for by a plan of
reorganization or readjustment that are subordinated to the Senior Indebtedness
and any securities issued under such plan in respect of Senior Indebtedness at
least to the same extent that the New
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Notes are subordinated to the payment of all Senior Indebtedness then
outstanding; provided that (a) if a new corporation results from such
reorganization or readjustment, such corporation assumes any Senior Indebtedness
not paid in full in cash or Cash Equivalents in connection with such
reorganization or readjustment and (b) the rights of the holders of such Senior
Indebtedness are not, without the consent of such holders, altered by such
reorganization or readjustment.
"Leverage Ratio" on any date of determination (the "Transaction Date")
means the ratio, on a pro forma basis, of (a) the aggregate amount of
Indebtedness of the Company and its Subsidiaries on a consolidated basis to (b)
the aggregate amount of Consolidated EBITDA of the Company attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period; provided, that for purposes of calculating Consolidated EBITDA
for this definition, (i) Acquisitions which occurred during the Reference Period
or subsequent to the Reference Period and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of the Reference Period,
(ii) transactions giving rise to the need to calculate the Leverage Ratio shall
be assumed to have occurred on the first day of the Reference Period, (iii) the
incurrence of any Indebtedness or issuance of any Disqualified Capital Stock
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date (and the application of the proceeds therefrom to
the extent used to refinance or retire other Indebtedness) shall be assumed to
have occurred on the first day of the Reference Period, and (iv) the
Consolidated Fixed Charges of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall remain in effect for the 12-month period immediately
following the Transaction Date) that has the effect of fixing the interest rate
on the date of computation, in which case such rate (whether higher or lower)
shall be used.
"LGP" means Leonard Green & Partners, L.P.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Management Agreement" means the management agreement, dated as of the
Issue Date, between the Company and LGP substantially as in effect on the Issue
Date.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock or a
Capital Contribution and by the Company and its Subsidiaries in respect of an
Asset Sale plus, in the case of an issuance of Qualified Capital Stock upon any
exercise, exchange or conversion of securities (including options, warrants,
rights and convertible or exchangeable debt) of the Company that were issued for
cash on or after the Issue Date, the amount of cash originally received by the
Company upon the issuance of such securities (including options, warrants,
rights and convertible or exchangeable debt) less, in each case, the sum of all
payments, fees, commissions and (in the case of Asset Sales, reasonable and
customary) expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Asset Sale or sale of Qualified Capital Stock, and, in the case of an
Asset Sale only, less (i) the amount (estimated reasonably and in good faith by
the Company) of income, franchise, sales and other applicable taxes required to
be paid by the Company or any of its respective Subsidiaries in connection with
such Asset Sale; (ii) the amounts of any repayments of Indebtedness secured,
directly or indirectly, by Liens on the assets which are the subject of such
Asset Sale or Indebtedness associated with such assets which is due by reason of
such Asset Sale (i.e., such disposition is permitted by the terms of the
instruments evidencing or applicable to such Indebtedness, or by the terms of a
consent granted thereunder, on the condition that the proceeds (or portion
thereof) of such disposition be applied to such Indebtedness), and other fees,
expenses and other expenditures, in each case, reasonably incurred as a
consequence of such repayment of Indebtedness (whether or not such fees,
expenses or expenditures are then due and payable or made, as the case may be);
(iii) all amounts deemed appropriate by the Company (as evidenced by a signed
certificate of the Chief Financial Officer of the
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Company delivered to the Trustee) to be provided as a reserve, in accordance
with GAAP, against any liabilities associated with such assets which are the
subject of such Asset Sale; and (iv) with respect to Asset Sales by Subsidiaries
of the Company, the portion of such cash payments attributable to persons
holding a minority interest in such Subsidiary.
"Obligation" means any principal, premium or interest payment, or monetary
penalty, or damages, or purchase price due by the Company or any Subsidiary
Guarantor under the terms of the New Notes or the Indenture.
"Permitted Indebtedness" means any of the following:
(a) that the Company and the Subsidiary Guarantors may incur
Indebtedness evidenced by the New Notes and the New Subsidiary Guarantees
and represented by the Indenture up to the amounts specified therein as of
the date thereof;
(b) that the Company and the Subsidiary Guarantors, as applicable, may
incur Refinancing Indebtedness with respect to any Indebtedness or
Disqualified Capital Stock, as applicable, that was permitted by the
Indenture to be incurred and any Indebtedness of the Company outstanding on
the Issue Date after giving effect to the Transactions;
(c) the Company and the Subsidiary Guarantors may incur Indebtedness
solely in respect of bankers' acceptances and letters of credit (in
addition to any such Indebtedness incurred under the Credit Agreement in
accordance with the Indenture) (to the extent that such incurrence does not
result in the incurrence of any obligation to repay any obligation relating
to borrowed money of others), all in the ordinary course of business in
accordance with customary industry practices, in amounts and for the
purposes customary in the Company's industry; provided, that the aggregate
principal amount outstanding of such Indebtedness (including any
Indebtedness issued to refinance, refund or replace such Indebtedness)
shall not exceed $5.0 million;
(d) the Company and the Subsidiary Guarantors may incur Indebtedness
arising from tender, bid, performance or government contract bonds, other
obligations of like nature, or warranty or contractual service obligations
of like nature, in any case, incurred by the Company or the Subsidiary
Guarantors in the ordinary course of business;
(e) the Company and the Subsidiary Guarantors may incur Interest Swap
and Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate or currency risk with respect to any fixed or
floating rate Indebtedness that is permitted by the Indenture to be
outstanding or any receivable or liability the payment of which is
determined by reference to a foreign currency; provided, that the notional
amount of any such Interest Swap and Hedging Obligation does not exceed the
principal amount of Indebtedness to which such Interest Swap and Hedging
Obligation relates; and
(f) the Company may incur Indebtedness to any Subsidiary Guarantor,
and any Subsidiary Guarantor may incur Indebtedness to any other Subsidiary
Guarantor or to the Company; provided, that, in the case of Indebtedness of
the Company, such obligations shall be unsecured and subordinated in all
respects to the Company's obligations pursuant to the New Notes and the
date of any event that causes such Subsidiary Guarantor to no longer be a
Subsidiary Guarantor shall be an Incurrence Date.
"Permitted Investment" means Investments in (a) any of the New Notes; (b)
Cash Equivalents; (c) intercompany notes to the extent permitted under clause
(f) of the definition of "Permitted Indebtedness," provided that Indebtedness
under any such notes of a Subsidiary Guarantor shall be deemed to be a
Restricted Investment if such person ceases to be a Subsidiary Guarantor; (d)
Investments in the form of promissory notes of members of the Company's or
Holdings's management not to exceed $1.0 million in principal amount at any time
outstanding solely in consideration of the purchase by such persons of Qualified
Capital Stock of the Company or Holdings; (e) Investments by the Company or any
Subsidiary Guarantor in any person that is or immediately after such Investment
becomes a Subsidiary Guarantor, or immediately after such Investment merges or
consolidates into the Company or any Subsidiary Guarantor in compliance with the
terms of the Indenture, provided that such person is engaged in all material
respects in a Related Business; (f) Investments in the Company by any Subsidiary
Guarantor, provided that in the case of
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Indebtedness constituting any such Investment, such Indebtedness shall be
unsecured and subordinated in all respects to the Company's obligations under
the New Notes; (g) Investments in securities of trade creditors or customers
received in settlement of obligations that arose in the ordinary course of
business or pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; (h)
Investments by the Company outstanding on the Issue Date; (i) transactions or
arrangements with officers or directors of the Company or any Subsidiary
Guarantor entered into in the ordinary course of business (including
compensation or employee benefit arrangements with any officer or director of
the Company or any Subsidiary Guarantor permitted under the covenant "Limitation
on Transactions with Affiliates"); (j) Investments in persons (other than
Affiliates of the Company) received as consideration from Asset Sales to the
extent not prohibited by the covenant "Limitation on Sale of Assets and
Subsidiary Stock"; (k) additional Investments at any time outstanding not to
exceed the sum of (i) $5.0 million and (ii) the cumulative gain (net of taxes
and all payments, fees, commissions and expenses incurred in such sale or
disposition) realized by the Company and the Subsidiary Guarantors in cash or
Cash Equivalents on the sale or other disposition after the Issue Date of
Investments (including Permitted Investments and Restricted Investments) made
after the Issue Date in accordance with the Indenture (but only to the extent
that such gain is excluded from the net income of the Company and the
Consolidated Subsidiaries by the definition of Consolidated Net Income); and
(l) the acquisition of Equity Interests of a person engaged in a Related
Business, other than a person described in clause (e), through the issuance of
Holdings Common Stock.
"Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 60 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not in any
case materially detract from the value of the property subject thereto (as such
property is used by the Company or any of its Subsidiaries) or interfere with
the ordinary conduct of the business of the Company or any of its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, only to the
extent, for an amount and for a period not resulting in an Event of Default with
respect thereto; (g) pledges or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security legislation; (h) Liens securing the New Notes; (i) Liens
securing Indebtedness of a person existing at the time such person becomes a
Subsidiary or is merged with or into the Company or a Subsidiary or Liens
securing Indebtedness incurred in connection with an Acquisition, provided that
such Liens were in existence prior to the date of such Acquisition, were not
incurred in anticipation thereof, and do not extend to any other assets; (j)
Liens arising from Purchase Money Indebtedness permitted to be incurred under
paragraph (a) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" provided such Liens relate solely
to the property which is subject to such Purchase Money Indebtedness; (k) leases
or subleases granted to other persons in the ordinary course of business not
materially interfering with the conduct of the business of the Company or any of
its Subsidiaries or materially detracting from the value of the assets of the
Company or any Subsidiary; (1) Liens arising from precautionary Uniform
Commercial Code financing statement filings regarding operating leases entered
into by the Company or any of its Subsidiaries in the ordinary course of
business; (m) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in accordance with the Indenture;
(n) Liens securing Senior Indebtedness of the Company or Senior Indebtedness of
Subsidiary Guarantors incurred in accordance with the Indenture; (o) Liens
securing Indebtedness incurred under paragraph (b) of the covenant "Limitation
on Incurrence of Additional Indebtedness and Disqualified Capital Stock"; and
(p) any interest or title of a lessor
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under any lease, whether or not characterized as capital or operating, provided
that such Liens do not extend to any property or assets which is not leased
property subject to such lease.
"Permitted Payments" means, without duplication, (a) payments to Holdings
in an aggregate amount not to exceed $500,000 in any fiscal year in an amount
sufficient to permit Holdings to pay reasonable and necessary operating expenses
and other general corporate expenses to the extent such expenses relate or are
fairly allocable to the Company and its Subsidiaries (including any reasonable
professional fees and expenses, but excluding all expenses payable to or to be
paid to or on behalf of an Excluded Person except in a transaction constituting
an Exempted Affiliate Transaction); (b) payments to Holdings to enable Holdings
to pay foreign, federal, state or local tax liabilities, not to exceed the
amount of any tax liabilities that would be otherwise payable by the Company and
its Subsidiaries and Unrestricted Subsidiaries to the appropriate taxing
authorities if they filed separate tax returns to the extent that Holdings has
an obligation to pay such tax liabilities relating to the operations, assets or
capital of the Company or its Subsidiaries and Unrestricted Subsidiaries,
provided such payment shall either be used by Holdings to pay such tax
liabilities within 90 days of Holdings's receipt of such payment or refunded to
the payee; (c) payments to Holdings by the Company made concurrently with and in
an amount equal to or less than payments to the Company (directly or indirectly
through one or more Subsidiary Guarantors) by an Unrestricted Subsidiary,
provided that in each case the Company distributes the same property as that so
received by the Company from such Unrestricted Subsidiary; (d) payments to an
Unrestricted Subsidiary by the Company (directly or indirectly through one or
more Subsidiary Guarantors) made concurrently with and in an amount equal to or
less than payments to the Company by Holdings, provided that in each case the
Company distributes the same property as that so received by the Company from
Holdings; (e) payments to Holdings to enable Holdings to pay, or the payment by
the Company directly of, the payments provided for by clauses (a), (d) and (e)
of the definition of "Exempted Affiliate Transaction"; provided that in the case
of clause (d) of such definition, no Default or Event of Default shall have
occurred and be continuing and the obligation to pay such amounts has been
subordinated to the payment of the New Notes; (f) cash dividends paid to
Holdings to the extent necessary to permit Holdings to repurchase common stock,
stock options and stock equivalents of Holdings held by former directors,
officers or employees of Holdings, the Company or any of the Subsidiary
Guarantors, in an aggregate amount not to exceed in any fiscal year $1.0 million
plus the aggregate Net Cash Proceeds received by the Company from the sale of
Holdings Common Stock to directors, officers or employees of Holdings; provided,
that any amount not so paid in any fiscal year may be paid in future fiscal
years; and (g) Restricted Payments in an aggregate amount not to exceed $4.0
million.
"Post-Commencement Interest and Expense Claims" means any and all claims
arising after the commencement of any bankruptcy, insolvency, receivership or
similar proceeding for interest on Senior Indebtedness at the rate (including
any applicable post-default rate) set forth in the instrument evidencing or
agreement governing such Senior Indebtedness or for expense reimbursement or
indemnification on the terms set forth in such instrument or agreement, whether
or not such claims are enforceable, allowable or allowed in such bankruptcy,
insolvency, receivership or similar proceeding and even if such claims are not
enforceable or allowed therein.
"pro forma" includes, with respect to an Acquisition or the incurrence of
Indebtedness in connection therewith, all adjustments permitted or required to
be included pursuant to Article 11 of Regulation S-X and subject to agreed-upon
procedures to be performed by the Company's independent accountants to determine
whether the pro forma calculations are made in accordance with Article 11 of
Regulation S-X.
"Public Equity Offering" means an underwritten offering of common stock of
the Company or Holdings for cash pursuant to an effective registration statement
under the Securities Act, provided at the time of or upon consummation of such
offering, such common stock of the Company or Holdings is listed on a national
securities exchange or quoted on the national market system of the Nasdaq Stock
Market.
"Purchase Money Indebtedness" of any person means any Indebtedness of such
person to any seller or other person incurred to finance the acquisition or
construction (including in the case of a Capitalized Lease Obligation, the
lease) of any business or real or personal tangible property (or, in each case,
any interest therein) acquired or constructed after the Issue Date which, in the
reasonable good faith judgment of the
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Board of Directors of the Company, is related to a Related Business of the
Company and which is incurred concurrently with, or within 180 days of, such
acquisition or the completion of such construction and, if secured, is secured
only by the assets so financed.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
issued on or after the Issue Date with the Net Cash Proceeds received by the
Company from the substantially concurrent sale of its Qualified Capital Stock or
any exchange of Qualified Capital Stock of the Company for any Capital Stock or
Indebtedness of the Company issued on or after the Issue Date.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the New Notes or the Indenture; provided that
"Reference Period" with regard to the Company shall include periods prior to the
Acquisition of its predecessors.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of the amount of fees, consents, premiums, prepayment penalties and
reasonable expenses incurred in connection with such Refinancing) the lesser of
(i) the principal amount or, in the case of Disqualified Capital Stock,
liquidation preference, of the Indebtedness or Disqualified Capital Stock so
Refinanced and (ii) if such Indebtedness being Refinanced was issued with an
original issue discount, the accreted value thereof (as determined in accordance
with GAAP) at the time of such Refinancing; provided, that if Disqualified
Capital Stock is to be so refinanced or if the Indebtedness to be so refinanced
is not Senior Indebtedness, (A) such Refinancing Indebtedness of any Subsidiary
of the Company shall only be used to Refinance outstanding Indebtedness or
Disqualified Capital Stock of such Subsidiary, (B) such Refinancing Indebtedness
shall (x) not have an Average Life shorter than the Indebtedness or Disqualified
Capital Stock to be so refinanced at the time of such Refinancing and (y) in all
respects, be no less subordinated or junior, if applicable, to the rights of
Holders of the New Notes than was the Indebtedness or Disqualified Capital Stock
to be refinanced, (C) such Refinancing Indebtedness shall have a final stated
maturity or redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness or Disqualified
Capital Stock to be so refinanced, and (D) such Refinancing Indebtedness shall
be secured (if secured) in a manner no more adverse to the Holders of the New
Notes than the terms of the Liens (if any) securing such refinanced
Indebtedness, including, without limitation, the amount of Indebtedness secured
shall not be increased (except by the amount of fees, consents, premiums,
prepayment penalties and reasonable expenses incurred in connection with such
Refinancing). For purposes of clarification and greater certainty, if
Indebtedness permitted by the terms of the Indenture (including clauses (a),
(b) and (c) of the second paragraph of "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock") is repaid, redeemed, defeased,
refunded, refinanced, discharged or otherwise retired for value from the
proceeds of Refinancing Indebtedness, the maximum amount of such Refinancing
Indebtedness shall be determined in accordance with the provisions of this
definition, and the amount of such Refinancing Indebtedness in excess of the
amount of such Indebtedness (as permitted by this definition) shall not reduce
the amount of Indebtedness permitted by the terms of this Indenture (including,
without limitation, not reducing or counting towards the amounts set forth in
such clauses (a), (b) and (c)).
