<PAGE> 1
As filed with the Securities and Exchange Commission on July 18, 1996
Registration No. 333-06619
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO.1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HOLLINGER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 95-3518892
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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401 NORTH WABASH AVENUE
CHICAGO, ILLINOIS 60611
(312) 321-2999
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
KENNETH L. SEROTA, ESQ.
VICE PRESIDENT-LAW AND FINANCE AND SECRETARY
HOLLINGER INTERNATIONAL INC.
401 NORTH WABASH AVENUE
CHICAGO, ILLINOIS 60611
(312) 321-2999
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
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MICHAEL C. MCLEAN WILLIAM P. ROGERS, JR.
KIRKPATRICK & LOCKHART LLP CRAVATH, SWAINE & MOORE
1500 OLIVER BUILDING WORLDWIDE PLAZA
PITTSBURGH, PENNSYLVANIA 15222-2312 825 EIGHTH AVENUE
(412) 355-6458 NEW YORK, NEW YORK 10019
(212) 474-1270
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Approximate date of commencement of proposed sale to public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3), (4)
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PRIDESSM--Depositary Shares
$.01 per share (1)............ 17,250,000 shares $10.00 $172,500,000 $--
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Convertible Preferred
Stock(4)...................... 8,625,000 shares -- -- --
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Class A Common Stock, par
value $.01 per share(4)....... 17,250,000 shares -- -- --
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(1) Includes the 2,250,000 PRIDESSM--Depositary Shares which the Underwriters
have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid and computed in accordance with Rule 457(c)on the basis of
the average of the high and low sales prices for the Class A Common Stock on
June 20, 1996 as reported on the New York Stock Exchange Composite Tape.
(4) In accordance with Rule 457(i), no fee is payable with respect to the shares
of Convertible Preferred Stock and Class A Common Stock being registered.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 18, 1996
PROSPECTUS
15,000,000 SECURITIES
LOGO
% PRIDES(SM) DEPOSITARY SHARES
REPRESENTING % CONVERTIBLE PREFERRED STOCK
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Each of the Preferred Redeemable Increased Dividend Equity SecuritiesSM, %
PRIDESSM (each, a "PRIDE" or a "Security" and collectively, the "PRIDES" or the
"Securities") offered hereby is a depositary share representing one half share
of Series B Convertible Preferred Stock, par value $.01 per share (the
"Convertible Preferred Stock"), of Hollinger International Inc. (the "Company").
Each PRIDE will entitle the holder thereof, proportionately, to all rights and
preferences of the underlying Convertible Preferred Stock.
The annual dividend payable with respect to each half share of Convertible
Preferred Stock represented by a PRIDE is $ . Dividends will be cumulative from
the date of issuance and will be payable quarterly in arrears on each ,
, , and , commencing , 1996. The portion of the
liquidation preference of the Convertible Preferred Stock represented by each
PRIDE will be equal to the sum of (i) the per PRIDE price to the public shown
below and (ii) the amount of unpaid and accrued dividends on the half share of
Convertible Preferred Stock represented thereby.
On the Mandatory Conversion Date of , 2000, unless either previously
redeemed or converted at the option of the holder, each outstanding half share
of Convertible Preferred Stock represented by a PRIDE will mandatorily convert
into (i) one share of Class A Common Stock, par value $.01 per share, of the
Company (the "Class A Common Stock"), subject to adjustment in certain events,
and (ii) the right to receive an amount in cash equal to all accrued and unpaid
dividends thereon.
PRIDES are not redeemable prior to , 1999. At any time and from time
to time on or after , 1999 until immediately prior to the Mandatory
Conversion Date, the Company may redeem any or all outstanding shares of
Convertible Preferred Stock represented by the PRIDES. Upon any such redemption,
each holder will receive, in exchange for each half share of Convertible
Preferred Stock represented by a PRIDE, the number of shares of Class A Common
Stock equal to (A) the sum of (i) $ , declining after , 1999 as set
forth herein to $ , until the Mandatory Conversion Date, and (ii) all accrued
and unpaid dividends on the Convertible Preferred Stock represented thereby (the
"Call Price") divided by (B) the Current Market Price (as defined herein) on the
applicable date of determination, but in no event less than shares of the
Class A Common Stock, subject to adjustment in certain events.
At any time prior to the Mandatory Conversion Date, unless previously
redeemed, each half share of the Convertible Preferred Stock represented by a
PRIDE is convertible at the option of the holder thereof into shares of Class
A Common Stock (equivalent to a conversion price of per share of Class A
Common Stock (the "Conversion Price")), subject to adjustment in certain events.
The number of shares of Class A Common Stock a holder will receive upon
redemption, and the value of the shares received upon conversion, will vary
depending on the market price of the Class A Common Stock from time to time, all
as set forth herein.
Dividends on each half share of Convertible Preferred Stock represented by a
PRIDE will accrue at a higher rate per underlying share of Class A Common Stock
than the rate at which dividends are currently paid on the Class A Common Stock.
The opportunity for equity appreciation afforded by an investment in the PRIDES
is less than that afforded by an investment in the Class A Common Stock because
the Conversion Price is higher than the price to the public of the PRIDES and
the Company may, at its option, redeem the Convertible Preferred Stock
represented by such PRIDES at any time on or after , 1999 and prior to
the Mandatory Conversion Date, and may be expected to do so if, among other
circumstances the Current Market Price of the Class A Common Stock exceeds the
Call Price. In such event, a holder of a PRIDE will receive less than shares
of Class A Common Stock, but no less than shares of Class A Common Stock. The
per share value of the Class A Common Stock received by holders of the PRIDES
may be more or less than the per share price to the public of the PRIDES offered
hereby, due to market fluctuations in the price of the Class A Common Stock. For
a detailed description of the terms of the PRIDES, the Convertible Preferred
Stock and the depositary agreement see "Description of the Securities--PRIDES
Deposit Agreement" and "Description of the Securities-- Convertible Preferred
Stock."
The Company is concurrently offering (the "Common Stock Offering") 10,000,000
shares (plus an additional 1,500,000 shares subject to the underwriters'
over-allotment options) of its Class A Common Stock. The Class A Common Stock is
listed on the New York Stock Exchange ("NYSE") under the symbol "HLR." The
Offering and the Common Stock Offering are not conditioned on one another.
PRIOR TO THE OFFERING MADE HEREBY THERE HAS BEEN NO PUBLIC MARKET FOR THE
SECURITIES. THE PRIDES HAVE BEEN APPROVED FOR LISTING ON THE NYSE SUBJECT TO
NOTICE OF ISSUANCE, UNDER THE SYMBOL "HLR PRP." ON JULY 17, 1996, THE LAST
REPORTED SALE PRICE OF THE CLASS A COMMON STOCK ON THE NYSE WAS $9.875 PER
SHARE.
FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY, SEE "RISK
FACTORS" BEGINNING ON PAGE 21.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS
PUBLIC DISCOUNT(1) TO COMPANY(2)
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Per Security................................................... $ $ $
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Total(3)....................................................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $ , payable by the Company.
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to 2,250,000 additional
Securities, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount, and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The Securities are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, and subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Securities offered hereby will be made in New York, New York on
or about August , 1996.
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MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
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The date of this Prospectus is August , 1996.
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SM Service mark of Merrill Lynch & Co.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
PRIDES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
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As used in this Prospectus, unless the context otherwise requires, (i) the
"Company" refers to Hollinger International Inc. and its consolidated
subsidiaries and affiliated companies; (ii) "Publishing Holdings" refers to
Hollinger International Publishing Holdings Inc.; (iii) "Publishing" refers to
Hollinger International Publishing Inc. and its consolidated subsidiaries and
affiliated companies; (iv) "Chicago Sun-Times" refers to The Sun-Times Company
and its consolidated subsidiaries; (v) "Jerusalem Post" refers to the
subsidiaries of the Company which publish The Jerusalem Post; (vi) "The
Telegraph" refers to The Telegraph plc and its consolidated subsidiaries and
affiliated companies; (vii) "DTH" refers to DT Holdings Limited; (viii) "FDTH"
refers to First DT Holdings Limited; (ix) "HTH" refers to Hollinger-Telegraph
Holdings Inc.; (x) "Hollinger Inc." refers to Hollinger Inc. and its
consolidated subsidiaries; (xi) "Southam" refers to Southam Inc. and its
consolidated subsidiaries; and (xii) "Fairfax" refers to John Fairfax Holdings
Limited and its consolidated subsidiaries.
All dollar references in this Prospectus are to United States dollars
unless otherwise specifically indicated. Except as otherwise indicated, the
financial information in this Prospectus relating to The Telegraph has been
translated into United States dollars ("$") from British pounds sterling ("L")
and British pence ("p"), financial information relating to Fairfax has been
translated into United States dollars from Australian dollars ("A$"), and
financial information relating to Southam has been translated into United States
dollars from Canadian dollars ("Cdn.$"), using exchange rates at the end of the
period for which the relevant statements are prepared for assets, liabilities
and minority interest and the weighted average exchange rates for the relevant
period for items in the statements of operations. See "Exchange Rates."
On May 31, 1996, the noon buying rate in The City of New York for cable
transfers in United States dollars as certified for customs purposes by the
Federal Reserve Bank of New York (the "Noon Buying Rate") was Cdn.$1.00 per
$.7297, L1.00 per $1.5495 and A$1.00 per $.7980. On July 17, 1996, the noon
buying rate in The City of New York for cable transfers in United States dollars
as certified for customs purposes by the Federal Reserve Bank of New York was
Cdn.$1.00 per $.7285, L1.00 per $1.5432 and A$1.00 per $.7875 See "Exchange
Rates" for historical exchange rate information.
Unless otherwise indicated, all circulation information contained in this
Prospectus represents approximate current or average daily or non-daily
circulation, as the case may be, derived from the following sources: (a) for the
Company's United States community newspapers, Chicago-area suburban newspapers
and Jerusalem Post, from the Company's unaudited internal records for the month
of March 1996; (b) for the Chicago Sun-Times, the Daily Southtown and the
Tribune-Democrat in Johnstown, Pennsylvania, from unaudited circulation
statements furnished to the Audit Bureau of Circulations ("ABC") in the United
States for the six month period October 1995 to March 1996; (c) for The Daily
Telegraph and The Sunday Telegraph, from audited circulation reports furnished
to ABC in the United Kingdom for the six month period October 1995 to March
1996; (d) for Fairfax, from audited circulation reports furnished to ABC in
Australia for the six month period July to December 1995; and (e) for Southam,
from recent public reports of Southam.
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3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by reference
to, and should be read in conjunction with, the more detailed information and
financial statements (including the notes hereto) included elsewhere in this
Prospectus. Unless the context requires otherwise, the information contained
herein assumes that the Underwriters' over-allotment options are not exercised.
See "Underwriting."
THE COMPANY
Hollinger International Inc. (the "Company"), through subsidiaries and
affiliated companies, is a leading publisher of English-language newspapers in
the United States, the United Kingdom, Australia, Canada and Israel. Included
among the 131 paid daily newspapers which the Company owns or has an interest in
are the Chicago Sun-Times and The Daily Telegraph. The 131 newspapers have a
world-wide daily combined circulation of approximately 4,300,000 (including
2,100,000 attributable to the publications of affiliates in which the Company
has less than a majority equity interest). In addition, the Company owns or has
an interest in 379 non-daily newspapers as well as magazines and other
publications. The Company's strategy is to achieve growth through acquisitions
and improvements in the cash flow and profitability of its newspapers,
principally through cost reductions. Since the Company's formation in 1986, the
existing senior management team has acquired over 410 newspapers and related
publications (net of dispositions) in the United States, The Telegraph in the
United Kingdom and Jerusalem Post in Israel, and has made significant
investments in newspapers in Australia and Canada. Over this period, the Company
has achieved substantial growth in revenues to $965.0 million in 1995 and
realized significant improvements in operating efficiencies at its newspapers.
The operations of the Company consist of its United States Newspaper Group
and its International Newspaper Group, which accounted for 58.0% and 42.0%,
respectively, of the Company's total operating revenues of $965.0 million for
the year ended December 31, 1995 and for 56.1% and 43.9%, respectively, of the
Company's total operating revenues of $253.9 million for the three months ended
March 31, 1996. The Company also owns equity investments in newspaper publishing
companies in Australia and Canada which contributed approximately $16.4 million
to the Company's earnings before taxes in 1995 and approximately $3.4 million in
the first three months of 1996.
