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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 333-46957
LIBERTY GROUP PUBLISHING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4197635
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3000 DUNDEE ROAD, SUITE 203 60062
NORTHBROOK, ILLINOIS (Zip Code)
(Address of Principal Offices)
Registrant's telephone number, including area code: (847) 272-2244
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of March 31, 2003 was 2,158,833, all of which is owned by
affiliates of the registrant. There is no public market for the common stock.
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TABLE OF CONTENTS
PART I
Disclosure Regarding Forward-Looking Statements.....................................................................1
Item 1. Business..................................................................................................1
Item 2. Properties................................................................................................6
Item 3. Legal Proceedings.........................................................................................6
Item 4. Submission of Matters to a Vote of Security Holders.......................................................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................................7
Item 6. Selected Financial Data...................................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................................20
Item 8. Financial Statements and Supplementary Data..............................................................20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................20
PART III
Item 10. Directors, Executive Officers and Other Key Employees of the Registrant..................................20
Item 11. Executive Compensation...................................................................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...........26
Item 13. Certain Relationships and Related Transactions...........................................................28
Item 14. Controls and Procedures..................................................................................29
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................................29
(a) 1. Consolidated Financial Statements....................................................................29
2. Financial Statement Schedules........................................................................30
(b) Reports on Form 8-K......................................................................................30
(c) The exhibits filed as a part of this report are listed in the following Exhibit Index....................30
i
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain "forward-looking
statements" (as defined in Section 21E of the Securities Exchange Act of 1934)
that reflect the Company's expectations regarding its future growth, results of
operations, performance and business prospects and opportunities. Words such as
"anticipates," "believes," "plans," "expects," "intends," "estimates" and
similar expressions have been used to identify these forward-looking statements,
but are not the exclusive means of identifying these statements. These
statements reflect the Company's current beliefs and expectations and are based
on information currently available to the Company. Accordingly, these statements
are subject to known and unknown risks, uncertainties and other factors that
could cause the Company's actual growth, results of operations, performance and
business prospects and opportunities to differ from those expressed in, or
implied by, these statements. As a result, no assurance can be given that the
Company's future growth, results of operations, performance and business
prospects and opportunities covered by such forward-looking statements will be
achieved. Such factors include, among others: (1) the Company's dependence on
local economies and vulnerability to general economic conditions; (2) the
Company's substantial indebtedness; (3) the Company's holding company structure;
(4) the Company's ability to implement its acquisition strategy; (5) the
Company's competitive business environment, which may reduce demand for
advertising; and (6) the Company's ability to attract and retain key employees.
For purposes of this annual report on Form 10-K, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. The Company is not obligated and has no intention to update or
revise these forward-looking statements to reflect new events, information or
circumstances.
ITEM 1. BUSINESS
OVERVIEW
Liberty Group Publishing, Inc. ("LGP" or "Registrant") is a Delaware
corporation formed on January 27, 1998 for purposes of acquiring a portion of
the daily and weekly newspapers owned by American Publishing Company or its
subsidiaries ("APC"), a wholly owned subsidiary of Hollinger International Inc.
("Hollinger"). LGP is a holding company for its wholly owned subsidiary, Liberty
Group Operating, Inc. ("Operating Company" or "LGO"). The consolidated financial
statements include the accounts of LGP and Operating Company and its
consolidated subsidiaries (the "Company").
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 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. 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 non-metropolitan markets. The Company's
newspapers generally face limited competition as a result of operating in
markets that are distantly located from large metropolitan areas and that can
typically support only one primary newspaper, with the exception of the
Company's publications in the Chicago suburban market. The Company has
strategically clustered its publications in geographically diverse,
non-metropolitan markets in the Midwest, Northeast and Western United States and
in the Chicago suburban market, which limits its exposure to economic conditions
in any single market or region.
The Company's portfolio of publications is comprised of 66 paid daily
newspapers and 126 paid non-daily newspapers. In addition, the Company publishes
110 free circulation and "total market coverage," or TMC, publications with
limited or no news or editorial content that it distributes free of charge and
that generally provide 100% penetration in their areas of distribution. The
Company believes that its publications are generally the most cost-effective
method for its advertisers to reach substantially all of the households in their
markets. Unlike large metropolitan newspapers, the Company derives a majority of
its revenues from local display advertising rather than classified and national
advertising, which are generally more sensitive to economic conditions.
INDUSTRY OVERVIEW
Newspaper publishing is the oldest and largest segment of the media
industry. Although there are several major national newspaper companies, the
Company believes that the newspaper publishing industry in the United States is
highly fragmented, with approximately 74% of daily and non-daily newspapers
having circulations of less than 10,000. Most of these smaller publications are
owned and operated by individuals whose newspaper holdings and financial
resources are generally limited. Further, the Company believes that relatively
few daily newspapers have been established in recent years due to the high cost
of starting a daily newspaper operation and building a franchise identity.
Moreover, most community markets cannot sustain more than one newspaper.
The operating strategy of many newspaper companies has been impacted by the
widespread use of the internet. Most newspapers have internet editions that
deliver the same news and editorial content at no cost to registered users.
However, the Company believes that most customers prefer their newspapers in
printed form.
Advertising revenue is the largest component of a newspaper's total
revenues. Advertising rates at newspapers, free circulars and TMC publications
are usually based on market size, circulation, penetration, demographics and
alternative advertising media available in the marketplace. Readers of
newspapers tend to be more highly educated and have higher incomes than
non-newspaper readers, making the newspaper industry very appealing to
advertisers attempting to reach this demographic group. The Company believes
that newspapers are the most effective medium for retail advertising, which
emphasizes the price of goods, in contrast to broadcast and cable television,
which are generally used for image advertising, or radio, which is usually used
to recall images or brands in the minds of listeners. The Company also believes
that metropolitan and community newspapers represent the dominant medium for
local advertising due to the importance of the information such newspapers
contain in the communities they serve. While circulation revenue is not as
significant as advertising revenue, circulation trends can affect the decisions
of advertisers and advertising rates.
Newspaper advertising revenues are cyclical and are generally affected by
changes in national and regional economic conditions. Classified advertising,
which generally comprises approximately 40% of U.S. newspaper advertising
revenues as a whole, is the most sensitive to economic cycles because it is
driven primarily by the demand for employment, real estate transactions and
automotive sales.
COMPETITIVE STRENGTHS
LOCAL MARKET FOCUS. As a result of the Company's strategic focus on local
content that emphasizes local names and faces, including youth sports, community
events, business, politics and entertainment, the Company believes that its
newspapers generate reader loyalty, perpetuate their franchise value and
represent the most effective means for local advertisers to reach potential
customers. Each of the Company's publications is tailored to its market to
provide local content that radio, television and large metropolitan newspapers
are generally unable to provide on a cost-effective basis because of their
broader geographic coverage. The Company's publications have several advantages
over metropolitan daily publications, including a lower cost structure, the
ability to publish only on their most profitable days (e.g., midweek and one
weekend day) and the ability to limit expensive investments in wire services and
syndicated feature material. In addition, the Company has relatively low
exposure to fluctuations in newsprint prices due to much lower page counts than
large metropolitan newspapers, with newsprint expense related to its
publications comprising 5.0% of its total advertising and circulation revenues
in 2002.
The Company has a broad base of local advertisers, with 73.9% of its
advertising revenues derived from display advertising in 2002. In that period,
no single display advertiser accounted for more than 1% of its total revenues.
The Company believes that local display advertising revenues at its publications
tend to be more stable than the advertising revenues of large metropolitan
newspapers because local businesses generally have fewer effective advertising
channels through which to reach their customers. The Company also is
significantly less reliant than large metropolitan newspapers upon classified
advertising, particularly "help wanted," real estate and automotive sections,
and national advertising, which are generally more sensitive to economic
conditions.
ATTRACTIVE COST STRUCTURE THROUGH STRATEGIC REGIONAL CLUSTERING AND STRICT
COST CONTROLS. The Company has acquired and assembled a network of strategically
clustered newspapers in geographically diverse regions. Strategic clustering
enables it to realize operating efficiencies and economic synergies, such as the
sharing of management, accounting and production functions within clusters. The
Company believes that strategic clustering enables its newspapers to generate
higher operating margins than they would otherwise be able to achieve on a
stand-alone basis. In addition, the Company has increased operating cash flows
at acquired and existing newspapers through cost reductions, including labor,
page width and page count reductions, as well as the implementation of
revenue-generation and expense-control best practices throughout the Company.
BUSINESS STRATEGY
DRIVE REVENUE GROWTH AT EXISTING PROPERTIES BY EXPANDING THE COMPANY'S
ADVERTISING BASE. The Company continuously seeks to utilize its dominant
distribution capability in the markets the Company serves to expand its
advertising base by targeting new advertisers for its local newspapers and
related publications and introducing new products that attract businesses that
do not typically advertise in its newspapers. These products include shopping
and visitors' guides and niche publications and inserts covering subjects such
as children and parenting, employment, health, senior living and real estate,
that are of interest to residents of particular
2
geographic areas and members of particular demographic groups. In addition, the
Company shares advertising concepts throughout its network of publications,
enabling its advertising managers and publishers to implement advertising
products and sales strategies that have already been successful in other markets
that the Company serves.
CONTINUE TO IMPROVE MARGINS THROUGH STRATEGIC REGIONAL CLUSTERING AND STRICT
COST CONTROLS. The Company has achieved significant operating efficiencies
within its network of strategically clustered publications, and the Company
believes that, as the Company continues to acquire and integrate additional
publications into its network, the Company will be able to realize incremental
operating efficiencies and synergies that will position it to continue to
improve its operating margins. The Company intends to continue to focus on
controlling costs, with a particular emphasis on managing staffing requirements,
leveraging production equipment to improve operating efficiencies and reducing
newsprint consumption.
