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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
SEPTEMBER 30, 2000 333-46959
LIBERTY GROUP OPERATING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4197636
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3000 DUNDEE ROAD, SUITE 203 NORTHBROOK, ILLINOIS 60062
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 272-2244
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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TABLE OF CONTENTS
<TABLE>
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PART I -- FINANCIAL INFORMATION PAGE
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Item 1 Unaudited Interim Consolidated Financial Statements
Unaudited Consolidated Balance Sheets at September 30, 2000 and December 31, 1999................ 1
Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 & September 30, 1999............................................ 2
Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 2000 & September 30, 1999................................................... 3
Notes to the Unaudited Interim Consolidated Financial Statements................................. 4
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk....................................... 10
PART II -- OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds........................................................ 11
Item 4 Submission of Matters to a Vote of Security Holders.............................................. 11
Item 6 Exhibits and Reports on Form 8-K................................................................. 11
Signature Page ................................................................................................. 12
</TABLE>
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LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $ 1,993 $ 1,860
Accounts receivable, net of allowance
for doubtful accounts of $1,817 and $1,141 in 2000 and 1999, respectively 21,996 19,561
Inventory .................................................................. 3,014 2,130
Prepaid expenses ........................................................... 1,315 507
Other current assets ....................................................... 179 306
--------- ---------
Total current assets .......................................................... 28,497 24,364
Property, plant and equipment, net ............................................ 54,681 39,356
Intangible assets, net ........................................................ 461,633 402,748
Deferred financing costs, net ................................................. 7,807 7,196
Other assets .................................................................. 456 2,217
--------- ---------
Total assets ...................................................................... $ 553,074 $ 475,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Borrowings under revolving credit facility ................................. $ 46,000 $ 99,500
Current portion of long-term liabilities ................................... 456 419
Accounts payable ........................................................... 3,346 1,744
Accrued expenses ........................................................... 13,435 14,445
Deferred revenue ........................................................... 8,861 7,801
--------- ---------
Total current liabilities ..................................................... 72,098 123,909
Long-term liabilities:
Term loan B ................................................................... 99,500 --
Senior subordinated notes ..................................................... 180,000 180,000
Long-term liabilities, less current portion ................................... 1,729 1,499
Deferred income taxes ......................................................... 24,258 19,488
--------- ---------
Total liabilities ................................................................. 377,585 324,896
Stockholders' equity
Common stock, $0.01 par value, 1,000 shares
authorized, 100 issued and outstanding at
September 30, 2000 and at December 31, 1999 ................................ -- --
Additional paid in capital .................................................... 176,793 148,661
Accumulated deficit ........................................................... (1,304) 2,324
--------- ---------
Total stockholders' equity (deficit) .............................................. 175,489 150,985
--------- ---------
Total liabilities and stockholders' equity (deficit) .............................. $ 553,074 $ 475,881
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Advertising .................................... $ 38,900 $ 31,695 $ 108,574 $ 86,707
Circulation .................................... 8,518 6,900 23,671 20,250
Job printing and other ......................... 3,528 3,483 9,441 9,636
--------- --------- --------- ---------
Total revenues .................................... 50,946 42,078 141,686 116,593
OPERATING COSTS AND EXPENSES:
Operating costs ................................ 21,956 17,763 59,989 49,606
Selling, general and administrative ............ 16,737 12,952 46,915 36,735
Depreciation and amortization .................. 5,301 3,747 14,559 11,093
--------- --------- --------- ---------
Income from operations ............................ 6,952 7,616 20,223 19,159
Interest expense .................................. 8,225 6,573 22,582 17,790
Amortization of debt issue costs .................. 312 292 918 815
Net gain on exchange and disposition of assets .... -- 6,689 -- 6,689
--------- --------- --------- ---------
Income (Loss) before income taxes.................. (1,585) 7,440 (3,277) 7,243
Income taxes ...................................... 13 -- 273 --
--------- --------- --------- ---------
Net income (loss) ................................. $ (1,598) $ 7,440 $ (3,550) $ 7,243
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
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Cash flows from operating activities:
Net loss ......................................................................... $ (3,550) $ 7,243
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization .................................................... 14,559 11,093
Amortization of debt issue costs ................................................. 918 815