"Related Business" means the business conducted (or proposed to be
conducted, including the activities referred to as being contemplated by the
Company, as described or referred to in this Prospectus) by the Company as of
the Issue Date and any and all businesses that in the good faith judgment of the
Board of Directors of the Company are reasonably related businesses, including
reasonably related extensions thereof.
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"Related Party" means any partnership or corporation which is managed by or
controlled by LGP or any Affiliate thereof.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in Cash Equivalents and other Permitted
Investments; provided, however, that a merger of another person with or into the
Company or a Subsidiary Guarantor in accordance with the terms of the Indenture
shall not be deemed to be a Restricted Investment so long as the surviving
entity is the Company or a direct wholly owned Subsidiary Guarantor.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Equity Interests
of such person or any Subsidiary of such person, (b) any payment on account of
the purchase, redemption or other acquisition or retirement for value of Equity
Interests of such person or any Subsidiary of such person, (c) other than with
the proceeds from the substantially concurrent sale of, or in exchange for,
Refinancing Indebtedness, any purchase, redemption, or other acquisition or
retirement for value of, any payment in respect of any amendment of the terms of
or any defeasance of, any Subordinated Indebtedness, directly or indirectly, by
such person or any Subsidiary of such person prior to the scheduled maturity,
any scheduled repayment of principal, or scheduled sinking fund payment, as the
case may be, of such Indebtedness, (d) any Restricted Investment by such person,
and (e) any payment provided for by clause (d) of the definition of "Exempted
Affiliate Transaction"; provided, however, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to Equity Interests of the Company to the extent payable solely in
shares of Qualified Capital Stock of the Company; (ii) any dividend,
distribution or other payment to the Company, or to any of the Subsidiary
Guarantors, by the Company or any of its Subsidiaries; (iii) payments made
pursuant to the Transactions; (iv) Permitted Investments; or (v) pro rata
dividends and other distributions on Equity Interests of any Subsidiary
Guarantor by such Subsidiary Guarantor.
"Revolving Credit Facility" means the $125,000,000 5-year Revolving Credit
Facility with Citicorp USA, Inc.
"Sale and Leaseback Transaction" means any transaction by which the Company
or a Subsidiary Guarantor, directly or indirectly, becomes liable as a lessee or
as a guarantor or other surety with respect to any lease of any property
(whether real or personal or mixed), whether now owned or hereafter acquired
that the Company or any Subsidiary Guarantor has sold or transferred or is to
sell or transfer to any other person in a substantially concurrent transaction
with such assumption of liability.
"Senior Bank Representative" means, at any time, the then-acting agent or
agents under the Revolving Credit Facility, which shall initially be Citicorp
USA, Inc.
"Senior Indebtedness" of the Company or any Subsidiary Guarantor means
Indebtedness (including, without limitation, Post-Commencement Interest and
Expense Claims) of the Company or such Subsidiary Guarantor arising under the
Credit Agreement evidencing or governing the Revolving Credit Facility or that,
by the terms of the instrument creating or evidencing such Indebtedness, is
expressly designated Senior Indebtedness and made senior in right of payment to
the New Notes or the applicable guarantee; provided, that in no event shall
Senior Indebtedness include (a) Indebtedness to any Subsidiary of the Company or
any officer, director or employee of the Company or any Subsidiary of the
Company, (b) Indebtedness incurred in violation of the terms of the Indenture,
(c) Indebtedness to trade creditors, and (d) Disqualified Capital Stock.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Stated Maturity," when used with respect to any New Note, means February
1, 2008.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment by its terms or
the terms of any document or instrument relating thereto to the New Notes or
such New Subsidiary Guarantee, as applicable, in any respect or has a final
stated maturity after the Stated Maturity.
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"Subsidiary," with respect to any person, means (i) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such person, by such person and one or more Subsidiaries of such person or by
one or more Subsidiaries of such person, (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly or indirectly,
at the date of determination thereof has at least majority ownership interest,
or (iii) a partnership in which such person or a Subsidiary of such person is,
at the time, a general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of the Company or of any Subsidiary of the
Company. Unless the context requires otherwise, Subsidiary means each direct and
indirect Subsidiary of the Company.
"Unrestricted Subsidiary" means any subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); provided, that (i) such subsidiary shall not
engage, to any substantial extent, in any line or lines of business activity
other than a Related Business, (ii) neither immediately prior thereto nor after
giving pro forma effect to such designation would there exist a Default or Event
of Default, and (iii) immediately after giving pro forma effect thereto, the
Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" (provided, however, that this
clause (iii) will not apply in the case of a newly formed subsidiary being
designated an Unrestricted Subsidiary, with the initial capitalization thereof
to be effected under clause (d) of the definition of "Permitted Payments"). The
Board of Directors of the Company may designate any Unrestricted Subsidiary to
be a Subsidiary; provided that (i) no Default or Event of Default is existing or
will occur as a consequence thereof and (ii) immediately after giving effect to
such designation, on a pro forma basis, the Company could incur at least $1.00
of Indebtedness pursuant to the Debt Incurrence Ratio of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock." Each such designation shall be evidenced by filing with the Trustee a
certified copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
BOOK-ENTRY, DELIVERY AND FORM OF NEW GLOBAL NOTE
Except as set forth below, the New Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof.
New Notes initially will be represented by one or more notes in registered
global form without interest coupons (collectively, the "New Global Note"). The
New Global Note will be deposited upon issuance with the Trustee as custodian
for DTC, in New York, New York and registered in the name of DTC or its nominee,
in each case for credit to an account of a direct or indirect participant in DTC
as described below.
Except as set forth below, the New Global Note may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the New Global Note may not be exchanged for
New Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry New Notes for Certificated New Notes."
Transfer of beneficial interests in the New Global Note will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The New
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
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DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
each actual purchaser of each security held by or on behalf of DTC are recorded
on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the New Global Note, DTC will credit the accounts of
Participants with portions of the principal amount of the New Global Note and
(ii) ownership of such interests in the New Global Note will be maintained by
DTC (with respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interests in the New
Global Note).
Investors in the New Global Note may hold their interests therein directly
through DTC, if they are Participants in such system. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a New Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, the ability of a person
having beneficial interests in a New Global Note to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests. For certain other restrictions on the
transferability of the New Notes, see "--Exchange of Book-Entry New Notes for
Certificated New Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE NEW GLOBAL NOTE WILL
NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY
OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED
OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium, if any, and interest
on the New Global Note registered in the name of DTC or its nominee will be
payable by the Trustee to DTC in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the New Notes, including the New Global Note,
are registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's records relating to or payments made on account of beneficial
ownership interests in the New Global Note, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's records relating to the
beneficial ownership interests in the New Global Note or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the New Notes (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interests in the relevant security as shown on
the records of DTC unless DTC has reason to believe it will not receive payment
on such payment date. Payments by the Participants to the beneficial owners of
New Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants and will not be the
responsibility of DTC, the Trustee or the Company. Neither the Company nor the
Trustee will be liable for any delay by DTC or any of its Participants in
identifying the beneficial owners of the New Notes, and the Company and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
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Interests in the New Global Note are expected to be eligible to trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity in
such interests will therefore settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants.
Subject to the transfer restrictions set forth under "Notice to Investors,"
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of New Notes only at the direction of one or more Participants
to whose account with DTC interests in the New Global Note are credited and only
in respect of such portion of the aggregate principal amount of the New Note as
to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the New Notes, DTC reserves the
right to exchange the New Global Note for New Notes in certificated form, and to
distribute such New Notes to its Participants.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the New Global Note among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by DTC or its participants of
their respective obligations under the rules and procedures governing its
operations.