OVERVIEW OF OPERATIONS
Strategic Regional Clusters
The Company has acquired, and intends to continue to acquire, community
publications that the Company can integrate into its network of existing
clusters or that can serve as the basis for creating new clusters. Strategic
clustering of its publications enables the Company to realize operating
efficiencies and economic synergies, such as the sharing of management,
accounting and production functions within clusters. Strategic clustering also
enables it to maximize revenues through the cross-selling of advertising among
contiguous newspaper markets. As a result of strategic clustering, the Company
believes that its newspapers are able to obtain higher operating margins than
they would otherwise be able to achieve on a stand-alone basis.
The following chart sets forth information for its publications by strategic
regional clusters as of December 31, 2002. For purposes of the chart, clusters
consist of five or more publications within a reasonably close proximity to each
other.
NUMBER OF NEWSPAPERS AND OTHER PUBLICATIONS
-------------------------------------------------------
FREE
PAID PAID CIRCULATION/TMC
STRATEGIC REGIONAL CLUSTERS DAILY NON-DAILY PUBLICATIONS TOTAL
-------------------------------------------------------- ----------- ----------- --------------- ---------
Baton Rouge region (Louisiana).......................... 0 4 3 7
Grand Forks region (North Dakota/Minnesota)............. 2 2 2 6
Honesdale region (Pennsylvania)......................... 1 2 2 5
Iowa.................................................... 1 4 4 9
Kansas City region (Kansas)............................. 2 4 3 9
Lake of the Ozarks region (Missouri).................... 3 3 9 15
Northern Missouri....................................... 5 1 6 12
Southern Illinois....................................... 6 9 5 20
Southern Michigan....................................... 3 5 7 15
Southwestern Louisiana.................................. 3 1 2 6
Southwestern Minnesota.................................. 0 7 4 11
Southwestern Missouri................................... 2 3 6 11
Southwestern New York/Northwestern Pennsylvania......... 4 3 12 19
Suburban Chicago........................................ 0 38 0 38
Twin Falls region (Idaho)............................... 2 6 2 10
Western Illinois........................................ 5 5 9 19
Wichita region (Kansas)................................. 6 4 6 16
In 2002, no single strategic regional cluster contributed more than 15% of
the Company's total revenues.
Advertising
Advertising revenue is the largest component of the Company's total
revenues, accounting for approximately 77.5%, 75.8% and 76.2% of its total
revenues in 2000, 2001 and 2002, respectively. The Company derives its
advertising revenues from display (local department stores, local accounts at
national department stores, specialty shops and other retailers), national
(national advertising accounts) and classified advertising (employment,
automotive, real estate and personals). Its advertising rate structures vary
among its publications and are a function of various factors, including local
market conditions, competition, circulation, readership and demographics.
3
Substantially all of the Company's advertising revenues are derived from a
diverse group of local retailers and classified advertisers. The Company
believes, based upon its operating experience, that its advertising revenues
tend to be more stable than the advertising revenues of large metropolitan
newspapers because its publications rely primarily on local advertising. Local
advertising has historically been more stable than national advertising because
local businesses generally have fewer effective advertising channels through
which to reach their customers. Moreover, the Company is less reliant than large
metropolitan newspapers upon classified advertising, particularly "help wanted,"
real estate and automotive sections, and national advertising, which are
generally more sensitive to economic conditions. The contribution of display,
national and classified advertising to its total advertising revenues for fiscal
years 2000, 2001 and 2002 were as follows:
YEAR ENDED
DECEMBER 31,
---------------------------
2000 2001 2002
------ ------ ------
Display........................... 70.5% 73.0% 73.9%
National.......................... 2.5 2.4 2.6
Classified........................ 27.0 24.6 23.5
------ ------ ------
Total advertising revenues... 100.0% 100.0% 100.0%
The Company does not rely upon any one company or industry for its
advertising revenues, which are derived from a variety of companies and
industries, and no single display advertiser represented more than 1% of its
total revenues in 2002. The Company's corporate management works with its local
newspaper management to approve advertising rates and with the advertising staff
of each local newspaper to develop marketing kits and presentations. A portion
of its publishers' compensation is based upon increased advertising revenues. In
addition, the Company shares advertising concepts throughout its network of
publications, enabling its advertising managers and publishers to leverage
advertising products and sales strategies that have already been successful in
other markets that the Company serves.
Circulation
While the Company's circulation revenue is not as significant as its
advertising revenue, circulation trends impact the decisions of advertisers and
advertising rates. Substantially all of its circulation revenues are derived
from home delivery sales of publications to subscribers and single copy sales
made through retailers and vending racks. In order to enhance its circulation
revenues and circulation trends, the Company has implemented quality
enhancements, such as: upgrading and expanding printing facilities and printing
presses; increasing the use of color and color photographs; improving graphic
design, including complete redesigns; developing creative and interactive
promotional campaigns and converting selected newspapers from afternoon to
morning publication.
Circulation revenue accounted for approximately 16.1%, 17.0% and 17.3% of
its total revenues in 2000, 2001 and 2002, respectively. A vast majority of 2002
circulation revenues were derived from subscription sales. The Company owns and
operates 66 paid daily publications that range in circulation from approximately
900 to 15,500, and 126 paid non-daily publications that range in circulation
from approximately 100 to 27,200. 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 marketing programs and
promotions to increase readership through both subscription and single copy
sales.
Job Printing
The Company operates 48 printing facilities. To the extent the Company has
excess press capacity at these facilities, the Company provides commercial
printing services to third parties, primarily other publishers who do not have a
printing press, on a competitive bid basis. The Company also prints other
commercial materials, including business cards and invitations, to produce
incremental revenue from existing equipment and personnel. Job printing and
other revenue accounted for approximately 6.3%, 7.2% and 6.5% of its total
revenues in 2000, 2001 and 2002, respectively.
Electronic Media
All of the Company's daily publications and certain of its weekly
publications have their own free-access websites. The Company's websites have a
consistent format and provide a selection of local and other news together with
classified advertising, feature articles and details of local events and
activities. The Company has also been able to expand the reach of its classified
advertisements, and increase its advertising revenues, by placing advertisements
on-line as well as in the newspapers. The Company
4
believes that its ability to self-promote its websites in its printed newspapers
as internet portals for the community and its focus on local content limits the
competitive threat to its core newspaper business from new media businesses.
Editorial
The Company's local paid daily and non-daily newspapers generally contain 8
to 14 pages with editorial content that emphasizes local news and topics of
interest to the communities that they serve, such as local business, politics,
entertainment and culture, as well as local youth, high school, college and
professional sports. National and world news stories are sourced from the
Associated Press. The Company's free circulation and TMC publications are
typically used as a vehicle for delivering pre-printed content and range from
limited to no editorial content.
The editorial staff at each of its newspapers typically consists of a
managing editor and several assistant editors and field reporters, who identify
and report the local news in their communities. As of December 31, 2002, the
Company employed approximately 530 editorial personnel that the Company believes
provide the most comprehensive local news coverage in the communities the
Company serves.
PRINTING AND DISTRIBUTION
The Company operates 48 printing and distribution facilities, including 31
facilities within its 17 strategic regional clusters. The production resources
located within each cluster are shared by the publications produced in each
region. On average, each of the Company's printing and distribution facilities
is responsible for producing six publications. Its newspapers are generally
fully paginated utilizing image-setter technology, which allows for design
flexibility and high-quality reproduction of color graphics. By clustering its
production resources, the Company is able to reduce the operating costs of its
newspapers while increasing the quality of its small market newspapers that
might not typically otherwise have access to higher quality production
facilities. Its consolidated printing and distribution facilities are generally
located within 60 miles of its newspapers.
The distribution of the Company's daily newspapers is typically outsourced
to independent, third-party distributors, who also distribute a majority of its
weekly and periodic publications. These distributors generally are independent
and locally based within each cluster. Some of the Company's TMC publications
and weekly publications are also delivered via U.S. mail.
NEWSPRINT
Newsprint represents one of the Company's largest costs of producing
newspapers. The Company has no long-term contracts to purchase newsprint. Its
newspapers purchase a portion of their newsprint directly from paper mills and
also make opportunistic spot market purchases within their geographic regions.
The Company believes that its purchasing policies have resulted in its
publications obtaining favorable newsprint prices. The Company incurred
newsprint expense related to its publications of approximately $11.3 million,
$12.6 million and $9.1 million in 2000, 2001, and 2002, respectively, net of
newsprint consumed by six related publications whose assets were sold on January
7, 2002. The Company has relatively low exposure to fluctuations in newsprint
prices due to much lower page counts than large metropolitan newspapers.
Newsprint expense related to its publications as a percentage of its total
advertising and circulation revenues for 2000, 2001 and 2002 was 6.4%, 7.0% and
5.0%, respectively, net of newsprint consumed by six related publications whose
assets were sold on January 7, 2002. The Company also incurred newsprint expense
related to job printing and other of approximately $3.5 million, $4.5 million
and $3.0 million in 2000, 2001 and 2002, respectively.
Historically, the price of newsprint has been cyclical and volatile,
reaching approximately $682 per short ton in 1996 and dropping to almost $409
per short ton in 1993. The average price of newsprint for December 2002, as
reported by Pulp & Paper Week, was approximately $436 per short ton. The Company
seeks to manage the effects of increases in prices of newsprint through a
combination of technology improvements, page width and page count reductions,
inventory management and advertising and circulation price increases.
SEASONALITY
The Company's revenues, like those of other newspaper companies, tend to
follow a distinct and recurring seasonal pattern, with high advertising revenues
in months containing significant events or holidays. Accordingly, due to fewer
holidays and more inclement weather as compared to other quarters, the Company's
first fiscal quarter is historically its weakest revenue quarter of the year.
Correspondingly, the Company's fourth fiscal quarter is historically its
strongest revenue quarter because it includes heavy holiday season advertising.