Non-cash compensation ............................................................ 142 146
Net gain on exchange and disposition of assets ................................... -- (6,689)
Changes in assets and liabilities, net of acquisitions:
Working capital-net .............................................................. (2,640) (5,537)
Other assets ..................................................................... -- 54
--------- ---------
Net cash flows provided by operating activities ..................................... 9,429 7,125
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (including print facility) ............ (8,221) (3,205)
Proceeds on sale of properties.................................................... 2,103 --
Acquisitions, net of cash acquired ............................................... (75,372) (51,416)
--------- ---------
Net cash flows used in investing activities ......................................... (81,490) (54,621)
--------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facility ................................... 68,350 46,400
Net proceeds from contribution of capital ........................................ 29,550 --
Net proceeds from issuing long term debt ......................................... 97,005 --
Net increase (decrease) in long term liabilities ................................. (861) 71
Extinguishment of debt on prior revolving credit facility ........................ (121,850) --
--------- ---------
Net cash flows provided by financing activities .................................. 72,194 46,471
--------- ---------
Net increase in cash and cash equivalents ........................................ 133 (1,025)
Cash and cash equivalents, at beginning of period ................................ 1,860 1,025
--------- ---------
Cash and cash equivalents, at end of period ...................................... $ 1,993 $ --
========= =========
Supplemental cash flow disclosures -
Cash interest paid ............................................................ 24,609 20,597
Other assets transferred to property, plant, and equipment (new print facility) 1,798 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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LIBERTY GROUP OPERATING, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY, BASIS OF PRESENTATION AND ACQUISITION
Liberty Group Operating, Inc. ("Operating Company") is a leading publisher of
community newspapers and related publications that are the dominant source of
news, print advertising, and other local content in their communities. Operating
Company is a wholly-owned subsidiary of Liberty Group Publishing, Inc. ("LGP").
The interim consolidated financial statements include the accounts of the
Operating Company and its consolidated subsidiaries (the "Company").
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying interim consolidated financial statements as of
September 30, 2000 and for the three and nine months ended September 30, 2000
and 1999 should be read in conjunction with the December 31, 1999 audited
consolidated financial statements of the Company included in the Company's Form
10-K filed with the Securities and Exchange Commission.
The Company began operations on January 27, 1998, upon the acquisition of
virtually all of the assets and certain liabilities that were used primarily in
the business of publishing, marketing and distributing a total of 166 community
newspapers and related publications ("Initial Acquisition"). The effective date
of the Initial Acquisition was January 1, 1998. Since that time, the Company has
purchased an additional 164 publications, for a total of 330 publications in 17
states across the United States.
(2) BORROWINGS
The Initial Acquisition, including the payment of related fees and expenses, was
financed in part from the proceeds of $180.0 million from the issuance and sale
by the Operating Company of $180.0 million aggregate principal amount of 9.375%
Senior Subordinated Notes (the "Notes") due February 1, 2008 and the proceeds of
$50.5 million from the issuance and sale by LGP of $89.0 million aggregate
principal amount of 11.625% Senior Discount Debentures (the "Debentures") due
February 1, 2009.
The Notes were issued by the Operating Company and are general unsecured
obligations of the Operating Company. The Notes are irrevocably and
unconditionally joint and severally guaranteed by each of the Operating
Company's existing and future subsidiaries. The Notes are redeemable for cash at
the option of the Operating Company anytime after February 1, 2003 at stipulated
redemption amounts or, in certain limited circumstances, are partially
redeemable on or prior to February 1, 2001 at a redemption amount of 109.375% of
their principal amount. In the event of a change in control of the Operating
Company or the Company, the Company must offer to repurchase the Notes at 101%
of their principal amount.
On April 18, 2000, the Company entered into an agreement to amend and restate
its $175.0 million credit facility. The amendment and restatement extended the
maturity date of the revolving credit facility ("Amended Revolving Credit
Facility") from January 2003 to March 2005, and included the issuance of a
$100.0 million Term Loan B. The Term Loan B matures in March 2007, and will
require annual principal payments of $0.5 million in 2000, $1.0 million from
2001 through 2004, $36.1 million in 2005, $47.5 million in 2006, and $11.9
million in 2007. The Term Loan B and the Amended Revolving Credit Facility bear
interest at the Company's option equal to the Base Rate (as defined in the
Amended Revolving Credit Facility) or the Eurodollar Rate (as defined in the
Amended Revolving Credit Facility) plus a margin that varies based upon a ratio
set forth in the Amended Revolving Credit Facility. There is an individual
margin for the Term Loan B and the Amended Revolving Credit Facility. The
Company pays a fee equal to the Applicable Margin or Eurodollar advances (as
defined in the Amended Revolving Credit Facility) per annum on the aggregate
amount of outstanding letters of credit. The Company also pays a fee on the
unused portion of the Amended Revolving Credit Facility. No principal payments
are due on the Amended Revolving Credit Facility until the maturity date.
