10-Q/A 1 c71968a1e10vqza.txt AMENDMENT TO QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 1 to FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED COMMISSION FILE NUMBER JUNE 30, 2002 333-46959 LIBERTY GROUP OPERATING, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-4197636 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 3000 DUNDEE ROAD, SUITE 203 NORTHBROOK, ILLINOIS 60062 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 272-2244 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of August 14, 2002, there were 100 shares outstanding of the Company's common stock, par value $0.01 per share. ================================================================================ EXPLANATORY NOTE This Amendment No. 1 to the Quarterly Report on Form 10-Q for Liberty Group Operating, Inc. for the quarter ended June 30, 2002 is being filed to amend and restate the items described below contained in our Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on August 14, 2002. This Amendment No. 1 makes changes to Item 1 (Consolidated Financial Statements) and Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of Part I of the Quarterly Report for the following purpose: - To restate the Company's consolidated financial statements as of and for the three and six months ended June 30, 2002, to revise items related to the Company's classification and amortization of advertiser and subscriber relationship intangible assets, income tax expense, cumulative effect of a change in accounting principle, goodwill, and deferred income tax liability, as more fully described in Note 3 to the Company's unaudited interim consolidated financial statements included in Item 1 of Part I of the Quarterly Report. - In connection with the restatements, Note 4 to the Company's unaudited interim consolidated financial statements included in Item 1 of Part I of the Quarterly Report has been revised. - In connection with the restatements, Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of the Quarterly Report has been revised to reflect the restated results of operations for the three and six months ended June 30, 2002. This report speaks as of the date of the original filing and the Company has not updated the disclosures in this report to speak as of a later date. 2 TABLE OF CONTENTS PAGE ---- PART I -- FINANCIAL INFORMATION Item 1 Consolidated Financial Statements Consolidated Balance Sheets at June 30, 2002 and December 31, 2001.................................. 4 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002............... 5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001........ 6 Notes to the Unaudited Interim Consolidated Financial Statements............................................. 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 9 Item 3 Quantitative and Qualitative Disclosures about Market Risk . 13 PART II - OTHER INFORMATION Item 1 Legal Proceedings.......................................... 14 Item 2 Changes in Securities and Use of Proceeds.................. 14 Item 3 Defaults Upon Senior Securities............................ 14 Item 4 Submission of Matters to a Vote of Security Holders........ 14 Item 5 Other Information.......................................... 14 Item 6 Exhibits and Reports on Form 8-K........................... 14 Signature Page............................................................... 15 Certifications............................................................... 16 3 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

See accompanying notes to unaudited interim consolidated financial statements. 4 LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)

See accompanying notes to unaudited interim consolidated financial statements. 5 LIBERTY GROUP OPERATING, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)

See accompanying notes to unaudited interim consolidated financial statements. 6 LIBERTY GROUP OPERATING, INC. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (1) THE COMPANY AND BASIS OF PRESENTATION Liberty Group Operating, Inc. ("LGO") is a leading publisher of community newspapers and related publications that are the dominant source of news, print advertising, and other local content in their communities. LGO is a wholly-owned subsidiary of Liberty Group Publishing, Inc. ("LGP"). The unaudited interim consolidated financial statements include the accounts of LGO and its consolidated subsidiaries (the "Company"). The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of management, of a normal recurring nature and are necessary to present a fair statement of the results of the interim periods presented. The accompanying interim consolidated financial statements as of June 30, 2002 and for the three months and six months ended June 30, 2002 and June 30, 2001 should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Form 10-K/A for the year ended December 31, 2001, filed with the Securities and Exchange Commission. The Company's results for the interim periods are not necessarily indicative of the results to be expected for the fiscal year. (2) RECLASSIFICATIONS Certain amounts in prior year's consolidated financial statements have been reclassified to conform to the 2002 