EXCHANGE OF BOOK-ENTRY NEW NOTES FOR CERTIFICATED NEW NOTES
A New Global Note is exchangeable for definitive New Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the New Global Note and the Company
thereupon fails to appoint a successor depositary or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance of
the New Notes in certificated form, or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of time
or both would be an Event of Default with respect to the New Notes. In addition,
beneficial interests in a New Global Note are exchangeable for definitive New
Notes upon the request of the beneficial holder to the Trustee through the
applicable procedures of DTC. In all cases, certificated New Notes delivered in
exchange for any New Global Note or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of the depositary (in accordance with its customary procedures) and
will bear the applicable restrictive legend referred to in "Notice to
Investors," unless the Company determines otherwise in compliance with
applicable law.
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DESCRIPTION OF REVOLVING CREDIT FACILITY
On January 27, 1998, the Company entered into a five-year, $125.0 million
revolving credit facility, (the "Revolving Credit Facility") with a syndicate of
financial institutions for whom Citicorp USA, Inc. acts as administrative agent.
The Revolving Credit Facility includes a $10.0 million subfacility for letters
of credit. As of April 3, 1998, there were no borrowings outstanding under the
Revolving Credit Facility. The Revolving Credit Facility will be used by the
Company for general corporate purposes and to finance subsequent acquisitions.
The Revolving Credit Facility is secured by a first priority security
interest in substantially all of the tangible and intangible assets of the
Company and of Holdings and Holdings' present and future direct and indirect
subsidiaries. In addition, the loans under the Revolving Credit Facility are
guaranteed, subject to certain limitations, by Holdings and by all future direct
and indirect subsidiaries of the Company and of Holdings.
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. For the first six months following the Closing Date,
the interest rate for borrowings under the Revolving Credit Facility will have a
floor of the Base Rate plus 0.75% or the Eurodollar Rate plus 2.0%. Applicable
interest rates will be increased 2.0% per annum during the continuance of any
Event of Default (as defined therein) under the Revolving Credit Facility. In
addition to customary letters of credit fronting fees and other fees, 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 Company also pays a fee on the unused portion of the Revolving
Credit Facility.
The obligation of the lenders under the Revolving Credit Agreement to
advance funds is subject to the satisfaction of certain conditions customary in
agreements of this type. In addition, the Company is subject to certain
affirmative and negative covenants customarily contained in agreements of this
type. The Revolving Credit Facility also provides for customary events of
default. See "Risk Factors--Secured Indebtedness; Subordination."
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DESCRIPTION OF HOLDINGS' INDEBTEDNESS AND PREFERRED STOCK
NEW HOLDINGS SENIOR DISCOUNT DEBENTURES
Contemporaneously with the Exchange Offer, Holdings will offer its New
Senior Discount Debentures maturing on February 1, 2009 in exchange for any and
all of its outstanding Old Senior Discount Debentures. As of the date of this
Prospectus, $89.0 million aggregate principal amount at maturity of Old Senior
Discount Debentures were outstanding. The New Senior Discount Debentures will be
senior unsecured obligations of Holdings. The issue price of the Old Senior
Discount Debentures represented a yield to maturity of 11 5/8% (computed on a
semi-annual bond equivalent basis) calculated from January 27, 1998. The New
Senior Discount Debentures will accrete at a rate of 11 5/8%, compounded
semi-annually, to an aggregate principal amount at maturity of $89.0 million by
February 1, 2003. Cash interest will not accrue on the New Senior Discount
Debentures prior to February 1, 2003. Commencing on August 1, 2003, cash
interest on the New Senior Discount Debentures will be payable at a rate of
11 5/8% per annum, semi-annually on February 1 and August 1 of each year.
The New Senior Discount Debentures will be redeemable at the option of
Holdings, in whole or in part, on or after February 1, 2003 at the redemption
prices set forth in the Debenture Indenture. In addition, the Debenture
Indenture contains covenants that, among other things, limit the ability of
Holdings to enter into certain mergers or consolidations or incur certain liens
and of Holdings and its subsidiaries to incur additional indebtedness, pay
dividends and make certain other restricted payments and engage in certain
transactions with affiliates. Upon certain circumstances, including a change in
control (as defined in the Debenture Indenture), Holdings will be required to
make an offer to purchase the New Senior Discount Debentures at prices specified
in the Debenture Indenture. The Debenture Indenture contains certain customary
events of default, which will include the failure to pay interest and principal,
the failure to comply with certain covenants in the Debenture Indenture or
certain events occurring under bankruptcy laws.
HOLDINGS PREFERRED STOCK
Holding's Senior Preferred Stock. On January 27, 1998, 1,800,000 shares of
Holdings' Old Senior Preferred Stock were issued to institutional investors.
Contemporaneously with the Exchange Offer, Holdings will exchange shares of New
Senior Preferred Stock for any and all outstanding shares of Old Senior
Preferred Stock. The New Senior Preferred Stock will have a liquidation
preference over the Holdings Junior Preferred Stock and the Holdings Common
Stock equal to the initial liquidation value of the New Senior Preferred Stock
plus accrued and unpaid dividends thereon. Such initial liquidation value will
be $45.0 million in the aggregate. The New Senior Preferred Stock will be
subject to a mandatory redemption on February 1, 2010 at 100% of the liquidation
preference plus accrued and unpaid dividends. Holdings may, at its option,
redeem the New Senior Preferred Stock at 100% or a negotiated premium of the
liquidation preference plus accrued and unpaid dividends. Upon a change of
control, Holdings must offer to repurchase the New Senior Preferred Stock at
100% of its liquidation preference plus accrued and unpaid dividends. The New
Senior Preferred Stock will bear cumulative dividends at the rate of 14 3/4% per
annum. Dividends may, at the option of Holdings, be paid in cash or in a number
of shares of New Senior Preferred Stock having a liquidation preference equal to
the amount of the dividend. The New Senior Preferred Stock will be exchangeable,
at the option of Holdings, for senior subordinated notes of Holdings that are
junior to the New Senior Discount Debentures. The terms of the New Senior
Preferred Stock will contain restrictions on junior payments. The New Senior
Preferred Stock will have no voting rights with respect to general corporate
matters except as provided by law or to authorize the issuance of senior or
parity equity securities of Holdings or to modify adversely the rights of the
New Senior Preferred Stock.
Holdings Junior Preferred Stock. The Holdings Junior Preferred Stock has a
liquidation preference over the Holdings Common Stock equal to the initial
liquidation value of the Holdings Junior Preferred Stock plus accrued and unpaid
dividends thereon. Such initial liquidation value is $49.0 million in the
aggregate. The Holdings Junior Preferred Stock is subject to a mandatory
redemption on February 1, 2010 at 100% of the liquidation preference plus
accrued and unpaid dividends. Holdings may, at its option, redeem the Holdings
Junior Preferred Stock at any time at 100% of the liquidation preference plus
accrued and unpaid dividends. Upon a change of control, Holdings must offer to
repurchase the Holdings Junior Preferred Stock at 100% of
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its liquidation preference plus accrued and unpaid dividends. The Holdings
Junior Preferred Stock bears cumulative dividends at the rate of 10% per annum.
Dividends may, at the option of Holdings, be paid in cash or in a number of
shares of Holdings Junior Preferred Stock having a liquidation preference equal
to the amount of the dividend. The terms of the Holdings Junior Preferred Stock
contain certain restrictions on junior payments. The Holdings Junior Preferred
Stock has no voting rights with respect to general corporate matters except as
provided by law or to authorize the issuance of senior or parity equity
securities of Holdings or to modify adversely the rights of the Holdings Junior
Preferred Stock.
Other than as set forth above with respect to ranking, the powers, rights,
designations and preferences, and qualifications, restrictions and limitations
thereof, of the Holdings Junior Preferred Stock are substantially similar to
those of the New Senior Preferred Stock, except that the Holdings Junior
Preferred Stock is not exchangeable for senior subordinated notes of Holdings.