The Company expects that seasonal fluctuations will continue to affect its
results of operations in future periods.
5
COMPETITION
Each of the Company's newspapers competes to varying degrees for advertising
and circulation revenue with local, regional and national newspapers, shoppers,
magazines, radio, broadcast and cable television, direct mail, the internet and
other media sources. Competition for newspaper advertising revenues is based
largely on advertising results, advertising rates, readership demographics and
circulation levels. Competition for circulation revenue is generally based on
the content of the newspaper, its price and editorial quality.
The Company's newspapers are the dominant sources for local news,
announcements and other information of interest to the communities that the
Company serves. Its publications generally have strong name recognition in their
markets and 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, with the exception of its publications in the Chicago
suburban market. However, as with most suburban and smaller daily newspapers,
some circulation competition exists from large daily newspapers published in
nearby metropolitan areas. The Company believes that these larger newspapers
generally do not compete in a meaningful way for local advertising revenues. The
Company provides its readers with community-specific content, which is generally
not available on a consistent basis in nearby metropolitan newspapers. Local
advertisers, especially businesses located within a small community, typically
target advertising towards customers living or working within their own
communities. The Company believes that its daily newspapers generally capture
the largest share of local advertising as a result of its direct and focused
coverage of the market and its cost-effective advertising rates relative to the
more broadly circulated metropolitan newspapers.
Although alternative media may be available, the Company believes that local
advertisers generally regard newspapers and free circulation and TMC
publications as the most cost-effective method of advertising time-sensitive
promotions and price-specific advertisements, as compared with broadcast and
cable television, which are generally used to advertise image, or radio, which
is usually used to recall images or brands in the minds of listeners. The
Company has, however, over the past several years faced increased competition
for classified advertising from online advertising as the use of the internet
has increased. From time to time, the Company competes with companies that are
larger and/or have greater financial and distribution resources than the Company
does.
EMPLOYEES
The Company employs approximately 2,200 full-time employees and
approximately 1,200 part-time employees. Approximately 2% of its employees
belong to labor unions. The Company has not experienced a strike or work
stoppage at any of its newspapers during the past five years, and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company has 143 operating and production facilities for its publications
in the United States. The Company owns 107 of these facilities and leases the
remaining 36 for terms ranging from one to five years. These facilities range in
size from approximately 1,000 to 55,000 square feet. The Company's executive
offices are located in Northbrook, Illinois, where the Company leases
approximately 4,900 square feet under a lease terminating in 2004. The Company
does not believe any individual property is material to its financial condition
or results of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings relating to
claims arising out of its operations in the ordinary course of business. The
Company is not party to any legal proceedings that, in the opinion of
management, is reasonably expected to have a material adverse effect on its
business, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
There is no public market for the Common Stock. As set forth in Item 12.
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters," 1,964,605 shares of Common Stock (91% of the total shares
outstanding) are owned by Green Equity Investors II, L.P. ("GEI II") and Green
Equity Investors III, L.P. ("GEI III"). The remaining shares of the Common Stock
are owned by certain officers and other management personnel of the Company. As
of March 31, 2003, there were 13 holders of Common Stock.
DIVIDENDS
LGP, which did not pay any dividends on the Common Stock in 2001 or 2002, 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. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2002
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN FIRST COLUMN)
------------- -------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security
holders................ 25,700 $5.75 23,780
Equity compensation plans
not approved by
security holders....... -- -- --
------ ----- ------
Total...................... 25,700 $5.75 23,780
====== ----- ------
There were no stock option grants during 2002. See Footnote 17 "Stock Option
Plans" in the Notes to the Consolidated Financial Statements for further
discussion.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company. During January 2002, the Company disposed of the assets of six related
publications that the Company acquired in 1999 and, accordingly, the historical
operating results of these publications have been reclassified and presented
below as a discontinued operation. Certain other historical amounts have been
reclassified to conform to the 2002 presentation, such as the transfer of
inserting expense and certain postage and delivery costs from selling, general
and administrative to operating costs. The data presented below should be read
in conjunction with the consolidated financial statements, including the notes
thereto, and with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Annual Report.
7
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising ...................... $ 82,570 $ 120,315 $ 145,787 $ 147,977 $ 146,918
Circulation ...................... 22,844 27,052 30,329 33,228 33,353
Job printing and other ........... 7,117 12,309 11,887 13,995 12,560
----------- ----------- ----------- ----------- -----------
Total revenues ...................... 112,531 159,676 188,003 195,200 192,831
Operating costs and expenses:
Operating costs .................. 53,293 76,179 90,541 98,607 90,390
Selling, general and
administrative ................... 28,986 42,689 52,799 53,764 53,526
Depreciation and amortization .... 11,917 16,496 19,193 21,315 17,027
----------- ----------- ----------- ----------- -----------
Income from continuing operations ... 18,335 24,312 25,470 21,514 31,888
Interest expense and amortization of
deferred financing costs ......... 25,234 32,313 40,229 40,710 35,507
Impairment of other assets .......... -- -- -- -- 223
Net gain on exchange and
disposition of properties ........ -- 6,197 -- -- --
----------- ----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes,
extraordinary item and
cumulative effect of change in
accounting principle ............. (6,899) (1,804) (14,759) (19,196) (3,842)
Income taxes ........................ -- 295 491 2,004 1,648
----------- ----------- ----------- ----------- -----------
Loss from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle ............. (6,899) (2,099) (15,250) (21,200) (5,490)
Income from discontinued
operations, net of tax ............ -- 513 1,817 1,508 4,269
Extraordinary gain on insurance
proceeds ......................... -- 485 -- -- --
Cumulative effect of change in
accounting principle, net of tax . -- -- -- -- (1,449)
----------- ----------- ----------- ----------- -----------
Net loss ............................ (6,899) (1,101) (13,433) (19,692) (2,670)
Dividends on preferred stock ........ (11,152) (13,595) (17,018) (19,989) (22,622)
----------- ----------- ----------- ----------- -----------
Net loss available
to common stockholders ........... $ (18,051) $ (14,696) $ (30,451) $ (39,681) $ (25,292)
=========== =========== =========== =========== ===========
Basic and diluted weighted-average .. 1,600,000 1,595,923 1,964,876 2,171,381 2,158,833
shares outstanding
Loss from continuing operations
before accounting change and
extraordinary gain ................ $ (11.28) $ (9.83) $ (16.42) $ (18.97) $ (13.02)
Net loss available to common
stockholders per share ............ $ (11.28) $ (9.21) $ (15.50) $ (18.27) $ (11.71)
=========== =========== =========== =========== ===========
STATEMENT OF CASH FLOWS DATA:
Capital expenditures ................ $ 2,232 $ 5,687 $ 9,654 $ 2,715 $ 2,496
Net cash provided by
operating activities ............. 21,865 8,499 15,734 12,925 24,224
Net cash provided by (used in)
investing activities ............. (388,678) (60,509) (92,092) (3,330) 23,954
Net cash provided by (used in)
financing activities ............. 366,386 52,845 75,535 (9,157) (47,956)
OTHER DATA (UNAUDITED):
EBITDA(1) ........................... $ 30,252 $ 40,808 $ 44,663 $ 42,829 $ 48,915
8
AS OF DECEMBER 31,
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 1,025 $ 1,860 $ 1,036 $ 1,474 $ 1,696
Total assets ........................... 410,068 479,160 563,501 543,902 506,325
Total long-term obligations
including current maturities
(excluding deferred income taxes) ... 283,936 344,231 402,746 402,689 364,153
Total mandatorily redeemable
preferred stock .................... 105,152 118,747 158,080 178,068 200,690
Stockholders' deficit .................. (10,392) (25,087) (48,026) (87,661) (112,936)
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, which for the Company is income from continuing operations
plus depreciation and amortization. EBITDA is not a measurement of financial
performance under accounting principles generally accepted in the United
States of America, or GAAP, and should not be considered in isolation or as
an alternative to income from operations, net income (loss), cash flows from
operating activities or any other measure of performance or liquidity
derived in accordance with GAAP. EBITDA is presented because the Company
believes it is an indicative measure of its operating performance and its
ability to meet its debt service requirements and is used by investors and
analysts to evaluate companies in its industry as a supplement to GAAP
measures.
Not all companies calculate EBITDA using the same methods; therefore, the
EBITDA figures set forth herein may not be comparable to EBITDA reported by
other companies. A substantial portion of the Company's EBITDA must be
dedicated to the payment of interest on its outstanding indebtedness and to
service other commitments, thereby reducing the funds available to the
Company for other purposes. Accordingly, EBITDA does not represent an amount
of funds that is available for management's discretionary use. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(IN THOUSANDS)
Income from continuing operations ... $18,335 $24,312 $25,470 $21,514 $31,888
Depreciation and amortization ....... 11,917 16,496 19,193 21,315 17,027
------- ------- ------- ------- -------
EBITDA .......................... $30,252 $40,808 $44,663 $42,829 $48,915
======= ======= ======= ======= =======
ITEM 7. 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. The discussion
and analysis below includes certain "forward-looking statements" (as such terms
are defined in Section 21E of the Securities Exchange Act of 1934) pertaining
to, among other things, competition in the Company's markets, availability of
adequate acquisition opportunities, price and availability of newsprint,
significant use of leverage, general economic conditions and environmental
matters. These statements are based on the beliefs, assumptions made by, and
information currently available to, the Company's management. The Company's
actual growth, results of operations, performance and business prospects and
opportunities in 2003 and beyond could differ materially from those expressed
in, or implied by, such forward-looking statements. See Part I. "Disclosure
Regarding Forward-Looking Statements" for certain factors that could cause or
contribute to such material differences.
OVERVIEW
Liberty Group Publishing, Inc. ("LGP" or "Registrant") is a Delaware
corporation formed on January 27, 1998 for purposes of acquiring a portion of
the daily and weekly newspapers owned by American Publishing Company or its
subsidiaries ("APC"), a wholly owned subsidiary of Hollinger International Inc.