presentation, which include the effect of discontinued operations and the transfer of inserting expense and certain postage and delivery costs from selling, general and administrative to operating costs. (3) RESTATEMENT The Company has filed this Form 10-Q/A to restate its financial statements as of and for the three and six months ended June 30, 2002 to reflect the following adjustments: - To reclassify the Company's advertiser and subscriber relationship intangible assets apart from goodwill as of January 1, 2002 and to amortize such intangible assets over their remaining useful lives during the three and six months ended June 30, 2002. Upon initial adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002, the Company concluded that its advertiser and subscriber relationship intangible assets did not meet the criteria for recognition apart from goodwill. As a result, the Company reclassified $233,793 of advertiser and subscriber relationship intangible assets into goodwill. However, based on the consensus reached by the Emerging Issues Task Force in Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination", the Company has subsequently concluded that its advertiser and subscriber relationship intangible assets do meet the criteria for recognition apart from goodwill under SFAS No. 142. Therefore, the reclassification into goodwill has been reversed as of January 1, 2002 and the advertiser and subscriber relationship intangible assets will continue to be amortized. The transition provisions of SFAS No. 142 require that the useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142, advertiser and subscriber relationship intangible assets were amortized over 40 and 33 years, respectively. The Company has concluded that, based upon current economic conditions and its current pricing strategies, the remaining useful lives for advertiser and subscriber relationship intangible assets are 30 and 20 years, respectively, and the amortization periods have been adjusted accordingly, with effect from January 1, 2002. The net effect of these adjustments is an increase in amortization expense of approximately $2,268 and $4,537 for the three and six months ended June 30, 2002, respectively, from what had previously been reported. - Income Tax expense was reduced by approximately $2,261 and $3,008 for the three and six months ended June 30, 2002, respectively, to reflect the tax effect of the adjustment to intangible amortization and a revision in the estimated effective tax rate. - In connection with the Company's reclassification of advertiser and subscriber relationship intangible assets apart from goodwill, the Company's cumulative effect of a change in accounting principle, net of tax, for the six months ended June 30, 2002 was reduced by approximately $199 from what had previously been reported. The Company's cumulative effect of a change in accounting principle, net of tax, represents goodwill and masthead impairment charges recorded upon the adoption of SFAS No. 142 for five properties that had fair values that were less than the net book value of the Company's goodwill and mastheads for such properties on January 1, 2002. - In connection with the Company's reclassification of advertiser and subscriber relationship intangible assets apart from goodwill, the Company's deferred income tax liability and goodwill as of January 1, 2002 were increased by approximately $12,897 from what had previously been reported. This increase reverses the approximately $12,897 decrease in the Company's deferred income tax liability and goodwill that was recorded upon the adoption of SFAS No. 142 on January 1, 2002 when advertiser and subscriber relationship intangible assets had been classified as part of goodwill. The consolidated financial statements as of and for the three and six months ended June 30, 2002 and notes thereto included in this amended Quarterly Report on Form 10-Q have been restated to include the effects of these adjustments, as follows:

(4) INTANGIBLE ASSETS (RESTATED) As of January 1, 2002, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. The transition provisions of SFAS No. 142 require that the useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142, advertiser and subscriber relationship intangible assets were amortized over estimated remaining useful lives of 40 and 33 years, respectively. The Company has concluded that, based upon current economic conditions and its current pricing strategies, the remaining useful lives for advertiser and subscriber relationship intangible assets are 30 and 20 years, respectively, and the amortization periods have been adjusted accordingly, with effect from January 1, 2002. Upon adoption of SFAS No. 142, the Company ceased amortization of goodwill and its mastheads because the Company has determined that the useful life of its mastheads is indefinite. Operating income for the three and six months ended June 30, 2001 includes $1,453 and $2,906, respectively, of amortization of goodwill and mastheads that are not included in results for the three and six months ended June 30, 2002 due to the implementation of SFAS No. 142. The effect on the Company's net income (loss) as a result of the adoption of SFAS No. 142 is as follows:

7 LIBERTY GROUP OPERATING, INC. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS)

The changes in the carrying amount of goodwill for the six months ended June 30, 2002 are as follows: Balance as of January 1, 2002 .............................. $196,061 Impairment losses .......................................... (2,231) Goodwill related to property sold .......................... (8,342) -------- Balance as of June 30, 2002 ................................ $185,488 ========

Properties will be tested for impairment in the fourth quarter of 2002 after the Company's annual budgeting process. After the Company's initial impairment test, it was determined that the fair values of five properties were less than the net book value of the Company's goodwill and mastheads for such properties on January 1, 2002. In the first quarter of 2002, a pre-tax goodwill and masthead impairment loss of $2,375 was recognized. The loss, which was $1,449, net of tax, was reported in the Company's consolidated statement of operations as a cumulative effect of change in accounting principle. The fair values of the properties were determined based on multiples of revenues and EBITDA (earnings before interest, taxes, depreciation, and amortization) reflected in the purchase prices of recent sales transactions of newspaper properties similar to those owned by the Company. (5) DISCONTINUED OPERATIONS The Company disposed of the assets of six related publications (acquired in 1999) in one transaction on January 7, 2002 for $26,510. The net book value of the assets was $19,393, resulting in a pre-tax gain of $7,117, or a gain of $4,342, net of the tax effect of $2,775. As a result of the sale, the disposition of the assets has been accounted for as a discontinued operation, and, accordingly, amounts in the consolidated statements of operations for all periods presented have been reclassified to reflect the disposition as a discontinued operation. Discontinued operations for the six months ended June 30, 2002 consisted of the gain on sale of the publications. For the quarter and six months ended June 30, 2001, income from discontinued operations, net of zero income taxes, was $438 and $748, respectively, and represented the operating results of the publications sold. 8 (6) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and for the associated asset retirement costs. SFAS No. 143 must be applied starting with fiscal years beginning after June 15, 2002. Management is currently evaluating the impact that the adoption of SFAS No. 143 will have on its consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 is effective beginning January 1, 2003. Management is currently evaluating the impact that the adoption of SFAS No. 145 will have on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This standard will be applied prospectively to exit or disposal activities initiated after December 15, 2002. Management does not believe the adoption of SFAS No. 146 will have a significant impact on the Company's consolidated financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Liberty Group Operating, Inc. ("LGO") is a Delaware corporation formed on January 27, 1998 for the purpose of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company or its subsidiaries, a wholly-owned subsidiary of Hollinger International Inc. LGO is a wholly-owned subsidiary of Liberty Group Publishing, Inc. ("LGP"). The unaudited interim consolidated financial statements include the accounts of LGO and its consolidated subsidiaries (the "Company"). The Company is a leading U.S. publisher of local newspapers and related publications that are the dominant source of local news and print advertising in their markets. At June 30, 2002, the Company owned and operated 320 publications in 17 states. The majority of the Company's paid daily newspapers have been published for more than 100 years and are typically the only paid daily newspapers of general circulation in their respective non-metropolitan markets. The Company's newspapers generally face limited competition as a result of operating in markets that are distantly located from large metropolitan areas and that can typically support only one primary newspaper, with the exception of our publications in the Chicago suburban market. The Company's portfolio of publications is comprised of 66 paid daily newspapers and 146 paid non-daily newspapers. In addition, the Company publishes 108 free circulation and "total market coverage" ("TMC") publications with limited or no news or editorial content that the Company distributes free of charge and that generally provide 100% penetration in their areas of distribution. The Company generates revenues from advertising, circulation and job printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. The revenue for job printing is recognized upon delivery. The Company's operating costs consist primarily of newsprint, labor and delivery costs. The Company's selling, general and administrative expenses consist primarily of labor costs. 