All outstanding shares of the Holdings Junior Preferred Stock were purchased by
GEI on January 27, 1998.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
All of the Company's issued and outstanding capital stock is owned by
Holdings. The Company has no outstanding capital stock other than common stock,
nor are there any outstanding options, warrants or other rights to purchase the
Company's capital stock.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the acquisition, ownership and disposition
of the New Notes acquired in and under the terms of the Exchange Offer by
Holders of Old Notes who acquired such Old Notes at their original issue for
cash, but does not purport to be a complete analysis of all potential tax
effects. To the extent this summary discusses matters of law or legal
conclusions, it constitutes the opinion of Mayer, Brown & Platt. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service (the "Service") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a Holder of the New Notes.
The discussion does not address all of the federal income tax consequences that
may be relevant to a Holder in light of such Holder's particular circumstances
or to Holders subject to special rules, such as certain financial institutions,
tax-exempt entities, insurance companies, dealers in securities, traders in
securities who elect to mark to market, and persons holding the New Notes as
part of a "straddle," "hedge" or "conversion transaction." Moreover, the effect
of any applicable state, local or foreign tax laws is not discussed. The
discussion deals only with New Notes held as "capital assets" within the meaning
of Section 1221 of the Code.
As used herein, the term "U.S. Holder" means a beneficial owner of a New
Note who or which is for U.S. federal income tax purposes (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or of any
State, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (iv) a trust if, and only if, (a) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (b) one or more U.S. persons have the authority
to control all substantial decisions of the trust. The term U.S. Holder also
includes certain former U.S. citizens whose income and gain on the New Notes
will be subject to U.S. taxation. As used herein, the term "Non-U.S. Holder"
means a beneficial owner of a New Note that is not a U.S. Holder. Unless
otherwise indicated from the context, "Holder" means either a U.S. Holder or a
Non-U.S. Holder.
The Company has not sought and will not seek any rulings from the Service
with respect to any position of the Company discussed below. There can be no
assurance that the Service will not take a different position from the Company
concerning the tax consequences of the acquisition, ownership or disposition of
the New Notes or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
CONSEQUENCES OF EXCHANGE OFFER TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of an Old Note for a New Note pursuant to the Exchange Offer
will not be taxable to the exchanging Holders for Federal income tax purposes.
As a result (i) an exchanging Holder will not recognize any gain or loss on the
exchange; (ii) the holding period for the New Note will include the holding
period for the Old Note; and (iii) the basis of the New Note will be the same as
the basis for the Old Note.
The Exchange Offer will result in no Federal income tax consequences to a
nonexchanging Holder.
LIQUIDATED DAMAGES
The treatment of interest described below with respect to the Notes is
based in part upon the Company's determination that, as of the date of issuance
of the Old Notes, the possibility that Liquidated Damages would be paid to
Holders of the Old Notes pursuant to a Registration Default was remote. The
Service may take a different position, which could affect the timing and
character of interest income reported by Holders of the Notes. While not free
from doubt, if such Liquidated Damages should in fact be paid, the Company
believes the Liquidated Damages would be taxable to a Holder as ordinary income
in accordance with such Holder's method of accounting.
83
<PAGE> 86
U.S. HOLDERS
Interest payable on the Notes will be includible in the income of a U.S.
Holder in accordance with such Holder's regular method of accounting. If a Note
is redeemed, sold or otherwise disposed of, a U.S. Holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale or other disposition of such Note (to the extent such amount does not
represent accrued but unpaid interest) and such Holder's tax basis in the Note.
Such gain or loss generally will be capital gain or loss, provided that the
Holder has held the Note as a capital asset. In general, the maximum tax rate
for non-corporate taxpayers on long-term capital gains is 20% for most capital
assets (including the Notes) held for more than 18 months. Capital gain of
non-corporate taxpayers on such assets having a holding period of more than one
year but not more than 18 months will be subject to a maximum tax rate of 28%.
NON-U.S. HOLDERS
On October 14, 1997, final Treasury Regulations (the "1997 Final
Regulations") were issued that affect the U.S. taxation of Non-U.S. Holders of
the Notes. The 1997 Final Regulations generally are effective for payments made
after December 31, 1998, regardless of the issue date of the Notes with respect
to which such payments are made, subject to certain transition rules. The
discussion under this heading and under "--Backup Withholding" below is for
informational purposes only and is not intended to be a complete discussion of
either the statutory and regulatory provisions that apply to payments made on
the Notes before January 1, 1999, or the provisions of the 1997 Final
Regulations. Prospective Non-U.S. Holders are urged to consult their tax
advisors with respect to the possible applicability of the various withholding
provisions of the Code and the Treasury Regulations promulgated thereunder.
Interest on the Notes. Payments of interest on the Notes by the Company or
any paying agent to a beneficial owner of a Note that is a Non-U.S. Holder will
not be subject to U.S. federal withholding tax, provided that (i) such Holder
does not own, actually or constructively, 10 percent or more of the total
combined voting power of all classes of stock of the Company entitled to vote;
(ii) such Holder is not, for U.S. federal income tax purposes, a controlled
foreign corporation related, directly or indirectly, to the Company through
stock ownership; (iii) such Holder is not a bank receiving interest described in
Section 881(c)(3)(A) of the Code; and (iv) certain certification requirements
(summarized below) are met (the "Portfolio Interest Exception"). If a Non-U.S.
Holder of a Note is engaged in a trade or business in the United States, and if
interest on the Note is effectively connected with the conduct of such trade or
business (and, if certain tax treaties apply, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Holder), the Non-U.S. Holder,
although exempt from U.S. withholding tax, will generally be subject to regular
U.S. income tax on such interest in the same manner as if it were a U.S. Holder.
In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject
to a branch profits tax equal to 30% (or such lower rate provided by an
applicable treaty) of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments. For purposes of the branch profits
tax, interest on a Note will be included in the earnings and profits of such
Non-U.S. Holder if such interest is effectively connected with the conduct by
the Non-U.S. Holder of a trade or business in the United States.
For payments of interest on the Notes made prior to January 1, 1999, in
order to qualify for the Portfolio Interest Exception, either (i) the beneficial
owner of a Note must certify on Internal Revenue Service Form W-8 or a
substitute form that is substantially similar to Form W-8, under penalties of
perjury, to the Company or a paying agent, as the case may be, that such owner
is a Non-U.S. Holder and must provide such owner's name and address or (ii) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution") and holds the Note on behalf of the beneficial owner
thereof must certify, under penalties of perjury, to the Company or paying
agent, as the case may be, that such certificate has been received from the
beneficial owner by it or by a Financial Institution between it and the
beneficial owner and must furnish the payor with a copy thereof. A certificate
described in this paragraph is effective only with respect to payments of
interest made to the certifying Non-U.S. Holder after delivery of the
certificate in the calendar year of its delivery and the two immediately
succeeding calendar years. In lieu of the certificate described in this
paragraph, a Non-U.S. Holder engaged in a trade or business in the United States
(with which interest payments on the Note are
84
<PAGE> 87
effectively connected) must provide to the Company a properly executed Internal
Revenue Service Form 4224 in order to claim an exemption from withholding tax.
A payment of interest on the Notes made to a foreign beneficial owner after
December 31, 1998, generally will qualify for the Portfolio Interest Exception
or, as the case may be, the exception from withholding for income effectively
connected with the conduct of a trade or business in the United States if, at
the time such payment is made, the withholding agent holds a valid Form W-8 (or
an acceptable substitute form) from the beneficial owner and can reliably
associate such payment with such Form W-8. In addition, under certain
circumstances a withholding agent is allowed under the 1997 Final Regulations to
rely on Form W-8 (or an acceptable substitute form) furnished by a financial
institution or other intermediary on behalf of one or more beneficial owners (or
other intermediaries) without having to obtain copies of the beneficial owner's
Form W-8 (or substitute thereof), provided that the financial institution or
intermediary has entered into a withholding agreement with the Service and thus
is a "qualified intermediary," and may not be required to withhold on payments
made to certain other intermediaries if certain conditions are met.
Disposition of Notes. Under current law, a Non-U.S. Holder of a Note
generally will not be subject to U.S. federal income tax on any gain recognized
on the sale, exchange or other disposition of such Note (other than gain
attributable to accrued interest, which is subject to the rules discussed
above), unless (i) the gain is effectively connected with the conduct of a trade
or business in the United States of the Non-U.S. Holder (and, if certain tax
treaties apply, is attributable to a U.S. permanent establishment maintained by
the Non-U.S. Holder); (ii) the Non-U.S. Holder is an individual who holds the
Note as a capital asset, is present in the United States for 183 days or more in
the taxable year of the disposition and either (a) such individual has a U.S.
