ITEM 1. BUSINESS
OVERVIEW
The Company is a leading U.S. publisher of local newspapers and related publications that are the dominant source of local news and print advertising in their markets. The Company owns and operates 251 publications in 15 states. The Company's total revenues are derived from advertising (73% of 1998 total revenues), circulation (20%) and job printing and other (7%).
The Company's primary operating costs and expenses are comprised of operating costs and selling, general and administrative expenses. Salaries and employee benefits are the Company's largest operating costs. The Company has been able to control salaries and employee benefit expenses by realizing efficiencies from the implementation of new technologies and the achievement of synergies from its strategy of clustering its newspaper operations.
INITIAL ACQUISITION
Liberty Group Publishing, Inc. ("LGP") was formed for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger International Inc.("Hollinger"). LGP is a holding company for its wholly-owned subsidiary Liberty Group Operating, Inc ("Operating Company"). The consolidated financial statements include the accounts of LGP and Operating Company and its consolidated subsidiaries (the "Company").
On January 27, 1998, the Company acquired from Hollinger virtually all of the assets and assumed certain liabilities that were used primarily in the business of publishing, marketing and distributing certain local newspapers (the "Initial Acquisition"). The initial purchase price including fees and expenses was $322.4 million. The effective date of the Initial Acquisition was January 1, 1998.
In the accompanying financial statements the terms "Liberty Group Publishing" or the "Company" when used with respect to periods prior to January 1, 1998 refer to the combined group of newspapers sold by APC (the Local Newspaper Group of American Publishing Company) and when used with
respect to periods subsequent to January 1, 1998 refers to Liberty Group Publishing, Inc. and its consolidated subsidiaries. The combined historical financial information of the newspapers acquired from APC prior to the Initial Acquisition on January 1, 1998 is referred to as "Predecessor" while the consolidated financial information of the newspapers subsequent to the date of the Initial Acquisition is referred to as "Successor."
The Company has accounted for the Initial Acquisition using the purchase method of accounting. Accordingly, the costs of the Initial Acquisition have been allocated to the assets acquired and liabilities assumed based upon their respective fair values using independent valuations. The costs of certain intangible assets acquired of $296.5 million are being amortized over periods ranging from 5 to 40 years. Because of the purchase price allocation, the accompanying financial statements of Successor are not directly comparable to those of Predecessor.
Certain administrative services, including accounting, payroll, administration, tax services and financial reporting, were historically performed for the Company by APC. The Company was charged directly by APC for certain of such services and also paid a management fee to APC that was based upon a percentage of total revenues. At the end of January 1998, the management fee to APC was replaced by a Transitional Services Agreement that allows for certain administrative services to be provided by APC at cost until the establishes its administrative services in-house. The Company provides all of its administration in-house as of April 1, 1999 and has terminated the Transitional Services Agreement effective March 31, 1999.
Prior to the Initial Acquisition, the Company operated as a business unit of APC and as such did not file separate tax returns. The income tax provision included in the Predecessor's financial statements was computed as if the Predecessor were a separate company. Subsequent to the Initial Acquisition, the Company has been and anticipates that it will be, for the foreseeable future, in a tax loss position. Given the uncertainty as to the timing of the Company's ability to utilize such losses to offset future taxable income, the Company does not presently anticipate recording any tax benefit associated with its pre-tax losses. In addition, due to the acquisition of the Company's assets from APC, the Company's asset values and capital structure are materially different than those set forth in the Predecessor's financial statements for periods preceding the Initial Acquisition and, accordingly, historical interest expense is not indicative of the interest expense that the Company incurs as a separate company.
The results of operations and cash flows of the Predecessor have been consolidated with those of the Company from January 1, 1998, the effective date upon which the Company and APC agreed as to the change of control of the newspapers to the Company.
In addition, during 1998, the Company acquired 91 publications in 18 transactions for a total acquisition cost of $61.8 million.
INITIAL CAPITALIZATION - BORROWINGS
The Initial Acquisition, including the payment of related fees and expenses, was financed in part by: (i) $180.0 million from the issuance and sale by the Operating Company of $180.0 million aggregate principal amount of 9.375%
Senior Subordinated Notes (the "Notes") due February 1, 2008 and (ii) $50.5 million from the issuance and sale by LGP of $89.0 million aggregate principal amount of 11.625% Senior Discount Debentures (the "Debentures") due February 1, 2009.
The Notes were issued by the Operating Company and are general unsecured obligations of the Operating Company. The Notes are irrevocably and unconditionally joint and severally guaranteed by each of the Operating Company's existing and future subsidiaries. The Notes are redeemable for cash at the option of the Operating Company anytime after February 1, 2003 at stipulated redemption amounts or, in certain limited circumstances, are partially redeemable on or prior to February 1, 2001 at a redemption amount of 109.375% of their principal amount. In the event of a change in control of the Operating Company or the Company, the Company must offer to repurchase the Notes at 101% of their principal amount.
The Debentures issued by LGP are general unsecured obligations and pay no cash interest until February 1, 2003. The Debentures will, however, accrete on a semi-annual equivalent bonds basis to a full principal amount of $89.0 million on February 1, 2003. Thereafter, cash interest on the Debentures will accrue and be payable semi-annually on February 1 and August 1 of each year. The Debentures are redeemable for cash at the option of LGP any time after February 1, 2003 at stipulated redemption amounts or, in certain limited circumstances, are partially redeemable on or prior to February 1, 2001 at a redemption amount of 111.625% of their accreted value. In the event of a change in control of LGP, LGP must offer to repurchase the Debentures at 101% of their accreted value.
On January 27, 1998 the Operating Company entered into a five-year $125.0 million revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility is secured by substantially all of the tangible and intangible assets of the Operating Company. Borrowings under the revolving credit facility bear interest at an annual rate, at the Company's option equal to the Base Rate (as defined in the credit agreement) or the Eurodollar Rate (as defined in the credit agreement) plus a margin that varies based upon a ratio set forth in the credit agreement (the "Applicable Margin"). Under the terms of the Revolving Credit Facility, the Company pays a fee equal to the Applicable Margin for Eurodollar Rate Advances (as defined in the credit agreement) per annum on the aggregate amount of outstanding letters of credit. The Operating Company also pays a fee on the unused portion of the Revolving Credit Facility. At December 31, 1998 the Operating Company has utilized $46.0 million of the Revolving Credit Facility.
INITIAL CAPITALIZATION - EQUITY
LGP has the authority to issue up to 21,255,000 shares of capital stock, of which 21,175,000 shares are designated as Preferred Stock, par value $0.01 per share, and 80,000 shares are designated as Common Stock, par value $0.01 per share. The Initial Acquisition, including the payment of related fees and expenses, was financed in part from the proceeds of (i) $45.0 million from the issuance and sale of 1.8 million shares of 14.75% Senior Mandatory Redeemable Exchangeable Cumulative Preferred Stock (the "Senior Preferred Stock"), (ii) $49.0 million from the issuance and sale of 49,000 shares of 10% Series B Junior Mandatory Redeemable Cumulative Preferred Stock (the "Junior Preferred Stock"), and (iii) $8.0 million from the issuance and sale of 80,000 shares of Common Stock. 100% of the Junior Preferred Stock and 90% of the Common Stock is owned Green Equity Investors II, L.P. the controlling stockholder of the Company. 10% of the Common Stock is owned by the Company's senior management team. The Senior Preferred Stock issued by LGP Company is senior to the Common Stock and Junior Preferred Stock of the Company, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company. Dividends may be paid, at the Company's option, at any dividend payment date in cash or in additional shares of Senior Preferred Stock having a liquidation preference equal to the dividend amount. The liquidation preference of the Senior Preferred Stock is $25 per share. The Senior Preferred Stock is redeemable at the option of the Company any time after February 1, 1999 at stipulated redemption amounts and is mandatorily redeemable, subject to certain conditions, on February 1, 2010 at a price equal to 100% of its liquidation preference per share. In the event of a change in control of the Company, the Company must offer to repurchase the Senior Preferred Stock at 100% of its liquidation preference per share. Except as required by law, the holders of shares of Senior Preferred Stock are generally not entitled or permitted to vote on any matters voted upon by the stockholders of the Company. Subject to certain conditions, the Senior Preferred Stock is exchangeable, on any dividend payment date, in whole, but not in part, at the option of the Company for 14.375% Senior Subordinated Debentures (the "Exchange Debentures") of the Company maturing February 1, 2010. The Exchange Debentures are redeemable prior to maturity on substantially the same terms as the Senior Preferred Stock. During 1998, the Company elected to pay all of its Senior Preferred Dividends in additional shares of Senior Preferred Stock.
The Junior Preferred Stock issued by LGP is senior to the Common Stock of LGP, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company. Dividends may be paid, at the Company's option, at any dividend payment date in cash or in additional shares of Junior Preferred Stock having a liquidation preference equal to the dividend amount. The Junior Preferred Stock is redeemable at the option of the Company at a price equal to 100% of its liquidation preference per share and is mandatorily redeemable on February 1, 2010 at a price equal to 100% of its liquidation preference per share. In the event of a change in control of the Company, the Company must offer to repurchase the Junior Preferred Stock at 100% of its liquidation preference per share. Except as required by law, the holders of shares of Junior Preferred Stock are generally not entitled or permitted to vote on any matters voted upon by the stockholders of the Company. During 1998, the Company elected to pay all of its Junior Preferred Dividends in additional shares of Junior Preferred Stock.
RECENT ACQUISITIONS AND DISPOSITIONS
The following newspapers were acquired by the Company during 1998:
The following newspapers were disposed of by the Company during 1998:
SUBSEQUENT EVENTS:
In January of 1999, the Company purchased all of the stock of Life Printing & Publishing a chain of 17 weekly publications in Oak Brook, Illinois with a combined circulation of 120,000. In February 1999, the Company has also purchased the 31,000 circulation Halstad Shopper located in Halstad, Minnesota.
INDUSTRY BACKGROUND
Newspaper publishing is the oldest and largest segment of the media industry. Due to a focus on local news, newspapers remain the dominant medium for local advertising. Newspapers continue to be the best medium for retail advertising which emphasizes the price of goods, in contrast to television which is generally used for image advertising.