9 On January 7, 2002, the Company disposed of the assets of six related publications (acquired in 1999) in one transaction for proceeds of $26.5 million (the "Disposition"). Accordingly, amounts in the consolidated statements of operations for all periods presented have been reclassified to reflect the Disposition as a discontinued operation. RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2001 Total Revenues. Total revenues for the quarter ended June 30, 2002 decreased by $0.6 million, or 1.2%, to $50.2 million from $50.8 million for the quarter ended June 30, 2001. The decrease in total revenues was comprised of a $0.1 million decrease in advertising revenue, a $0.2 million increase in circulation revenue and a $0.7 million decrease in job printing and other revenue. The advertising and printing revenue decrease was primarily driven by lower classified recruitment and printing revenues in the Chicago suburban market, as well as the discontinuation of two lower margin print jobs in the Company's community markets. The classified advertising decrease was partially offset by an increase in preprint and display revenues. Total revenues for the six months ended June 30, 2002 decreased by $2.0 million, or 2.1%, to $95.2 million from $97.2 million for the six months ended June 30, 2001. The decrease in total revenues was comprised of a $1.0 million decrease in advertising revenue, a $0.2 million increase in circulation revenue and a $1.3 million decrease in job printing and other revenue. The advertising and printing revenue decrease was primarily driven by lower classified recruitment and printing revenues in the Chicago suburban market, as well as the discontinuation of two lower margin print jobs in the Company's community markets. Operating Costs. Operating costs for the quarter ended June 30, 2002 decreased $2.5 million, or 9.9%, to $22.5 million from $25.0 million for the quarter ended June 30, 2001. This decrease was primarily due to lower newsprint, labor and delivery costs. The decrease in labor was primarily due to a reduction in operating staff. As a percentage of total revenues for the quarter ended June 30, 2002, operating costs decreased to 44.8% from 49.1% for the quarter ended June 30, 2001. Operating costs for the six months ended June 30, 2002 decreased by $5.3 million to $44.0 million from $49.3 million for the six months ended June 30, 2001. This decrease was primarily due to lower newsprint, labor and delivery costs. The decrease in labor was primarily due to a reduction in operating staff. As a percentage of total revenues for the six months ended June 30, 2002, operating costs decreased to 46.2% from 50.7% for the six months ended June 30, 2001. Selling, General and Administrative. Selling, general and administrative expenses for the quarter ended June 30, 2002 remained constant at $13.8 million, primarily due to higher insurance and performance based incentive costs, offset by lower labor costs resulting from reductions in administrative staff. As a percentage of total revenues, selling, general and administrative expenses increased from 27.1% for the quarter ended June 30, 2001 to 27.7% for the quarter ended June 30, 2002. For the six months ended June 30, 2002, selling, general and administrative expenses decreased by $0.9 million to $26.8 million from $27.6 million for the six months ended June 30, 2001, primarily due to lower labor costs resulting from reductions in administrative staff. As a percentage of total revenues, selling, general and administrative expenses decreased from 28.4% for the six months ended June 30, 2001 to 28.1% for the six months ended June 30, 2002. EBITDA. EBITDA (which is defined as earnings before interest, taxes, depreciation and amortization, which for the Company is income from operations plus depreciation and amortization) for the quarter ended June 30, 2002 increased by $1.7 million to $13.8 million from $12.1 million for the quarter ended June 30, 2001. The increase in EBITDA during the quarter ended June 30, 2002 was primarily due to lower newsprint, delivery and labor costs from reduced headcount partially offset by lower revenues. For the six months ended June 30, 2002, EBITDA increased $4.2 million to $24.5 million from $20.3 million for the six months ended June 30, 2001. The increase in EBITDA for the six months ended June 30, 2002 was primarily due to lower newsprint, delivery and labor costs from reduced headcount partially offset by lower revenues. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, or GAAP, and should not be considered as an alternative to income from operations, net income (loss), cash flows from operating activities or any other measure of performance or liquidity derived in accordance with GAAP. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in its industry. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. However, not all companies calculate EBITDA using the same methods; therefore, the EBITDA figures set forth herein may not be comparable to EBITDA reported by other companies. A substantial portion of the Company's EBITDA must be dedicated to the payment of interest on its outstanding indebtedness and to service other commitments, thereby reducing the funds available to the Company for other purposes. Accordingly, EBITDA does not represent an amount of funds that is available for management's discretionary use.