See "Recent Developments" for information concerning the pending proposal
of the Company to acquire the ordinary shares of The Telegraph not presently
controlled by the Company, the recent acquisition of additional common shares of
Southam, recent United States newspaper acquisitions and other developments.
United States Newspaper Group. The Company is the largest newspaper
publishing group in the United States, as measured by paid daily newspapers
owned and operated, and one of the twelve largest in terms of daily circulation.
The Company's United States operations consist of its Chicago Group, led by the
Chicago Sun-Times, the eighth largest circulation metropolitan daily newspaper
in the United States, and its Community Newspaper Group, consisting of 336
newspapers and related publications. As of June 1, 1996, the Company published a
total of 410 newspapers and related publications in the United States with a
combined paid daily and non-daily circulation of approximately 2,464,000 and a
total combined paid and free circulation of approximately 4,908,000. The
Community Newspaper Group also includes, for accounting and management purposes,
the Company's wholly owned subsidiary which publishes The Jerusalem Post,
Israel's only English-language daily newspaper, with a paid daily circulation of
approximately 17,000. The related weekend edition of The Jerusalem Post and
English and French-language international weekly editions have paid circulations
of approximately 37,600, 47,000 and 3,900, respectively. The Chicago Group and
the Community Newspaper Group accounted for 30.9% and 25.2%, respectively, of
the Company's total operating revenues for the three months ended March 31,
1996.
The Community Newspaper Group's daily newspapers have been published on
average for almost 100 years and are typically the only paid daily newspapers of
general circulation in their respective communities. In addition, the Community
Newspaper Group publishes weekly paid newspapers and Sunday editions of a number
of paid dailies which are typically the only paid non-daily newspapers of
general
4
<PAGE> 6
circulation serving their communities. Generally, the Company's daily and
non-daily community newspapers combine news, sports and features with special
emphasis on local information and provide one of the primary sources of such
community information for the towns in which they are distributed. The Company
also publishes free circulation publications in these communities, including
shoppers, with limited or no news or editorial content. As a group, these
publications provide the Company with a stable and established circulation
within the communities they serve, which it believes provides an effective
medium for advertisers to reach a significant portion of the households in these
communities.
International Newspaper Group. The Company's International Newspaper Group
consists of its 64.0% owned subsidiary, The Telegraph, and minority equity
investments in Fairfax and Southam. Upon consummation of the Scheme (described
below under "Recent Developments"), the Company will own 100% of the ordinary
shares of The Telegraph. The Telegraph publishes The Daily Telegraph, the
leading quality (or broadsheet) newspaper in the United Kingdom. The Telegraph
also publishes The Sunday Telegraph, The Weekly Telegraph, the Electronic
Telegraph and The Spectator magazine. The Daily Telegraph is the largest
circulation quality daily newspaper in the United Kingdom with an average daily
circulation of approximately 1,044,000, representing a 38.5% share of the
quality daily newspaper market. The Daily Telegraph's Saturday edition has the
highest average daily circulation (approximately 1,196,000) among quality daily
newspapers in the United Kingdom. The Sunday Telegraph is the second largest
circulation quality Sunday newspaper in the United Kingdom with an average
circulation of approximately 663,000.
The Company has less than a majority equity investment in Fairfax, a
publicly traded Australian newspaper and magazine publisher with fiscal 1995
revenues of A$944.5 million, and Southam, a publicly traded Canadian newspaper
publisher with 1995 revenues of Cdn.$1,022.3 million. Fairfax is one of
Australia's largest newspaper publishing companies with seven daily newspapers
(with a total paid circulation of approximately 654,000), 34 non-daily
newspapers and 29 magazines. Fairfax's principal publications are the leading
quality newspapers in Australia's two largest cities, The Sydney Morning Herald
(circulation approximately 253,000) and The Age (Melbourne--circulation
approximately 215,000), and Australia's only daily business newspaper, The
Australian Financial Review (national--circulation approximately 82,000). The
Telegraph is the largest shareholder of Fairfax, with an approximate 24.7%
interest. Southam is Canada's largest publisher of daily newspapers with 17
daily newspapers and 33 non-daily newspapers with a total daily circulation of
approximately 1,400,000. Southam's principal publications include The Gazette
(Montreal), The Ottawa Citizen, the Calgary Herald, The Vancouver Sun, The
Province (Vancouver) and The Edmonton Journal. The Company and The Telegraph
indirectly hold an approximate 19.5% interest in Southam and a Canadian
subsidiary of Hollinger Inc. (which controls the Company) currently owns an
approximate 21.5% interest in Southam. The combined total of approximately 41.0%
makes the Hollinger group the largest shareholder in Southam.
RECENT DEVELOPMENTS
The Telegraph. On April 24, 1996, the Boards of Directors of the Company
and The Telegraph announced a recommended proposal by the Company to acquire all
of the outstanding ordinary shares of The Telegraph not presently controlled by
the Company (the "Telegraph Minority Shares"). The consideration to be paid to
the holders of the Telegraph Minority Shares would consist of (i) a cash payment
of L5.60 per share ($8.68 based on the Noon Buying Rate); (ii) a special cash
dividend of 10p per share ($0.15 based on the Noon Buying Rate) (payable to all
shareholders of record of The Telegraph at the relevant record date, currently
expected to be July 30, 1996); (iii) a contingent cash payment to be made by
FDTH if The Telegraph's approximate 25% interest in Fairfax is sold within two
years at a price in excess of a specified amount; and (iv) an option to purchase
new preference shares of The Telegraph, each as more fully described below. In
addition, outstanding Telegraph options, to the extent permitted by their terms,
may be exercised prior to the Scheme becoming effective or, if not exercised,
will be cancelled in exchange for cash payments as provided under the Scheme.
The total consideration payable by the Company (including the special dividend
to be paid to the holders of the Telegraph Minority Shares and the net amount
payable in respect of outstanding Telegraph options but not the contingent cash
payment) is estimated at approximately $453 million, based on the Noon Buying
Rate. The acquisition will be effected by means of a "scheme of arrangement"
5
<PAGE> 7
under Section 425 of the Companies Act 1985 of Great Britain (the "Scheme"). As
a result, The Telegraph would become an indirect wholly owned subsidiary of the
Company. The independent directors of The Telegraph and their independent
financial advisors have recommended approval of the Scheme. The Scheme was
approved by a statutory majority of the holders of the Telegraph Minority Shares
present and voting at the shareholder meetings held on June 26, 1996. In
addition, on June 19, 1996, approval was obtained from each class of option
holders of The Telegraph to amend the terms of such options such that the Scheme
will not cause The Telegraph to breach its obligations to the option holders.
Following the approvals by the statutory majority of holders of Telegraph
Minority Shares and the amendments to the terms of the options, the Scheme will
be submitted to an English court for approval at a hearing scheduled for July
24, 1996. It is expected that the Scheme, if approved, would become effective on
July 31, 1996 and payment of the cash consideration to holders of Telegraph
Minority Shares and the special dividend to all holders of Telegraph shares
(other than Company subsidiaries which will waive their entitlement thereto)
would be made on or about August 8, 1996.
The Company has entered into definitive agreements with certain financial
institutions for short-term bank credit facilities and bridge financing in the
aggregate amount of approximately $625.0 million to provide the necessary
financing for the Scheme and to repay outstanding bank indebtedness of The
Telegraph. Upon the consummation of the Common Stock Offering and this Offering,
there will be $417.0 million outstanding in respect of such bank credit
facilities and bridge financing. See "Description of Certain Indebtedness and
Other Obligations," "Description of the Securities" and "Description of the
Purchase Contracts."
Upon completion of the Scheme, The Telegraph will pay a special dividend of
10p per share in place of its normal interim dividend of about half that amount.
In lieu of an immediate cash payment of L5.60 per share, the holders of the
Telegraph Minority Shares outside of the United States, Canada and Australia
will be entitled to elect to receive payments under the Scheme over time through
a loan note due 2001 guaranteed by a financial institution as an alternative to
some or all of the cash consideration. The holders of the Telegraph Minority
Shares will be entitled to receive a further cash payment if The Telegraph's
approximate 25% interest in Fairfax is sold prior to the second anniversary of
the effective date of the Scheme (which is expected to be July 31, 1996) at a
price (net of taxes and certain other costs incurred in connection with the
disposal of such Fairfax shares) in excess of A$3.00 per share. Since the
holders of Telegraph Minority Shares own in the aggregate approximately 36% of
the outstanding ordinary shares of The Telegraph as of the effective date of the
Scheme, they would be entitled to receive approximately 36% of the aggregate net
proceeds of such a disposal of Fairfax shares, payable to each holder pro rata
on the basis of that minority holder's interest in The Telegraph as of the
effective date of the Scheme. The closing market price of the ordinary shares of
Fairfax was A$2.90 per share on April 23, 1996, the date prior to the
announcement of the proposal to purchase the Telegraph Minority Shares. The
holders of the Telegraph Minority Shares also will receive an option to purchase
(the "Purchase Option"), exercisable on the second anniversary of the effective
date of the Scheme (the "Purchase Date"), that number of new preference shares
of The Telegraph as will provide each shareholder with at least the same
percentage of voting rights of The Telegraph as each shareholder held prior to
the Scheme becoming effective for a cash exercise price of L16.80 per new
preference share. FDTH will have the right to settle its obligations under any
exercised Purchase Option in cash rather than by delivery of new preference
shares of The Telegraph. The cash payment to be made by FDTH would be an amount
per new preference share equal to the product of (i) L5.60 and (ii) a fraction,
the numerator of which would be the weighted average of the closing prices of
the Company's Class A Common Stock on the New York Stock Exchange for the 21
trading days prior to the Purchase Date and the denominator of which is $12.375
(the closing price of the Company's Class A Common Stock on April 23, 1996). In
light of the cash cost to exercise the Purchase Option and the formula
applicable to FDTH's cash payment alternative described above, a holder of
Telegraph Minority Shares would not be able to receive an immediate cash profit
from FDTH at the time of exercise of the Purchase Option unless the weighted
average market price of the Class A Common Stock of the Company is above $37.125
(three times its market value at April 23, 1996) and FDTH elects to settle its
obligations under the Purchase Option in cash. If FDTH does not elect to settle
its obligations under the Purchase Option in cash, any new preference shares
received upon exercise will be shares in an unlisted company and there will be
no established market in these shares. The Company is considering monetizing its
investment in Fairfax. See "Business Strategy."
6
<PAGE> 8
Southam. On May 24, 1996, Hollinger Inc., the parent corporation of the
Company, announced that its wholly owned Canadian subsidiary had purchased from
a subsidiary of Power Corporation of Canada ("Power") the 16,349,743 common
shares (the "Power Shares") of Southam held by Power representing approximately
21.5% of Southam's outstanding common shares, at a price of Cdn.$18.00 per
share. This purchase increased the Company's and Hollinger Inc.'s combined
holdings in Southam to approximately 41% of Southam's outstanding common shares,
including 19.5% which is currently held indirectly by the Company. The Company
will have the right to acquire a substantial equity interest in the subsidiary
company which purchased the Power Shares. Hollinger Inc. stated that it intends
to further increase its holdings in Southam through permissible transactions to
or above 50% of Southam's outstanding common shares and may, subject to market
and other conditions, seek to acquire all Southam common shares not owned or
controlled by Hollinger Inc. or the Company through an offer of the Company's
Class A Common Stock or securities convertible into or exchangeable for such
stock. Hollinger Inc. and the Company have agreed to combine their interests in
Southam so that the Company will hold indirectly non-voting common shares and
voting preference shares representing one half of the voting power and all of
the common equity of their combined interests. The Company has applied for a
ruling from Revenue Canada that would permit the Company to hold indirectly 100%
of the common equity interests in Southam held by the Company and Hollinger Inc.
without affecting Southam's status as a Canadian publisher of newspapers and
periodicals. If such a ruling is received, the full ownership of the equity
interests in Southam held by Hollinger Inc. and the Company would be transferred
to the Company. There can be no assurance, however, that such ruling will be
obtained or that the Company and Hollinger Inc. will not be required to effect a
different ownership structure for combining their interests in Southam. If the
Company obtains control of Southam (through share ownership or otherwise),
Southam's results of operations will be consolidated for accounting purposes.