("Hollinger"). LGP is a holding company for its wholly owned subsidiary, Liberty
Group Operating, Inc. ("Operating Company" or "LGO"). The consolidated financial
statements include the accounts of LGP and Operating Company and its
consolidated subsidiaries (the "Company").
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 302 publications located in 17
states that reach approximately 2.37 million people on a weekly basis. 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 non-metropolitan markets. The Company generates
9
revenues from advertising, circulation and job printing. Advertising revenue is
recognized upon publication of the advertisements. Circulation revenue, which is
billed to customers at the beginning of the subscription period, is recognized
on a straight-line basis over the term of the related subscription. The revenue
for job printing is recognized upon delivery. The Company's operating costs
consist primarily of newsprint, labor and delivery costs. The Company's selling,
general and administrative expenses consist primarily of labor costs.
The Company acquired 43 publications, in 12 transactions, for a total
acquisition cost of $84.5 million during 2000. The Company has not acquired
any significant publications since December 2000.
On January 7, 2002, the Company disposed of the assets of six related
publications (acquired in 1999) in one transaction for proceeds of $26.5 million
(the "Disposition"). Accordingly, amounts in the consolidated statements of
operations for all periods presented have been reclassified to reflect the
operating results of these publications as discontinued operations.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Total Revenues. Total revenues for the year ended December 31, 2002
decreased by $2.4 million, or 1.2%, to $192.8 million. The decrease in total
revenues for 2002 was comprised of a $1.1 million, or 0.7%, decrease in
advertising revenue, a $0.1 million, or 0.4%, increase in circulation revenue
and a $1.4 million, or 10.3%, decrease in job printing and other revenue. The
advertising and printing revenue decrease was primarily driven by a decrease in
classified recruitment and printing revenues of $2.2 million and $1.0 million,
respectively, in the Chicago suburban market, as well as the discontinuation of
two lower margin print jobs in the Company's community markets, partially offset
by an increase in preprint and national advertising revenues of $0.9 million and
$0.2 million, respectively.
Operating Costs. Operating costs for 2002 were $90.4 million, or 46.9% of
total revenues, which was a decrease of $8.2 million over the year ended
December 31, 2001, when operating costs were $98.6 million, or 50.5% of total
revenues. This decrease was primarily due to a decrease in newsprint costs of
$5.0 million, delivery costs of $1.1 million and labor costs of $1.5 million
resulting from a reduction in operating staff.
Selling, General and Administrative. Selling, general and administrative
expenses for 2002 decreased by $0.2 million to $53.5 million, or 27.8% of total
revenues, from $53.8 million for 2001 when selling, general and administrative
expenses were 27.5% of total revenues. The decrease was primarily due to a
decrease in labor costs of $1.6 million resulting from reductions in
administrative staff, partially offset by higher performance-based incentive
compensation of $1.4 million.
Depreciation and Amortization. As of January 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets," which replaces the requirement to amortize intangible assets
with indefinite lives and goodwill with a requirement for an annual impairment
test. SFAS No. 142 also establishes requirements for identifiable intangible
assets. The transition provisions of SFAS No. 142 require that useful lives of
previously recognized intangible assets be
10
reassessed and the remaining amortization periods adjusted accordingly. Prior to
the adoption of SFAS No. 142, advertiser and subscriber relationship intangible
assets were amortized over estimated remaining useful lives of 40 and 33 years,
respectively. The Company has concluded that, based upon current economic
conditions and its current pricing strategies, the remaining useful lives for
advertiser and subscriber relationship intangible assets are 30 and 20 years,
respectively, and the amortization periods have been adjusted accordingly, with
effect from January 1, 2002. Non-compete agreements are amortized over periods
of up to 10 years depending on the specifics of the agreement. The change in
useful lives had no impact on cash flow.
Depreciation and amortization expense for 2002 decreased by $4.3 million to
$17.0 million from $21.3 million for 2001 as a result of the adoption of SFAS
No. 142. For 2002, the Company recorded $11.9 million in amortization of
intangible assets compared with $15.3 million for 2001. Upon adoption of SFAS
No. 142, the Company ceased amortization of goodwill. The Company also ceased
amortization of its mastheads because it determined that the useful life of its
mastheads was indefinite. Had SFAS No. 142 been adopted on January 1, 2001,
income from continuing operations before income taxes and cumulative effect of
change in accounting principle for 2001 would have been increased by $5.7
million had goodwill and mastheads not been amortized and reduced by $1.9
million due to the change in useful lives of advertiser and subscriber
relationship intangible assets.
Income from Continuing Operations. Income from continuing operations
increased by $10.4 million from $21.5 million, or 11.0% of total revenues, for
2001 to $31.9 million, or 16.5% of total revenues, for 2002. The increase was
primarily driven by decreases in operating costs, selling, general and
administration expenses and amortization expense, partially offset by lower
revenues.
EBITDA. EBITDA for 2002 increased by $6.1 million to $48.9 million, from
$42.8 million for 2001. The increase was primarily driven by lower newsprint,
delivery and labor costs, partially offset by lower revenues, as discussed
above. EBITDA as a percentage of total revenues increased from 21.9% to 25.4%.
EBITDA is not a measurement of financial performance under accounting principles
generally accepted in the United States of America, or GAAP, and should not be
considered in isolation or as an alternative to income from operations, net
income (loss), cash flows from operating activities or any other measure of
performance or liquidity derived in accordance with GAAP. EBITDA is presented
because the Company believes it is an indicative measure of its operating
performance and its ability to meet its debt service requirements and is used by
investors and analysts to evaluate companies in its industry as a supplement to
GAAP measures.
Not all companies calculate EBITDA using the same methods; therefore,
the EBITDA figures set forth herein may not be comparable to EBITDA reported by
other companies. A substantial portion of the Company's EBITDA must be dedicated
to the payment of interest on its outstanding indebtedness and to service other
commitments, thereby reducing the funds available to the Company for other
purposes. Accordingly, EBITDA does not represent an amount of funds that is
available for management's discretionary use.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(IN THOUSANDS)
Income from continuing operations ... $18,335 $24,312 $25,470 $21,514 $31,888
Depreciation and amortization ....... 11,917 16,496 19,193 21,315 17,027
------- ------- ------- ------- -------
EBITDA .......................... $30,252 $40,808 $44,663 $42,829 $48,915
======= ======= ======= ======= =======
Interest Expense. Interest expense (including amortization of deferred
financing costs) decreased by $5.2 million to $35.5 million for 2002 from $40.7
million for 2001. The decrease in interest expense was due to the reduction of
indebtedness resulting from the application of proceeds from the Disposition and
lower interest rates.
Income Tax Expense. Income tax expense for 2002 decreased by $0.4 million to
$1.6 million from $2.0 million for 2001. The decrease in income tax expense was
due to lower deferred federal and lower current state and local income tax
expense.
Income from Discontinued Operations. Income from discontinued operations was
$4.3 million for 2002 compared to $1.5 million for 2001. On January 7, 2002, the
Company disposed of the assets of six related publications (acquired in 1999)
for proceeds of $26.5 million, resulting in a pre-tax gain of $7.0 million and
an after-tax gain of $4.3 million.
Cumulative Effect of Change in Accounting Principle. Pursuant to the
adoption of SFAS No. 142, an initial impairment test of properties was performed
in the first quarter of 2002. As a result of this test, it was determined that
the fair values of five properties
11
were less than the net book value of the Company's goodwill and mastheads for
such properties on January 1, 2002. As a result, an after-tax goodwill and
masthead impairment loss of $1.4 million, or $2.4 million pre-tax, was recorded
in 2002 as a cumulative effect of change in accounting principle.
Net Loss. For 2002, the Company recognized a net loss of $(2.7) million
compared to a net loss of $(19.7) million for 2001. The $17.0 million decrease
in net loss was primarily attributable to an after-tax gain of $4.3 million on
the Disposition, lower amortization expense resulting from the adoption of SFAS
No. 142 and lower newsprint, labor, delivery and interest costs, partially
offset by lower revenues and the cumulative effect of change in accounting
principle related to goodwill and masthead impairment losses, as previously
discussed.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total Revenues. Total revenues for the year ended December 31, 2001
increased by $7.2 million, or 3.8%, to $195.2 million. The increase in total
revenues for 2001 was comprised of a $2.2 million, or 1.5%, increase in
advertising revenue, a $2.9 million, or 9.6%, increase in circulation revenue,
and a $2.1 million, or 17.7%, increase in job printing and other revenue. The
increase in revenues was primarily due to revenue from publications acquired in
2000 of $12.9 million and same-property increases in circulation of $0.1
million, partially offset by decreases in same-property printing and advertising
revenue of $0.7 million and $5.3 million, respectively.
Operating Costs. Operating costs for 2001 were $98.6 million, or 50.5% of
total revenues, which was an increase of $8.1 million over the year ended
December 31, 2000 when operating costs were $90.5 million, or 48.2% of total
revenues. The increase in operating costs as a percentage of total revenues for
2001 was primarily due to an increase in same-property delivery and newsprint
costs of $0.2 million and $0.1 million, respectively, and lower revenues,
partially offset by a decrease in labor costs of $0.1 million.
Selling, General and Administrative. Selling, general and administrative
expenses for 2001 increased by $1.0 million to $53.8 million, or 27.5% of total
revenues, from $52.8 million for 2000 when expenses were 28.1% of total
revenues.
Depreciation and Amortization. Depreciation and amortization expense for
2001 increased by $2.1 million to $21.3 million, from $19.2 million for 2000.
The increase was due to depreciation of assets acquired in 2000, depreciation on
capital expenditures made in 2001, and a full year of amortization of
intangibles from 2000 acquisitions.