Depreciation and Amortization. As of January 1, 2002, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. The transition provisions of SFAS No. 142 require that the useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142, advertiser and subscriber relationship intangible assets are amortized over estimated remaining useful lives of 40 and 33 years, respectively. The Company has concluded that, based upon current economic conditions and its current pricing strategies, the remaining useful lives for advertiser and subscriber relationship intangible assets are 30 and 20 years, respectively, and the amortization periods have been adjusted accordingly, with effect from January 1, 2002. Depreciation and amortization expense for the quarter ended June 30, 2002 decreased by $0.8 million to $4.5 million from $5.3 million for the quarter ended June 30, 2001 as a result of the adoption of SFAS No. 142. The Company recorded $3.2 million in amortization of intangible assets for the quarter ended June 30, 2002, compared with $3.9 million for the quarter ended June 30, 2001. For the six months ended June 30, 2002, depreciation and amortization expense decreased by $1.6 million to $8.9 million from $10.5 million for the six months ended June 30, 2001 as a result of the adoption of SFAS No. 142. For the six months ended June 30, 2002, the Company recorded $6.2 million in amortization of intangible assets, compared with $7.9 million for the six months ended June 30, 2001. The Company ceased amortization of goodwill and its mastheads because the Company has determined that the useful life of its mastheads is indefinite. Operating income for the three and six months ended June 30, 2001 includes $1.5 million and $2.9 million, respectively, of amortization of goodwill and mastheads that are not included for the three and six months ended June 30, 2002 due to the implementation of SFAS No. 142. Additionally, advertiser and subscriber relationship intangible assets are amortized over 30 and 20 years, respectively, for the three and six months ended June 30, 2002, as compared to 40 and 33 years, respectively, for the three and six months ended June 30, 2001. Interest Expense. Interest expense (including amortization of deferred financing costs) for the quarter ended June 30, 2002 decreased by $1.8 million to $6.3 million from $8.1 million for the quarter ended June 30, 2001. The decrease in interest expense was due to the reduction of indebtedness resulting from the application of proceeds from the Disposition, increased cash flow from operations and lower interest rates. For the six months ended June 30, 2002, interest expense decreased $3.6 million to $12.8 million from $16.4 million for the six 10 months ended June 30, 2001. The decrease in interest expense was due to the reduction of indebtedness resulting from the application of proceeds from the Disposition, increased cash flow from operations and lower interest rates. Income Tax Expense (Benefit). Income tax benefit for the quarter ended June 30, 2002 was $0.4 million compared to income tax expense of $0.3 million for the quarter ended June 30, 2001. The decrease in income tax expense was due to a decrease in the Company's deferred income tax liability during the three months ended June 30, 2002. For the six months ended June 30, 2002, the income tax benefit was $0.3 million compared to income tax expense of $0.3 million for the six months ended June 30, 2001. Cumulative Effect of Change in Accounting Principle. Pursuant to the adoption of SFAS No. 142, the Company performed an initial impairment test of its properties in the first quarter of 2002. As a result of this test, the Company determined that the fair values of five properties were less than the net book value of the Company's goodwill and mastheads for such properties on January 1, 2002. As a result, an after-tax goodwill impairment loss of $1.4 million, or $2.4 million pre-tax, was recorded in the quarter ended March 31, 2002. Impairment will be tested again in the fourth quarter after the Company's annual budgeting process. Discontinued Operations. For the six months ended June 30, 2002, the Company recorded an after-tax gain of $4.3 million as a result of the Disposition in which the Company sold assets with a net book value of $19.4 million for a pre-tax gain of $7.1 million. The Company's income from discontinued operations for the quarter and six months ended June 30, 2001 was $0.4 million and $0.7 million, respectively. Net Income (Loss). The Company recorded net income of $3.4 million for the quarter ended June 30, 2002, compared to a net loss of $1.1 million for the quarter ended June 30, 2001. The $4.5 million increase in net income was primarily attributable to lower amortization expense resulting from the adoption of SFAS No. 142 and lower newsprint, labor, delivery and interest costs, partially offset by lower revenues. For the six months ended June 30, 2002, the Company recorded net income of $5.9 million compared to a net loss of $6.2 million for the six months ended June 30, 2001. The $12.1 million increase in net income was primarily attributable to an after tax gain of $4.3 million on the Disposition and lower amortization expense resulting from the adoption of SFAS No. 142, offset by lower revenue and the 11 cumulative effect of change in accounting principle related to goodwill and masthead impairment losses in the amount of $1.4 million discussed above. LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities. Cash provided by operating activities for the six months ended June 30, 2002 increased by $8.1 million to $11.3 million, compared with $3.2 million for the six months ended June 30, 2001. The increase was primarily due to increased EBITDA and a decrease in interest rates and borrowing levels. Cash Flows from Investing Activities. Cash provided by investing activities for the six months ended June 30, 2002 primarily reflects the Disposition partially offset by capital expenditures. The Company's capital expenditures consisted of the purchase of machinery, equipment, furniture and fixtures relating to its publishing operations. The Company has no material commitments for capital expenditures. The Company intends to continue to pursue its strategy of opportunistically purchasing community newspapers in contiguous markets and new markets. Cash Flows from Financing Activities. Cash used in financing activities for the six months ended June 30, 2002 reflects the reduction of indebtedness under the Company's Amended and Restated Credit Agreement, dated as of April 18, 2000, as further amended, with a syndicate of financial institutions led by Citibank, N.A., with Citicorp USA, Inc. as administrative agent (the "Amended Credit Facility"). The Company is subject to certain covenants that limit its ability to pay cash 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 have been, and are expected to continue to be, cash provided by operating activities and borrowings under the Amended Credit Facility. The Amended Credit Facility provides for a $100.0 million principal amount Term Loan B that matures in March 2007 and a revolving credit facility with a $135.0 million aggregate commitment amount available, including a $10.0 million sub-facility for letters of credit, that matures in March 2005. The Amended Credit Facility is secured by a first-priority security interest in substantially all of the tangible and intangible assets of LGO, LGP and all of LGP's other present and future direct and indirect subsidiaries. Additionally, the loans under the Amended Credit Facility are guaranteed, subject to specified limitations, by LGP and all of the future direct and indirect subsidiaries of LGO and LGP. The Company believes that these sources will provide sufficient liquidity and capital resources to meet its financial obligations for the foreseeable future. On May 10, 2001, the Company entered into the First Amendment to its Amended Credit Facility (the "Amendment"). The Amendment decreased the aggregate commitment available under the revolving credit facility from $175.0 million to $135.0 million and amended the Cash Interest Coverage Ratio and Senior Leverage Ratio. Under the terms of the Amended Credit Facility, the Company is required to permanently reduce the Term Loan B and/or the revolving commitment amount with Disposition proceeds in excess of $1.5 million if the proceeds are not reinvested in Permitted Acquisitions (as defined under the Amended Credit Facility) within 300 days of receipt of such proceeds. The Company is highly leveraged and has indebtedness that is substantial in relation to its stockholder's equity, tangible equity and cash flow. Interest expense for the six months ended June 30, 2002 was $12.8 million, including amortization of deferred financing costs of $0.6 million. The degree to which the Company is leveraged could have important consequences, including the following: (1) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest on the 9 3/8% Senior Subordinated Notes and interest on its other indebtedness, thereby reducing the funds available to the Company for other purposes; (2) indebtedness under the Amended Credit Facility is at variable rates of interest, which causes the Company to be vulnerable to increases in interest rates; (3) the Company is more leveraged than certain competitors in its industry, which might place the Company at a competitive disadvantage; (4) the Company may be hindered in its ability to adjust rapidly to changing market conditions; (5) the Company's substantial degree of leverage could make it more vulnerable in the event of a downturn in general economic conditions or other adverse events in its business; and (6) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired. 12 As of June 30, 2002, the aggregate outstanding principal amount of the Company's senior subordinated notes was $180.0 million. On June 3, 2002, LGP filed a registration statement with the Securities and Exchange Commission on Form S-2 (as amended, the "Registration Statement") with respect to an initial public offering of its common stock. Reference is made