See "--Business Strategy" below and "The Company--Recent Developments."
Following a request by Hollinger Inc., Southam has scheduled a special
shareholders meeting for July 22, 1996 to consider the election of five new
directors proposed by Hollinger Inc. to replace five of the existing directors
of Southam. Hollinger Inc. has advised that, if its nominees are elected, it
believes that the reconstituted Board of Directors of Southam should be in a
position to consider steps designed to enhance operating performance and improve
editorial quality at Southam.
The purchase of the Power Shares was financed through a short-term bank
credit facility (the "Southam Facility") in the amount of Cdn.$300 million
between the Company and a Canadian chartered bank. The Southam Facility is
guaranteed by Hollinger Inc. and matures on November 25, 1996. The funds under
the Southam Facility were advanced by the Company to a Canadian subsidiary of
Hollinger Inc. as an intercompany loan. The Hollinger Inc. guarantee of the
Southam Facility is secured by a pledge of the Power Shares and 7,539,028 shares
of Class A Common Stock and 14,990,000 shares of Class B Common Stock held by
Hollinger Inc. Existing registration rights agreements and security agreements
entered into by Hollinger Inc. and its Canadian lenders have been amended to
reflect the pledges under the Southam Facility.
Recent United States Acquisitions. On April 30, 1996, the Company
consummated a trade of several newspapers with Garden State Newspapers, Inc. The
Company acquired the Tribune-Democrat in Johnstown, Pennsylvania, with a daily
paid circulation of 46,000, in exchange for six smaller daily newspapers and
several weekly newspapers from the Company's Community Newspaper Group and
approximately $31.0 million in cash, subject to certain adjustments.
New Chicago Printing Facility. In December 1995, Chicago Sun-Times
initiated a preliminary phase of its planned development of a new printing
facility by submitting a bid to acquire approximately 29 acres of land from the
City of Chicago for approximately $4.4 million, subject to negotiation of a
definitive purchase agreement and satisfactory resolution of various conditions
to the bid and necessary municipal approvals. The Company anticipates that the
site acquisition and the selection of the vendor for the new printing presses
will be completed in 1996. Management of Chicago Sun-Times expects that the size
of the new facility will be approximately 300,000 square feet to permit combined
printing, inserting and distribution functions for the Chicago Sun-Times and the
Chicago Sunday Sun-Times. Management preliminarily estimates that the aggregate
cost of the acquisition of the site, the development of the new printing
facility and the purchase and
7
<PAGE> 9
installation of new printing presses will be approximately $75.0 million and
that the facility will be operational in late 1998.
BUSINESS STRATEGY
The Company's strategy is to achieve growth in its newspaper business
through acquisitions and improvements in the cash flow and profitability of its
newspapers, principally through cost reductions. Management also expects that
additional revenue sources, including an increase in the availability of color
advertising and an expansion of the Company's publications into electronic
media, will contribute to the Company's future growth in revenues and cash
flows. The Company plans to install new printing facilities in Chicago within
the next two years, which should increase the availability of color advertising,
lower production costs, improve operating efficiencies and enhance product
quality. In addition, the Company recently started selling advertising space on
the Chicago Sun-Times' new homepage on the Internet and, in November 1994, The
Telegraph created the Electronic Telegraph on the Internet. The Jerusalem Post
and many of the Company's community newspapers are also available
electronically. The Company has recently formed a division named "Hollinger
Digital" which will coordinate, support and control development in this area.
The Company expects that its future acquisitions will be principally of
community newspapers with daily circulation ranging from 10,000 to 25,000;
however, the Company may consider the acquisition of selected larger circulation
publications that meet the Company's acquisition criteria. Such larger
circulation publications may include metropolitan or other significant
newspapers, as well as community daily newspapers with circulation ranging from
25,000 to 75,000 (such as the Johnstown Tribune-Democrat with a circulation of
46,000) to the extent they become available and meet the Company's acquisition
criteria. The Company seeks newspaper acquisition candidates that are
underperforming in terms of cash flow but have a long history of publishing
within a community and, from the Company's point of view, possess strong
leadership and advertiser loyalty; have the potential for increased gross
operating profit through cost reductions, revenue enhancements and synergies
with the Company's existing operations; and are available at attractive prices.
The Company's strategy is to operate newspapers in regional clusters where
feasible, which enables the Company to market advertising on a regional basis
and allows for improved efficiency from reductions in overhead, centralized
purchasing and, to the extent practicable, regionalized printing.
The Company expects the Scheme to be completed in early August 1996 as a
result of which The Telegraph would become indirectly wholly owned by the
Company. The Company believes that, as a consequence, it will have greater
access to the cash flow of The Telegraph and will have enhanced financing and
corporate flexibility.
The acquisition by a Canadian subsidiary of Hollinger Inc. of the Power
Shares, representing a 21.5% interest in Southam, together with the 19.5%
interest indirectly owned by the Company, provides Hollinger Inc. and the
Company with a combined approximate 41% interest in Southam. Hollinger Inc.'s
stated plans are to increase its ownership interest by permissible purchases to
or above 50% and may, subject to market and other conditions, seek to acquire
all Southam common shares not then owned or controlled by Hollinger Inc. or the
Company through an offer of the Company's Class A Common Stock or securities
convertible into or exchangeable for such stock. See "Recent Developments."
Hollinger Inc. and the Company have agreed to combine their interests in Southam
so that the Company will hold indirectly non-voting common shares and voting
preference shares representing one half of the voting power and all of the
common equity of their combined interests. Hollinger Inc. will hold voting
preference shares representing one half of the voting power and with a nominal
amount of paid-up capital which will not be entitled to any payments, including
dividends, other than a liquidation preference on the nominal amount. Hollinger
Inc. and the Company expect this transaction to occur promptly following the
July 22, 1996 Southam shareholders meeting. The Company has applied for a ruling
from Revenue Canada that would permit the Company to hold indirectly 100% of the
common equity interests in Southam held by the Company and Hollinger Inc.
without affecting Southam's status as a Canadian publisher of newspapers and
periodicals. If such a ruling is received, the full ownership of the equity
interests in Southam held by Hollinger Inc. and the Company would be transferred
to the
8
<PAGE> 10
Company. If the Company obtains control of Southam (through share ownership or
otherwise), Southam's results of operations will be consolidated for accounting
purposes.
The Telegraph's approximate 25% minority interest in Fairfax cannot be
increased under existing Australian foreign ownership regulations. The
Australian government has proposed the formation of a governmental committee to
review ownership rules, which is expected to make its recommendations in early
1997. Management has stated that the outcome of the Australian government review
will be taken into account in determining The Telegraph's strategy in relation
to its investment in Fairfax. Depending upon the outcome of the Australian
government review of its foreign investment policies and other relevant factors,
the Company intends either to (i) increase its investment in Fairfax possibly to
a majority position or (ii) sell or otherwise dispose of its interest in
Fairfax, which should result in a substantial capital gain and (depending upon
the structure of any such transaction) use all or a portion of the proceeds to
reduce the Company's and its subsidiaries' long term debt. The Company is also
considering the alternative of issuing a security designed to monetize its
investment in Fairfax (valued at approximately $392.2 million, or A$2.52 per
ordinary share as of July 16, 1996), while retaining the option of maintaining
or increasing its indirect holdings in Fairfax.
The Company and Hollinger Inc. have agreed that the Company will be
Hollinger Inc.'s principal vehicle for engaging in and effecting acquisitions in
the newspaper business and in related media businesses in the United States,
Israel and, through The Telegraph, the United Kingdom, the rest of the European
Community, Australia and New Zealand (the "Telegraph Territory"). Hollinger Inc.
has reserved to itself the ability to pursue all media (including newspaper)
acquisition opportunities outside the United States, Israel and the Telegraph
Territory, and all media acquisition opportunities unrelated to the newspaper
business in the United States, Israel and the Telegraph Territory, except that
the Company is permitted to increase its investment in Southam.
BACKGROUND
The Company was organized in 1986, when it undertook its first acquisition
of an independently owned newspaper group of 16 paid dailies in five states and
related paid and free non-daily publications, the management of which continues
to be among the senior operating officers of the United States Newspaper Group.
From 1986 through June 1, 1996, the Company acquired over 410 newspapers and
related publications (net of dispositions) located in 28 states, including 335
paid dailies and related publications in its Community Newspaper Group, the
Chicago Sun-Times, the Daily Southtown, 72 related weekly and bi-weekly Chicago
area suburban newspapers and related publications, The Jerusalem Post and the
Johnstown Tribune-Democrat. Since 1986, the United States Newspaper Group has
spent approximately $619.4 million on acquisitions and its revenues have grown
from $31.4 million in 1987 to $559.9 million in 1995.
Hollinger Inc. acquired a controlling interest in The Telegraph in 1986
and, since that time, has succeeded in reversing prior years' declines in
revenue and profitability by, among other things, broadening the readership base
of The Telegraph's newspaper titles, increasing advertising revenue, removing
restrictive work practices and making technological improvements in pre-press
publishing and printing operations. In addition to improving the profitability
of its newspaper operations, The Telegraph has made substantial investments in
Fairfax and Southam, which have contributed significantly to The Telegraph's
profitability in the past two years. As a result of the October 1995
reorganization of the Company's and Hollinger Inc.'s international newspaper
operations (the "Reorganization"), the Company acquired Hollinger Inc.'s
controlling interest in The Telegraph and, indirectly, The Telegraph's
substantial equity investments in Fairfax and Southam.
CONCURRENT FINANCING
Concurrently with this Offering, the Company is offering 10,000,000 shares
(plus an additional 1,500,000 shares subject to the Underwriters' over-allotment
options) of its Class A Common Stock in the Common Stock Offering. The net
proceeds of the Common Stock Offering will be applied, together with the net
proceeds of the Offering, as follows: (i) to provide $218.0 million to FDTH to
finance a portion of the acquisition of the Telegraph Minority Shares ($100.0
million of which would be in lieu of the Publishing
9
<PAGE> 11
Holdings Note Facility, which would be cancelled), to repay outstanding
indebtedness of The Telegraph and to pay related transaction costs and (ii) the
balance for general corporate purposes, including working capital. The Offering
and the Common Stock Offering are not conditioned on one another.
FUTURE FINANCING PLANS
In addition to the Common Stock Offering and after the completion of this
Offering, the Company, through a subsidiary or an affiliate, may issue high
yield debt securities, or other debt or equity securities, possibly including a
security which would allow the Company to monetize its interest in Fairfax. The
Company anticipates that it would apply the net proceeds from any such offering
for one or more of the following: (i) the repayment of outstanding amounts under
the Southam Facility, the FDTH Credit Facility (as hereinafter defined) and the
Amended Publishing Credit Facility (as hereinafter defined) (or any extension or
refinancing of any of the foregoing), (ii) the redemption of the DTH and FDTH
Preference Shares (as hereinafter defined), and (iii) other corporate purposes,
including capital expenditures and acquisitions.
OWNERSHIP BY HOLLINGER INC.
Hollinger Inc. owns 66.5% of the combined equity interest and 88.2% of the
combined voting power of the outstanding Class A Common Stock and Class B Common
Stock of the Company. In addition, Hollinger Inc. owns all of the outstanding
Series A Convertible Redeemable Preferred Stock, par value $.01 per share
("Series A Preferred Stock"), of the Company, which is convertible at any time
into shares of Class A Common Stock at the initial conversion price of the
Canadian dollar equivalent of $14 per share. Based on the initial conversion
price, 5,651,593 shares of Class A Common Stock would have been issuable as of
June 1, 1996.
Hollinger Inc. is effectively controlled by The Hon. Conrad M. Black,
Chairman of the Board and Chief Executive Officer of Hollinger Inc. and the
Company, through his direct and indirect ownership and control of Hollinger
Inc.'s securities. Mr. Black has advised the Company that Hollinger Inc. does
not presently intend to reduce its voting power in the Company's outstanding
Common Stock to less than 50%. Furthermore, Mr. Black has advised the Company
that he does not presently intend to reduce his voting control over Hollinger
Inc. such that a third party would be able to exercise effective control over
it.