Readers of daily and Sunday newspapers tend to be more highly educated and have higher incomes than non-newspaper readers. Management believes that newspapers continue to be the most cost-effective means for advertisers to reach this highly targeted demographic group.
Advertising revenues are the largest component of a newspaper's revenues followed by circulation revenues. Advertising rates at each newspaper are based upon market size, circulation, readership, demographic makeup of the market, and the availability of alternative advertising media in the marketplace. While circulation revenue is not as significant as advertising revenue, circulation trends can impact 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 makes up approximately one-third of newspaper advertising revenues, is the most sensitive to economic improvements or slowdowns as it is primarily affected by the demand for employment, real estate transactions and automotive sales.
OPERATING STRATEGY
The Company's strategy is to increase revenues and cash flows through local news leadership; revenue enhancement; strategic technological investments; high quality editorial content and presentation; circulation growth; geographic clustering; targeted marketing programs; and cost control, as described below:
LOCAL NEWS LEADERSHIP. The Company's newspapers generally have the largest local news gathering resources in their markets. As a result of emphasizing local content, including youth sports, community events, business, politics, and entertainment, the Company's newspapers generate reader loyalty and create franchise value. Because the Company's provision of local news is a typically unique product in its markets, its newspapers differentiate themselves from other forms of media and satisfy the demands of both its reader and advertisers.
REVENUE ENHANCEMENT. The Company aggressively capitalizes on the good name and reputation it has built in each of its local communities to reach out to non-traditional newspaper customers through the development of milestone programs, on-line activities and ancillary product marketing.
STRATEGIC TECHNOLOGICAL INVESTMENTS. The Company has committed to develop and maintain websites for all of its daily newspapers and certain of its weekly papers. The websites provide an online editorial presence and full online classified services for the Company's newspapers and will allow the Company to take advantage of the increasing use of the Internet and the potential advertising opportunities. Although the Company believes that providing an online product is important to broadening the presence of its newspapers in their respective communities and ultimately increasing the Company's revenues through such value added services, the Company believes almost all of its customers prefer the newspaper in a printed form. By being the leading, provider of local news in most of its markets, management believes that its newspapers are well positioned to enhance and expand their leadership position among local advertisers, whether in print or electronic form.
HIGH QUALITY EDITORIAL CONTENT AND PRESENTATION. The Company's newspapers are committed to editorial excellence, providing the proper mix of local and national news to effectively serve the needs of their local markets. The Company's newspapers often receive awards for excellence in various areas in their respective regions and categories. In addition, the Company's newspapers are designed to attract readers through attractive layouts and color enhancements. Geographic clustering allows for better quality equipment than smaller markets might otherwise warrant, resulting in a significant increase in newspaper quality.
CIRCULATION GROWTH. The Company believes that circulation growth is important to the creation of long-term franchise value at its newspapers. Accordingly, the Company has and will continue to invest in telemarketing and promotional campaigns to increase circulation and readership.
GEOGRAPHIC CLUSTERING. The Company has acquired and assembled newspapers, and may continue to acquire newspapers, in contiguous markets ("clustering"). Clustering enables the Company to realize operating efficiencies and economic synergies, such as the sharing of management, accounting and production functions. In addition, the Company seeks to increase operating cash flows at acquired newspapers through cost reductions, including labor and web width reductions, as well as overall improved cost management. Clustering also enables management to maximize revenues through the cross selling of advertising among contiguous newspaper markets. As a result of clustering, management believes that the Company's newspapers are able to obtain higher operating margins than they would otherwise be able to achieve on a stand-alone basis.
COST CONTROL. Each of the Company's newspapers emphasizes cost control with a particular focus on managing staffing requirements. In addition, the Company further controls labor costs through investments in state-of-the-art production equipment that improves production efficiencies. Management is equally focused on newsprint cost control. The Company takes advantage of group discounts for its major operating and capital costs including newsprint, ink, supplies, computers, software, and printing equipment.
Management believes that successful implementation of the operating strategy described above will position the Company to continue to achieve internal growth. The Company also continues to seek strategic or targeted newspaper acquisitions and dispositions such as the acquisitions previously discussed. The Company continually reviews newspaper acquisition candidates for acquisitions that would contribute to the Company's overall growth strategy, whether through revenue growth and/or cost reduction opportunities, and represent attractive values based on price.
ADVERTISING, CIRCULATION AND PRINTING REVENUES.
Advertising revenue includes DISPLAY (local and national department stores, specialty shops and other retailer), NATIONAL (national advertising accounts), and CLASSIFIED advertising (employment, automotive, real estate and personals). Management believes that classified advertising is more volatile than other newspaper revenues. Classified advertising for the Company represents a smaller portion of its revenues than other newspapers in the industry. As a result, management believes its revenue stream is more predictable than other newspaper companies. The contribution of Display, National, Classified, Circulation, and Job Printing & Other revenue to total revenues for fiscal years 1998 and 1997 were as follows:
NEWSPRINT.
Newsprint represents one of the largest costs of producing a newspaper. The Company's newspapers buy newsprint from a number of suppliers, resulting in an adequate supply of newsprint at market prices. In 1998 and 1997, the Company consumed approximately 17,000 and 16,000 short tons of newsprint, respectively, and, during the same periods, incurred newsprint expense of approximately $7.2 million and $6.1 million respectively. Newsprint expense as a percentage of revenue for 1998 and 1997 was 6.4% and 6.2%, respectively. Newsprint expense varies between years because of fluctuations in prices and consumption.
EMPLOYEE RELATIONS. The Company employs approximately 1,715 full-time employees and 907 part-time employees. Less than 2% of its employees belong to labor unions. There has never been a strike or work stoppage against any of the Company's newspapers during the Company's ownership, and the Company believes that its relations with its employees are generally good. SEASONALITY.
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 generally poor weather and a lack of holidays, the Company's first fiscal quarter is the Company's weakest revenue quarter of the year.
COMPETITION.
Each of the Company's newspapers competes to varying degrees with magazines, radio, television and cable television, as well as with some weekly publications and other advertising media, including electronic media, for advertising and circulation revenue. Competition for newspaper advertising is largely based upon circulation, price and the content of the newspaper. LGP's newspapers are the dominant local news and information source, with strong name recognition in their market and minimal direct competition from similar daily newspapers published in their markets. However, as with most suburban and smaller daily newspapers, some circulation competition exists from larger daily newspapers which are usually published in nearby metropolitan areas. Management believes larger daily newspapers with circulation in LGP's newspaper markets generally do not compete in any meaningful way for local advertising revenues, a newspaper's main source of revenues. LGP's daily newspapers capture the largest share of local advertising as a result of their direct coverage of the market. In addition, management believes advertisers generally regard newspaper advertising as the most effective method of advertising promotions and pricing as compared to television, which is generally used to advertise image. The Company may from time to time compete with other companies, which have greater financial resources than the Company.
ELECTRONIC MEDIA.
Many newspaper companies are now publishing news and other content on the world wide web. In addition, there are several new start-up companies which have developed sites on the world wide web which are, by design, advertising and/or subscription supported. Many of these sites target specific types of advertising such as employment and automotive classified.
The Company has developed a strategy which it believes will allow it to leverage its strong local franchise and participate in the advertising growth on the Internet.
LGP is in the process of establishing a local website for each of its daily newspapers. In addition, LGP is continuing to develop strategic alliances to enhance content, functionality and delivery. The Company believes the design, functionality, and content of its websites will allow the Company to expand its leadership position among local advertisers and create additional revenue streams in the future.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located in an office park in Northbrook, Illinois, where the Company leases approximately 3,000 square feet under a lease terminating in 2001. The Company also maintains locations and offices at numerous locations throughout the United States for its publications and printing operations. The Company does not believe that any of these properties are material to the Company.