Income from Continuing Operations. Income from continuing operations
decreased by $4.0 million from $25.5 million, or 13.5% of total revenues, for
2000 to $21.5 million, or 11.0% of total revenues, for 2001. The decrease was
primarily driven by a decrease in same-property advertising revenue, higher
newsprint and delivery costs, and higher depreciation and amortization expense
partially offset by lower labor costs, as previously discussed.
EBITDA. EBITDA for 2001 decreased to $42.8 million from $44.7 million for
2000. The decrease was primarily driven by a decrease in same-property
advertising revenue and higher same-property delivery and newsprint costs,
partially offset by lower labor costs from reduced headcount, as previously
discussed. EBITDA as a percentage of total revenues declined from 23.8% to
21.9%.
Interest Expense. Interest expense (including amortization of deferred
financing costs) increased by $0.5 million to $40.7 million for 2001 from $40.2
million for 2000, primarily due to an increase in accretion on the Debentures
(as defined below) of $0.9 million, which was partially offset by lower interest
rates on borrowings under the Amended Credit Facility (as defined below).
Income Tax Expense. Income tax expense for 2001 increased by $1.5 million to
$2.0 million from $0.5 million for 2000. The increase in income tax expense was
due to higher state and local income taxes of $0.3 million and an increase in
federal income tax expense of $1.2 million. During the fourth quarter of 2001, a
portion of the Debentures was purchased in the open market at a discount by
related parties. This transaction resulted in a deemed cancellation and
reissuance of the Debentures for federal income tax purposes, and thus a portion
of the discount and interest relating to these Debentures may not be deductible
for federal income tax purposes.
Net Loss. For 2001, the Company recognized a net loss of $(19.7) million
compared to a net loss of $(13.4) million for 2000. The $6.3 million increase in
the net loss was due primarily to lower same-property advertising revenues,
higher newsprint and delivery costs as well as higher depreciation,
amortization, and interest expense, which was partially offset by lower labor
costs, as previously discussed.
12
CRITICAL ACCOUNTING POLICY DISCLOSURE
The preparation of financial statements in conformity with GAAP
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.
As of January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
requires an annual impairment test for goodwill and other intangible assets
with indefinite lives. The Company assesses impairment of goodwill and
mastheads by using multiples of recent and projected revenues and EBITDA for
individual properties to determine the fair value of the properties and deducts
the fair value of assets other than goodwill and mastheads to arrive at the
fair value of goodwill and mastheads. This amount is then compared to the
carrying value of goodwill and mastheads to determine if any impairment has
occurred. The multiples of revenues and EBITDA used to determine fair value are
based on the Company's experience in acquiring and selling properties and
multiples reflected in the purchase prices of recent sales transactions of
newspaper properties similar to those it owns. If there is a significant change
in such multiples, or a deterioration in revenue or EBITDA for any of the
properties, additional impairment losses may have to be recorded.
Upon adoption of SFAS No. 142, the Company ceased amortization of
goodwill. The Company also ceased amortization of its mastheads because it
determined that the useful life of its mastheads is indefinite.
The transition provisions of SFAS No. 142 require that the useful lives
of previously recognized intangible assets be reassessed and the remaining
amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142,
advertiser and subscriber relationship intangible assets were amortized over
estimated remaining useful lives of 40 and 33 years, respectively. The Company
has concluded that, based upon current economic conditions and its current
pricing strategies, the remaining useful lives for advertiser and subscriber
relationship intangible assets are 30 and 20 years, respectively, and the
amortization periods have been adjusted accordingly, with effect from January 1,
2002. The change in useful lives had no impact on the Company's cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities. Cash provided by operating activities
in 2000 was $15.7 million and decreased $2.8 million to $12.9 million in 2001.
The decrease in 2001 was primarily due to a decrease of $1.8 million in income
from continuing operations before depreciation and amortization and higher
borrowing levels. Cash provided by operating activities increased by
$11.3 million to $24.2 million in 2002. The increase in 2002 was primarily due
to an increase of $6.1 million in income from continuing operations before
depreciation and amortization and a decrease in interest rates and borrowing
levels.
Cash flows from investing activities. Cash used in investing activities was
$92.1 million in 2000 and $3.3 million in 2001 compared to cash provided from
investing activities of $24.0 million in 2002. The decrease of $88.8 million in
cash used from 2000 to 2001 relates primarily to a decrease in the number and
size of acquisitions from 2000 to 2001 in the amount of $83.9 million and a
decrease in capital expenditures of $6.9 million. The increase of $27.3 million
in cash provided from 2001 to 2002 was primarily due to $26.7 million of
proceeds from the Disposition and the sale of other assets, partially offset by
$2.5 million of capital expenditures. The Company's capital expenditures in 2002
consisted of the purchase of machinery, equipment, furniture and fixtures
relating to its publishing operations. The Company has no material commitments
for capital expenditures. The Company intends to continue to pursue its strategy
of opportunistically purchasing community newspapers in contiguous markets and
new markets.
Cash flows from financing activities. Cash provided by financing activities
was $75.5 million in 2000 compared to cash used in financing activities of $9.2
million in 2001 and $48.0 million in 2002. Cash provided by financing activities
in 2000 primarily resulted from the issuance of preferred stock of $20.7 million
and Common Stock of $7.4 million and borrowings under the Term Loan B of $98.5
million and the revolving credit facility of $71.8 million, partially offset by
the repayment of the previous revolving credit facility of $121.9 million. Net
cash used in financing activities in 2001 related to the repayment of a portion
of the revolving credit facility of $7.1 million and the Term Loan B and other
liabilities of $2.0 million. Net cash used in financing activities in 2002
reflects the reduction of indebtedness under the revolving credit facility of
$21.1 million, the Term Loan B of $26.0 million, and other liabilities of $0.9
million.
Amended credit facility. LGO is a party to an Amended and Restated Credit
Agreement, dated as of April 18, 2000, as further amended, with a syndicate of
financial institutions led by Citibank, N.A, with Citicorp USA, Inc. as
administrative agent (the "Amended Credit Facility"). The Amended Credit
Facility provides for a $100.0 million principal amount Term Loan B that matures
in March 2007 and a revolving credit facility with a $135.0 million aggregate
commitment amount available, including a $10.0 million sub-facility for letters
of credit, that matures in March 2005. The Amended Credit Facility is secured by
a first-priority security
13
interest in substantially all of the tangible and intangible assets of LGO, LGP
and LGP's other present and future direct and indirect subsidiaries.
Additionally, the loans under the Amended Credit Facility are guaranteed,
subject to specified limitations, by LGP and all of the future direct and
indirect subsidiaries of LGO and LGP. The Company is required to permanently
reduce the Term Loan B and/or revolving commitment amount with disposition
proceeds in excess of $1.5 million if the proceeds are not reinvested in
Permitted Acquisitions (as defined under the Amended Credit Facility) within 300
days of receipt of such proceeds. On October 23, 2002, LGO repaid $25.0 million
principal amount of the Term Loan B with the proceeds from the Disposition. The
proceeds of the Disposition were initially used to reduce the outstanding amount
under the revolving credit facility and Operating Company borrowed such amounts
under the revolving credit facility in connection with the repayment of the Term
Loan B.
The Term Loan B and the revolving credit facility bear interest, at LGO's
option, equal to the Alternate Base Rate for an ABR loan (as defined in the
Amended Credit Facility) or the Adjusted LIBO Rate for a eurodollar loan (as
defined in the Amended Credit Facility) plus an applicable margin. The
applicable margin is based on: (1) whether the loan is an ABR loan or eurodollar
loan; and (2) the ratio of (a) indebtedness of LGO and its subsidiaries that
requires interest to be paid in cash to (b) pro forma EBITDA for the 12-month
period then ended. LGO also pays an annual fee equal to the applicable
eurodollar margin for the aggregate amount of outstanding letters of credit.
Additionally, LGO pays a fee on the unused portion of the revolving credit
facility. No principal payments are due on the revolving credit facility until
the maturity date. As of December 31, 2002, the Term Loan B requires annual
principal payments of $0.7 million in 2003 and 2004, $26.9 million in 2005,
$35.3 million in 2006 and $8.8 million in 2007. The Amended Credit Facility
contains financial covenants that require LGO and LGP to satisfy specified
quarterly financial tests, including a maximum senior leverage ratio, a minimum
cash interest coverage ratio and a maximum leverage ratio. The Amended Credit
Facility also contains affirmative and negative covenants customarily found in
loan agreements for similar transactions.
LGP is highly leveraged and has indebtedness that is substantial in relation to
its stockholders' deficit, tangible equity and cash flow. Interest expense for
2002 was $35.5 million, including non-cash interest of $9.4 million with respect
to the Debentures and amortization of deferred financing costs of $2.3 million.
The degree to which LGP is leveraged could have important consequences,
including the following: (1) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of interest on Operating
Company's $180.0 million aggregate principal amount of 9 3/8% Senior
Subordinated Notes (the "Notes") due February 1, 2008 and interest on other
indebtedness, thereby reducing the funds available to the Company for other
purposes; (2) indebtedness under the Amended Credit Facility is at variable
rates of interest, which causes the Company to be vulnerable to increases in
interest rates; (3) the Company is more leveraged than certain competitors in
its industry, which might place the Company at a competitive disadvantage; (4)
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 (5) the Company's ability to obtain additional financing
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired.
As of December 31, 2002, approximately $94.3 million was outstanding under
the Amended Credit Facility, the aggregate principal amount of the Notes
outstanding was $180.0 million, and the accreted principal amount of $89.0
million aggregate principal amount of 11 5/8% Senior Discount Debentures (the
"Debentures") due February 1, 2009 was approximately $88.2 million.
Liquidity. The Company's principal sources of funds will be cash provided by
operating activities and borrowings under its revolving credit facility.