After the Common Stock Offering, Hollinger Inc. will continue to have a
majority equity ownership interest in the Company. Hollinger Inc. will own 58.5%
of the combined equity interest and 84.2% of the combined voting power of the
outstanding Common Stock of the Company (57.5% and 83.6%, respectively, if the
Underwriters' over-allotment options are exercised in full) (without giving
effect to the future issuance of Class A Common Stock in connection with the
Securities or upon conversion of the Series A Preferred Stock), and 49.6% and
78.8%, respectively, upon the issuance of up to approximately 15,000,000 shares
of Class A Common Stock in connection with the PRIDES. As a result, Hollinger
Inc. will continue to be able to control the outcome of any election of
directors and to direct management policy, strategic direction and financial
decisions of the Company.
FINANCING AND ORGANIZATIONAL STRUCTURE
For financing and organizational purposes, the Company and its subsidiaries
are divided into (i) a United States Newspaper Group, including the Chicago
Group and American Publishing Company, which consists of the group formerly
referred to as the Community Newspaper Group, including Jerusalem Post (referred
to herein as the "Community Newspaper Group"), and (ii) an International
Newspaper Group, including DTH, FDTH, The Telegraph and their subsidiaries and
affiliated companies, including Fairfax and Southam.
10
<PAGE> 12
Set forth below is an organizational chart which illustrates, as of the
closing of the Offering and after giving effect to the consummation of the
Common Stock Offering, the Scheme and related financings, the ownership of the
Company and its principal subsidiaries and affiliates:
- ------------------
(1) Mr. Conrad M. Black owns directly and indirectly 49.5% of the outstanding
common shares of Hollinger Inc.
(2) 84.2% of voting power and, assuming the underwriters' over-allotment options
are exercised in the Common Stock Offering, 83.6% of voting power and 57.5%
of combined equity interests, and 78.8% of voting power and 49.6% of
combined equity interests upon the issuance of up to approximately
15,000,000 shares of Class A Common Stock in connection with the Securities.
(3) Excludes nonvoting preference shares of DTH and FDTH held by unrelated
parties and nonvoting preference shares of FDTH held by DTH, which
preference shares are not convertible into voting shares.
(4) Excludes L5.0 million nonvoting preference shares of The Telegraph held by
FDTH, which preference shares are not convertible into voting shares.
(5) Owned by a wholly owned Canadian subsidiary of Hollinger Inc., a company in
which the Company will have the right to acquire a substantial equity
interest.
11
<PAGE> 13
RISK FACTORS
Prospective purchasers of the Securities offered hereby should consider the
factors set forth under "Risk Factors" as well as the other information set
forth in this Prospectus, including investment in the Securities will become
investment in Class A Common Stock, limitations on opportunity for equity
appreciation, factors affecting trading prices, limited shareholder rights,
dilution of Class A Common Stock, possible illiquidity of the secondary market,
international holding company structure, growth strategy, restrictions in debt
agreements, other restrictive arrangements, substantial leverage, control by
Hollinger Inc. and disproportionate voting rights, newspaper industry
competition, cyclicality of revenues, newsprint costs, foreign operations and
currency exchange rates, dividend policy, limitations on control of The
Telegraph, Southam and Fairfax, potential conflicts of interest, shares eligible
for future sale and issuance of preferred stock.
12
<PAGE> 14
THE OFFERING
Securities.................... % PRIDES. Each PRIDE is a depositary share
representing one half of a share of Convertible
Preferred Stock. The Convertible Preferred
Stock ranks prior to the Common Stock and
junior to the Company's existing Series A
Preferred Stock as to payment of dividends and
distribution of assets upon liquidation.
Convertible Preferred Stock represented by the
PRIDES mandatorily converts into shares of
Class A Common Stock on , 2000 (the
"Mandatory Conversion Date"), and the Company
has the option to redeem the Convertible
Preferred Stock represented by the PRIDES, in
whole or in part, at any time and from time to
time on or after , 1999 and prior to the
Mandatory Conversion Date at the Call Price,
payable in shares of Class A Common Stock. In
addition, the Convertible Preferred Stock
represented by the PRIDES is convertible into
shares of Class A Common Stock at the option of
the holder at any time prior to the Mandatory
Conversion Date as set forth below.
Conversion at the Option of
the Holder.................... At any time prior to the Mandatory Conversion
Date, unless previously redeemed, each
fractional share of Convertible Preferred Stock
represented by a PRIDE is convertible at the
option of the holder thereof into of a share
of Class A Common Stock (the "Conversion Price
Rate"), equivalent to the Conversion Price of
$ per share of Class A Common Stock,
subject to adjustment as described herein. The
number of shares of Class A Common Stock a
holder will receive upon redemption, and the
value of the shares received upon conversion,
will vary depending on the market price of the
Class A Common Stock from time to time, all as
set forth herein. The right of holders to
convert Convertible Preferred Stock represented
by the PRIDES called for redemption will
terminate immediately prior to the close of
business on the redemption date. See
"Description of the Securities-- PRIDES Deposit
Agreement--Conversion," and "Description of the
Securities--Convertible Preferred
Stock--Conversion at the Option of the Holder."
Dividends..................... Holders of the PRIDES will be entitled to
receive annual cumulative dividends on the
shares of Convertible Preferred Stock
represented thereby at a rate per annum of $ ,
payable quarterly in arrears on , ,
, and of each year, commencing ,
1996 and including the Mandatory Conversion
Date referred to below (each, a "Payment Date")
or, if any such date is not a business day, on
the next succeeding business day, commencing
, 1996. See "Description of the
Securities--PRIDES Deposit
Agreement--Dividends" and "Description of the
Securities--Convertible Preferred
Stock--Dividends."
Mandatory Conversion.......... On the Mandatory Conversion Date, unless
previously redeemed or converted, each half
share of Convertible Preferred Stock
represented by the outstanding PRIDES will
mandatorily convert into (i) one share of Class
A Common Stock, subject to adjustment in
certain events, and (ii) the right to receive
cash in an amount equal
13
<PAGE> 15
to all accrued and unpaid dividends thereon
(other than previously declared dividends
payable to a holder of record as of a prior
date). See "Description of the
Securities--PRIDES Deposit Agreement" and
"Description of the Securities--Convertible
Preferred Stock--Mandatory Conversion." The
value of the Class A Common Stock that may be
received by holders of the PRIDES upon
mandatory conversion may be more or less than
the amount paid for the PRIDES offered hereby
due to market fluctuations in the price of the
Class A Common Stock.
Optional Redemption........... PRIDES are not redeemable prior to ,
1999. At any time and from time to time on or
after , 1999, and ending immediately
prior to the Mandatory Conversion Date, the
Company may redeem any or all outstanding
shares of Convertible Preferred Stock
represented by the PRIDES. Upon such
redemption, each holder will receive, in
exchange for each PRIDE, the number of shares
of Class A Common Stock equal to the Call Price
(the sum of (i) $ , declining after ,
1999, as set forth herein to $ until the
Mandatory Conversion Date and (ii) all accrued
and unpaid dividends on the Convertible
Preferred Stock represented thereby (other than
previously declared dividends payable to a
holder of record as of a prior date)) divided
by the Current Market Price (as defined herein)
on the applicable date of determination, but in
no event less than of a share of Common
Stock, subject to adjustment as described
herein. See "Description of the
Securities--PRIDES Deposit Agreement--Optional
Redemption." For purposes of such a redemption,
the date for determination of the Current
Market Price of the Class A Common Stock will
be two business days prior to the announcement
of the redemption, and the market price of the
Class A Common Stock may vary between the date
of such determination and the subsequent
delivery of such shares.
Enhanced Dividend Yield;
Less Equity Appreciation
Than Class A Common Stock..... Dividends on each half share of Convertible
Preferred Stock represented by a PRIDE will
accrue at a higher rate than the rate at which
dividends are currently paid on the Class A
Common Stock. The opportunity for equity
appreciation afforded by an investment in the
PRIDES is less than the opportunity for equity
appreciation afforded by a direct investment in
the Class A Common Stock because the Class A
Common Stock receivable by a holder of PRIDES
on the Mandatory Conversion Date, upon earlier
redemption by the Company or upon earlier
conversion at the option of the holder will
only exceed the per share amount paid for the
PRIDES offered hereby if, as the case may be,
the Current Market Price of the Class A Common
Stock exceeds such amount paid, the Current
Market Price exceeds the Call Price by at least
% (which represents an appreciation of %
over the per share price to the public of the
PRIDES) or the Current Market Price exceeds the
Conversion Price by at least % (which
represents an appreciation of % over the per
share price to the public of the PRIDES). The
per share value of Class A Common Stock
received by holders of PRIDES may be more or
less than the per
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<PAGE> 16
share amount paid for the PRIDES offered
hereby, due to market fluctuations in the price
of the Class A Common Stock. See "Description
of the Securities--Convertible Preferred
Stock--Enhanced Dividend Yield; Less Equity
Appreciation Than Common Stock."
Voting Rights................. The holders of PRIDES will have the right to
direct the voting of the shares of Convertible
Preferred Stock represented thereby. As a
result, holders of PRIDES will, in effect, have
the right with the holders of Class A Common
Stock and Class B Common Stock (collectively,
the "Common Stock") to vote in the election of
Directors and upon each other matter coming
before any meeting of the holders of Common
Stock on the basis of 4/5 of a vote for each
half share of Convertible Preferred Stock
represented by the PRIDES. On such matters, the
holders of the PRIDES and the holders of Common
Stock will vote together as one class except as
otherwise provided by law or the Company's
Amended and Restated Certificate of
Incorporation. In addition, (i) whenever
dividends on the Convertible Preferred Stock
represented by the PRIDES or any other series
of the Company's preferred stock (all series of
which hereinafter are called the "Preferred
Stock") with like voting rights are in arrears
and unpaid for six quarterly dividend periods,
and in certain other circumstances, the holders
of the PRIDES (voting separately as a class)
will be entitled to vote, on the basis of one
vote for each share of Convertible Preferred
Stock represented by the PRIDES, for the
election of two Directors of the Company, such
Directors to be in addition to the number of
Directors constituting the Board of Directors
immediately prior to the accrual of such right,
and (ii) the holders of the PRIDES may have
voting rights with respect to certain
alterations of the Company's Amended and
Restated Certificate of Incorporation and
certain other matters, voting on the same basis
or separately as a series. See "Description of
the Securities--PRIDES Deposit
Agreement--Voting Rights" and "Description of
the Securities--Convertible Preferred
Stock--Voting Rights."
Liquidation Preference
and Ranking................... The shares of Convertible Preferred Stock
represented by the PRIDES will rank prior to
the Common Stock and junior to the Series A
Preferred Stock as to payment of dividends and
distribution of assets upon liquidation. The
liquidation preference of each half share of
Convertible Preferred Stock represented by a
PRIDE is an amount equal to the sum of (i) the
per PRIDE price to the public shown on the
cover page of this Prospectus and (ii) any
accrued and unpaid dividends on such fractional
share. See "Description of the
Securities--PRIDES Deposit Agreement--
Dividends" and "Description of the
Securities--Convertible Preferred
Stock--Dividends" and "--Liquidation Rights."
Listing....................... The PRIDES have been approved for listing on
the NYSE, subject to notice of issuance, under
the symbol "HLR PrP." The Class A Common Stock
is listed on the NYSE under the symbol "HLR."
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<PAGE> 17
Relative Rights of
Class A Common Stock
and Class B Common Stock...... The Class A Common Stock and Class B Common
Stock have identical rights with respect to
cash dividends and in any sale or liquidation,
but have different voting rights. The Class A
Common Stock is entitled to one vote per share
while the Class B Common Stock is entitled to
ten votes per share on all matters, including
the election of directors, where the two
classes vote together as a single class. The
shares of Class B Common Stock are convertible
at any time at the option of the holder into
Class A Common Stock on a share-for-share basis
and are transferable by the holder of the Class
B Common Stock under certain conditions. All of
the outstanding Class B Common Stock is owned
by Hollinger Inc. See "Description of Capital
Stock" and "Principal Stockholders."