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(3) STOCKHOLDERS' EQUITY
LGP owns 100% of the common stock of the Company. There are no other classes of
stock.
(4) ACQUISITIONS
In the first nine months of 2000, the Company acquired 37 publications in 10
transactions for a total cash purchase cost of $75.4 million, including the
following acquisitions that had a material impact on the Company's results:
<TABLE>
<CAPTION>
DATE PURCHASE PRICE DESCRIPTION
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<S> <C> <C> <C>
Elko Daily Free Press....................... 1/3/2000 $ 13.2 Purchase of stock and real estate
Downers Grove Reporter-Progress............. 5/1/2000 11.5 Purchase of stock and assets
Adrian, Coldwater and Sturgis,
Michigan.................................... 6/30/2000 40.7 Purchase of assets
Other Publications.......................... Various 10.0 Purchase of stock and assets
------------
Total purchase price paid................... $ 75.4
============
</TABLE>
The Company has accounted for these acquisitions using the purchase method of
accounting. Accordingly, the costs of each acquisition has been allocated to the
assets acquired and liabilities assumed based upon their respective fair values
using independent valuations where appropriate. The costs of certain intangible
assets acquired are being amortized over periods ranging from 5 to 40 years. The
results of operations are included in the consolidated financial statements
since the dates of acquisition.
The following unaudited pro forma financial information presents the Company's
results of operations as if the acquisitions accounted for as purchases had
occurred at the beginning of the respective year. This summary is provided for
informational purposes only. It does not reflect the actual results that would
have occurred had the acquisitions been made as of the beginning of the
respective years or of results that may occur in the future.
<TABLE>
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NINE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
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Pro Forma Revenues................................................... $152,951 $127,858
Pro Forma Net income (loss).......................................... ($3,432) $7,325
</TABLE>
(5) RELATED PARTY TRANSACTIONS
On January 27, 1998, the Company entered into a Management Agreement with
Leonard Green & Partners, L.P. ("Green"), the principal stockholder of LGP,
whereby Green will provide management, consulting and financial planning
services to the Company.
(6) EMPLOYMENT AGREEMENT AMENDMENT
On August 11, 2000, Liberty Group Operating, Inc. (the "Registrant"),
Kenneth L. Serota (the "Executive"), Liberty Group Publishing, Inc. (the
"Registrant's Parent"), Green Equity Investors II, L.P. ("Green II") and Green
Equity Investors III, L.P. ("Green III") entered into that certain Amendment to
Employment Agreement, dated as of such date (the "Employment Agreement
Amendment"), pursuant to which that certain Employment Agreement, dated as of
November 21, 1997, between the Registrant, the Executive and the Registrant's
Parent was amended as follows: (i) the term of the Employment Agreement was
extended for an additional three-year period until January 1, 2004; (ii) the
annual base salary payable to the Executive thereunder for the fourth, fifth and
sixth years of the extended term thereof was established at $450,000, $475,000
and $500,000, respectively; (iii) the Registrant agreed to pay, in arrears, to
the Executive thereunder an automobile allowance of $500 per month for each
month during the extended term thereof ending on or prior to December 31,
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2000 and $800 per month for each month of the extended term thereof thereafter;
and (iv) the Registrant agreed to pay to the Executive eighteen (18) months of
base salary at the then current annual base salary payable to the Executive
thereunder in the event that the Executive's employment with the Registrant is
terminated by the Registrant without Cause or by the Executive for Good Reason,
each as defined in such Employment Agreement, as amended by the Employment
Agreement Amendment (as so amended, the "Employment Agreement").