to the Registration Statement for information concerning the offering and transactions contemplated by the Registration Statement, including LGP's intended use of proceeds from the initial public offering and the impact of such intended use on LGP's capital structure and indebtedness. There can be no assurance that LGP will consummate the initial public offering of its common stock. Safe Harbor Provision. This Form 10-Q/A contains certain "forward- looking statements" (as defined in Section 21E of the Securities Exchange Act of 1934, as amended) that reflect the Company's expectations regarding its future growth, results of operations, performance and business prospects and opportunities. Words such as "anticipates," "believes," "plans," "expects," "intends," "estimates" and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. These statements reflect the Company's current beliefs and expectations and are based on information currently available to us. Accordingly, these statements are subject to known and unknown risks, uncertainties and other factors that could cause the Company's actual growth, results of operations, performance and business prospects and opportunities to differ from those expressed in, or implied by, these statements. As a result, no assurance can be given that the Company's future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. Such factors include, among others: (1) the Company's dependence on local economies and vulnerability to general economic conditions; (2) the Company's substantial indebtedness; (3) the Company's ability to implement its acquisition strategy; (4) the Company's competitive business environment, which may reduce demand for advertising; and (5) the Company's ability to attract and retain key employees. For purposes of this Form 10-Q/A, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Except to the extent required by the federal securities laws and rules and regulations of the Securities and Exchange Commission, the Company has no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances. SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table reflects a summary of the Company's contractual cash obligations as of June 30, 2002:

RELATED PARTY TRANSACTIONS The Company paid $370,000 in management fees for each of the quarters ended June 30, 2002 and 2001 to Leonard Green & Partners, L.P. The Company is also obligated to pay other fees to Leonard Green & Partners, L.P. of $475,000, of which $350,000 will be paid this year and the remaining $125,000 will be paid in 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has a $135.0 million revolving credit facility and a separate Term Loan B that mature in March 2005 and 2007, respectively. Borrowings under the revolving credit facility and the Term Loan B bear interest at an annual rate, at the Company's option, equal to the Alternate Base Rate (as defined in the Amended Credit Facility) or the Adjusted LIBO Rate (as defined in the Amended Credit Facility) plus a margin that varies based upon a ratio set forth in the Amended Credit Facility. As a result, the Company's interest expense will be affected by changes in the Alternate Base Rate or in the Adjusted LIBO Rate. At June 30, 2002, the Company had borrowings outstanding of $7.4 million under the revolving credit facility and $98.0 million under the Term Loan B. A hypothetical 100 basis point change in interest rates would impact quarterly interest expense by approximately $0.3 million based on the amount outstanding at June 30, 2002. 13 PART II ITEM 1. LEGAL PROCEEDINGS. The Company is involved from time to time in legal proceedings relating to claims arising out of its operations in the ordinary course of business. The Company is not party to any legal proceedings that, in the opinion of its management, are reasonably expected to have a material adverse effect on its business, financial condition or cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8-K None 14 SIGNATURES Pursuant to the requirements 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. LIBERTY GROUP OPERATING, INC. /s/ KENNETH L. SEROTA -------------------------------------------- Kenneth L. Serota President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) /s/ DANIEL D. LEWIS -------------------------------------------- Daniel D. Lewis Chief Financial Officer (principal financial and accounting officer) Date: November 26, 2002 15 CERTIFICATION I, Kenneth L. Serota, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Liberty Group Operating, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 26, 2002 /s/ KENNETH L. SEROTA ------------------------------ Name: Kenneth L. Serota Title: President, Chief Executive Officer and Chairman of the Board of Directors 16 CERTIFICATION I, Daniel D. Lewis, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Liberty Group Operating, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 26, 2002 /s/ DANIEL D. LEWIS ------------------------------ Name: Daniel D. Lewis Title: Chief Financial Officer 17

LIBERTY GROUP OPERATING INC 10-Q/A