Use of Proceeds............... All of the net proceeds from the sale of the
Securities offered hereby (which, at an assumed
per PRIDE price of $10.00, is estimated to be
approximately $145.0 million and $166.8 million
if the Underwriters' over-allotment option is
exercised in full) will be applied, together
with the net proceeds of the Common Stock
Offering (i) to provide $218.0 million to FDTH
to finance a portion of the acquisition of the
Telegraph Minority Shares ($100.0 million of
which would be in lieu of the Publishing
Holdings Note Facility, which would be
cancelled), to repay outstanding indebtedness
of The Telegraph and to pay related transaction
costs, and (ii) the balance for general
corporate purposes, including working capital.
The Offering and the Common Stock Offering are
not conditioned on one another.
Future Financing Plans........ In addition to the Common Stock Offering and
after the completion of this Offering, the
Company may, through a subsidiary or an
affiliate, issue high yield debt securities, or
other debt or equity securities, possibly
including a security which would allow the
Company to monetize its interest in Fairfax.
The Company anticipates that it would apply the
net proceeds from any such offering for one or
more of the following: (i) the repayment of
outstanding amounts under the Southam Facility,
the FDTH Credit Facility and the Amended
Publishing Credit Facility (or any extension or
refinancing of any of the foregoing), (ii) the
redemption of the DTH and FDTH Preference
Shares (as hereinafter defined), and (iii)
other corporate purposes, including capital
expenditures and acquisitions.
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<PAGE> 18
SUMMARY FINANCIAL AND OTHER DATA(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(2)
Operating revenues:
Advertising................... $307,716 $325,165 $ 316,640 $ 522,381 $ 635,560 $ 151,621 $ 160,357
Circulation................... 209,544 233,416 217,608 245,218 262,670 59,466 76,049
Job Printing.................. 19,735 22,066 25,044 27,675 49,198 11,563 12,621
Other......................... 8,735 11,338 10,309 13,563 17,539 4,106 4,866
-------- -------- -------- -------- -------- -------- --------
Total operating revenues........ 545,730 591,985 569,601 808,837 964,967 226,756 253,893
Operating costs and expenses.... 450,797 473,368 447,262 693,108 857,091 198,620 229,179
Depreciation and amortization... 32,037 35,226 34,545 45,200 52,388 12,603 12,841
-------- -------- -------- -------- -------- -------- --------
Operating income................ 62,896 83,391 87,794 70,529 55,488 15,533 11,873
Interest expense................ (20,886) (27,167) (26,264) (32,593) (43,189) (10,761) (12,564)
Equity in earnings of
affiliates.................... 18 6,382 13,476 35,659 16,449 5,728 3,407
Other income, net(3)............ 14,499 89,543 36,989 91,886 18,199 12,499 2,501
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes,
minority interest, cumulative
effect of change in accounting
for income taxes and
extraordinary item............ 56,527 152,149 111,995 165,481 46,947 22,999 5,217
Income taxes.................... 14,320 39,132 36,475 41,300 18,108 7,314 1,700
-------- -------- -------- -------- -------- -------- --------
Earnings before minority
interest, cumulative effect of
change in accounting for
income taxes and extraordinary
item.......................... 42,207 113,017 75,520 124,181 28,839 15,685 3,517
Minority interest............... 11,166 14,848 25,475 21,409 22,637 7,944 5,421
-------- -------- -------- -------- -------- -------- --------
Earnings before cumulative
effect of change in accounting
for income taxes and
extraordinary item............ 31,041 98,169 50,045 102,772 6,202 7,741 (1,904)
Cumulative effect of change in
accounting for income taxes... -- -- (24,256) -- -- -- --
Extraordinary loss on debt
extinguishments............... -- -- -- -- -- -- (2,150)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)............. $ 31,041 $ 98,169 $ 25,789 $ 102,772 $ 6,202 $ 7,741 $ (4,054)
======== ======== ======== ======== ======== ======== ========
Net earnings per common share... $ 0.64 $ 2.02 $ 0.53 $ 1.90 $ 0.11 $ 0.14 $ (0.06)
======== ======== ======== ======== ======== ======== ========
Average number of common shares
outstanding................... 48,601 48,601 48,601 53,980 56,956 56,956 66,056
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:(4)
Working capital (deficit)....... $ 25,749 $ 58,259 $ (58,793) $ (10,621) $ (124,175) $ 38,868 $ 68,763
Total assets(5)................. 855,692 748,843 1,034,155 1,463,755 1,570,105 1,440,979 1,652,602
Minority interest............... 41,871 64,039 79,290 109,518 97,298 118,763 97,738
Total long-term debt............ 333,981 281,783 374,496 489,969 621,652 467,973 574,168
Redeemable preferred stock...... 80,966 208,767 206,846 204,101 306,452 204,185 306,608
Total stockholders' equity(6)... 253,693 72,907 111,664 303,469 295,244 305,075 434,480
SEGMENT DATA:
Operating revenues:
United States Newspaper
Group....................... $157,397 $173,219 $ 185,043 $ 422,594 $ 559,929 $ 129,770 $ 142,347
International Newspaper
Group....................... 388,333 418,766 384,558 386,243 405,038 96,986 111,546
-------- -------- -------- -------- -------- -------- --------
Total operating revenues........ $545,730 $591,985 $ 569,601 $ 808,837 $ 964,967 $ 226,756 $ 253,893
======== ======== ======== ======== ======== ======== ========
Operating income:
United States Newspaper
Group....................... $ 3,938 $ 11,778 $ 18,069 $ 39,566 $ 32,156 $ 7,139 $ 3,242
International Newspaper
Group....................... 58,958 71,613 69,725 30,963 23,332 8,394 8,631
-------- -------- -------- -------- -------- -------- --------
Total operating income.......... $ 62,896 $ 83,391 $ 87,794 $ 70,529 $ 55,488 $ 15,533 $ 11,873
======== ======== ======== ======== ======== ======== ========
EBITDA(7)
United States Newspaper
Group....................... $ 28,828 $ 38,386 $ 43,582 $ 76,576 $ 77,382 $ 16,861 $ 13,641
International Newspaper
Group....................... 80,604 99,421 87,208 50,447 36,725 11,275 11,073
-------- -------- -------- -------- -------- -------- --------
Total EBITDA.................... $109,432 $137,807 $ 130,790 $ 127,023 $ 114,107 $ 28,136 $ 24,714
======== ======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Company (consolidated)
Number of paid daily newspapers
(end of period)(8)............ 82 82 96 98 113 98 112
Market value of Fairfax equity
stake (end of period)(9)...... $ 423,989 $ 408,812 $ 437,380
Market value of Southam equity
stake (end of period)(9)...... 163,643 157,174 173,552
Capital expenditures............ $ 61,058 $ 14,882 $ 9,162 $ 27,795 $ 21,699 $ 5,764 $ 4,051
Acquisition expenditures(10).... 49,350 36,952 20,638 227,321 97,232 -- 5,071
</TABLE>
- ------------------
(1) The financial data presented above is derived from the Consolidated
Financial Statements of the Company.
(2) The statement of operations data and other data include data for The
Telegraph, DTH and Jerusalem Post for all periods presented, Chicago
Sun-Times from the date of its acquisition by the Company on March 31, 1994
and Daily Southtown from the date of its acquisition by the Company on
December 23, 1994.
(3) Other income, net includes gain on the sale of Telegraph shares, gain on
dilution of Fairfax interest, gain on the sale of marketable securities,
issuance costs of subsidiaries' redeemable preferred stock and foreign
currency gain (loss).
(4) The balance sheet data include The Telegraph, DTH and Jerusalem Post for
all periods presented, the Chicago Sun-Times as at September 30, 1994 and
thereafter and Daily Southtown as at December 31, 1994 and thereafter.
Long-term debt does not include intercompany indebtedness owed to Hollinger
Inc., which amounted to $21.5 million at December 31, 1995 and $4.1 million
at March 31, 1996.
(5) Includes intangible assets, net of accumulated amortization, which amounted
to $455,203,000 and $529,694,000 at December 31, 1994 and 1995 and
$526,972,000 at March 31, 1996. Such assets consist of the value of
acquired subscriber and advertiser lists, noncompetition agreements,
archives and goodwill. The amortization periods for intangible assets range
from three to 40 years.
(6) See Consolidated Statements of Stockholders' Equity.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and certain other income items. Among the other income items
excluded are gain on the sale of Telegraph shares, gain on the sale of
marketable securities, gain on dilution of Fairfax and issue costs of
subsidiaries' redeemable preferred stock of $70,353,000, $28,538,000,
$80,592,000 and $11,968,000 for the years ended December 31, 1992, 1993,
1994 and 1995, respectively. EBITDA is not intended to represent an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) as an indicator of the Company's operating
performance, or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. The Company believes that EBITDA largely determines its ability
to fund current operations and to service debt due to the significant
number of acquisitions made by the Company which have resulted in non-cash
charges for depreciation and amortization. These non-cash charges have
adversely affected net earnings, but have not affected EBITDA.
(8) Number of paid daily newspapers owned by the Company and its subsidiaries
(excluding those newspapers published by Fairfax and Southam).
(9) Represents The Telegraph's 24.8%, 24.6% and 24.7% interest (196,374,606
shares and convertible debentures) in Fairfax on December 31, 1994 and 1995
and March 31, 1996, respectively, and the combined 19.5% interest of The
Telegraph and FDTH in Southam (14,790,000 shares) at each period end. See
Note 3 to Supplemental Consolidated Financial Statements for information
concerning investments in affiliates.
(10) Represents costs of acquiring newspapers and investments in newspaper
companies. Such amounts do not include notes payable to former owners and
deferred amounts due under noncompetition agreements with former owners.
Such amounts do not include the cost of acquiring the Telegraph Minority
Shares (approximately $463 million, including the special dividend and
transaction costs) and the Power Shares (approximately $217 million,
including transaction costs).
18
<PAGE> 20
SUMMARY PRO FORMA DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
-------------------------- --------------------------
ACTUAL PRO FORMA(1)(2) ACTUAL PRO FORMA(1)(2)
------- --------------- ------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating income................................... $55,488 $ 48,139 $11,873 $10,036
Interest expense................................... 43,189 106,614 12,564 25,346
Net earnings (loss)................................ 6,202 (40,766) (4,054) (12,585)
Weighted average common shares outstanding......... 56,956 66,956 66,056 76,056
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------
PRO FORMA(2)
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 139,265
Working capital (deficit)................................................... (475,275)
Total assets(3)............................................................. 2,281,899
Total debt (including intercompany indebtedness)............................ 1,065,777
Redeemable preference shares of DTH and FDTH................................ 227,083
Series A redeemable stock................................................... 79,525
Convertible Preferred Stock represented by the PRIDES....................... 145,000
Total stockholders' equity.................................................. 673,980
</TABLE>
- ------------------
(1) Pro forma statement of operations data gives effect, assuming such
transactions occurred on January 1, 1995, to (i) the acquisition of the
Telegraph Minority Shares, the acquisition by Publishing of newly issued
Telegraph ordinary shares and the related financing; (ii) the acquisition of
the Power Shares of Southam (approximately 21.5%) which were acquired by a
Canadian subsidiary of Hollinger Inc., a company in which the Company will
have the right to acquire a substantial equity interest, and the related
financing; and (iii) the Common Stock Offering and this Offering. Does not
include costs and expenses of approximately $ million associated
with the acquisition of Telegraph Minority Shares and the acquisition of
Power Shares of Southam. See Pro Forma Condensed Consolidated Financial
Statements.
(2) Pro forma balance sheet data gives effect, assuming such transactions
occurred on March 31, 1996, to (i) the acquisition of the Telegraph Minority
Shares, the acquisition by Publishing of newly issued Telegraph ordinary
shares and the related financing; and (ii) the acquisition of the Power
Shares of Southam (approximately 21.5%) which were initially acquired by a
Canadian subsidiary of Hollinger Inc., a company in which the Company will
have the right to acquire a substantial equity interest, and related bank
borrowings incurred by the Company to finance such acquisition; and (iii)
the sale of 10,000,000 shares of Class A Common Stock offered by the Company
in the Common Stock Offering (at a price of $10.00 per share and after
deducting estimated underwriting discounts and offering expenses) and the
consummation of the PRIDES Offering and the application of the estimated net
proceeds therefrom to acquire the Telegraph Minority Shares, to repay
Telegraph bank indebtedness, and the balance for working capital. See Pro
Forma Condensed Consolidated Financial Statements.