In addition, under and pursuant to the Employment Agreement Amendment,
the Registrant's Parent issued and sold to the Executive 4,372 shares of Common
Stock of the Registrant's Parent and 184.42 shares of Series B 10% Junior
Redeemable Cumulative Preferred Stock of the Registrant's Parent (collectively,
the "Loan Equity") for an aggregate purchase price of $250,000, payable in the
form of a full recourse, unsecured promissory note of the Executive which
promissory note shall, subject to acceleration on certain specific events
specified therein, mature on December 31, 2025, and shall be subject to
forgiveness at the times and on the conditions specified in the Employment
Agreement in the event that certain performance standards of the Registrant or
other events specified in the Employment Agreement are satisfied or occur. In
the event that the Executive's employment with the Registrant is terminated by
the Registrant for Cause or by the Executive for Good Reason (each as defined in
the Employment Agreement), the Registrant's Parent, Green II or Green III shall
have the option under the Employment Agreement Amendment to purchase the Loan
Equity at a purchase price per share of $15.00 per share of Common Stock and
$1,000.00 per share of Junior Redeemable Cumulative Preferred Stock, plus
accrued and unpaid dividends on each such share of Common Stock or Junior
Redeemable Cumulative Preferred Stock; provided, however, that such repurchase
option shall expire (a) with respect to 33.33% of such Loan Equity on each of
January 1, 2002 and January 1, 2003 and with respect to the remainder of such
Loan Equity on January 1, 2004 provided that the Executive is employed by the
Registrant on each such date and (b) with respect to 100% of such Loan Equity on
a Liquidity Event (as defined in the Employment Agreement Amendment) provided
that the Executive is employed by the Registrant immediately prior to such
Liquidity Event.
In addition, under and pursuant to the Employment Agreement Amendment,
the Registrant's Parent issued and sold to the Executive 23,174 shares of Common
Stock of the Registrant's Parent (collectively, the "Additional Equity") for a
purchase price per share of $15.00 for an aggregate purchase price of $347,610,
payable in the form of a non-recourse, secured promissory note of the Executive
in the original principal amount of $225,947 and a full recourse, secured
promissory note of the Executive in the original principal amount of $121,663
(collectively, the "Additional Equity Notes"), each of which Additional Equity
Notes shall, subject to acceleration on certain specific events specified
therein, mature on December 31, 2025 and is secured by the Additional Equity.
The Registrant's Parent, Green II and Green III shall have the option under the
Employment Agreement Amendment to purchase the Additional Equity at a purchase
price per share of $15.00 (a) in the event that the aggregate internal rate of
return realized by Green III on the Common Stock of the Registrant's Parent and
the Junior Redeemable Cumulative Preferred Stock of the Registrant's Parent
purchased by Green III pursuant to that certain Stock Purchase Agreement, dated
as of April, 18, 2000, between the Registrant's Parent and Green III does not
equal or exceed twenty-five percent (25%) under the circumstances and on the
conditions specified in the Employment Agreement Amendment or (b) in the event
that the Executive's employment with the Registrant is terminated by the
Registrant for Cause or by the Executive for Good Reason (each as defined in the
Employment Agreement), provided, however, that the repurchase option described
in this clause (b) shall expire (i) with respect to 33.33% of such Additional
Equity on each of January 1, 2002 and January 1, 2003 and with respect to the
remainder of such Additional Equity on January 1, 2004 provided that the
Executive is employed by the Registrant on each such date and (ii) with respect
to 100% of such Additional Equity on a Liquidity Event (as defined in the
Employment Agreement Amendment) provided that the Executive is employed by the
Registrant immediately prior to such Liquidity Event.
The foregoing summary of the terms of the Employment Agreement
Amendment is qualified in its entirety by reference to the provisions thereof, a
copy of which is filed as an exhibit to this Form 10-Q filing and is hereby
incorporated herein by reference
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(7) RECLASSIFICATIONS
Certain amounts in prior year's financial statements have been reclassified to
conform to the 2000 presentation.
(8) SUBSEQUENT EVENT
On November 1, 2000, the Company purchased the assets of the Pekin Daily Times
from Mid-Illinois Newspaper, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
historical financial statements of the Company, including the notes thereto
which has been summarized in the Company's Annual Report on Form 10-K, SEC file
number 333-46957. Certain information in this section includes forward-looking
statements pertaining to, among other things, competition in its markets,
availability of adequate acquisition opportunities, price and availability of
newsprint, significant use of leverage, general economic conditions, and
environmental matters.
OVERVIEW
Liberty Group Operating, Inc. ("Operating Company") is a leading
publisher of community newspapers and related publications that are the dominant
source of news, print advertising, and other local content in their communities.