The following table summarizes the publications owned by the Company as of December 31 1998:
(D=DAILY, W=WEEKLY, S=SHOPPER, T=TOTAL MARKET COVERAGE, F=FREE, A=ANNUAL, BI-A=BI-ANNUAL)
ARIZONA GLOBE ARIZONA SILVER BELT (W) GILA COUNTY ADVANTAGE (S) MOCCASIN (W)
ARKANSAS HEBER SPRINGS THE SUN TIMES (W) HELENA THE DAILY WORLD (D) DAILY WORLD TMC (T) NEWPORT NEWPORT DAILY INDEPENDENT (D) NEWPORT DAILY INDEPENDENT TMC (T) STUTTGART STUTTGART DAILY LEADER (D) THE STUTTGART DAILY TMC (T)
CALIFORNIA GRIDLEY THE GRIDLEY HERALD (W) THE GRIDLEY SHOPPING NEWS (S) MOUNT SHASTA DUNSMUIR NEWS (W) MOUNT SHASTA HERALD (W) SUPERSAVER ADVERTISER (S) VOICE OF THE MOUNTAIN (T) WEED PRESS (W) TAFT DAILY MIDWAY DRILLER (D) THE WESTSIDE SHOPPING NEWS (T) YREKA SISKIYOU DAILY NEWS (D) SISKIYOU DAILY NEWS "EXTRA" (T)
IDAHO BURLEY SOUTH IDAHO PRESS (D) SUNRISE SHOPPER (W) THE NEWS REVIEW (W) HAILEY WOOD RIVER JOURNAL (W) YOUR HOME MAGAZINE (M) WOOD RIVER JOURNAL DINING (A) EXPOLORER (BI-A) MINODOKA MINODOKA COUNTY NEWS (W)
ILLINOIS BENTON BENTON EVENING NEWS (D) THE BENTON STANDARD (W) CANTON DAILY LEDGER (D) SPOON RIVER ADVERTISER (S) CARMI THE CARMI TIMES (D) THE WEEKLY TIMES (W) WHITE COUNTY SHOPPER NEWS (S) CHESTER CHESTER HERALD TRIBUNE (W) CHRISTOPHER CHRISTOPHER PROGRESS (W) DUQUOIN THE ASHLEY NEWS (W) DUQUOIN EVENING CALL (D) PERRY COUNTY EXTRA (S) DWIGHT DWIGHT STAR & HERALD (W) THE REGISTER (S) GARDNER CHRONICLE (W) COURIER PRESS (HERSCHER) (W) ELMHURST - PRESS PUBLICATIONS ELMHURST PRESS (W) THE PRESS - OAK BROOK (W) THE PRESS - ADDISON (W) THE PRESS - WOOD DALE (W) THE PRESS - BENSENVILLE (W) VILLA PARK ARGUS (W) THE PRESS OAKBROOK TERRACE (W) LOMBARD SPECTATOR (W) LEMONT METROPOLITAN (W) BOLINGBROOK METROPOLITAN (W) DARIEN METROPOLITAN (W) ROMEOVILLE METROPOLITAN (W) WESTCHESTER NEWS (W) WEST COOK COUNTY PRESS (W) WEST COOK PRESS COUNTRYSIDE (W) PRESS - BLOOMINGDALE (W) PRESS - GLENDALE HEIGHTS (W) PRESS - ROSELLE (W) PRESS - ITASCA (W) PRESS - CAROL STREAM (W) PRESS - BARTLETT (W) PRESS - HANOVER PARK/STREAMWOOD (W) MARENGO PRESS (W) HUNTLEY/FARMSIDE PRESS (W) GLEN ELLYN PRESS (F) WHEATON PRESS (F) NAPERVILLE PRESS (F) ORLAND/TINLEY VILLAGER (F) BATAVIA WINDMILL (F) SUGAR GROVE HERALD (F) BLACKBERRY PRESS (F) NORTH AURORA HERALD (F) WEST COOK PRESS - LAGRANGE (F) STRICTLY CLASSIFIED (F) FAIRBURY THE BLADE (W) FLORA CCAP SPECIAL (T) DAILY ADVOCATE PRESS (D) GALATIA MONEY STRETCHER (S) GALESBURG PENNYSAVER PRESS (S) HARRISBURG ELDORADO DAILY JOURNAL (D) HARRISBURG DAILY REGISTER (D) HERRIN THE SPOKESMAN (W) THE SPOKESMAN SUNDAY (T) MACOMB MACOMB JOURNAL (D) JOURNAL EXTRA (W) MARION MARION DAILY REPUBLICAN (D) MARION DAILY EXTRA (T) MONMOUTH DAILY REVIEW ATLAS (D) OQUAWKA CURRENT (W) PENNYSAVER (S) MURPHYSBORO MURPHYSBORO AMERICAN (W) AMERICAN MONDAY (T) NEWTON NEWTON PRESS-MENTOR (W) NORRIS CITY NORRIS CITY BANNER (W) OLNEY JASPER COUNTY NEWS EAGLE ADVANTAGE (T) THE OLNEY DAILY MAIL (D) THE WEEKLY MAIL (W) PONTIAC DAILY LEADER (D) HOME TIMES (W) LIVINGSTON SHOPPING NEWS (S) SHAWNEETOWN GALLATIN DEMOCRAT (W) RIDGWAY NEWS (W) SPRINGFIELD SPRINGFIELD SHOPPER (S) TEUTOPOLIS TEUTOPOLIS PRESS (W) WEST FRANKFORT DAILY AMERICAN (D) TRADER (W) FRANKLIN PRESS (T)
IOWA CHARLES CITY CHARLES CITY PRESS (D) THE EXTRA (T) SIX COUNTY SHOPPER (S)
KANSAS ATCHISON THE ATCHISON DAILY GLOBE (D) ATCHISON AREA ADVERTISER (T) AUGUSTA AUGUSTA DAILY GAZETTE (D) AUGUSTA ADVERTISER (T) DERBY DAILY REPORTER (D) THE RECORD (W) THE WEEKLY SHOPPER (S) THE WICHITA JOURNAL (W) EL DORADO THE EL DORADO TIMES (D) EL DORADO TIMES WEEKLY (T) SHOPPERS GUIDE (S) KANSAS CITY KANSAS CITY KANSAN (D) KANSAS CITY KANSAS "SUNDAY" (W) WYNDOTT COUNTY SHOPPER (S) LEAVENWORTH THE LEAVENWORTH TIMES (D) THE LEAVENWORTH TIMES SUNDAY (W) RIVER BEND JOURNAL (T) CHRONICLE SHOPPER (S) MCPHERSON MCPHERSON SENTINEL (D) THE SENTINEL AD-VISER (T) MAC SHOPPER (S) SHAWNEETOWN JOURNAL-HERALD (W) WELLINGTON DAILY NEWS (D)
LOUISIANA DERIDDER BEAUREGARD DAILY NEWS (D) GONZALES ASCENSION CITIZEN (W) NICKEL ADS (S) THE STAR WATCH (T) IOWA IOWA NEWS (W) LEESVILLE LEESVILLE DAILY LEADER (D) MOSS BLUFF MOSS BLUFF NEWS (W) SULPHUR SOUTHWEST DAILY NEWS (D) GUARDIAN (S) VINTON VINTON NEWS (W) WESTLAKE WESTLAKE NEWS (W)
MICHIGAN CHEBOYGAN CHEBOYGAN DAILY TRIBUNE (D) SHOPPERS FAIR (S) IONIA SENTINEL-STANDARD (D) SENTINEL STANDARD TMC (T) SAULT STE MARIE THE EVENING NEWS (D) TRI COUNTY BUYERS GUIDE (T)
MINNESOTA CROOKSTON CROOKSTON DAILY TIMES (D) CROOKSTON VALLEY SHOPPER (S) GRANITE FALLS GRANITE FALLS/CLARKSFIELD ADVOCATE-TRIBUNE (W) MONTEVIDEO MONTEVIDEO AMERICAN NEWS (W) THE STAR ADVISOR (S) REDWOOD FALLS REDWOOD FALLS GAZETTE (W) REDWOOD FALLS LIVEWIRE (S) ST. JAMES ST. JAMES PLAIN DEALER (W) TOWN AND COUNTRY SHOPPER (S) SLEEPY EYE SLEEPY EYE HERALD DISPATCH (W) THE SLEEPY EYE REMINDER (S)
MISSOURI BOONVILLE BOONVILLE DAILY NEWS (D) THE RECORD (T) BROOKFIELD DAILY NEWS BULLETIN (D) CAMDENTON LAKE SUN LEADER (D)
CARTHAGE THE CARTHAGE PRESS (D) THE CARTHAGE PRESS SCOPE (T) CHILLICOTHE C.T. EXTRA (S) CONSTITUTION TRIBUNE (D) GREENFIELD LAKE STOCKTON SHOPPER (S) MILLER PRESS (W) THE VEDETTE (W) KIRKSVILLE KIRKSVILLE CRIER (S) KIRKSVILLE DAILY EXPRESS & NEWS (D) MACON CHRONICLE HERALD (D) MACON JOURNAL (T) MARCELINE MARCELINE PRESS (W) SHO-ME SHOPPER (S) MEXICO THE MEXICO LEDGER (D) THE MEXICO LEDGER TMC (T) MONROE CITY MARK TWAIN REGIONAL NEWS (F) MONROE CITY NEWS (W) NEOSHO NEOSHO DAILY NEWS (D) NEOSHO DAILY NEWS "ETC." (T) NEOSHO DAILY NEWS "SUNDAY" (W) OSAGE BEACH VACATION NEWS (F) ROLLA ROLLA DAILY NEWS (D) ROLLA DAILY NEWS "PLUS" (T) ST. JAMES ADVERTISER (T) ST. JAMES LEADER JOURNAL (W) WAYNESVILLE THE DAILY GUIDE (D) DAILY GUIDE EXTRA (T) FORT WOOD CONSTITUTION (F)
NEW YORK BATH STEUBEN COURIER ADVOCATE (F) CANISTEO HORNELL CANISTEO PENN-E-SAVER (S) DANSVILLE GENESEE COUNTY EXPRESS (W) GENESEEWAY SHOPPER (S) FT. PLAIN MOHAWK VALLEY PENNYSAVER (S) HERKIMER THE EVENING TELEGRAM (D) IMAGES (F) HORNELL EVENING TRIBUNE (D) THE SPECTATOR (SUNDAY) (W) THE TRIBUNE EXTRA (T) HORSEHEADS THE SHOPPER (S) LIBERTY CATSKILL SHOPPER (S) LITTLE FALLS THE EVENING TIMES (D) TIMES-SAVER (T) PAINTED POST CORNING-ELMIRA PENNYSAVER (S) PENN YAN CHRONICLE AD-VISER (S) THE CHRONICLE-EXPRESS (W) SAUGERTIES MOUNTAIN PENNYSAVER (F) SAUGERTIES PENNYSAVER(S) SAUGERTIES POST STAR (W) SYRACUSE THE BUSINESS RECORD (W)
WELLSVILLE ALLEGANY CO. PENNYSAVER (S) WELLSVILLE DAILY REPORTER (D) WELLSVILLE DAILY TMC (T)
NORTH DAKOTA DEVILS LAKE DEVILS LAKE DAILY JOURNAL (D) THE COUNTY PEDDLER (W)
PENNSYLVANIA CARBONDALE THE CARBONDALE NEWS (W) CORRY CORRY JOURNAL (D) CORRY JOURNAL TMC (T) HONESDALE THE INDEPENDENT EXTRA (T) THE WAYNE INDEPENDENT (D) KANE KANE REPUBLICAN (D) MILTON LEWISBURG DAILY JOURNAL (D) MILTON DAILY STANDARD (D) THE STANDARD-JOURNAL (T) MOSCOW/HAMLIN THE VILLAGER (W) PUNXSUTAWNEY COUNTRY NEIGHBORS (F) THE PUNXSUTAWNEY SPIRIT (D) THE (PUNXSUTAWNEY) SPIRIT TMC (T) RIDGWAY THE RIDGWAY RECORD (D) SHOP-RIGHT (S) SAINT MARY'S THE DAILY PRESS (D) THE DAILY PRESS TMC (T) SAYRE THE EVENING TIMES (D) THE TIMES EXTRA (T) TITUSVILLE TITUSVILLE HERALD (D) TITUSVILLE HERALD TMC (T) WARREN WARREN COUNTY GUIDE (F) WAYNESBORO THE RECORD HERALD (D) RECORD HERALD SHOPPERS EXPRESS (S)
WEST VIRGINIA KEYSER MINERAL DAILY NEWS TRIBUNE (D) NEWS TRIBUNE & MOUNTAIN ECHO (W) TODAY'S SHOPPER (S)
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in a number of legal proceedings which have arisen in the ordinary course of business. In the opinion of management, the outcome of these legal proceedings will not have a material adverse impact on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public market for the Company's Common Stock. As set forth in Item 12, 72,000 shares (90% of the total shares) are owned by Green Equity Investors II, L.P. (GEI). The remaining shares of the Common Stock are owned by certain officers and other management personnel of the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected historical financial data of the Company. The selected historical financial data as of and for the years ended December 31, 1995, 1996, 1997 and 1998, are derived from the historical financial statements of the Company. The selected historical financial data for the year ended December 31, 1994 has been derived from the unaudited financial statements of the Company and include, in the opinion of the Company, all adjustments necessary to present fairly the data for such periods. The data presented below should be read in conjunction with the financial statements, including the notes thereto, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Form 10-K.