(3) Includes intangible assets, net of accumulated amortization, which amounted
to $820,951,000 at March 31, 1996 on a pro forma basis assuming the
transactions referred to in Note (3) had occurred at March 31, 1996. Such
intangible assets consist of the value of acquired subscriber and advertiser
lists, noncompetition agreements, archives and goodwill. The amortization
periods for intangible assets range from three to 40 years.
19
<PAGE> 21
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully the following factors, in addition to the other information
and financial data included or incorporated by reference in this Prospectus.
INVESTMENT IN THE SECURITIES WILL BECOME INVESTMENT IN CLASS A COMMON STOCK
Following the Mandatory Conversion Date, or earlier if previously redeemed
or converted at the option of the holder, a beneficial ownership in the PRIDES
will convert to a beneficial ownership in the Class A Common Stock. See
"Description of the Securities--Convertible Preferred Stock--General." There can
be no assurance that the value of the Class A Common Stock receivable by the
holder on the Mandatory Conversion Date or upon earlier redemption or conversion
will be equal to or greater than the per share price to the public of the
PRIDES. If the Current Market Price of the Class A Common Stock is less than the
per share price to the public, such amount receivable by the holder on the
Mandatory Conversion Date will be less than the per share price to the public of
the PRIDES, in which case an investment in the PRIDES will result in a loss.
Accordingly, a holder of the PRIDES assumes the risk that the market value of
the Class A Common Stock may decline, and that such decline could be
substantial.
LIMITATIONS ON OPPORTUNITY FOR EQUITY APPRECIATION
The opportunity for equity appreciation afforded by an investment in the
PRIDES is less than the opportunity for equity appreciation afforded by a direct
investment in the Class A Common Stock because the Class A Common Stock
receivable by a holder of PRIDES on the Mandatory Conversion Date, upon earlier
redemption by the Company or upon earlier conversion at the option of the holder
will only exceed the per share amount paid for the PRIDES offered hereby if, as
the case may be, the Current Market Price of the Class A Common Stock exceeds
such amount paid, the Current Market Price exceeds the Call Price by at least
% (which represents an appreciation of % over the per share price to the
public of the PRIDES) or the Current Market Price exceeds the Conversion Price
by at least % (which represents an appreciation of % over the per share
price to the public of the PRIDES). The Class A Common Stock received by holders
of the PRIDES may be more or less than the per share amount paid for the PRIDES
offered hereby, due to market fluctuations in the price of the Class A Common
Stock. See "Description of the Securities-- Convertible Preferred
Stock--Enhanced Dividend Yield; Less Equity Appreciation Than Common Stock."
FACTORS AFFECTING TRADING PRICES
The trading prices of the PRIDES in the secondary market will be directly
affected by the trading prices of the Class A Common Stock in the secondary
market. It is impossible to predict whether the price of Class A Common Stock
will rise or fall. Trading prices of the Class A Common Stock will be influenced
by the Company's operating results and prospects and by economic, financial and
other factors and market conditions that can affect the capital markets
generally, including the level of, and fluctuations in, the trading prices of
stock generally and sales of substantial amounts of Class A Common Stock in the
market subsequent to the offering of the PRIDES or the perception that such
sales could occur.
LIMITED SHAREHOLDER RIGHTS
Unless the PRIDES are either previously redeemed or converted at the option
of the holder, holders of the Securities will be entitled to limited voting
rights and will have no rights to receive any dividends or other distributions
in respect of the Class A Common Stock. Holders of the PRIDES will have the
right to vote with the holders of the Company's Common Stock on the basis of
4/5 of a vote for each half share of Convertible Preferred Stock represented by
the PRIDES.
20
<PAGE> 22
DILUTION OF COMMON STOCK
The number of shares of Class A Common Stock that holders of the PRIDES are
entitled to receive on the Mandatory Conversion Date or upon earlier redemption
or conversion at the option of the holder is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and certain
other actions of the Company that modify its capital structure. See "Description
of the Securities--Convertible Preferred Stock--Conversion Adjustments." Such
number of shares of Class A Common Stock to be received by such holders on the
Mandatory Conversion Date or earlier will not be adjusted for other events, such
as offerings of Common Stock for cash or in connection with acquisitions. The
Company is not restricted from issuing additional Common Stock during the term
of the PRIDES and has no obligation to consider the interests of the holders of
the PRIDES for any reason. Additional issuances may materially and adversely
affect the price of the Class A Common Stock and, because of the relationship of
the number of shares to be received on the Mandatory Conversion Date or earlier
to the price of the Class A Common Stock, such other events may adversely affect
the trading price of the PRIDES.
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the PRIDES will trade in the secondary
market or whether such market will be liquid or illiquid. The PRIDES are novel
securities and there is currently no secondary market for the PRIDES. The PRIDES
have been approved for listing on the NYSE, subject to notice of issuance.
However, there can be no assurance that an active trading market for the PRIDES
will develop or that such listing will provide the holders of the PRIDES with
liquidity of investment.
INTERNATIONAL HOLDING COMPANY STRUCTURE
The Company is an international holding company and its assets consist
solely of investments in its subsidiaries and affiliated companies. As a result,
the Company's ability to meet its future financial obligations is dependent upon
the availability of cash flows from its United States and foreign subsidiaries
and affiliated companies (subject to applicable withholding taxes) through
dividends, intercompany advances, management fees and other payments. Similarly,
the Company's ability to pay dividends on the Convertible Preferred Stock
represented by the PRIDES and the Class A Common Stock will be limited as a
result of its dependence upon the distribution of earnings of its subsidiaries
and affiliated companies. The Company's subsidiaries and affiliated companies
are under no obligation to pay dividends and, in the case of Publishing, its
principal United States subsidiaries and The Telegraph, are or will be subject
to statutory restrictions and restrictions in debt agreements that may limit
their ability to pay dividends. See "Restrictions in Debt Agreements" below.
Substantially all of the shares of the subsidiaries of the Company have been
pledged, or will be pledged pursuant to the Scheme and related financing and the
Southam Facility, to lenders of the Company. The portion of the Company's
indirect interest in Southam held through HTH (18.9%), a subsidiary of the
Company, has been pledged to lenders of Hollinger Inc. The Company's right to
participate in the distribution of assets of any subsidiary or affiliated
company upon its liquidation or reorganization will be subject to the prior
claims of the creditors of such subsidiary or affiliated company, including
trade creditors, except to the extent that the Company may itself be a creditor
with recognized claims against such subsidiary or affiliated company.
GROWTH STRATEGY
The Company's strategy is to achieve growth through acquisitions and
improvements in the cash flow and profitability of its newspapers, principally
through cost reductions. The Company's growth strategy presents risks inherent
in assessing the value, strengths and weaknesses of acquisition opportunities,
in evaluating the costs of new growth opportunities at existing operations and
in managing the numerous publications it has acquired and improving their
operating efficiency. While the Company believes that there are significant
numbers of potential acquisition candidates, the Company is unable to predict
the number or timing of future acquisition opportunities or whether any such
opportunities will meet the Company's acquisition criteria or, if such
acquisitions occur, whether the Company will be able to achieve improved
operating efficiencies or enhanced profitability. While the Company continues to
evaluate the feasibility of increasing its equity
21
<PAGE> 23
interests in Fairfax and further increasing its equity interest in Southam,
there can be no assurance that the Company will be successful in any such
efforts or that any increase in its investments will have a positive effect on
the Company's consolidated results of operations. In addition, there can be no
assurance that the Company's planned purchase of the Telegraph Minority Shares
or the recent acquisition of the Power Shares will have a positive effect on the
Company's consolidated results of operations. Accordingly, there can be no
assurance that the Company will continue to experience the rate of growth that
it has had in the past. In addition, the Company's acquisition strategy is
largely dependent on the Company's ability to obtain additional debt or other
financing on acceptable terms. See "Restrictions in Debt Agreements", "Other
Restrictive Arrangements" and "Substantial Leverage" below.
RESTRICTIONS IN DEBT AGREEMENTS
The instruments governing the terms of the principal indebtedness and
redeemable preferred stock of the Company and its principal subsidiaries contain
various covenants, events of default and other provisions that could limit the
flexibility of the Company. Such provisions include requirements to maintain
compliance with certain financial ratios, limitations on the ability of the
Company and certain of its subsidiaries to make acquisitions or investments
without the consent of the lenders and limitations on the ability of the
Company's principal subsidiaries to incur indebtedness, make dividend and other
payments to the Company and take certain other actions. In addition, such
indebtedness is secured by, among other things, pledges of the stock of the
Company's principal subsidiaries. See "Description of Certain Indebtedness and
Other Obligations."
The amount available for the payment of dividends by the Company at any
time is a function of (i) restrictions in agreements binding the Company
limiting its ability to pay dividends and (ii) restrictions in agreements
binding the Company's subsidiaries limiting their ability to pay dividends to
the Company. The Company is not a party to a debt agreement that restricts the
payment of dividends. However, certain agreements binding Publishing and other
subsidiaries of the Company contain such restrictive provisions. As of March 31,
1996, after giving effect to the adjustments set forth under "Capitalization,"
the total amount of funds that would be unrestricted as to payment of dividends,
management fees and other payments by Publishing under its debt instruments
would have been, under the more restrictive provisions, approximately $26
million, if the Offering and the Common Stock Offering are completed. The
foregoing calculation is based on the sum of the following for the period
January 1, 1996 to March 31, 1996: (i) 50% of the sum of (x) consolidated net
income of Publishing and its restricted subsidiaries (principally its United
States subsidiaries), or if it is a loss, 100% of such loss, and (y)
amortization expense of Publishing and such subsidiaries; (ii) 50% of the cash
dividends received by Publishing and its restricted subsidiaries from any
unrestricted subsidiaries, including The Telegraph; and (iii) $25 million. In
addition, the amount available for dividends is permitted to be increased, among
other provisions, by the amount of net cash proceeds from capital contributions
made to Publishing. See "Description of Certain Indebtedness and Other
Obligations." In addition, the Company's subsidiaries, American Publishing
(1991) Inc. and FDTH, are parties to agreements that limit their respective
abilities to pay dividends to the Company.
OTHER RESTRICTIVE ARRANGEMENTS
The Company's equity interests in The Telegraph, Southam and Fairfax are
held through intermediate English holding companies, DTH and FDTH, whose only
significant long-term assets are their direct or indirect interests in The
Telegraph, Southam and Fairfax. DTH and FDTH have outstanding preference shares
held by persons other than the Company and its affiliates (the "DTH Preference
Shares," the "FDTH Preference Shares," and, collectively, the "DTH and FDTH
Preference Shares") with an aggregate redemption amount of $227.1 million (as of
March 31, 1996) and which require the payment of quarterly dividends with a
current effective dividend cost of 5.5% per annum (after giving effect to
certain interest rate and currency exchange agreements). After giving effect to
the transaction described below, as of such date, approximately 30% of the
issued and outstanding FDTH Preference Shares are held by unrelated parties and
the remaining 70% of such preference shares are held by Argsub (as defined
below). In addition, DTH owns all 165,000,000 non-cumulative redeemable
preference shares of L1 per share issued by FDTH and 23,801,420 non-cumulative
redeemable preference shares of Cdn.$1 per share issued by FDTH which were
transferred by
22
<PAGE> 24
Hollinger Inc. to DTH pursuant to the HTH/FDTH Share Exchange Agreement dated
July 19, 1995 (the "HTH/FDTH Share Exchange Agreement"). All of the outstanding
DTH Preference Shares are held by unrelated parties.
On December 29, 1995, DTH transferred all outstanding FDTH Preference
Shares which it then held (with an aggregate redemption amount of Cdn.$140
million ($102.8 million)) to a wholly owned English subsidiary ("Argsub") of
Argus Corporation Limited ("Argus"), a Canadian corporation all the voting stock
of which is indirectly owned or controlled by Mr. Black, in exchange for newly
issued preference shares (with an aggregate redemption amount of Cdn.$140
million ($102.8 million)) of such English subsidiary. Such preference shares
have terms substantially identical to those of the FDTH Preference Shares and
constitute the entire issued and outstanding preference share capital of such
subsidiary. The transaction was structured to eliminate economic gain or loss to
Argus and Argsub on the preference shares. Argus owns directly and indirectly
approximately 31.3% of the common shares of Hollinger Inc.