Operating Company is a wholly-owned subsidiary of Liberty Group Publishing, Inc
("LGP"). The interim consolidated financial statements include the accounts of
the Operating Company and its consolidated subsidiaries (the "Company").
The Company's primary operating costs and expenses are comprised of
operating costs and selling, general and administrative expenses. Salaries and
employee benefits are the Company's largest operating costs. The Company has
been able to control salaries and employee benefit expenses by realizing
efficiencies from the implementation of new technologies and the achievement of
synergies from its strategy of clustering its newspaper operations.
The Company began operations on January 27, 1998, upon the acquisition
of virtually all of the assets and certain liabilities that were used primarily
in the business of publishing, marketing and distributing a total of 166
community newspapers and related publications ("Initial Acquisition"). The
effective date of the Initial Acquisition was January 1, 1998. Since that time,
the Company has purchased an additional 164 publications, for a total of 330
publications in 17 states across the United States.
The Company has accounted for these acquisitions using the purchase
method of accounting. Accordingly, the costs of each acquisition has been
allocated to the assets acquired and liabilities assumed based upon their
respective fair values using independent valuations where appropriate. The costs
of certain intangible assets acquired are being amortized over periods ranging
from 5 to 40 years.
As a result of the depreciation, amortization, and interest expense
related to these acquisitions, the Company has been and anticipates that it will
be, for the foreseeable future, in a tax loss position. Given the uncertainty as
to the timing of the Company's ability to utilize such losses to offset future
taxable income, the Company does not presently anticipate recording any tax
benefit associated with its pre-tax losses.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
Total Revenues. Total revenues for the quarter ended September 30, 2000
increased by $8.9 million, or 21.1%, to $50.9 million from $42.1 million for the
quarter ended September 30, 1999. The increase in total revenues was primarily
due to acquisitions and growth in local advertising revenue and was comprised of
a $7.2 million increase in advertising revenue, a $1.6 million increase in
circulation revenue, and a $0.1 million increase in job printing and other
revenue. Total revenues for the nine months ended September 30, 2000 increased
by $25.1 million, or 21.5%, to $141.7 million from $116.6 million as of
September 30, 1999. The increase in total revenues for the nine months was
primarily due to acquisitions and increases in local advertising
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revenues and was comprised of a $21.9 million increase in advertising revenue
and a $3.4 million increase in circulation revenue, while job printing and other
revenue decreased by $0.2 million.
Operating Costs. Operating costs for the quarter ended September 30,
2000 were $22.0 million which was an increase of $4.2 million over the quarter
ended September 30, 1999. This increase was primarily driven by acquisitions and
higher labor, newsprint, and delivery costs. Total operating costs for the nine
months ended September 30, 2000 increased by $10.4 million, to $60.0 million
from $49.6 million as of September 30, 1999. This increase was primarily driven
by acquisitions and higher labor, newsprint, and delivery costs. As a percentage
of revenue for the quarter ended September 30, 2000, operating costs increased
from 42.2% to 43.1%, primarily due to lower sales growth than the related
increase in operating costs and also the operating cost structure of properties
acquired in the last twelve months.
Selling, General and Administrative. Selling, general and
administrative expenses for the quarter ended September 30, 2000 increased by
$3.8 million, to $16.7 million from $12.9 million for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000, selling,
general and administrative expenses increased by $10.2 million to $46.9 million
from $36.7 million as of September 30, 1999. The increase in selling, general
and administrative expenses during the quarter ended September 30, 2000 was
primarily due to acquisitions and higher labor and bad debt costs. As a
percentage of revenue for the quarter ended September 30, 2000, selling, general
and administrative expenses increased from 30.8% to 32.9%, primarily because
properties acquired in the last twelve months had a higher selling, general and
administrative cost structure than existing properties.
Depreciation and Amortization. Depreciation and amortization expense
for the quarter ended September 30, 2000 increased by $1.6 million, to $5.3
million from $3.7 million for the quarter ended September 30, 1999, as a result
of the net depreciation and amortization of fixed assets and intangible assets
acquired and disposed of during the preceding twelve months. For the nine months
ended September 30, 2000 depreciation and amortization expense increased by $3.5
million to $14.6 million from $11.1 million as of September 30, 1999 as a result
of fixed assets and intangibles assets acquired and disposed of during the
preceding twelve months.