"tax home" (as defined for U.S. federal income tax purposes) or (b) the gain is
attributable to an office or other fixed place of business maintained in the
United States by such individual; or (iii) the Non-U.S. Holder is subject to tax
pursuant to the Code provisions applicable to certain U.S. expatriates. In the
case of a Non-U.S. Holder that is described under clause (i) above, its gain
will be subject to the U.S. federal income tax on net income that applies to
U.S. persons and, in addition, if such Non-U.S. Holder is a foreign corporation,
it may be subject to the branch profits tax as described above. An individual
Non-U.S. Holder that is described under clause (ii) above will be subject to a
flat 30% tax on gain derived from the sale, which may be offset by U.S. capital
losses (notwithstanding the fact that he or she is not considered a U.S.
resident). Thus, individual Non-U.S. Holders who have spent 183 days or more in
the United States in the taxable year in which they contemplate a sale of a Note
are urged to consult their tax advisors as to the tax consequences of such sale.
Estate Tax Consequences. A Note held by an individual who is not a U.S.
citizen or resident (as specially defined for United States federal estate tax
purposes) at the time of his death will not be subject to U.S. federal estate
tax as a result of such individual's death, provided that, at the time of such
individual's death, the individual does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of stock of
the Company entitled to vote and payments with respect to such Note would not
have been effectively connected with the conduct by such individual of a trade
or business in the United States.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to "reportable payments" on the Notes. This
withholding generally applies only if the Holder (i) fails to furnish his or her
social security or other taxpayer identification number ("TIN"); (ii) furnishes
an incorrect TIN; (iii) is notified by the Service that he or she has failed to
report properly payments of interest and dividends and the Service has notified
the Company that the Holder is subject to backup withholding; or (iv) fails,
under certain circumstances, to provide a certified statement, signed under
penalty of perjury, that the TIN provided is his or her correct number and that
he or she is not subject to backup withholding. Any amount withheld from payment
to a holder under the backup withholding rules is allowable as a credit against
such holder's federal income tax liability, provided that the required
information is furnished to the Service. Certain Holders (including, among
others, corporations and foreign individuals who comply with certain
certification requirements) are not subject to backup withholding. Holders
should consult their tax advisors as
85
<PAGE> 88
to their qualifications for exemption from backup withholding and the procedure
for obtaining such an exemption.
INFORMATION REPORTING
The Company is required to furnish certain information to the Service and
will furnish annually to record Holders of the Notes information with respect to
interest paid on the Notes during the calendar year.
SUBSEQUENT PURCHASERS
The foregoing does not discuss special rules that may affect the treatment
of purchasers that acquire the Notes other than at the time of original issuance
at the issue price, including those provisions of the Code relating to the
treatment of "market discount" and "acquisition premium." For example, the
market discount provisions of the Code may require a subsequent purchaser of
Notes at a market discount to treat all or a portion of any gain recognized upon
sale or other disposition of such Notes as ordinary income and to defer a
portion of any interest expense that would otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such Notes until the
holder disposes of such Notes in a taxable transaction.
86
<PAGE> 89
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities and not acquired directly
from the Company. The Company has agreed that for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer that resells New Notes that was received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of New Notes
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay the expenses
incident to the Exchange Offer and will indemnify the Holders of the Old Notes
against certain liabilities, including liabilities under the Securities Act, in
connection with the Exchange Offer.
LEGAL MATTERS
Mayer, Brown & Platt, Chicago, Illinois will pass upon certain legal
matters regarding the legality of the New Notes for the Company.
EXPERTS
The combined financial statements of the Company as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997, and the balance sheet of Liberty Group Operating, Inc. as of December 31,
1997, included elsewhere in the Prospectus have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
securities being offered by this Prospectus. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, to which reference is hereby made.
The Registration Statements and exhibits thereto may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained
87
<PAGE> 90
by mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site
(http://www.sec.gov) that contains reports and information statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission.
The Company currently is not subject to the informational requirements of
the Exchange Act. As a result of the Exchange Offer, the Company will become
subject to such requirements. In addition, pursuant to the Indenture, the
Company has agreed to file with the Commission and provide to the Holders of the
Old Notes annual reports and the information to be delivered pursuant to
Sections 13 and 15(d) of the Exchange Act.
88
<PAGE> 91
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
LIBERTY GROUP OPERATING, INC.
Independent Auditors' Report................................ F-2
Balance Sheet as of December 31, 1997....................... F-3
Notes to Balance Sheet...................................... F-4
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
Independent Auditors' Report................................ F-6
Combined Financial Statements:
Combined Statements of Net Assets as of December 31, 1996
and 1997............................................... F-7
Combined Statements of Operations and Changes in Net
Assets for the Years Ended December 31, 1995, 1996 and
1997................................................... F-8
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997....................... F-9
Notes to Combined Financial Statements.................... F-10
</TABLE>
F-1
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
The Directors
Liberty Group Operating, Inc.:
We have audited the accompanying balance sheet of Liberty Group Operating,
Inc. as of December 31, 1997. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Liberty Group Operating, Inc. as of
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 17, 1998
F-2
<PAGE> 93
LIBERTY GROUP OPERATING, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Total assets................................................ $ --
=====
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities........................................... $ --
-----
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01; 1,000 shares authorized,
100 shares subscribed for.............................. 100
Subscription receivable................................... (100)
-----
Total stockholders' equity............................. --
-----
Total liabilities and stockholders' equity............. $ --
=====
</TABLE>
See accompanying notes to balance sheet.
F-3
<PAGE> 94
LIBERTY GROUP OPERATING, INC.
NOTES TO BALANCE SHEET
DECEMBER 31, 1997
(1) FORMATION OF COMPANY
Liberty Group Operating, Inc. (the "Company") was formed on November 19,
1997 under the laws of the State of Delaware. The Company entered into a
subscription agreement dated November 19, 1997 to issue 100 shares of common
stock for total consideration of $100 to Liberty Group Publishing, Inc.
("Holdings").
(2) SUBSEQUENT EVENTS (UNAUDITED)
On January 27, 1998, the Company acquired, for cash payments of $307.2
million, consisting of the contractual purchase price of $309.1 million, plus
interest of $1.1 million and a cash adjustment of $3.0 million, from
wholly-owned subsidiaries of Hollinger International, Inc. ("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. Of the total purchase price, approximately $31.0 million
represented consideration in connection with a non-competition agreement whereby
Hollinger and its affiliates have agreed not to compete, directly or indirectly,
with the Company's acquired operations for a period of five years.
The acquisition, including the payment of related fees and expenses, was
financed from the (i) proceeds of $180.0 million from the issuance and sale by
the Company of $180.0 million aggregate principal amount of 9.375% Senior
Subordinated Notes due February 1, 2008 (the "Notes"), (ii) proceeds of $50.5
million from the issuance and sale by Holdings of $89.0 million aggregate
principal amount at maturity of 11.625% Senior Discount Debentures due February
1, 2009, (iii) proceeds of $45.0 million from the issuance and sale of 1.8
million shares of 14.75% Senior Redeemable Exchangeable Cumulative Preferred
Stock, (iv) proceeds of $49.0 million from the issuance and sale of 49,000
shares of 10% Series B Junior Redeemable Cumulative Preferred Stock, and (v)
proceeds of $8.0 million from the issuance and sale of 80,000,000 shares of
Holdings common stock. In connection with the financing of the acquisition,
Holdings made a capital contribution of $129.1 million, representing the net
proceeds from the sale by Holdings of the securities described above, to the
Company.
The Notes are general unsecured obligations of the Company and are
irrevocably, fully and unconditionally joint and severally guaranteed by each of
the Company's existing and future subsidiaries. The Notes are redeemable for
cash at the option of the 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
the principal value. In the event of a change in control of the Company, the
Company must offer to repurchase the Notes at 101% of their principal value.
On January 27, 1998, the Company and American Publishing Management
Services, Inc. ("APMS"), a wholly-owned subsidiary of Hollinger, entered into a
transitional services agreement which provides that APMS will, at the Company's
option, provide certain services to the Company, including accounting and
finance-related information systems and administrative processing support,
employee benefits and insurance coverage, administrative and information
processing support, and treasury and advertising services. APMS will provide
such services at cost for a period of up to three years.