The DTH Preference Shares are redeemable at the option of the holder at any
time on four days' notice at a redemption price discounted in accordance with an
agreed formula, and the FDTH Preference Shares and the DTH Preference Shares are
redeemable by the issuer or the holders on the fifth anniversary of their
issuance (May or June 1997, respectively), each five year anniversary thereafter
and at other prescribed times and in prescribed circumstances, including where
the consolidated debt of Hollinger Inc. is more than two times its consolidated
equity (the "Debt to Equity Ratio"). The Debt to Equity Ratio is affected by,
among other things, Hollinger Inc.'s consolidated results of operations, as well
as changes in the levels of consolidated debt of Hollinger Inc. and its
subsidiaries, including the Company. Accordingly, there can be no assurance that
Hollinger Inc. will be in compliance with the Debt to Equity Ratio as of any
future date. The Company has been informed by Hollinger Inc. that, based on
preliminary calculations as of June 30, 1996, Hollinger Inc. believes that it is
in compliance with the Debt to Equity Ratio at June 30, 1996. Final calculations
will be made when the interim consolidated financial statements of Hollinger
Inc. become available. However, in light of the contemplated additional debt
financing to be incurred in connection with the acquisition of the Telegraph
Minority Shares, Hollinger Inc. has indicated that it will not be in compliance
with the Debt to Equity Ratio as of September 30, 1996. Accordingly, there can
be no assurance that holders of the DTH or FDTH Preference Shares will not
exercise their retraction rights against DTH or FDTH or Hollinger Inc. pursuant
to contractual arrangements with the holders under which Hollinger Inc. has
agreed to purchase the DTH and FDTH Preference Shares. In the event Hollinger
Inc. is required to purchase any DTH and FDTH Preference Shares under these
circumstances, Hollinger Inc. shall have the right, following written notice, to
require the Company to purchase such shares at the then retraction price. The
aggregate amount of any such payments by the Company to Hollinger Inc. (other
than in respect of shares held by Argsub) would be a maximum of approximately
$125.6 million. See "Description of Certain Indebtedness and Other Obligations."
Hollinger Inc. has indemnified the holders of the DTH and FDTH Preference
Shares and agreed to purchase these preference shares if DTH or FDTH fails to
pay the full amount of dividends or redemption prices on such shares and in
certain other events. The Company has entered into an agreement to compensate
Hollinger Inc. for any payments made by Hollinger Inc. to holders of the DTH and
FDTH Preference Shares and to purchase any DTH and FDTH Preference Shares which
Hollinger Inc. is required to purchase in accordance with the terms thereof. The
timing of any such payments by the Company to Hollinger Inc. will be determined
by Hollinger Inc. See "Description of Certain Indebtedness and Other
Obligations."
Substantially all of the Company's indirect 19.5% equity interest in
Southam is held through HTH (18.9%), a Canadian corporation which is jointly
owned by FDTH and The Telegraph. The balance of the Company's indirect interest
in Southam is owned directly by FDTH (0.3%) and The Telegraph (0.3%). A
subsidiary of Hollinger Inc. holds the 21.5% equity interest in Southam formerly
held by Power. The shares representing FDTH's one-half interest in HTH are
subject to a pledge securing certain Hollinger Inc. debentures in the principal
amount of Cdn.$125 million due November 1, 1998 (the "Southam-Linked
Debentures"). In the event Hollinger Inc. does not deliver clear legal title to
such HTH shares on or prior to April 1, 1999, or upon demand by FDTH,
approximately one-half of the Company's indirect equity interest in Southam
would be subject to the rights of the holders of the Southam-Linked Debentures.
23
<PAGE> 25
SUBSTANTIAL LEVERAGE
The Company and its subsidiaries have substantial leverage and have
substantial debt service obligations, as well as obligations under the Series A
Preferred Stock of the Company (which is convertible into shares of Class A
Common Stock) and redeemable preferred shares of its subsidiaries. Following
consummation of the Offering and the concurrent Common Stock Offering, the
Company will continue to be substantially leveraged and have substantial debt
service obligations. The instruments governing the terms of the principal
indebtedness and redeemable preferred stock of the Company, Publishing and its
principal United States and foreign subsidiaries contain various covenants,
events of default and other provisions that could limit the financial
flexibility of the Company, including the payment of dividends with respect to
outstanding Common Stock and Preferred Stock and the implementation of its
growth strategy.
Since 1986 the Company, principally through its subsidiaries, has incurred
substantial indebtedness principally to fund its newspaper acquisitions and
capital expenditures. At March 31, 1996, after giving effect to the Offering and
the concurrent Common Stock Offering, the Company's consolidated adjusted total
debt, redeemable preferred stock and stockholders' equity would have been
$1,065.8 million, $306.6 million and $674.0 million, respectively, and total
debt and redeemable preferred stock would represent approximately 67.1% of its
total capitalization. Of the Company's consolidated adjusted total debt, $659.0
million is due within one year or less of March 31, 1996. See "Capitalization."
In addition to this Offering and after the completion of the Common Stock
Offering, the Company may, through a subsidiary or an affiliate, issue high
yield debt securities or other debt or equity securities, possibly including a
security which would allow the Company to monetize its interest in Fairfax. The
Company anticipates that it would apply the net proceeds from any such offering
for one or more of the following: (i) the repayment of outstanding amounts under
the Southam Facility, the FDTH Credit Facility and the Amended Publishing Credit
Facility (or any extension or refinancing of any of the foregoing), (ii) the
redemption of the DTH and FDTH Preference Shares, and (iii) other corporate
purposes, including capital expenditures and acquisitions.
The substantial leveraged position of the Company could make it vulnerable
to a downturn in the operating performance of its business or a downturn in
economic conditions and could have the following consequences: (i) the Company's
ability to obtain additional debt financing on attractive terms for corporate or
other purposes, including the financing of future acquisitions, may be limited;
(ii) the funds available to the Company for its operations and for dividends on
its Common Stock may be reduced as a result of the use of an increased portion
of available cash flow to pay debt service; (iii) certain of the Company's
borrowings are and will continue to be at variable rates of interest, which
could result in higher interest expenses in the event of increases in interest
rates; and (iv) such indebtedness and outstanding redeemable preferred stock
contain financial and restrictive covenants (including certain change of control
provisions related to Hollinger Inc.'s control of the Company), the failure to
comply with which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. See "Restrictions
in Debt Agreements" and "Other Restrictive Arrangements" above and "Description
of Certain Indebtedness and Other Obligations."
On February 7, 1996, Publishing completed a public offering of $250.0
million principal amount of 9 1/4% senior subordinated notes due February 1,
2006 (the "Notes") priced at par (the "Notes Offering"). Payment of the
principal of, premium, if any, and interest on the Notes is guaranteed by the
Company on an unsecured senior subordinated basis. Concurrently with the Notes
Offering, Publishing entered into a credit agreement with two banks (the
"Publishing Credit Facility"). See "Description of Certain Indebtedness and
Other Obligations."
In May 1996, Publishing entered into an amended and restated credit
agreement (the "Amended Publishing Credit Facility") with a certain lender,
which consists of a secured, non-amortizing revolving credit facility with a
maximum of $125.0 million of available credit. Subsequently, the lender has
agreed to amend the agreement to provide for a maximum of $150.0 million of
available credit, of which $140.0 million is expected to be used to finance
Publishing's acquisition of newly-issued Telegraph ordinary shares. The
Telegraph will apply the proceeds of this issuance to repay a portion of its
outstanding bank indebtedness. Also
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in May 1996, FDTH entered into a credit agreement (the "FDTH Credit Facility")
with certain lenders, which consists of a secured, non-amortizing revolving
credit facility with a maximum of L250 million ($387.4 million) of available
credit to be used to finance FDTH's acquisition of a portion of the Telegraph
Minority Shares pursuant to the Scheme and to repay Telegraph bank indebtedness.
After giving effect to this Offering and the Common Stock Offering and the
application of the estimated net proceeds therefrom, the Company expects to
borrow approximately $277.0 million under this facility for such purposes and to
have available L15 million ($23.0 million) for working capital purposes of The
Telegraph.
In addition, Publishing Holdings and the Company entered into a securities
purchase agreement (the "Publishing Holdings Note Facility") with a purchaser
which relates to $100 million aggregate principal amount of Publishing Holdings
Senior Secured Increasing Rate Exchangeable Notes (the "Publishing Holdings
Notes"). However, so long as the Company raises at least $100 million of
proceeds in this Offering or in the Common Stock Offering prior to the
consummation of the Scheme, the Publishing Holdings Note Facility will be
terminated and the Publishing Holdings Notes will not be issued. In the event
that any Publishing Holdings Notes are issued (and not refinanced with the
proceeds of the Common Stock Offering or the PRIDES Offering), the proceeds of
such issuance would be loaned to FDTH to finance the acquisition by FDTH of a
portion of the Telegraph Minority Shares.
The Company also entered into the Southam Facility with a Canadian bank in
May 1996, which consists of a secured, non-amortizing credit facility guaranteed
by Hollinger Inc. and three of its subsidiaries in the amount of Cdn.$300
million and which was used for the purchase of the Power Shares of Southam and
is secured by such shares. See "Description of Certain Indebtedness and Other
Obligations."
CONTROL BY HOLLINGER INC. AND DISPROPORTIONATE VOTING RIGHTS
Hollinger Inc. owns 33,610,754 Shares of the Class A Common Stock and all
of the outstanding shares of the Class B Common Stock, constituting
approximately 66.5% of the combined equity interest in the Company and
approximately 88.2% of the combined voting power of the Common Stock (without
giving effect to any conversion of Series A Preferred Stock into shares of Class
A Common Stock). Hollinger Inc. is effectively controlled by Mr. Black, Chairman
of the Board and Chief Executive Officer of Hollinger Inc. and the Company,
through his direct and indirect ownership and control of Hollinger Inc.'s
securities. Upon consummation of the Common Stock Offering, Hollinger Inc. will
own shares of Common Stock representing approximately 58.5% of the combined
equity interest and approximately 84.2% of the combined voting power (without
giving effect to the issuance of shares of Class A Common Stock upon conversion
of Series A Preferred Stock or in connection with the PRIDES) of the outstanding
Common Stock (57.5% and 83.6%, respectively, if the underwriters' over-allotment
options in the Common Stock Offering are exercised in full), and 49.6% and
75.8%, respectively, upon the issuance of up to approximately 15,000,000 shares
of Class A Common Stock in connection with the PRIDES. As a result, Hollinger
Inc. is in a position to control the outcome of substantially all actions
requiring stockholder approval, including the election of the entire Board of
Directors. The retention by Hollinger Inc. of securities representing more than
50% of the voting power of the Company's outstanding Common Stock will preclude
any acquisition of control of the Company not favored by Hollinger Inc. Subject
to the fiduciary responsibilities of the directors of the Company to all
stockholders and the terms of agreements defining the ongoing relationships
between Hollinger Inc. and the Company, Hollinger Inc., through its ability to
control the outcome of any election of directors, will continue to be able to
direct management policy, strategic direction and financial decisions of the
Company. Mr. Black has advised the Company that Hollinger Inc. does not
presently intend to reduce its voting power in the Company's outstanding Common
Stock to less than 50%. Furthermore, Mr. Black has advised the Company that he
does not presently intend to reduce his voting control over Hollinger Inc. such
that a third party would be able to exercise effective control over it.
Hollinger Inc. may sell or transfer shares of Class B Common Stock, and
thus potentially voting control of the Company, to an unaffiliated third person
provided such purchaser or transferee offers to purchase all shares of Class A
Common Stock from the holders thereof for an amount per share equal to the
amount per share received by Hollinger Inc. for the Class B Common Stock.
Hollinger Inc. has pledged all shares of Common Stock and Series A Preferred
Stock owned by it to Canadian chartered banks as collateral for
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outstanding indebtedness of Hollinger Inc. and the Southam Facility. A default
under such indebtedness could result in a change of control of the Company. See
"Description of Capital Stock."