LGP has no operations of its own and accordingly has no independent means of
generating revenue. As a holding company, LGP's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its subsidiaries, in particular from Operating Company.
The indentures relating to the Notes, Debentures and the Amended Credit Facility
impose upon the Company certain financial and operating covenants, including,
among others, requirements that the Company satisfy certain quarterly financial
tests, including a maximum senior leverage ratio, a minimum cash interest
coverage ratio and a maximum leverage ratio, limitations on capital expenditures
and restrictions on the Company's ability to incur debt, pay dividends or take
certain other corporate actions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, all required capital expenditures
and pursue its business strategy for at least the next 12 months. On February 1,
2003, the Company's Debentures will reach an accreted value of $89.0 million,
which is equivalent to the principal amount of the Debentures at maturity. At
this time, the Company will begin accruing cash interest on the Debentures.
Semi-annual interest payments will subsequently commence on August 1, 2003 and
continue through the maturity date of February 1, 2009. The semi-annual payments
will increase the Company's annual cash interest obligations by $5.2 million in
2003, $10.3 million in each year from 2004 through 2008, and $5.2 million in
2009.
14
On June 3, 2002, the Company filed a registration statement with the
Securities and Exchange Commission on Form S-2 (as amended, the "Registration
Statement") with respect to an initial public offering of the Company's common
stock, par value $0.01 per share (the "Common Stock"). Reference is made to the
Registration Statement for information concerning the offering and transactions
contemplated by the Registration Statement, including the Company's intended use
of proceeds from the initial public offering and the impact of such intended use
on the Company's capital structure and indebtedness. There can be no assurance
that the Company will consummate the initial public offering of the Common
Stock.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of the Company's contractual cash
obligations as of December 31, 2002 (in thousands):
2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
9 3/8% senior subordinated notes ....... $ -- $ -- $ -- $ -- $ -- $180,000 $180,000
11 5/8% senior discount debentures(1)... -- -- -- -- -- 89,000 89,000
Term Loan B ............................ 744 744 26,862 35,320 8,830 -- 72,500
Revolving credit facility .............. -- -- 21,845 -- -- -- 21,845
Non-compete payments ................... 380 282 282 177 177 216 1,514
Real estate lease payments ............. 362 214 92 43 7 -- 718
Finder fee payments .................... 125 -- -- -- -- -- 125
Other .................................. 4 5 -- -- -- -- 9
-------- -------- -------- -------- -------- -------- --------
$ 1,615 $ 1,245 $ 49,081 $ 35,540 $ 9,014 $269,216 $365,711
======== ======== ======== ======== ======== ======== ========
- ----------
(1) On February 1, 2003, the Company's Debentures will reach an accreted value
of $89.0 million, which is equivalent to the principal amount of the Debentures
at maturity. At this time, the Company will begin accruing cash interest on the
Debentures. Semi-annual interest payments will subsequently commence on August
1, 2003 and continue through the maturity date of February 1, 2009. The
semi-annual payments will increase the Company's annual cash interest
obligations by $5.2 million in 2003, $10.3 million in each year from 2004
through 2008 and $5.2 million in 2009.
RELATED-PARTY TRANSACTIONS
EXECUTIVE STOCK INVESTMENTS
Upon the commencement of his employment in January 1998, LGP loaned Kenneth
L. Serota $250,000 pursuant to an Unsecured Promissory Note. The loan was
forgiven on a pro rata daily basis from January 28, 1998 to January 28, 2001.
LGP also provided Mr. Serota with three additional loans on August 11, 2000, in
the principal amounts of $250,000, $225,947 and $121,663. The $250,000 loan was
used by Mr. Serota to purchase 4,372 shares of Common Stock and 184.42 shares of
Junior Preferred Stock, while the $225,947 and $121,663 loans were used by Mr.
Serota to purchase an aggregate of 23,174 shares of Common Stock. Each of these
loans accrues interest at a rate of 6.22% per annum until each loan matures. LGP
is required to forgive the $250,000 loan, including all accrued interest, under
certain circumstances. The $225,947 and $121,663 loans become due, including
unpaid accrued interest, when Mr. Serota sells all or part of the Common Stock
purchased with the proceeds of such loans in an amount proportional to the
number of shares of Common Stock sold.
In addition, certain other executives were given the opportunity to purchase
Common Stock. Under the plan, each executive paid cash for 50% of their stock
investment and executed a five year note for the remaining 50%. The Board of
Directors approved the forgiveness of these loans including accrued interest, in
3 equal installments in January 1999, 2000, and 2001. LGP has the right to
repurchase the Common Stock at the original cost if the executive terminates his
employment or is terminated for cause.
On December 15, 2000, LGP issued and sold to management investors 28,626
shares of Common Stock for a purchase price per share of $15.00 for an aggregate
purchase price of approximately $429,000.
During 2001, LGP repurchased 22,344 shares of Common Stock from former
management stockholders. The purchase price was paid through loan forgiveness
and approximately $63,000 in cash.
OTHER RELATED-PARTY TRANSACTIONS
The Company paid $1.3 million, $1.5 million and $1.5 million in management
fees in 2000, 2001 and 2002, respectively, and $356,000, $375,000 and $350,000
in other fees in 2000, 2001 and 2002, respectively, to Leonard Green & Partners,
L.P. The
15
Company is obligated to pay other fees to Leonard Green & Partners, L.P. of
$125,000 in 2003. See Item 13. "Certain Relationships and Related Transactions"
for further discussion of this and other transactions.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
the Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that results from the acquisition,
construction, development, and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption
of SFAS No. 143 is not expected to have a material effect on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, amends existing guidance on
reporting gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, unless the items meet the
definition of extraordinary under APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are
applicable to fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The adoption of SFAS No. 145 is not expected to
have a material effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity".
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements for interim and annual periods ending after December 15,
2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
consolidated financial statements.
RISK FACTORS FOR INVESTMENT CONSIDERATIONS
THE COMPANY DEPENDS TO A GREAT EXTENT ON THE ECONOMIES AND THE DEMOGRAPHICS
OF THE LOCAL COMMUNITIES THAT IT SERVES AND IS ALSO SUSCEPTIBLE TO GENERAL
ECONOMIC DOWNTURNS, WHICH COULD CONTINUE TO HAVE A MATERIAL IMPACT ON ITS
ADVERTISING AND CIRCULATION REVENUES AND ITS PROFITABILITY.
The Company's advertising revenues and, to a lesser extent, circulation
revenues, depend upon a variety of factors specific to the communities that its
publications serve. These factors include, among others, the size and
demographic characteristics of the local population, local economic conditions
in general and the economic condition of the retail segments of the communities
that its
16
publications serve. If the local economy, population or prevailing retail
environment of a community served by the Company experiences a downturn, its
publications, revenues and profitability in that market would be adversely
affected. For example, the Company's total revenues for the 2002 decreased by
$2.4 million from 2001 as a result of, among other things, a decrease in
classified recruitment and printing revenues of $2.2 million and $1.0 million,
respectively, in the Chicago suburban market. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
The Company's advertising and circulation revenues are also susceptible to
negative trends in the general economy that affect consumer spending. The
advertisers in its newspapers and related publications are primarily retail
businesses, which can be significantly affected by regional or national economic
downturns and other developments. For example, if there is continued
consolidation among the Company's advertisers, such as retailers, grocery stores
and banks, or if large national retailers that rely less on local print
advertising expand their operations to include grocery stores and replace
grocers that presently advertise in its newspapers, the Company's advertising
revenues would decrease. Additionally, due to the Company's substantial
indebtedness, it may be more susceptible to adverse general economic effects
than some of the competitors in its industry, some of which have greater
financial and other resources than the Company does.
THE COMPANY'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL
HEALTH AND REDUCE THE FUNDS AVAILABLE TO IT FOR OTHER PURPOSES.
The Company has, and intends to continue to have, a significant amount of
indebtedness. As of December 31, 2002, the Company had total indebtedness of
$362.5 million. The Company expects to incur additional indebtedness to fund
operations, capital expenditures or future acquisitions. The Company's
substantial indebtedness could adversely affect its financial health in the
following ways:
- a substantial portion of the Company's cash flow from operations must
be dedicated to the payment of interest on its outstanding
indebtedness, thereby reducing the funds available to it for other
purposes;
- indebtedness under the Amended Credit Facility is at variable rates of
interest, which causes it to be vulnerable to increases in interest
rates;
- the Company is more leveraged than certain competitors in its industry,
which might place it at a competitive disadvantage;
- 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
- the Company's ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes may be impaired.
In addition, the Amended Credit Facility and other indebtedness contain
financial and other restrictive covenants that limit the Company's ability to
incur additional debt and engage in other activities that may be in its
long-term best interests. The Company's failure to comply with these covenants
could trigger an event of default which, if not waived or cured, could result in
the acceleration of the maturity of its indebtedness. If the Company's
indebtedness is accelerated, it may not have sufficient cash resources to
satisfy its obligations in respect of its indebtedness and the Company may not
be able to continue its operations.
LGP IS A HOLDING COMPANY, AND ITS ACCESS TO THE CASH FLOW OF ITS
SUBSIDIARIES IS SUBJECT TO RESTRICTIONS IMPOSED BY ITS INDEBTEDNESS.