Interest Expense. Interest expense for the quarter ended September 30,
2000 increased by $1.6 million to $8.2 million from $6.6 million for the quarter
ended September 30, 1999. For the nine months ended September 30, 2000, interest
expense increased $4.8 million to $22.6 million from $17.8 million as of
September 30, 1999. The increase in interest expense was due to interest on
borrowings used to fund acquisitions and higher interest rates.
EBITDA. EBITDA (which is defined as earnings income before interest,
taxes, depreciation and amortization) for the quarter ended September 30, 2000
increased by $0.9 million, to $12.3 million from $11.4 million for the quarter
ended September 30, 1999. For the nine months ended September 30, 2000, EBITDA
increased $4.5 million, to $34.8 million from $30.3 million as of September 30,
1999. The increase in EBITDA during the quarter ended September 30, 2000 was
primarily due to operating income generated by acquisitions, increases in local
advertising revenue, which were partially offset by increases in labor,
newsprint, bad debts, and delivery costs.
Net Income (Loss). The Company incurred a net loss of $1.6 million for
the quarter ended September 30, 2000, compared to net income of $7.4 million for
the quarter ended September 30, 1999. The $9.0 million fluctuation was
attributed to net gains on 1999 asset dispositions, increases in depreciation,
amortization, and interest expense associated with acquisitions, and higher
labor, newsprint, bad debt, and delivery costs, which were partially offset by
operating income from acquisitions and increases in local advertising revenue.
For the nine months ended September 30, 2000, the Company incurred a net loss of
$3.6 million compared to net income of $7.2 million for the nine months ended
September 30, 1999. The $10.8 million fluctuation was attributed to net gains on
1999 asset dispositions, increases in depreciation, amortization, and interest
expense associated with acquisitions, and higher labor, newsprint, bad debt, and
delivery costs, which is partially offset by operating income from acquisitions
and increases in local advertising revenue.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities. Net cash provided by operating
activities for the nine months ended September 30, 2000 increased by $2.3
million to $9.4 million compared with cash provided of $7.1 million for the nine
months ended September 30, 1999. The increase, net of acquisitions, was
primarily due to lower receivables, higher payables, partially offset by higher
interest expense on the Amended Revolving Credit Facility and higher prepaid
expenses, inventory, and lower accrued expenses.
Cash Flows From Investing Activities. Net cash used in investing
activities for the nine months ended September 30, 2000 reflects the acquisition
of the Elko Daily Free Press (NV), Magic Valley Publishing (ID), New Hampton
Tribune & Advertiser (IA), Dansville-Wayland Pennysaver (NY), Plaquemine
Publishing (LA), Downers Grove Reporter (IL), Terry Newspapers (IL),
McDonough/Fulton County Shoppers (IL), along with the publications purchased in
Adrian (MI), Coldwater (MI), Sturgis (MI), Bronson (MI), and Clintonville (WI).
The Company will continue to pursue its strategy of opportunistically purchasing
community newspapers in contiguous markets and clusters of community newspapers
in new markets. The Company will only pursue acquisitions that it believes would
contribute to the Company's overall cash flow growth. The Company's capital
expenditures consist of the purchase of machinery, equipment, furniture and
fixtures relating to its publishing operations.
Cash Flows From Financing Activities. Net cash flows provided by
financing activities for the nine months ended September 30, 2000 reflect
borrowings made under the Company's revolving credit facilities to fund
acquisition costs, proceeds from issuing common and preferred stock, proceeds
from acquiring a Term Loan B, which were partially offset by a payment to
extinguish a prior Revolving Credit Facility balance at April 18, 2000. The
Company is subject to certain covenants that limit its ability to pay dividends
and make other restricted payments and does not expect to pay cash dividends in
the foreseeable future.
Liquidity. The Company's principal sources of funds will be cash
provided by operating activities and borrowings under its Amended Revolving
Credit Facility. The Company believes that such funds will provide the Company
with sufficient liquidity and capital resources to meet its current and
financial obligations for the foreseeable future. See Note 2 to the Unaudited
Consolidated Financial Statements for a summary of the terms of the Amended
Revolving Credit Facility.