Newspaper EBITDA includes income from operations adjusted to exclude depreciation and amortization expense, Corporate expenses, and non-cash compensation.
NOTES TO SELECTED FINANCIAL DATA
(1) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred financing costs, and dividends on preferred stock. The ratio of earnings to fixed charges is helpful to investors as it provides a measure, generally calculated consistently by all companies, of a company's ability to meet its debt service requirements. For the year ended December 31, 1997 earnings were sufficient to cover fixed charges by $12.2 million and for the year ended December 31, 1998 earnings were insufficient to cover fixed charges by $6.9 million.
ITEM 7.
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 historical financial data of the Company for the period before January 1, 1998 refers to the operations of the Company when it was owned by American Publishing Company ("APC"), a wholly owned subsidiary of Hollinger International, Inc. Effective January 1, 1998 the Company purchased substantially all of the assets and assumed certain liabilities that were used in the business of publishing and distributing certain local newspapers ("the Initial Acquisition"). 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 its 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, performance and business prospects in 1999, and beyond could differ materially from those expressed in, or implied by, such forward-looking statements. See "Disclosure Regarding Forward-Looking Statements" on page 3 for a discussion of features that could cause or contribute to such material differences.
OVERVIEW
The Company is a leading U.S. publisher of local newspapers and related publications that are the dominant source of local news and print advertising in their markets. The Company's revenues are derived from advertising (73% of 1998 total revenues), circulation (20%) and job printing and other (7%).
The Company's primary costs and expenses are comprised of operating costs and selling, general and administrative expenses. Salaries and employee benefits are the Company's largest operating costs. The Company has been able to control salaries and employee benefit expenses by realizing efficiencies from the implementation of new technologies and the achievement of synergies from its strategy of geographically clustering its newspaper operations. Liberty Group Publishing, Inc. ("LGP") was formed for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger International Inc.("Hollinger"). LGP is a holding company for its wholly-owned subsidiary Liberty Group Operating, Inc ("Operating Company"). The consolidated financial statements include the accounts of LGP and Operating Company and its consolidated subsidiaries (the "Company").
On January 27, 1998, the Company acquired from Hollinger virtually all of the assets and assumed certain liabilities that were used primarily in the business of publishing, marketing and distributing certain local newspapers (the "Initial Acquisition"). The initial purchase price including fees and expenses was $322.4 million. The effective date of the Initial Acquisition was January 1, 1998.
In the accompanying financial statements the terms "Liberty Group Publishing" or the "Company" when used with respect to periods prior to January 1, 1998 refer to the combined group of newspapers sold by APC and when used with respect to periods subsequent to January 1, 1998 refers to Liberty Group Publishing, Inc. and its consolidated subsidiaries. The combined historical financial information of the newspapers acquired from APC prior to the Initial Acquisition on January 1, 1998 is referred to as "Predecessor" while the consolidated financial information of the Company subsequent to the date of the Initial Acquisition is referred to as "Successor."
The Company has accounted for the Initial Acquisition using the purchase method of accounting. Accordingly, the costs of the Initial Acquisition have been allocated to the assets acquired and liabilities assumed based upon their respective fair values using independent valuations. The costs of certain intangible assets acquired of $296.5 million are being amortized over periods ranging from 5 to 40 years. Because of the purchase price allocation, the accompanying financial statements of Successor are not directly comparable to those of Predecessor.
Certain administrative services, including accounting, payroll, administration, tax services and financial reporting, were historically performed for the Company by APC. The Company was charged directly by APC for certain of such services and also paid a management fee to APC that was based upon a percentage of total revenues. At the end of January 1998, the management fee to APC was replaced by a Transitional Services Agreement that allows for certain administrative services to be provided by APC at cost until the Company can establish capabilities to provide its administrative services in-house. The Company provides all of its administration in-house as of April 1, 1999 and has terminated the Transitional Services Agreement effective March 31, 1999.
Prior to the Initial Acquisition, the Company operated as a business unit of APC and as such did not file separate tax returns. The income tax provision included in the Predecessor's financial statements was computed as if the Predecessor were a separate company. Subsequent to the Initial Acquisition, the Company has been and anticipates that it will be, for the foreseeable future, in a tax loss position. Given the uncertainty as to the timing of the Company's ability to utilize such losses to offset future taxable income, the Company does not presently anticipate recording any tax benefit associated with its pre-tax losses. In addition to the Initial Acquisition, due to the acquisition of the Company's assets from APC, the Company's asset values and capital structure are materially different than those set forth in the Predecessor's financial statements for periods preceding the Initial Acquisition and, accordingly, historical interest expense is not indicative of the interest expense that the Company incurs as a separate company.
The results of operations and cash flows of the Predecessor have been consolidated with those of the Company from January 1, 1998, the effective date upon which the Company and APC agreed as to the change of control of the newspapers to the Company.
In addition to the Initial Acquisition, during 1998, the Company acquired 91 publications in 18 transactions for a total acquisition cost of $61.8 million.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of operations as a percentage of total revenues for the years ended December 31, 1996, 1997 and 1998.
EBITDA includes income from operations adjusted to exclude depreciation and amortization expense.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues for the year ended December 31, 1998 increased by $13.8 million, or 14%, to $112.5 million. The increase in revenue was primarily due to acquisitions with same store increases in advertising revenue offset by declines in printing revenue. The increase in total revenues for the year ended December 31, 1998 was comprised of a $11.9 million or 17% increase in advertising revenue and a $1.4 million or 6% increase in circulation revenue, and a $0.5 million or 6% increase in job printing and other revenue.
Operating costs for the year ended December 31, 1998 were $46.0 million or 41% of revenue which was an increase of $6.7 million over the year ended December 31, 1997 when operating costs were $39.3 million or 40% of revenue. This increase was primarily driven by higher newsprint prices, and the increase in the minimum wage that went into effect in September of 1997.
Selling, general and administrative expenses for the year ended December 31, 1998 increased by $7.1 million, to $36.3 million or 32% of revenues from $29.2 million for the year ended December 31, 1997 when expenses were 29% of revenues. The increase in selling, general and administrative expenses as a percentage of revenue for the year ended December 31, 1998 was primarily due to increases in management costs associated with becoming an independent company including management fees paid to the controlling stockholder, and by the increase in the minimum wage that went into effect in September of 1997.
Depreciation and amortization expense for the year ended December 31, 1998 increased by $4.4 million, to $11.9 million from $7.5 million for the year
ended December 31, 1997, as a result of the write-up in basis of assets acquired in the Initial Acquisition as well as subsequent acquisitions.
Income from operations for the year decreased by $4.5 million from $22.8 million or 23% of revenues to $18.3 million or 16% of revenues primarily due to higher depreciation and amortization charges as a result of the write-up in basis of assets acquired in the Initial Acquisition as well as subsequent acquisitions.
EBITDA for the year ended December 31, 1998 increased by $0.1 million, to $30.3 million from $30.2 million for the year ended December 31, 1997. The decrease in EBITDA as a percentage of revenue during the year ended December 31, 1998 was due to higher administrative expenses, increased newsprint costs, and the effect of the increase in the minimum wage in September of 1997.
EBITDA includes income from operations adjusted to exclude depreciation and amortization expenses. The Company believes that EBITDA provides additional information for determining its ability to meet future debt service requirements. However, EBITDA is not a defined term under Generally Accepted Accounting Principles ("GAAP") and is not indicative of operating income or cash flow from operations as determined under GAAP.
For the year ended December 31, 1998, the Company incurred a net loss of $6.9 million which is not directly comparable to the prior year due primarily to higher depreciation and amortization expenses, increased interest expense, and higher administrative expenses associated the Initial Acquisition and subsequent acquisitions.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total Revenues. Total revenues for the year ended December 31, 1997 increased by $1.2 million, or 1%, to $98.7 million from $97.5 million for the year ended December 31, 1996. The increase in total revenues was comprised of a $1.9 million increase in advertising revenue and a $0.4 million increase in circulation revenue offset by a $1.1 million decrease in job printing and other revenue. During the year ended December 31, 1997, the Company acquired publications in two markets. The publications acquired during the year ended December 31, 1997 contributed $0.8 million to total revenues for such period. The increase in advertising revenue during the year ended December 31, 1997 was primarily due to general continued strength in demand for advertising in the Company's markets. The increase in circulation revenue during the year ended December 31, 1997 was primarily due to increases in the cover prices of selected newspaper publications. The decrease in job printing and other revenue during the year ended December 31, 1997 was primarily due to the Company pursuing fewer opportunities for commercial printing than in the prior year.
Operating Costs. Operating costs for the year ended December 31, 1997 decreased by $0.4 million, or 1%, to $39.3 million from $39.7 million for the year ended December 31, 1996. Operating costs decreased as a percentage of total revenues to 40% for the year ended December 31, 1997 from 41% for the year ended December 31, 1996. Approximately $1.3 million of the decrease in operating costs as a percentage of total revenues during the year ended December 31, 1997 was due to declines in newsprint prices and approximately $0.7 million of the decrease was due to the continued successful implementation of cost controls at the Company's publications.
Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 1997 decreased by $0.7 million, or 3%, to $29.2 million from $29.9 million for the year ended December 31, 1996. Selling, general and administrative expenses decreased as a percentage of total revenues to 29% for the year ended December 31, 1997 from 30% for the year ended December 31, 1996. The decrease in selling, general and administrative expenses during the year ended December 31, 1997 was primarily due to the continued implementation of cost controls at the Company's publications.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 1997 decreased by $0.4 million, or 4%, to $7.5 million from $7.9 million for the year ended December 31, 1996. As a percentage of revenues, depreciation and amortization was 8% in 1997 and 1996.
Income from Operations. Income from operations for the year ended December 31, 1997 increased by $2.7 million, or 13%, to $22.8 million from $20.1 million for the year ended December 31, 1996. Income from operations as a percentage of total revenues increased to 23% for the year ended December 31, 1997 from 21% for the year ended December 31, 1996. The increase in income from operations was primarily due to higher total revenues and lower operating costs described above.
EBITDA. EBITDA for the year ended December 31, 1997 increased by $2.3 million, or 8%, to $30.2 million from $28.0 million for the year ended December 31, 1996. EBITDA margin increased to 30.6% for the year ended December 31, 1997 from 28.7% for the year ended December 31, 1996. The increase in EBITDA and EBITDA margin during the year ended December 31, 1997 was primarily due to higher total revenues and lower operating costs described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities. Net cash provided by operating activities for the year ended December 31, 1998 increased by $7.3 million to $21.9 million compared with $14.6 million for the year ended December 31, 1997. The increase in net working capital is due to increases in accounts receivable and inventory offset by increases in accounts payable and accrued charges.
Cash Flows From Investing Activities. Net cash used in investing activities for the year ended December 31, 1998 reflects the Initial Acquisition of substantially all of the assets and liabilities of 166 newspapers, plus associated fees and expenses totaling $322.4 million. The Company acquired an additional 91 publications during 1998 for $61.8 million. As a result, cash flow from investing activities is not comparable to the prior period. The Company's capital expenditures consist of the purchase of machinery, equipment, furniture and fixtures relating to its publishing operations. The Company has no material commitments for capital expenditures, but will continue to pursue its strategy of opportunistically purchasing local newspapers in contiguous markets and clusters of local newspapers in new markets. The Company will only pursue acquisitions that it believes would contribute to the Company's overall cash flow growth.
Cash Flows From Financing Activities. Net cash flows from financing activities for the year ended December 31, 1998 reflect the initial capitalization of the Company through the issuance of Common Stock and Senior Subordinated Notes, net of associated fees, and is not directly comparable to the prior year. The Company is subject to certain covenants that limit its ability to pay dividends and make other restricted payments and does not expect to pay cash dividends in the foreseeable future
Liquidity. The Company's principal sources of funds will be cash provided by operating activities and borrowings under its Revolving Credit Facility. The Company believes that such funds will provide the Company with sufficient liquidity and capital resources to meet its current and financial obligations for the foreseeable future. See Note 7 to the Consolidated Financial Statements for a summary of the terms of the Revolving Credit Facility. The Company is dependent upon the cash flows of the Operating Company to fund the repayment of its borrowings and the redemption requirements under its respective preferred stock agreements.
LGP is highly leveraged and has indebtedness that is substantial in relation to its stockholders' deficit, tangible equity and cash flow. Total interest expense for the year ended December 31, 1998 was $25.2 million including non-cash interest of $5.6 million and amortization of debt issuance costs of $1.3 million. The degree to which LGP is leveraged could have important consequences, including the following: (i) for the fiscal year ending December 31, 1998, a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest on the Notes and interest on its other indebtedness, thereby reducing the funds available to the Company for other purposes; (ii) indebtedness under the Revolving Credit Facility is at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; (iii) the Company is substantially more leveraged than certain of it competitors, which might place the Company at a competitive disadvantage; (iv) the Company may be hindered in its ability to adjust rapidly to changing market conditions; (v) the Company's substantial degree of leverage could make it more vulnerable in the event of a downturn in general economic condition or other adverse events in its business; and (vi) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired.
YEAR 2000
The Company has implemented a program to assess, remediate and mitigate the potential impact of the Year 2000 problem throughout the Company. A Year 2000 problem will occur where date-sensitive software uses two digit year date fields, sorting the year 2000 ("00") before the year 1999 ("99"). The Year 2000 problem can arise in software, technology equipment, or any other equipment or process that uses embedded software, resulting in data corruption and processing errors.
The Company has evaluated its internal software and computer systems. Costs associated with addressing the risk of operational disruption from internal software system failures relating to Year 2000 issues amounted to approximately $0.5 million in 1998 and are estimated to approximate $0.2 million in 1999.
Management believes that the Company's systems will be substantially Year 2000 ready prior to the commencement of the year 2000. The Company does not have a material business risk from such Year 2000 issues provided the Company's suppliers, vendors, service providers and customers, over which the Company has no control, successfully address their own Year 2000 issues. The Company will attempt to assess and monitor its suppliers, vendors, service providers and customers Year 2000 remediation efforts.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Company implemented Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" as of January 1, 1998. This Statement establishes standards for the way public businesses report information about operating segments in annual financial statements and in interim financial reports. The commonality of products and operating characteristics, combined with the lack of distinction by customer, have resulted in management's determination that no reportable segments exist. Geographic disclosures are not appropriate as the Company's operations are contained solely within the U.S.
During 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", and Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities", both of which will be effective for the Company's 1999 financial statements. The Company is currently assessing the impacts of these new statements but does not expect any material effect on its consolidated financial position, liquidity, or results of operations.
QUARTERLY COMPARISONS
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 generally poor weather and a lack of holidays, the Company's first fiscal quarter is the Company's weakest revenue quarter of the year.
The following tables set forth an unaudited summary of quarterly financial data. This quarterly information has been prepared on the same basis as the annual consolidated financial statements and, in management's opinion, reflects all adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's subsidiary, Liberty Group Operating, Inc. has a $125.0 million Revolving Credit Facility that matures in January of 2003. Borrowings under the Revolving Credit Facility bear interest at an annual rate, at the Company's option equal to the Base Rate (as defined in the Credit Agreement) or the Eurodollar Rate (as defined in the Credit Agreement) plus a margin that varies based upon a ratio set forth in the Credit Agreement. As a result the Company's interest expense will be affected by changes in the Base Rate or in the Eurodollar Rate. At December 31, 1998, the Company had borrowed $46 million under this Revolving Credit Facility.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is included in the financial statements and notes thereto, and related Independent Auditors' Report, appearing on pages to of this Form 10-K, and in Item 7 of this Form 10-K under the heading "Quarterly Comparisons."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 10.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the name, age and position of individuals who serve as directors of the Company and executive officers of the Company. Each director of the Company will hold office until the next annual meeting of the stockholders or until his successor has been elected. Qualified officers of the Company are elected by their respective Boards of Directors and serve at the discretion of such Boards.
Kenneth L. Serota is President and Chief Executive Officer. Mr. Serota is also a director of LGP. He served as Vice President--Law & Finance and Secretary of Hollinger from May 1995 to December 1997 and as a director of APC from 1996 to 1997. Prior thereto, Mr. Serota served as Senior Vice President of a privately held frozen food manufacturer from June 1992 through March 1995. Previously, Mr. Serota served as an attorney and a certified public accountant in private practice. Mr. Serota has significant experience negotiating and closing acquisitions of newspaper publications and primarily focuses his efforts on executing the Company's acquisition program and overseeing all administrative functions of LGP.
Kenneth W. Cope is Executive Vice President and has primary responsibility for newspaper publications in the western region of the United States. Mr. Cope is also a director of LGP. He served as Deputy Chairman of APC from August 1996 to January 1998. Prior thereto, he served as Executive Vice President and a member of APC's Board of Directors from 1989 to 1996. Mr. Cope had been employed at APC since 1987 and had completed more than 50 acquisitions of local publications during his tenure at APC. Prior to his employment at APC, Mr. Cope was an owner of the Neosho Daily News in Neosho, Missouri, which is a publication acquired by the Company in the Initial Acquisition. Mr. Cope has more than 38 years' experience in the newspaper industry. Mr. Cope is also a director of Community Bank & Trust.
Scott T. Champion is Executive Vice President - Operations and has primary responsibility for all community newspaper publications. He served as a Senior Vice President of the Company for 1998. Prior thereto, he served as a 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 newspaper publications. Mr. Champion currently serves as the publisher of the Daily Review Atlas and Pennysaver in Monmouth, Illinois, which publications were acquired by the Company in the Initial Acquisition, and has served in such position since 1984. Mr. Champion has more than 18 years' experience in the newspaper industry.
Kevin O'Shea is Senior Vice President and the Chief Financial Officer. Mr. O'Shea served as Vice President and Corporate Treasurer of Bell & Howell Company from February 1996 to March 1998. From 1989 to 1996, Mr. O'Shea served as Vice President and Corporate Treasurer of Spencer Stuart, a global consulting firm. Prior thereto, Mr. O'Shea served as Vice President and treasurer/group controller for The Pritzker Organization, a large and diversified family holding company.
Gene A. Hall is Senior Vice President and has primary responsibility for newspaper publications in the midwestern region of the United States. He served as a Senior Vice President of APC from 1992 to 1998. Prior thereto, he served as a regional manager of APC and had been employed at APC since 1988. Prior to his employment at APC, Mr. Hall was the owner and publisher of the Charles City Press, Six County Shopper and The Extra in Charles City, Iowa. Mr. Hall currently serves as the publisher of the Charles City Press, Six County Shopper and The Extra, which publications were acquired by the Company in the Initial Acquisition, and has served in such positions since 1986. Mr. Hall has more than 28 years' experience in the newspaper industry. Mr. Hall is also a director of First Security Bank & Trust.