LGP is a holding company for its wholly-owned subsidiary, LGO, and LGP does
not have and may not in the future have any assets other than the common stock
of LGO. LGO conducts its operations through its subsidiaries. LGO's available
cash will depend upon the cash flow of its subsidiaries and the ability of its
subsidiaries to make funds available to LGO in the form of loans, dividends or
otherwise. LGO is a party to an indenture governing the Notes and Amended Credit
Facility, each of which imposes substantial restrictions on LGO's ability to pay
dividends to LGP. Any payment of dividends will be subject to the satisfaction
of certain financial conditions set forth in the indentures related to the Notes
and the Amended Credit Facility. The ability of LGO and its subsidiaries to
comply with these conditions may be affected by events that are beyond LGP's
control. The breach of these conditions could result in a default under the
indentures governing the Notes and the Amended Credit Facility, and in the event
of any such default, the holders of the Notes and/or the lenders under the
Amended Credit Facility could elect to accelerate the maturity of all the Notes
or the loans under the Amended Credit Facility. If the maturity of the Notes or
the loans under the Amended Credit Facility were to be accelerated,
17
all such outstanding debt would be required to be paid in full before LGO or its
subsidiaries would be permitted to distribute any assets or cash to LGP. LGP
expects future borrowings by LGO to contain restrictions or prohibitions on the
payment of dividends by LGO and its subsidiaries to it.
THE COMPANY INTENDS TO CONTINUE TO PURSUE ACQUISITION OPPORTUNITIES, WHICH
MAY SUBJECT IT TO CONSIDERABLE BUSINESS AND FINANCIAL RISK.
The Company has grown through, and anticipates that it will continue to grow
through, acquisitions of paid daily and non-daily newspapers and free
circulation and TMC publications. The Company continually evaluates potential
acquisitions and intends to actively pursue acquisition opportunities, some of
which could be significant. The Company may not be successful in identifying
acquisition opportunities, assessing the value, strengths and weaknesses of
these opportunities and consummating acquisitions on acceptable terms.
Acquisitions may expose the Company to particular business and financial risks
that include:
- diverting management's attention;
- assuming liabilities;
- incurring significant additional capital expenditures, transaction and
operating expenses and non-recurring acquisition-related charges;
- experiencing an adverse impact on the Company's earnings from the
amortization or impairment of acquired goodwill and other intangible
assets;
- failing to integrate the operations and personnel of the acquired
newspapers and publications;
- entering new markets with which the Company is not familiar; and
- failing to retain key personnel of the acquired newspapers and
publications.
The Company may not be able to successfully manage acquired newspapers and
publications or increase its profits from these operations. If the Company is
unable to successfully implement its acquisition strategy or address the risks
associated with acquisitions, or if the Company encounters unforeseen expenses,
difficulties, complications or delays frequently encountered in connection with
the integration of acquired entities and the expansion of operations, its growth
and ability to compete may be impaired, it may fail to achieve acquisition
synergies and it may be required to focus resources on integration of operations
rather than more profitable areas. In addition, the Company may compete for
certain acquisition targets with companies having greater financial resources
than it. The Company anticipates that it will finance acquisitions through cash
provided by operating activities and borrowings under its Amended Credit
Facility, which would reduce its cash available for other purposes, including
the repayment of indebtedness.
THE COMPANY'S BUSINESS MAY SUFFER IF THERE IS A SIGNIFICANT INCREASE IN THE
PRICE OF NEWSPRINT OR A REDUCTION IN THE AVAILABILITY OF NEWSPRINT.
The basic raw material for newspapers is newsprint. In 2002, the Company's
newsprint consumption related to its publications totaled approximately $9.1
million, which was 5.0% of its total advertising and circulation revenues. The
Company also incurred newsprint expense related to job printing and other of
approximately $3.0 million in 2002. The Company has no long-term contracts to
purchase newsprint. The Company's inability to obtain an adequate supply of
newsprint in the future could have a material adverse effect on its ability to
produce its publications. Historically, the price of newsprint has been cyclical
and volatile, reaching approximately $682 per short ton in 1996 and dropping to
almost $409 per short ton in 1993. The average price of newsprint for December
2002, as reported by Pulp & Paper Week, was approximately $436 per short ton.
Significant increases in newsprint costs could have a material adverse effect on
the Company's financial condition and results of operations. See Item 1.
"Business -- Newsprint."
18
THE COMPANY COMPETES WITH A LARGE NUMBER OF COMPANIES IN THE MEDIA INDUSTRY,
AND IF IT IS UNABLE TO COMPETE EFFECTIVELY, ITS ADVERTISING AND CIRCULATION
REVENUES MAY DECLINE.
The Company's business is concentrated in newspapers and other publications
located primarily in non-metropolitan markets in the United States. The
Company's revenues primarily consist of advertising and paid circulation.
Competition for advertising revenues and paid circulation comes from local,
regional and national newspapers, shoppers, magazines, broadcast and cable
television, radio, direct mail, the internet and other media. For example, as
the use of the internet has increased over the past several years, the Company
has lost some classified advertising and subscribers to online advertising
businesses and its free internet sites that contain abbreviated versions of its
newspapers, respectively. Competition for newspaper advertising revenues is
based largely upon advertiser results, advertising rates, readership,
demographics and circulation levels, while competition for circulation is based
largely upon the content of the newspaper, its price and editorial quality. The
Company's local and regional competitors are typically unique to each market,
and many of its competitors for advertising revenues are larger and have greater
financial and distribution resources than it. The Company may incur increasing
costs competing for advertising expenditures and paid circulation. The Company
may also experience a decline of circulation or print advertising revenue due to
alternative media, such as the internet. If it is not able to compete
effectively for advertising expenditures and paid circulation, the Company's
revenues may decline. See "Business -- Competition."
THE COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A RESULT
OF A VARIETY OF FACTORS, WHICH MAY AFFECT ITS CASH FLOWS.
The Company's quarterly revenues and operating results have varied
significantly in the past and are expected to fluctuate in the future due to a
number of factors. For example, the timing of new newspaper acquisitions,
related pre-acquisition expenses, losses or charges incurred as a result of
acquisitions, including significant write-downs, write-offs or impairment
charges, and the amount of revenue contributed by new and existing newspapers
may cause its quarterly results to fluctuate. Additionally, the Company's
business is subject to seasonal fluctuations that it expects to continue to
affect its operating results in future periods. The Company's first fiscal
quarter of the year tends to be its weakest quarter because advertising volume
is at its lowest levels following the holiday season. Correspondingly, its
fourth fiscal quarter tends to be its strongest quarter because the fourth
fiscal quarter includes heavy holiday season advertising. Other factors that
affect the Company's quarterly revenues and operating results may be beyond its
control, including changes in the pricing policies of its competitors, the
hiring and retention of key personnel, wage and cost pressures, changes in
newsprint prices and general economic factors. These quarterly fluctuations in
revenues and operating results may affect the Company's cash flows.
THE COMPANY IS SUBJECT TO ENVIRONMENTAL AND EMPLOYEE SAFETY AND HEALTH
REGULATION THAT COULD CAUSE IT TO INCUR SIGNIFICANT COMPLIANCE EXPENDITURES AND
LIABILITIES.
The Company's operations are subject to federal, state and local laws and
regulations pertaining to the environment, air and water quality, storage tanks
and the management and disposal of wastes at its facilities. Its operations are
also subject to various employee safety and health laws and regulations,
including those pertaining to occupational injury and illness, employee exposure
to hazardous materials and employee complaints. Environmental and employee
safety and health laws tend to be complex, comprehensive and frequently
changing. As a result, the Company may be involved from time to time in
administrative and judicial proceedings and investigations related to
environmental and employee safety and health issues. These proceedings and
investigations could result in substantial costs to it, divert management's
attention and, if it is determined that the Company is not in compliance with
applicable laws and regulations, result in significant liabilities, fines or the
suspension or interruption of the operations of specific printing facilities.
Future events, such as changes in existing laws and regulations, new laws or
regulations or the discovery of conditions not currently known to the Company,
may give rise to additional compliance or remedial costs that could be material.
THE COMPANY DEPENDS ON KEY PERSONNEL, AND IT MAY NOT BE ABLE TO OPERATE AND
GROW ITS BUSINESS EFFECTIVELY IF IT LOSES THE SERVICES OF ANY OF ITS SENIOR
EXECUTIVE OFFICERS OR IS UNABLE TO ATTRACT QUALIFIED PERSONNEL IN THE FUTURE.
The Company is dependent upon the efforts of its senior executive officers.
In particular, it is dependent upon the management and leadership of Kenneth L.
Serota, the Company's President, Chief Executive Officer and Chairman of the
Board of Directors. The loss of Mr. Serota or other senior executive officers
could affect the Company's ability to run its business effectively.
The success of the Company's business is heavily dependent on its ability to
retain its current management and to attract and retain qualified personnel in
the future. Competition for senior management personnel is intense and the
Company may not be able to retain its personnel. The Company has not entered
into employment agreements with its key personnel, other than with Mr. Serota,
and these individuals may not continue in their present capacity with the
Company for any particular period of time. The Company does not have key man
insurance for any executive officers or key personnel. The loss of any senior
executive officer requires the remaining
19
executive officers to divert immediate and substantial attention to seeking a
replacement. The Company's inability to find a replacement for any departing
executive officer on a timely basis could adversely affect its ability to
operate and grow its business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Operating Company has a $135.0 million revolving credit facility and a
separate Term Loan B that mature in March 2005 and 2007, respectively.
Borrowings under the revolving credit facility and the Term Loan B bear interest
at an annual rate, at the Company's option, equal to the Alternate Base Rate (as
defined in the Amended Credit Facility) or the Adjusted LIBO Rate (as defined in
the Amended Credit Facility) plus a margin that varies based upon a ratio set
forth in the Amended Credit Facility. As a result, the Company's interest
expense will be affected by changes in the Alternate Base Rate or in the
Adjusted LIBO Rate. At December 31, 2002, the Company had borrowings outstanding
of $21.8 million under the revolving credit facility and $72.5 million under the
Term Loan B. A hypothetical 100 basis point change in interest rates would
impact annual interest expense by approximately $0.9 million based on the amount
outstanding at December 31, 2002.