LGP is highly leveraged and has indebtedness that is substantial in
relation to its stockholders' deficit, tangible equity and cash flow. Total
interest expense for the nine months ended September 30, 2000 was $23.5 million
including and amortization of debt issuance costs of $.9 million. The degree to
which LGP is leveraged could have important consequences, including the
following: (i) for the fiscal year ending December 31, 2000, a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of interest on the Notes and interest on its other indebtedness, thereby
reducing the funds available to the Company for other purposes; (ii)
indebtedness under the Amended Revolving Credit Facility and Term Loan B is at
variable rates of interest, which causes the Company to be vulnerable to
increases in interest rates; (iii) the Company is substantially more leveraged
than certain of its competitors, which might place the Company at a competitive
disadvantage; (iv) the Company may be hindered in its ability to adjust rapidly
to changing market conditions; (v) the Company's substantial degree of leverage
could make it more vulnerable in the event of a downturn in general economic
condition or other adverse events in its business; and (vi) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired.
Recent Acquisitions. On August 1, 2000, the Company purchased the
assets of the McGraw Publishing Company, which included a group of seven weekly
newspapers.
Safe Harbor Provision. This Form 10-Q contains "forward-looking
statements," which can be identified by the use of forward-looking terminology,
such as "may," "intend," "will," "expect," "anticipate," "estimate," "seek," or
"continue" or the negative thereof or other variations thereon or comparable
terminology. In particular, any statements, expressed or implied, concerning the
future operating results or the ability to generate revenues, income or cash
flow are forward-looking statements. Although LGP believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been accurate. LGP disclaims
any obligation to update any such forward-looking statements or to publicly
announce results of any revisions to any of the forward-looking statements
contained in this Form 10-Q to reflect future events or developments. All
forward-looking statements are expressly qualified by such cautionary
statements. Actual results could differ materially and adversely from the
forward-looking statements as a result of, among other things, competition in
the Company's markets, availability of attractive acquisition opportunities,
price and availability of newsprint, the Company's significant use of leverage,
general economic conditions and environmental matters.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
On April 18, 2000, the Company entered into an agreement to amend and restate
its $175.0 million credit facility. The amendment and restatement extended the
maturity date of the revolving credit facility ("Amended Revolving Credit
Facility") from January 2003 to March 2005, and included the issuance of a
$100.0 million Term Loan B. The Term Loan B matures in March 2007, and will
require annual principal payments of $0.5 million in 2000, $1.0 million from
2001 through 2004, $36.1 million in 2005, $47.5 million in 2006, and $11.9
million in 2007. The Term Loan B and the Amended Revolving Credit Facility bear
interest at the Company's option equal to the Base Rate (as defined in the
Amended Revolving Credit Facility or the Eurodollar Rate (as defined in the
Amended Revolving Credit Facility) plus a margin that varies based upon a
ratio set forth in the amended and restated credit agreement. There is an
individual margin for the Term Loan B and the Amended Revolving Credit Facility,
the Company pays a fee equal to the Applicable Margin or Eurodollar advances (as
defined in the amended and restated credit agreement) per annum on the aggregate
amount of outstanding letters of credit. The Company also pays a fee on the
unused portion of the Amended Revolving Credit Facility. No principal payments
are due on the Amended Revolving Credit Facility until the maturity date.
At September 30, 2000, the Company had borrowed $46.0 million under the Amended
Revolving Credit Facility.
During 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, which is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes a
comprehensive standard for the recognition and measurement of derivative
instruments and hedging activities. The Company does not expect the adoption of
the new standard to have a material effect on its financial position,
liquidity, or results of operations.
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PART II
ITEM 2. Changes in Securities and Use of Proceeds.
None
ITEM 4. Submission of Matters to a Vote of Securities Holders.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2) Financial Data
(b) Reports on form 8-K
On July 14, 2000, the Company filed Form 8-K to report its acquisition of
assets, including the real property of IMG Holdings, Inc, a Delaware
Corporation; ("IMGH") Independent Media Holdings, Inc., a Delaware Corporation
and wholly owned subsidiary of IMGH ("IMH"); and Independent Media Group, Inc.,
a Wisconsin Corporation and wholly owned subsidiary of IMH. On September 13,
2000, the Company filed Form 8-K/A on which it included the required financial
statements in connection with the acquisition of assets and real property.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to by signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY GROUP PUBLISHING, INC.
/s/ KENNETH L. SEROTA
--------------------------------------
Kenneth L. Serota
President and Chief Executive Officer
/s/ KEVIN O'SHEA
--------------------------------------
Kevin O'Shea
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
Date: November 14, 2000
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