Joseph C. Piccirillo is Senior Vice President and has primary responsibility for newspaper publications in the eastern region of the United States. He served as a Senior Vice President of APC from 1994 to 1998. Prior thereto, he served as a regional manager of APC and had been employed at APC since 1987. Prior to his employment at APC, Mr. Piccirillo served as regional manager for the Bradford, Pennsylvania newspaper group that formed the core group of APC. Mr. Piccirillo currently serves as the publisher of The Ridgway Record and Shop-Right in Ridgway, Pennsylvania, which publications were acquired by the Company in the Initial Acquisition, and has served in such position since 1971. Mr. Piccirillo has more than 40 years' experience in the newspaper industry. Leonard I. Green is the Chairman of the Board of Directors of LGP. He has been an executive officer and an equity owner of Leonard Green & Partners, L.P., a merchant banking firm that manages GEI, since the formation of Leonard Green & Partners, L.P. and GEI in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). Mr. Green has also been, individually or through a corporation, a partner in LGA, a merchant banking firm, since its inception in 1989. Prior to forming LGA, Mr. Green had been a partner of Gibbons, Green, van Amerongen for more than five years. Mr. Green is also a director of Rite Aid Corporation, Carr-Gottstein Foods Co., Communications & Power Industries, Inc. and Hechinger Company.
Gregory J. Annick is a director of LGP. He has been an executive officer and an equity owner, through a trust, of Leonard Green & Partners, L.P., a merchant banking firm that manages GEI, since the formation of LGP and GEI in 1994 by the principals of LGA. He joined LGA as an associate in 1989, became a principal in 1993, and through a corporation became a partner of LGA in 1994. From 1988 to 1989, Mr. Annick was an associate with the merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of Carr-Gottstein Foods Co., Communications & Power Industries, Inc., Leslie's Poolmart, Inc. and Hechinger Company.
John G. Danhakl is a director of LGP. He has been an executive officer and an equity owner of Leonard Green & Partners, L.P., a merchant banking firm that manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated ("Drexel"). Mr. Danhakl is also a director of Big 5 Corp., Communications & Power Industries, Inc., Leslie's Poolmart, Inc., Hechinger Company, Twinlab Corporation and The Arden Group, Inc.
Peter J. Nolan is a director of LGP. He has been an executive officer and an equity owner of Leonard Green & Partners, L.P., a merchant banking firm that manages GEI, since April 1997. Mr. Nolan had previously been a Managing Director of DLJ and Co-Head of DLJ's Los Angeles Investment Banking Division and had been with DLJ since 1990. Prior to joining DLJ, Mr. Nolan was a First Vice President at Drexel. Mr. Nolan is also a director of Wavetek Corporation.
Item 11.
Item 11. Executive Compensation.
(1) Mr. Serota's other compensation consists of a transfer of 1,600 common shares from the controlling stockholder valued at $160,000, plus the related tax gross-up of $132,237, upon the commencement of his employment, plus $77,169 in loan forgiveness pursuant to his employment agreement, plus a $5,000 contribution to a deferred compensation plan and a car allowance of $5,769.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Directors and Executive Officers own 99% of the common stock as a group.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENT
LGP and Kenneth Serota have entered into an employment agreement, dated as of November 21, 1997 (the "Employment Agreement"), whereby Mr. Serota has agreed to serve as President and Chief Executive Officer of the Company for a period of three years commencing January 1, 1998 and for additional successive one-year periods thereafter, unless either party gives timely notice to the other that the employment term shall not be so extended. The Employment Agreement provides for a base salary of $350,000, $375,000 and $400,000 for the years 1998, 1999 and 2000, respectively, and those benefits generally available to the employees of the Company, including life insurance, health insurance, deferred compensation and profit sharing. In addition to receiving a base salary, Mr. Serota is eligible to receive a bonus based on the attainment of applicable performance standards agreeable to the Company and Mr. Serota, including standards based on annual revenue growth, EBITDA growth, completion of reasonably acceptable acquisitions and growth of acquired properties. The Employment Agreement also provides, subject to certain exceptions, that upon a termination of Mr. Serota's employment during the term thereof (other than for "cause" as defined therein or voluntary resignation), the Company is generally obligated to pay Mr. Serota the greater of one year's salary or an amount equal to his base salary for the remaining term under the Employment Agreement plus, in either case, a portion of his bonus for the year of termination. The Company has also loaned to Mr. Serota $250,000 pursuant to an Unsecured Promissory Note dated January 27, 1998. The amount of the loan will be forgiven by the Company pro rata on a daily basis during the initial three-year term of the Employment Agreement and shall be forgiven in its entirety if Mr. Serota is terminated by the Company without cause, if Mr. Serota terminates his employment for good reason (as defined therein), death or disability, or upon the consummation of an initial public offering of securities of the Company.
On January 27, 1998, in satisfaction of the Company's obligations under the terms of the Employment Agreement, GEI transferred to Mr. Serota 2% of the fully-diluted equity of LGP and, in addition, Mr. Serota purchased from GEI an additional 2% of the fully-diluted equity of the Company for the price and on the terms and conditions such equity was purchased by GEI. The Company loaned to Mr. Serota 50% of the purchase price of such shares pursuant to a Secured Recourse Promissory Note dated January 27, 1998. Such loan bears interest at a rate equal to the applicable federal rate for loans of the same maturity as of the date of the loan. The outstanding principal amount of the loan, together with all interest accrued thereon, will be due and payable in full upon the earlier of (i) a change in control (as defined in the Employment Agreement) or (ii) January 1, 2001. The Employment Agreement provides certain "call" rights to the Company, which are generally exercisable upon Mr. Serota's termination of employment with the Company.
Subsequent to the purchase of such shares by Mr. Serota and the Management Investors (as defined below), GEI owned 90% of the Company's Common Stock. LGP, in turn, owns 100% of the outstanding common stock of Liberty Group Operating. See "Directors and Officers of Registrant," "Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management."
MANAGEMENT SHARES
On January 27, 1998, GEI transferred an aggregate of 3,200 shares of Common Stock ("Management Shares") to the Chief Executive Officer of the Company, Mr. Serota, pursuant to a management stockholders agreement (the "Management Stockholders Agreement"). The Management Stockholders Agreement contains a "call" option exercisable by LGP upon termination of Mr. Serota's employment with LGP or Liberty Group Operating, a right of first refusal in favor of Mr. Serota, certain "piggyback" registration rights, "tag-along" sale rights and "drag-along" sale obligations consistent with the terms of the Employment Agreement. In addition, LGP or GEI may sell shares of LGP Common Stock to other current or prospective officers and employees of Liberty Group Operating (together with the Senior Management Investors, the "Management Investors"). As of the date hereof, a total of 4,800 Management Shares have been transferred to employees other than Mr. Serota at a price of $100 per share, for total consideration of $480,000.
Shares of LGP Common Stock were sold to Management Investors pursuant to Management Subscription and Stockholders Agreements among LGP, GEI and the respective Management Investor (each such agreement, a "Management Share Agreement"). Pursuant to the Management Share Agreements, transfers of the Management Shares (other than transfers to certain related transferees) are subject to various restrictions, including a right of first refusal in favor of LGP. Each Management Share Agreement also contains a "call" option exercisable by LGP upon termination of the Management Investor's employment with LGP, Liberty Group Operating and their subsidiaries. The Management Share Agreements also contain certain "piggyback" registration rights, "tag-along" sale rights and "drag-along" sale obligations. These rights and obligations lapse upon the occurrence of certain events. Each Management Share Agreement contains a noncompetition provision which prohibits a Management Investor from competing, directly or indirectly, with the Company's publications located within certain designated communities for a period of three years from the termination date of such Management Investor's employment with the Company or its subsidiaries.
COMPENSATION OF DIRECTORS
Individuals who are officers of Liberty Group Operating and LGP, as well as Messrs. Green, Annick, Danhakl and Nolan, do not receive any
compensation directly for their service on LGP's and Liberty Group Operating's Boards of Directors. Liberty Group Operating has agreed, however, to pay LGP certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions - -- Management Fees".
MANAGEMENT FEES
Upon the consummation of the Initial Acquisition, Leonard Green & Partners L.P. received a fee of $6.8 million for its services in arranging and structuring the Initial Acquisition. Leonard Green & Partners L.P. is an affiliate of Green Equity Investors II, L.P., an investment partnership which owns approximately 90% of LGP Common Stock and all outstanding shares of LGP Junior Preferred Stock. LGP, in turn, owns 100% of the outstanding common stock of Liberty Group Operating.
In connection with the Initial Acquisition, Liberty Group Operating entered into a Management Agreement with Leonard Green & Partners L.P. pursuant to which Liberty Group Operating agreed to pay Leonard Green & Partners L.P. an annual management fee of $1.0 million. Such fee is payable in equal monthly installments, but is subordinated in right of payment to the Senior Discount Debentures and the Senior Subordinated Notes. See "Directors and Officers of Registrant." "Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management." PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements, Financial Statement Schedules and Exhibits.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1997 and 1998.
Consolidated Statements of Operations for the years ended December 31, 1996, 1997, and 1998.
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1997, and 1998.
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997, and 1998.
Notes to Consolidated Financial Statements.
2. The following financial statement schedule of the Company and the related report of independent auditors are intended as pages S-1 and S-2 of this Form 10-K: Report of Independent Auditors Schedule II - Valuation and Qualifying Accounts. All other financial statement schedules are omitted because such schedules are not required or the information required has been presented in the aforementioned financial statements.
3. The following exhibits are filed with this Form 10-K or incorporated by reference as set forth below.
EXHIBIT INDEX
No reports on Form 8-K were filed during the year ended December 31, 1998. On January 28, 1999, the Company filed Form 8-K for its acquisition of Life Printing & Publishing Co., Inc. a group of 17 weekly publications based in Oak Brook, Illinois, and certain real property in Oak Brook, Illinois owned by Jongo Real Estate Partnership. INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors Liberty Group Publishing, Inc.:
We have audited the accompanying consolidated balance sheet of Liberty Group Publishing, Inc. and subsidiaries (Successor) as of December 31, 1998, and the combined statement of net assets of the Local Newspaper Group of American Publishing Company (Predecessor) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 1998 (Successor period), and the related combined statements of operations and changes in net assets and cash flows for each of the years in the two-year period ended December 31, 1997 (Predecessor periods). These consolidated and combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of Liberty Group Publishing, Inc. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the Successor period, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor combined financial statements present fairly, in all material respects, the financial position of the Local Newspaper Group of American Publishing Company as of December 31, 1997, and the results of their operations and their cash flows for the Predecessor periods, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective January 1, 1998, Liberty Group Publishing, Inc. and subsidiaries acquired the assets and assumed certain liabilities of the Local Newspaper Group of American Publishing Company in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than for the periods before the acquisition and, therefore, is not comparable.