On January 27, 1998, the 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 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 have a floor of the Base Rate plus 0.75% or the Eurodollar Rate
plus 2.0%. Under the terms of the Revolving Credit Facility, the
F-4
<PAGE> 95
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 Company also pays a fee of 0.5% on the unused portion of the
Revolving Credit Facility.
On January 27, 1998, the Company entered into a Management Agreement with
Leonard Green & Partners, L.P. ("LGP"), the principal shareholder of Holdings,
whereby LGP will provide management, consulting and financial planning services
to the Company for an annual management fee of $1.0 million.
F-5
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hollinger International Inc.:
We have audited the accompanying combined statements of net assets of the
Local Newspaper Group of American Publishing Company, a group of publishing
businesses owned by American Publishing Company or its subsidiaries (the
"Business"), a wholly-owned subsidiary of Hollinger International Inc., as of
December 31, 1996 and 1997, and the related combined statements of operations
and changes in net assets and cash flows for each of the years in the three-year
period ended December 31, 1997. These combined financial statements are the
responsibility of the Business' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined net assets of the Business as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 17, 1998
F-6
<PAGE> 97
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
COMBINED STATEMENTS OF NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEC31,ER
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,768 $ 1,452
Accounts receivable, net of allowance for doubtful
accounts of
$1,022 in 1996 and $1,014 in 1997...................... 10,619 10,308
Inventories............................................... 1,611 1,947
Prepaid expenses and other current assets................. 259 278
-------- --------
Total current assets................................... 14,257 13,985
Property, plant and equipment, net of accumulated
depreciation.............................................. 21,552 20,503
Intangible assets, net of accumulated amortization.......... 77,165 75,212
-------- --------
Total assets........................................... $112,974 $109,700
======== ========
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Current portion of long-term liabilities.................. $ 627 $ 338
Accounts payable.......................................... 1,204 1,119
Accrued expenses.......................................... 2,016 2,223
Deferred revenue.......................................... 4,329 4,411
-------- --------
Total current liabilities.............................. 8,176 8,091
Long-term liabilities, less current portion................. 1,152 706
Deferred income taxes....................................... 666 1,764
-------- --------
Total liabilities...................................... 9,994 10,561
Net assets.................................................. 102,980 99,139
-------- --------
Total liabilities and net assets....................... $112,974 $109,700
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE> 98
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS EN31, DECEMBER
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Advertising.............................................. $ 60,255 $ 66,816 $ 68,712
Circulation.............................................. 19,058 22,004 22,341
Job printing and other................................... 8,054 8,722 7,666
-------- -------- --------
Total revenues............................................. 87,367 97,542 98,719
OPERATING COSTS AND EXPENSES:
Operating costs.......................................... 29,405 31,320 29,318
Selling, general and administrative...................... 34,506 38,259 39,162
Depreciation and amortization............................ 7,290 7,854 7,470
-------- -------- --------
Income from operations..................................... 16,166 20,109 22,769
Interest expense........................................... 11,195 10,968 10,551
-------- -------- --------
Income before income taxes................................. 4,971 9,141 12,218
Income taxes............................................... 2,338 4,006 5,271
-------- -------- --------
Net income................................................. 2,633 5,135 6,947
Net assets, beginning of period............................ 96,355 106,945 102,980
Transfer (to) from APC, net................................ 7,957 (9,100) (10,788)
-------- -------- --------
Net assets, end of period.................................. $106,945 $102,980 $ 99,139
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE> 99
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS EN31, DECEMBER
------------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 2,633 $ 5,135 $ 6,947
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization........................................... 4,172 4,383 4,250
Depreciation........................................... 3,118 3,471 3,220
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................... (1,391) (376) 311
Inventories............................................ (1,969) 1,850 (336)
Prepaid expenses and other current assets.............. 17 (1) (19)
Accounts payable....................................... 548 (577) (85)
Accrued expenses....................................... 159 228 207
Deferred revenue....................................... 602 190 82
-------- ------- -------
Cash provided by operating activities....................... 7,889 14,303 14,577
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (2,255) (3,081) (1,713)
Proceeds from sales of assets............................... 29 342 35
Acquisitions, net of cash acquired.......................... (12,680) (1,781) (1,692)
-------- ------- -------
Cash used in investing activities........................... (14,906) (4,520) (3,370)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term liabilities........................... (754) (844) (735)
Transfer (to) from APC, net................................. 7,957 (9,100) (10,788)
-------- ------- -------
Cash provided by (used in) financing activities............. 7,203 (9,944) (11,523)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 186 (161) (316)
Cash and cash equivalents, at beginning of period........... 1,743 1,929 1,768
-------- ------- -------
Cash and cash equivalents, at end of period................. $ 1,929 $ 1,768 $ 1,452
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE> 100
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
The Local Newspaper Group of American Publishing Company (the "Business")
represents a portion of the small and mid-size daily and weekly newspapers owned
by American Publishing Company or its subsidiaries ("APC"), a wholly owned
subsidiary of Hollinger International Inc. The Business is located in 11 states
with the largest concentration of newspapers being in the Midwest. Raw
materials, mainly newsprint and ink, are readily available, and the Business is
not dependent on a single or limited number of suppliers. Customers range from
individual subscribers to local and national advertisers. No individual customer
accounts for a significant percentage of revenues.
(B) BASIS OF PRESENTATION
The accompanying combined financial statements represent all of the net
assets and associated revenues, expenses, and cash flows of the Business,
assuming that the Business, currently part of APC, was organized for all periods
as a separate legal entity. Intercompany transactions between entities
comprising the Business have been eliminated. Certain net assets of the Business
are to be transferred to a separate legal entity under an agreement in principle
described in Note 10.
The Business maintains its own cash only for certain daily expenses;
principal operating cash disbursements are paid by APC on behalf of the
Business. Such cash disbursements, interest, income taxes and related-party
transactions are paid by APC and are reflected as a change in the net activity
with APC.
APC has historically provided certain services to the Business, including
accounting, payroll administration, tax services, consulting assistance on
operational issues and financial reporting. The cost of providing such services
is recovered by APC by allocating to the Business a management fee using a
percentage of revenue method. The management fee, which is included in selling,
general and administrative expenses, was $2,162, $2,422 and $2,192 for the years
ended December 31, 1995, 1996 and 1997, respectively. In the opinion of
management of the Business, such management fee is representative of the cost of
performing such services.
As the Business' operations represent a portion of APC, the operations of
the Business have been financed through, and certain of the assets of the
Business have been pledged as security for borrowings of, APC. The Business'
interest expense represents an allocation of APC's interest expense (calculated
as APC's weighted average interest rate of 10.46%, 10.45% and 10.64% for the
years ended December 31, 1995, 1996 and 1997, respectively, applied to the
average balances of the net assets of the Business for each respective period).
Subsequent to completion of the transactions described in Note 10, the Business
is expected to have a capital structure different than that in the accompanying
combined statements of net assets and, accordingly, interest expense is not
necessarily indicative of the interest expense that the Business would have
incurred as a separate independent entity.
Details with respect to the transfers (to) from APC, net, follow:
<TABLE>
<CAPTION>
YEARS ENDED
DE31,BER
------------------------------------------
1995 1996 1997
-------- -------- ------------------
<S> <C> <C> <C>
Cash transferred to APC.............................. $(63,406) $(71,581) $(73,318)
Cash disbursements by APC on behalf of the
Business........................................... 55,520 44,983 44,836
Current income tax liabilities....................... 2,486 4,108 4,612
Management fees...................................... 2,162 2,422 2,531
Interest............................................. 11,195 10,968 10,551
-------- -------- --------
$ 7,957 $ (9,100) $(10,788)
-------- -------- --------
</TABLE>
F-10
<PAGE> 101
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(D) INVENTORIES
Inventories consist principally of newsprint, which is valued at the lower
of cost or not realizable value. Cost is determined using the first-in,
first-out (FIFO) or moving-average method.
(E) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Routine maintenance and
repairs are expensed as incurred.
Depreciation is calculated under the straight-line method over the
estimated useful lives, principally 25 years for buildings and improvements and
5 to 10 years for machinery and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
(F) INTANGIBLE ASSETS
Intangible assets consist principally of circulation-related assets,
noncompetition agreements with former owners of acquired newspapers, and the
excess of acquisition costs over estimated fair value of net assets acquired
(goodwill). The fair market value of intangible assets purchased is determined
primarily through the use of independent appraisals. Amortization is calculated
using the straight-line method over the respective estimated useful lives
ranging from 30 years for circulation related assets, 3 to 15 years for
noncompetition agreements, and 40 years for goodwill.