For additional information regarding the Company's Amended Credit Facility,
see Item 7 " Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this Item 8 is included in the consolidated
financial statements and notes thereto, and related Independent Auditors'
Report, appearing on pages 34 to 56 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
REGISTRANT
The following table sets forth the name, age and position of LGP's
directors, executive officers and other key employees as of March 31, 2003:
NAME AGE POSITION
------------------------------- ----- ------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS:
Kenneth L. Serota...................... 41 President, Chief Executive Officer and Chairman of the
Board of Directors
Daniel D. Lewis........................ 40 Chief Financial Officer
Scott T. Champion...................... 43 Executive Vice President, Chief Operating Officer --
Community Division and Director
Gene A. Hall........................... 51 Senior Vice President-- Midwestern Region
Randy Cope............................. 42 Executive Vice President-- Missouri, Kansas and Arkansas
Kelly Luvison.......................... 43 Executive Vice President-- Eastern Region
John G. Danhakl........................ 47 Director
Peter J. Nolan......................... 44 Director
Jonathan A. Seiffer.................... 31 Director
KEY EMPLOYEES:
Theodore G. Mike....................... 56 Vice President-- Eastern Region
Ronald A. Wallace...................... 45 Vice President-- Sales and Marketing
Gerald R. Smith........................ 54 President-- Liberty Group Suburban Newspapers, Inc.
KENNETH L. SEROTA is LGP's President and Chief Executive Officer and has
served in that capacity since January 1998. Mr. Serota is also the Chairman of
the Board of Directors and has been a Director since January 1998. Mr. Serota
has had equivalent titles and responsibilities at LGO during the same time
periods. Previously, he served as Vice President-- Law & Finance and Secretary
of Hollinger from May 1995 to December 1997 and as a director of its APC
Division, which owned the publications initially acquired by us, from 1996 to
1997. Previously, Mr. Serota served as an attorney and a certified public
20
accountant. Mr. Serota has significant experience negotiating and closing
acquisitions of publications and primarily focuses his efforts on executing the
Company's acquisition functions and overseeing all of its administrative and
finance functions. Mr. Serota received a B.S. in Accountancy and a J.D. from the
University of Illinois.
DANIEL D. LEWIS is LGP's Chief Financial Officer with primary responsibility
for its financial and accounting activities. He served as LGP's Vice President--
Finance and Secretary from May 2001 to May 2002. From September 1999 to May
2001, Mr. Lewis served as LGO's corporate controller. Mr. Lewis has had
equivalent titles and responsibilities at LGO during the same time periods.
Prior to joining us, Mr. Lewis served as a management consultant for
PricewaterhouseCoopers LLP. In addition, Mr. Lewis has held management positions
with Kraft Foods Inc. and Berkshire Hathaway Inc. Mr. Lewis is a certified
public accountant.
SCOTT T. CHAMPION is LGP's Executive Vice President and Chief Operating
Officer -- Community Division and has primary responsibility for all community
publications. Mr. Champion has been a Director since January 2000. In 1998, he
served as LGP's Senior Vice President. Mr. Champion has had equivalent titles
and responsibilities as an executive officer at LGO during the same time
periods. Prior to 1998, he served as Senior Vice President, regional manager,
and district manager of APC and had been employed at APC since 1988. Prior to
his employment at APC, Mr. Champion served as the publisher of a group of
privately owned publications. Mr. Champion has more than 19 years of experience
in the newspaper industry.
GENE A. HALL is LGP's Senior Vice President and has primary responsibility
for publications in the Midwestern region of the United States. He was appointed
LGP's Senior Vice President in January 1998. Mr. Hall has had equivalent titles
and responsibilities at LGO during the same time periods. Prior to his
employment with LGP, he served as a Senior Vice President of APC from 1992 to
1998. Prior to 1992, he served as a regional manager 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, which the Company currently owns. Mr. Hall has more than 33 years of
experience in the newspaper industry.
RANDALL W. COPE is LGP's Executive Vice President responsible for newspaper
operations in Missouri, Kansas and Arkansas. Mr. Cope held the position of Vice
President from December 1998 until he was named LGP's Executive Vice President
in April 2002. Mr. Cope also oversees the Company's national classified
advertising network. From 1995 to 1998, Mr. Cope was regional manager and
publisher of the Northwest Arkansas Times in Fayetteville, Arkansas, which was
owned by APC. Mr. Cope has 20 years of experience covering all areas of
newspaper operations.
KELLY M. LUVISON is LGP's Executive Vice President responsible for newspaper
operations in western New York, Pennsylvania and West Virginia, as well as
Liberty Business Development Group. Mr. Luvison served as regional manager for
the Company since January 1998, was appointed a Vice President in January 2000
and Executive Vice President in April 2002. Prior to January 1998, Mr. Luvison
was a regional manager for APC. Since 1996, Mr. Luvison has been publisher of
the Evening Tribune in Hornell, New York, a newspaper the Company currently
owns, in addition to his duties as a regional manager and Vice President.
JOHN G. DANHAKL has been a Director since January 1998. Mr. Danhakl has been
a partner of Leonard Green & Partners, L.P. 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 from 1985 to
1990. Mr. Danhakl is also a director of Arden Group, Inc., Big 5 Sporting Goods
Corporation, Communications & Power Industries Inc., Twinlab Corporation,
Diamond Triumph Auto Glass, Inc., Leslie's Poolmart, Inc., VCA Antech, Inc.,
PETCO Animal Supplies, Inc., Rite Aid Corporation and MEMC Electronic Materials,
Inc.
PETER J. NOLAN has been a Director since January 1998. Mr. Nolan has been a
partner of Leonard Green & Partners, L.P. since 1997. Mr. Nolan previously
served as Managing Director and Co-Head of DLJ's Los Angeles Investment Banking
Division since 1990. Prior to joining DLJ, Mr. Nolan had been a Vice President
at Drexel Burnham Lambert Incorporated and a First Vice President at Prudential
Securities Incorporated. Mr. Nolan is also a director of VCA Antech Inc. and
several private companies.
JONATHAN A. SEIFFER has been a Director since January 1998. Mr. Seiffer has
been a partner of Leonard Green & Partners, L.P. since 1999. From 1994 through
1999, Mr. Seiffer was a Vice President and Associate of Leonard Green &
Partners, L.P. Prior to joining Leonard Green & Partners, L.P., Mr. Seiffer was
a member of the corporate finance department of DLJ. Mr. Seiffer is also a
director of Diamond Triumph Auto Glass, Inc., Gart Sports Company, Dollar
Financial Group, Inc. and several private companies.
THEODORE G. MIKE is LGP's Vice President and has primary responsibility for
many of its newspaper operations in the eastern region of the United States. Mr.
Mike served as regional manager since January 1998, and was appointed Vice
President in January 1999. Mr. Mike served as a regional manager for APC from
1992 to 1997. Mr. Mike has also been publisher of The Evening Times in Sayre,
Pennsylvania, a newspaper the Company currently owns, since 1992. Mr. Mike has
more than 35 years of experience in the newspaper industry.
21
RONALD A. WALLACE is LGP's Vice President-- Sales and Marketing. Mr. Wallace
joined the Company in his current role in March 2002. Prior to joining LGP, Mr.
Wallace was a Regional Publisher with Morris Communications Corporation from
1996 to 2001. Also with Morris from 1994 to 1995, Mr. Wallace served as
Advertising & Marketing Director at a 40,000 circulation daily newspaper in
Athens, Georgia. Mr. Wallace is a 25-year newspaper veteran having held
positions with Times Mirror Corporation, Hartman Walls Corporation, Belo Corp.,
Ingersoll Publications, Sun Newspapers and Ogden Newspapers, Inc.
GERALD R. SMITH is President of Liberty Group Suburban Newspapers, Inc., an
indirect subsidiary of the Company. From February 1999 to February 2001, Mr.
Smith served as Executive Vice President-- General Manager of Liberty Group
Suburban Newspapers, Inc. Prior to February 1999, Mr. Smith held various
positions over 14 years at the Daily Southtown, a 60,000 circulation daily
newspaper in Chicago including Executive Vice President-General Manager, and was
responsible for day-to-day operations from 1991 to 1999.
COMMITTEES OF THE BOARD OF DIRECTORS
LGP's board of directors has established an audit committee, a compensation
committee and an executive committee. LGP's board may establish other committees
from time to time to facilitate the management of the Company.
LGP's audit committee is currently comprised of Messrs. Nolan, Seiffer and
Serota and is charged with the following responsibilities:
o the engagement, oversight and compensation of the Company's
independent public accountants;
o reviewing the plan, scope and results of the annual audit to be
conducted by the Company's independent public accountants;
o pre-approving services provided to the Company by its independent
public accountants;
o meeting periodically with the Company's independent public accountants
and its Chief Financial Officer to review matters relating to its
consolidated financial statements, its accounting principles and its
system of internal accounting controls; and
o reporting its recommendations as to the approval of the Company's
consolidated financial statements to the board of directors.
LGP's compensation committee (including a subcommittee thereof) is
responsible for establishing guidelines and standards relating to the
determination of executive compensation, considering and making recommendations
to the board of directors regarding executive compensation and administering the
Company's stock option and incentive award plans. LGP's compensation committee
is currently comprised of Messrs. Nolan, Seiffer and Serota.
Our executive committee is authorized to manage LGP's business and affairs
between the meetings of LGP's board of directors. LGP's executive committee is
currently comprised of Messrs. Nolan, Seiffer and Serota.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and non-cash compensation paid to
LGP's chief executive officer and each of the four other most highly compensated
executive officers of LGP who earned more than $100,000 in salary and bonus
during 2002 (each a named executive officer and, collectively, the named
executive officers):
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SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------- ------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
------------------------------------------------- ------ --------- --------- ---------------- ------------
Kenneth L. Serota................................ 2002 478,008 675,000 -- --
President and CEO 2001 455,500 -- -- --
2000 405,500 300,000 112,973 (1) --
Scott T. Champion................................ 2002 204,500 245,000 -- --
Executive V