/s/ KPMG LLP
Chicago, Illinois March 30, 1999
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to consolidated financial statements. LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
See accompanying notes to consolidated financial statements.
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
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 251 publications in 15 states. The Company's total revenues are derived from advertising (73% of 1998 total revenues), circulation (20%) and job printing and other (7%). Raw materials, mainly newsprint and ink, are readily available from a number of suppliers. No single customer accounts for a significant percentage of revenues.
(b) BASIS OF PRESENTATION
Liberty Group Publishing, Inc. ("LGP") was formed for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company or its subsidiaries ("APC"), a wholly-owned subsidiary of Hollinger International Inc. ("Hollinger"). LGP is a holding company for its wholly-owned subsidiary Liberty Group Operating, Inc. ("Operating Company"). The consolidated financial statements include the accounts of LGP and Operating Company and their consolidated subsidiaries (the "Company").
On January 27, 1998, the Company acquired from Hollinger virtually all of the assets and assumed certain liabilities that were used primarily in the business of publishing, marketing and distributing certain local newspapers (the "Initial Acquisition"). The initial purchase price including fees and expenses was $322,378. The effective date of the Initial Acquisition was January 1, 1998.
Prior to the Initial Acquisition, the Company's operations represented a portion of APC and the Company's operations were financed through APC. The accompanying consolidated financial statements represent all of the assets and associated revenues, expenses, and cash flows of the Company, assuming that the Company was organized for all periods as a separate legal entity. Intercompany transactions between newspapers owned by the Company have been eliminated.
The historical interest expense represents an allocation of APC's interest expense (calculated as APC's weighted average interest rate of 10.45% and 10.64% for the years ended December 31, 1996 and 1997, respectively, applied to the average balances of the net assets of the Business for each respective period). Because the Company's capital structure changed significantly as a result of the Initial Acquisition, historical interest expense is not necessarily indicative of the interest expense that the Company would have incurred as a separate independent entity.
In the accompanying financial statements the terms "Liberty Group Publishing" or the "Company" when used with respect to periods prior to January 1, 1998 refer to the combined group of newspapers sold by APC (the Local Newspaper Group of American Publishing Company) and when used with respect to periods subsequent to January 1, 1998 refers to Liberty Group Publishing, Inc. and its consolidated subsidiaries. The combined historical financial information of the newspapers acquired from APC prior to the Initial Acquisition on January 1, 1998 is referred to as "Predecessor" while the consolidated financial information of the newspaper subsequent to the date of the Initial Acquisition is referred to as "Successor."
The Company has accounted for the Initial Acquistion using the purchase method of accounting. Accordingly, the costs of the Initial Acquisition have been allocated to the assets acquired and liabilities assumed based upon their respective fair values using independent valuations. The costs of certain intangible assets acquired of $296.5 million are being amortized over periods ranging from 5 to 40 years. Because of the purchase price allocation, the accompanying financial statements of Successor are not directly comparable to those of Predecessor.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(d) INVENTORIES
Inventories consist principally of newsprint, which is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) or moving-average method.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Routine maintenance and repairs are expensed as incurred.
Depreciation is calculated under the straight-line method over the estimated useful lives, principally 25 years for buildings and improvements and 5 to 10 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
(f) INTANGIBLE ASSETS
Intangible assets consist principally of circulation-related assets, noncompetition agreements with former owners of acquired newspapers, and the excess of acquisition costs over estimated fair value of net assets acquired
(goodwill). The fair market value of intangible assets purchased is determined primarily through the use of independent appraisals. Amortization is calculated using the straight-line method over the respective estimated useful lives ranging from 33 years for circulation related assets, up to 10 years for noncompetition agreements depending upon the specifics of the agreement, and 40 years for advertiser lists and goodwill.
The Company assesses the recoverability of its long-lived assets, such as property, plant and equipment and intangible assets, whenever events or changes in business circumstances indicate the carrying amount of the assets, or related group of assets, may not be fully recoverable. Factors leading to impairment include a combination of historical losses, anticipated future losses and inadequate cash flow. The assessment of recoverability is based on management's estimate. If undiscounted operating cash flows do not exceed the net book value of the long-lived assets, then a permanent impairment has occurred. The Company would record the difference between the net book value of the long-lived asset and the fair value of such asset as a charge against income in the consolidated statement of operations if such a difference arose.
(g) REVENUE RECOGNITION
Circulation revenue, which is billed to the customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. Advertising revenue is recognized upon publication of the advertisements. The revenue for job printing is recognized upon delivery.
(h) INCOME TAXES
Subsequent to the Initial Acquisition, the Company has been, and anticipates that it will be for the foreseeable future, in a tax loss position. Given the uncertainty as to the timing of the Company's ability to utilize such losses to offset future taxable income, the Company does not presently anticipate recording any tax benefit associated with its pre-tax losses. Prior to the Initial Acquisition, the Company represents a business unit of APC and as such did not file separate income tax returns. The income tax provision included in the accompanying consolidated statements of operations has been computed as if the Company were a separate company.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Historical results of the predecessor reflect current income taxes as transfers to APC as APC is responsible for the payment of income tax liabilities. State income taxes were computed utilizing a blended state rate of 5%, which is net of federal income tax benefit.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS AND LONG-LIVED ASSETS
The Company has reviewed the following financial instruments and determined that their fair values approximated their carrying values as of December 31, 1998: cash equivalents; borrowings under line of credit; accounts receivable; accounts payable and accrued expenses; Senior Subordinated Notes; Senior discount debentures; and long-term liabilities,
(j) CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and highly liquid certificates of deposit with a maximum term at origination of three months or less.
(k) RECLASSIFICATIONS
Certain amounts in prior years' financial statements and related notes have been reclassified to conform to the 1998 presentation.
(2) ACQUISITIONS
During 1998, the Company acquired substantially all of the assets of 166 newspapers for $322,378. The Company also acquired certain other newspapers for an aggregate purchase price of approximately $61,787. The purchase prices were allocated to the assets using the purchase method of accounting. The excess of the purchase prices over the estimated fair value of the tangible and identifiable intangible assets acquired (goodwill) was $125,496 for the year ended December 31, 1998. Results of the acquired newspaper businesses have been included in consolidated statements of operations since the dates of acquisition.
The following unaudited pro forma summary presents the Company's results of operations as if the acquisitions accounted for as purchases had occurred at the beginning of the period. This summary is provided for informational purposes only. It does not necessarily reflect the actual results that would have occurred had the acquisitions been made as of the begining of the period or of results that may occur in the future.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
(4) INTANGIBLE ASSETS
Intangible assets consisted of the following:
(5) ACCRUED EXPENSES
Accrued expenses consisted of the following:
(6) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1998 consists of the following:
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1998 are as follows:; 1999, $0; 2000, $0; 2001,$0; 2002, $0; and 2003, $0; and thereafter $236,102.
The Initial Acquisition, including the payment of related fees and expenses, was financed in part by: (i) $180,000 from the issuance and sale by the Operating Company of $180,000 aggregate principal amount of 9.375% Senior Subordinated Notes (the "Notes") due February 1, 2008 and (ii) $50,500 from the issuance and sale by LGP of $89,000 aggregate
principal amount of 11.625% Senior Discount Debentures (the "Debentures") due February 1, 2009.
The Notes were issued by the Operating Company and are general unsecured obligations of the Operating Company. The Notes are irrevocably and unconditionally joint and severally guaranteed by each of the Operating Company's existing and future subsidiaries. The Notes are redeemable for cash at the option of the Operating Company anytime after February 1, 2003 at stipulated redemption amounts or, in certain limited circumstances, are partially redeemable on or prior to February 1, 2001 at a redemption amount of 109.375% of their principal amount. In the event of a change in control of the Operating Company or the Company, the Company must offer to repurchase the Notes at 101% of their principal amount.
The Debentures issued by LGP are general unsecured obligations and pay no cash interest until February 1, 2003. The Debentures will, however, accrete on a semi-annual equivalent bonds basis to a full principal amount of $89,000 on February 1, 2003. Thereafter, cash interest on the Debentures will accrue and be payable semi-annually on February 1 and August 1 of each year. The Debentures are redeemable for cash at the option of LGP any time after February 1, 2003 at stipulated redemption amounts or, in certain limited circumstances, are partially redeemable on or prior to February 1, 2001 at a redemption amount of 111.625% of their accreted value. In the event of a change in control of LGP, LGP must offer to repurchase the Debentures at 101% of their accreted value. LGP is dependent upon the cash flows of the Operating Company to service these debt repayment requirements.
(7) REVOLVING CREDIT FACILITY
On January 27, 1998 the Operating Company entered into a five-year $125,000 revolving credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility is secured by substantially all of the tangible and intangible assets of the Operating Company. Borrowings under the revolving credit facility bear interest at an annual rate, at the Company's option equal to the Base Rate (as defined in the credit agreement) or the Eurodollar Rate (as defined in the credit agreement) plus a margin that varies based upon a ratio set forth in the credit agreement (the "Applicable Margin"). Under the terms of the Revolving Credit Facility, the Company pays a fee equal to the Applicable Margin for Eurodollar Rate Advances (as defined in the credit agreement) per annum on the aggregate amount of outstanding letters of credit. The Operating Company also pays a fee on the unused portion of the Revolving Credit Facility. At December 31, 1998 the Operating Company has utilized $46,000 of the Revolving Credit Facility. The Average Interest Rate on these Borrowings was slightly more than 7% per annum at December 31, 1998.
(8) LONG-TERM LIABILITY
The long-term liability principally represents amounts due under non-interest- bearing non-compete agreements through 2008.
The aggregate amount of principal payments at December 31, 1998 follows:
(9) ISSUANCE OF COMMON STOCK
On the date of the Initial Acquisition, the Company issued 80,000 shares of Common Stock, par value $0.01 per share. No other shares common shares were issued during the year.