The Business assesses the recoverability of its long-lived assets, such as
property, plant and equipment and intangible assets whenever events or changes
in business circumstances indicate the carrying amount of the assets, or related
group of assets, may not be fully recoverable. Factors leading to impairment
include a combination of historical losses, anticipated future losses and
inadequate cash flow. The write-down is reported with other income in the
combined statement of operations and changes in net assets. The assessment of
recoverability is based on management's estimate. If undiscounted operating cash
flows do not exceed the net book value of the long-lived assets, then a
permanent impairment has occurred. The Business would record the difference
between the net book value of the long-lived asset and the fair value of such
asset as a charge against income in the combined statement of operations if such
a difference arose.
(G) REVENUE RECOGNITION
Circulation revenue, which is billed to the customers at the beginning of
the subscription period, is recognized on a straight-line basis over the term of
the related subscription. Advertising revenue is recognized upon publication of
the advertisements. The revenue for job printing is recognized upon delivery.
(H) INCOME TAXES
The Business represents a business unit of APC and as such does not file
separate income tax returns. The income tax provision included in the
accompanying combined statements of operations and changes in net assets has
been computed as if the Business were a separate company.
F-11
<PAGE> 102
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Current income taxes are
reflected as a decrease of transfers to APC as APC is responsible for the
payment of income tax liabilities. State income taxes are computed utilizing a
blended state rate of 5%, which is net of Federal income tax benefit.
(I) CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and highly liquid certificates of
deposit with a maximum term at origination of three months or less.
(2) ACQUISITIONS
During the years ended December 31, 1995, 1996 and 1997, the Business
acquired certain newspaper businesses for $12,680, $1,781 and $1,385. Using the
purchase method of accounting, the purchase prices were allocated to the assets
and liabilities acquired based on their estimated fair values. The excess of the
purchase prices over the estimated fair value of the tangible and identifiable
intangible assets acquired (goodwill) was $4,396, $1,369 and $1,170 for the
years ended December 31, 1995, 1996 and 1997, respectively. Results of the
acquired newspaper businesses have been included in combined statements of
operations and net assets since the dates of acquisition.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DE31,BER
--------------------------------------------
1995 1996 1997
-------- -------- ------------------
<S> <C> <C> <C>
Land............................................... $ 1,954 $ 1,955 $ 2,131
Buildings and improvements......................... 12,544 13,386 13,906
Machinery and equipment............................ 18,454 18,826 19,781
Furniture and fixtures............................. 8,076 9,456 10,425
-------- -------- --------
41,028 43,623 46,243
Less accumulated depreciation...................... (19,036) (22,071) (25,740)
-------- -------- --------
$ 21,992 $ 21,552 $ 20,503
======== ======== ========
</TABLE>
F-12
<PAGE> 103
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(4) INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DEC31,ER
---------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Non-compete agreements.................................... $ 28,526 $ 28,646 $ 28,646
Subscriber lists.......................................... 50,741 50,741 50,741
Advertiser lists.......................................... 21,214 21,214 21,214
Goodwill.................................................. 37,531 36,672 38,970
-------- -------- --------
138,012 137,273 139,571
Less accumulated amortization............................. (55,725) (60,108) (64,359)
-------- -------- --------
$ 82,287 $ 77,165 $ 75,212
======== ======== ========
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DEC31,ER
---------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Accrued payroll............................................. $ 727 $ 818 $ 944
Accrued vacation............................................ 339 330 309
Accrued bonus............................................... 392 520 554
Accrued realty tax.......................................... 90 79 101
Accrued other............................................... 240 269 315
------ ------ ------
$1,788 $2,016 $2,223
====== ====== ======
</TABLE>
(6) LONG-TERM LIABILITY
The long-term liability represents amounts due under non-interest-bearing
non-compete agreements through 2004.
The aggregate amount of principal payments at December 31, 1997 follows:
<TABLE>
<S> <C>
1998........................................................ $ 338
1999........................................................ 240
2000........................................................ 193
2001........................................................ 82
2002........................................................ 70
Thereafter.................................................. 121
------
$1,044
======
</TABLE>
F-13
<PAGE> 104
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(7) INCOME TAXES
Income tax expense (benefit) for the periods shown below consisted of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. Federal.............................................. $4,009 $ 659 $4,668
State and local........................................... 603 -- 603
------ ----- ------
4,612 659 5,271
====== ===== ======
Year ended December 31, 1996:
U.S. Federal.............................................. 3,599 (102) 3,497
State and local........................................... 509 -- 509
------ ----- ------
4,108 (102) 4,006
====== ===== ======
Year ended December 31, 1995:
U.S. Federal.............................................. 2,186 (148) 2,038
State and local........................................... 300 -- 300
------ ----- ------
2,486 (148) 2,338
====== ===== ======
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35% to earnings before income tax expense as a result
of the following:
<TABLE>
<CAPTION>
YEARS EN31, DECEMBER
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense............................. $1,740 $3,199 $4,276
Increase in income taxes resulting from:
Amortization of goodwill.................................. 344 344 344
State and local income taxes.............................. 254 463 651
------ ------ ------
$2,338 $4,006 $5,271
====== ====== ======
</TABLE>
F-14
<PAGE> 105
LOCAL NEWSPAPER GROUP OF AMERICAN PUBLISHING COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at 1997, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
DEC31,ER
---------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts...................................... $ 387 $ 409 $ 405
Property, plant and equipment, principally due to
differences in depreciation............................ -- 59 --
Compensated absences, principally due to accrual for
financial
reporting purposes..................................... 135 132 124
------ ------ ------
Deferred tax assets............................... 522 600 529
------ ------ ------
Deferred tax liabilities:
Intangible assets, principally due to differences in basis
and
amortization........................................... 2,514 1,266 1,766
Property, plant, and equipment, principally due to
differences in depreciation............................ 902 -- 527
------ ------ ------
Total gross deferred tax liabilities.............. 3,416 1,266 2,293
------ ------ ------
Net deferred tax liability........................ $2,894 $ 666 $1,764
====== ====== ======
</TABLE>
(8) EMPLOYEE BENEFIT PLANS
The Business sponsors a noncontributory (defined contribution) retirement
savings plan for all employees satisfying minimum service requirements as
defined in the plan. The Business did not make any contributions to the plan
during 1995, 1996 or 1997.
(9) FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, may not represent actual values of the
financial instruments that could be realized in the future.
The carrying value of all financial instruments at December 31, 1995, 1996
and 1997 approximated their estimated fair values.
(10) SALE OF BUSINESS (UNAUDITED)
On November 21, 1997, Hollinger International Inc. and certain of its
subsidiaries executed asset purchase agreements to sell virtually all of the
assets and certain liabilities of the Business to Liberty Group Operating, Inc.
for cash consideration of $309.1 million. Such transaction was consummated on
January 27, 1998.
F-15
<PAGE> 106
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE NEW
NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE NEW NOTES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary..................................... 1
Risk Factors................................ 11
Use of Proceeds............................. 15
The Exchange Offer.......................... 15
Capitalization.............................. 22
Unaudited Pro Forma Combined Financial
Data...................................... 23
Selected Combined Historical and Pro Forma
Financial Data............................ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 30
Business.................................... 35
Management.................................. 43
Certain Relationships and Related
Transactions.............................. 47
The Acquisition............................. 48
Principal Stockholders...................... 50
Description of New Notes.................... 51
Description of Revolving Credit Facility.... 80
Description of Holdings' Indebtedness and
Preferred Stock........................... 81
Description of Capital Stock of the
Company................................... 82
Certain United States Federal Tax
Considerations............................ 83
Plan of Distribution........................ 87
Legal Matters............................... 87
Experts..................................... 87
Available Information....................... 87
Index to Financial Statements............... F-1
</TABLE>
======================================================
======================================================
LIBERTY GROUP OPERATING
9 3/8% NEW SENIOR SUBORDINATED
NOTES DUE 2008
-----------------------------------
PROSPECTUS
-----------------------------------
APRIL 27, 1998
======================================================