(10) ISSUANCE OF PREFERRED STOCK
LGP has the authority to issue up to 21,255,000 shares of capital stock, of which 21,175,000 shares are designated as Preferred Stock, par value $0.01 per share, and 80,000 shares are designated as Common Stock, par value $0.01 per share. The Initial Acquisition, including the payment of related fees and expenses, was financed in part from the proceeds of (i) $45,000 from the issuance and sale of 1.8 million shares of 14.75% Senior Mandatory Redeemable Exchangeable Cumulative Preferred Stock (the "Senior Preferred Stock"), (ii) $49,000 from the issuance and sale of 49,000 shares of 10% Series B Junior Mandatory Redeemable Cumulative Preferred Stock (the "Junior Preferred Stock"), and (iii) $8,000 from the issuance and sale of 80,000 shares of Common Stock. 100% of the Junior Preferred Stock and 90% of the Common Stock is owned by Green Equity Investors II, L.P. the controlling stockholder of the Company. 10% of the Common Stock is owned by the Company's senior management team.
The Senior Preferred Stock issued by the Company is senior to the Common Stock and Junior Preferred Stock of the Company, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company. Dividends may be paid, at the Company's option, at any dividend payment date in cash or in additional shares of Senior Preferred Stock having a liquidation preference equal to the dividend amount. The liquidation preference of the Senior Preferred Stock is $25 per share.
The Senior Preferred Stock is redeemable at the option of the Company any time after February 1, 1999 at stipulated redemption amounts and is mandatorily redeemable, subject to certain conditions, on February 1, 2010 at a price equal to 100% of its liquidation preference per share. The Company has no obligation to redeem the preferred shares at any time prior to February 1, 2010. In the event of a change in control of the Company, the Company must offer to repurchase the Senior Preferred Stock at 100% of its liquidation preference per share, plus accrued but unpaid dividends. LGP is dependent upon the cash flows of the Operating Company to service these redemption requirements.
Except as required by law, the holders of shares of Senior Preferred Stock are generally not entitled or permitted to vote on any matters voted upon by the stockholders of the Company. Subject to certain conditions, the Senior Preferred Stock is exchangeable, on any dividend payment date, in whole, but not in part, at the option of the Company for 14.375% Senior Subordinated Debentures (the "Exchange Debentures") of the Company maturing February 1, 2010. The Exchange Debentures are redeemable prior to maturity on substantially the same terms as the Senior Preferred Stock. During 1998, the Company elected to pay all of its Senior Preferred Dividends in additional shares of Senior Preferred Stock. At December 31, 1998, the Company had accumlated but undeclared dividends of $1,235.
The Junior Preferred Stock issued by LGP is senior to the Common Stock of LGP, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company. Dividends may be paid, at the Company's option, at any dividend payment date in cash or in additional shares of Junior Preferred Stock having a liquidation preference equal to the dividend amount.
The Junior Preferred Stock is redeemable at the option of the Company at a price equal to 100% of its liquidation preference per share and is mandatorily redeemable on February 1, 2010 at a price equal to 100% of its Liquidation preference per share. The Company has no obligations to redeem the preferred shares at any time prior to February 1, 2010. In the event of a change in control of the Company, the Company must offer to repurchase the Junior Preferred Stock at 100% of its liquidation preference per share, plus accrued but unpaid dividends. LGP is dependent upon the cash flows of the Operating Company to service these redemption requirements.
Except as required by law, the holders of shares of Junior Preferred Stock are generally not entitled or permitted to vote on any matters voted upon by the stockholders of the Company. During 1998, the Company elected to pay all of its Junior Preferred Dividends in additional shares of Junior Preferred Stock. At December 31, 1998, the Company had accumlated but undeclared dividends of $880.
(11) INCOME TAXES
Income taxes for the periods shown below consisted of:
In 1996, 1997, and 1998, income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 35% in 1996 and 1997 and 34% in 1998 to earnings (loss) before income tax expense as a result of the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at 1997 and 1998 are presented below:
At December 31, 1998, the Company maintains net operating loss carryforwards for federal and state income tax purposes of $13,931, which are available to offset future taxable income, if any, and which begin to expire in 2018.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the lack of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes that a portion of the recorded deferred tax assets will not be recoverable. Accordingly, the Company has recorded a valuation allowance against certain federal and state deferred tax assets during 1998 amounting to $2,641.
The Company acquired deferred tax liabilities of $8,455 in 1998 through corporate acquisitions.
(12) EMPLOYEE BENEFIT PLANS
During 1998, the Company established certain benefit plans for its employees.
The Company established a defined contribution plan conforming to IRS rules for 401(k) plans, for all of its employees satisfying minimum service requirements as set forth under the plan. The plan allows for a discretionary matching contribution. The Company did not make a matching contribution in 1998.
The Company established three non-qualified deferred compensation plans, as described below, for certain of its employees.
The Company established the Liberty Group Publishing, Inc. Publishers' Deferred Compensation Plan ("Publishers Plan"), a non-qualified deferred compensation plan for the benefit of certain designated publishers of the Company's newspapers. Under the Publishers' Plan, the Company credits an amount to a bookkeeping account established for each participating publisher pursuant to a pre-determined formula which is based upon the gross operating profits of each such publisher's newspaper. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating publisher vest on an installment basis over a period of 15 years. A participating publisher forfeits all amounts under the Publishers' Plan in the event that the publisher's employment with the Company is terminated for "cause" as defined in the Publishers' Plan. Amounts credited to a participating publisher's bookkeeping account are distributable upon termination of the publisher's employment with the Company, and will be made in a lump sum or installments as elected by the publisher.
The Company established the Liberty Group Publishing, Inc. Executive Benefit Plan ("Executive Benefit Plan"), a non-qualified deferred compensation plan for the benefit of certain key employees of the Company. Under the Executive Benefit Plan, the Company credits an amount, determined by the Company's sole discretion, to a bookkeeping account established for each participating key employee. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. The amounts credited to the bookkeeping account on behalf of each participating key employee vest on an installment basis over a period of 5 years. A participating key employee forfeits all amounts under the Executive Benefit Plan in the event that the key employee's employment with the Company is terminated for "cause" as defined in the Executive Benefit Plan. Amounts credited to a participating key employee's bookkeeping account are distributable upon termination of the key employee's employment with the Company, and will be made in a lump sum or installments as elected by the key employee.
The Company established the Liberty Group Publishing, Inc. Executive Deferral Plan ("Executive Deferral Plan"), a non-qualified deferred compensation plan for the benefit of certain key employees of the Company. Under the Executive Deferral Plan, eligible key employees may elect to defer a portion of their compensation for payment at a later date. Currently, the Executive Deferral Plan allows a participating key employee to defer up to 100% of his or her annual compensation until termination of employment or such earlier period as elected by the participating key employee. Amounts deferred are credited to a bookkeeping account established by the Company for this purpose. The bookkeeping account is credited with earnings and losses based upon the investment choices selected by the participant. Amounts deferred under the Executive Deferral Plan are fully vested and nonforfeitable. The amounts in the bookkeeping account are payable to the key employee at the time and in the manner elected by the key employee.
(13) RELATED PARTY TRANSACTIONS
EXECUTIVE STOCK INVESTMENTS
During 1998, the majority common stockholder transferred 1,600 common shares to the Chief Executive Officer upon the commencement of his employment. This transaction was treated as a compensation expense and an additional contribution to paid in capital.
The Company has loaned the Chief Executive Officer $250 pursuant to an Unsecured Promissory Note. The Loan will be forgiven on a pro rata Daily Basis from January 28, 1998 to January 28, 2001. The Loan will be forgiven in its entirety if the Chief Executive Officer is terminated by the Company without cause or if the Chief Executive Officer terminates his employment for good reason (as defined in the agreement) death, disability, or upon the consummation of an initial public offering of securities of the Company.
In addition, certain other executives were given the opportunity to purchase common stock in the Company. Under the plan, each executive paid cash for 50% of their stock investment and executed a five year note for the remaining 50%. The Company has the right to repurchase the common stock at the original cost if the executive terminates his employment or is terminated for cause.
MANAGEMENT FEES
During 1998, the Company paid $917 in management fees to its majority common stockholder.
(14) SUBSEQUENT EVENTS
In January of 1999, the Company purchased all of the stock of Life Printing & Publishing a chain of 17 weekly publications in Oak Brook, Illinois with a combined circulation of 120,000. In February 1999, the Company has also purchased the 31,000 circulation Halstad Shopper located in Halstad, Minnesota.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors Liberty Group Publishing, Inc.:
Under date of March 30, 1999, we reported on the consolidated balance sheet of Liberty Group Publishing, Inc. and subsidiaries (Successor) as of December 31, 1998, and the combined statement of net assets of the Local Newspaper Group of American Publishing Company (Predecessor) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1998 (Successor period), and the related combined statements of operations and changes in net assets and cash flows for each of the years in the two-year period ended December 31, 1997, as contained in the 1998 Form 10-K. In connection with our audits of the aforementioned consolidated and combined financial statements, we also audited the related financial statement schedule. The financial statement schedule is the responsibility of the Companies' management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated and combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois March 30, 1999
S-1 SCHEDULE II
LIBERTY GROUP PUBLISHING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
S-2 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1999 LIBERTY GROUP PUBLISHING, INC. (Registrant)
By /s/ Kenneth L. Serota ------------------------------- Kenneth L. Serota, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities on the dates indicated.
Dated: March 31, 1999 /s/ Kenneth L. Serota ----------------------------------- Kenneth L. Serota, President and Chief Executive Officer
Dated: March 31, 1999 /s/ Kevin O'Shea ----------------------------------- Kevin O'Shea, Senior Vice President, Chief Financial Officer and Secretary
Dated: March 31, 1999 /s/ Leonard Green ----------------------------------- Leonard Green, Director
Dated: March 31, 1999 /s/ Peter Nolan ----------------------------------- Peter Nolan, Director
Dated: March 31, 1999 /s/ Greg Annick ----------------------------------- Greg Annick, Director
Dated: March 31, 1999 /s/ John Danhakl ----------------------------------- John Danhakl, Director