NEWSPAPER INDUSTRY COMPETITION
Revenues in the newspaper industry are dependent primarily upon advertising
revenues and paid circulation. Competition for advertising and circulation
revenue comes from local and regional newspapers, radio, broadcast and cable
television, direct mail, and other communications and advertising media that
operate in the Company's markets. The extent and nature of such competition is,
in large part, determined by the location and demographics of the markets and
the number of media alternatives in those markets. Some of the Company's
competitors are larger and have greater financial resources than the Company.
For example, in the Chicago metropolitan area, the Chicago Sun-Times competes
with a large established metropolitan daily and Sunday newspaper that is the
fifth largest metropolitan daily and Sunday newspaper in the United States. In
the United Kingdom, The Daily Telegraph competes with other national newspapers,
principally The Times, which over the past two years substantially reduced its
cover price in an effort to increase its circulation. This strategy led The
Daily Telegraph to reduce its weekday cover prices in June 1994 in order to
maintain its circulation levels, although its circulation revenues were
adversely affected. In July 1995 and November 1995 The Daily Telegraph,
following the lead of its principal competitor, increased its weekday cover
price by a total of 10p per copy, or 33%, with limited effect on circulation
levels to date. In June 1996, The Times reduced its cover price to 10p on
Mondays only, as part of its "summer sport promotion." To promote its "summer of
sport," The Daily Telegraph launched a 12-week voucher promotion beginning
Saturday, June 8 enabling readers to redeem vouchers to purchase The Daily
Telegraph on Mondays for 10p.
CYCLICALITY OF REVENUES
Advertising and, to a lesser extent, circulation revenues of the Company,
as well as those of the newspaper industry in general, are cyclical and
dependent upon general economic conditions. Historically, increases in
advertising revenues have corresponded with economic recoveries while decreases,
as well as changes in the mix of advertising, have corresponded with general
economic downturns and regional and local economic recessions. The Company
believes, however, that the geographic diversity of its global operations may
mitigate, to some degree, the effects of an economic downturn in any particular
market served by the Company.
NEWSPRINT COSTS
Newsprint represents the single largest raw material expense of the
Company's newspapers throughout the world and is one of its most significant
operating costs. Newsprint costs increased approximately 40% per metric ton in
1995 on an industry-wide basis, and the average cost per metric ton of newsprint
was substantially higher in the first half of 1996 than in the first half of
1995. While the major newsprint producers recently rescinded their previous
planned price increase, any future increases could have an adverse effect on the
Company's results of operations. Although the Company has implemented measures
in an attempt to offset the rise in newsprint prices, such as reducing page
width and managing its return policy, such increases have had an adverse effect
on the Company's results of operations. The Company has no effective ability to
use long term fixed price newsprint supply contracts to hedge its exposure to
price fluctuations.
FOREIGN OPERATIONS AND CURRENCY EXCHANGE RATES
Operations outside of the United States accounted for approximately 42% of
the Company's operating revenues and approximately 42% of the Company's
operating income for the year ended December 31, 1995 and approximately 43.9% of
operating revenues and approximately 72.7% of operating income for the three
months ended March 31, 1996. In addition, equity in earnings of affiliates
(principally Fairfax and Southam) are in foreign currencies. In general, the
Company does not hedge against foreign currency exchange rate risks. As a
result, the Company may experience economic loss and a negative impact on
earnings with respect to its investments and on dividends from its foreign
subsidiaries, solely as a result of currency exchange rate fluctuations.
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DIVIDEND POLICY
The Company has paid quarterly dividends on its Common Stock since the
third quarter of 1994. The quarterly dividend was previously $0.025 per share of
Common Stock and was increased to $0.10 per share of Common Stock in the first
quarter of 1996. As an international holding company, the Company's ability to
declare and pay dividends in the future with respect to its Common Stock and the
Convertible Preferred Stock will be dependent, among other factors, upon its
results of operations, financial condition and cash requirements, the ability of
its United States and foreign subsidiaries (principally The Telegraph) to pay
dividends and make other payments to the Company under applicable law and
subject to restrictions contained in existing and future loan agreements, the
prior payment of dividends to holders of Series A Preferred Stock and any other
stock ranking senior to the Common Stock or the PRIDES with respect to dividend
rights, the preference share terms and other financing obligations to third
parties relating to such United States or foreign subsidiaries or the Company,
as well as foreign and United States tax liabilities with respect to dividends
and other payments from those entities. See "International Holding Company
Structure," "Restrictions in Debt Agreements" and "Other Restrictive Agreements"
above and "Market Prices and Dividend Policy."
LIMITATIONS ON CONTROL OF THE TELEGRAPH, SOUTHAM AND FAIRFAX
Telegraph. Hollinger Inc. is also a party to a Co-operation Agreement with
The Telegraph which restricts members of the Hollinger Inc. group (other than
The Telegraph and its subsidiaries), from engaging in media businesses in the
European Community, Australia or New Zealand, except through their holding of
shares in The Telegraph, without The Telegraph's prior consent. In addition, The
Telegraph and its subsidiaries are not permitted to engage in media businesses
in North America, the Caribbean and Israel without Hollinger Inc.'s prior
consent. Hollinger Inc. has also undertaken in the Co-operation Agreement to
refrain from exercising any voting rights under its control in The Telegraph on
any proposal to change the corporate governance provisions of the Articles of
Association. This agreement may be rescinded or modified if agreed to by the
Company's and The Telegraph's Board of Directors.
Southam Joint Venture. The terms of the joint venture between The
Telegraph and Hollinger Inc. (to which the Company is bound) relating to the
joint investment of FDTH and The Telegraph in Southam through HTH, a Canadian
holding company owned equally by the Company and The Telegraph, restrict each
party's ability to deal both with the underlying shares of Southam held by HTH
and with their own interests in HTH. The parties may pledge their interests in
HTH to secure financing, so long as the lender agrees to be bound by the terms
of the joint venture agreement. FDTH's 50% interest in HTH has been pledged to
secure the Southam-Linked Debentures and The Telegraph's 50% interest in HTH has
been pledged under the FDTH Credit Facility.
Southam. Southam is a constrained share corporation under the Canada
Business Corporations Act. The general effects of its constrained share status
are to restrict the holding or ownership of its shares by non-Canadians, either
individually or in the aggregate, within limits set from time to time by the
Board of Directors (which is currently set at 25%); to prevent the issue or
transfer of its shares in circumstances where these limits would be exceeded;
and to limit the voting rights attached to its shares in circumstances where
these limits are exceeded. Because 18.9% of the Company's indirect 19.5%
interest in Southam is held by HTH, a Canadian corporation which is controlled
directly or indirectly by Hollinger Inc., a Canadian corporation, and a wholly
owned Canadian subsidiary of Hollinger Inc. currently holds a 21.5% interest,
Southam's constrained share provisions should not restrict the Company's or
Hollinger Inc.'s investment in Southam.
Hollinger Inc. and Southam entered into an agreement in January 1993 that
provides, among other things, that: (i) a majority of directors on the board of
directors of Southam and each board committee must be independent of Hollinger
Inc. and Southam's management; (ii) Hollinger Inc. is entitled to representation
on the Southam board of directors proportionate to its shareholding and (iii)
independent director and, in certain cases, shareholder approvals are required
for major transactions between Hollinger Inc. and Southam. This agreement
remains in effect as long as Hollinger Inc. owns at least 15% of the then
outstanding common shares in the capital of Southam and ceases to have effect if
Hollinger Inc. becomes the majority shareholder of Southam and could be modified
or cancelled by mutual agreement between Hollinger Inc. and the Board of
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Directors of Southam. Following a request by Hollinger Inc., Southam has
scheduled a special shareholders meeting for July 22, 1996 to consider the
election of five new directors proposed by Hollinger Inc. to replace five of the
existing directors of Southam.
Fairfax. The Telegraph is the single largest shareholder of Fairfax, a
publicly owned company, but its ownership is currently limited under Australian
law to 25% of Fairfax's issued capital. While The Telegraph has no contractual
entitlement to board representation, it is closely involved in the management of
Fairfax and is able to exert significant influence over the financial and
operating policy decisions of Fairfax.
POTENTIAL CONFLICTS OF INTEREST
The Company and Hollinger Inc. have entered into agreements for the purpose
of defining their ongoing relationships, including a Services Agreement (to
which Publishing is also a party) and a Business Opportunities Agreement. These
agreements were developed in the context of a parent-subsidiary relationship
and, therefore, were not the result of arms-length negotiations between
independent parties. See "Certain Relationships."
Services Agreement. The Services Agreement governs the provision by
Hollinger Inc. of certain advisory, consultative, procurement and administrative
services to the Company. The Services Agreement also contemplates that the
Company may provide services to Hollinger Inc. The services to be provided
pursuant to the Services Agreement include, among other things, strategic advice
and planning and financial services (including advice and assistance with
respect to acquisitions); assistance in operational matters; participation in
group insurance programs; and guarantees of indebtedness of the Company or other
forms of credit enhancements. The party receiving the services will reimburse
the party rendering the services for its allocable costs in providing those
services, as determined by the provider thereof or, in the case of a guarantee,
for an amount equal to the cost to the party of obtaining a bank letter of
credit in the amount of such guarantee. The party allocating its costs will
consider the salaries or other compensation payable to directors, officers and
employees actually providing services, out-of-pocket costs, the cost of
obtaining substantially equivalent services from a third party and other factors
as may be deemed appropriate. The Services Agreement will be in effect for so
long as Hollinger Inc. holds at least 50% of the voting power of the Company,
subject to termination by either party under certain specified circumstances.
Payments made pursuant to the Services Agreement are subject to the review and
approval of the Audit Committee of the Board of Directors of the Company.
In addition, Hollinger Inc. and The Telegraph are parties to a separate
services agreement under which The Telegraph bears two-thirds of the cost of the
office of the Chairman incurred by Hollinger Inc. as long as Mr. Black remains
Chairman of the Board of The Telegraph, and requires that other services will be
provided at cost, including the arrangement of insurance, assistance in the
arrangement of financing and assistance and advice on acquisitions, dispositions
and joint venture arrangements. The Company anticipates that the total amount to
be received by Hollinger Inc. under the Services Agreement and The Telegraph
services agreement will increase from approximately $5 million in 1995 to
approximately $8.4 million in 1996. See "Certain Relationships." Hollinger Inc.
has assigned its rights and obligations under The Telegraph services agreement
to the Company and Publishing on May 9, 1996 with the consent of The Telegraph.
Business Opportunities. The Business Opportunities Agreement provides that
the Company will be Hollinger Inc.'s principal vehicle for engaging in and
effecting acquisitions in newspaper businesses and in related media businesses
in the United States, Israel and, through The Telegraph, the Telegraph
Territory. Hollinger Inc. has reserved to itself the ability to pursue newspaper
and all media acquisition opportunities outside the United States, Israel and
the Telegraph Territory, and media acquisition opportunities unrelated to the
newspaper business in the United States, Israel and the Telegraph Territory,
except that the Company is permitted to increase its indirect investment in
Southam. The Business Opportunities Agreement does not restrict newspaper
companies in which Hollinger Inc. has a minority investment from acquiring
newspaper or media businesses in the United States, Israel or the Telegraph
Territory, nor does it restrict subsidiaries of Hollinger Inc. from acquiring up
to 20% interests in publicly held newspaper businesses in the United States. The
Business Opportunities Agreement will be in effect for so long as Hollinger Inc.
holds at least 50% of the voting power of the Company, subject to termination by
either party under specified circumstances.
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Continuing Agreements Relating to the Reorganization. In connection with
the Company's October 1995 Reorganization, Hollinger Inc. and the Company
entered into the Share Exchange Agreement (the "Share Exchange Agreement").
Under the Share Exchange Agreement, Hollinger Inc. and the Company have agreed
that if the Company proposes to effect a public offering of its equity or
equity-linked securities for cash, or to issue equity-linked securities in any
acquisition by the Company of the stock or assets of an unrelated corporation or
entity, at any time during the 24 months following the closing date of such
agreement, the Company's efforts to raise capital through such offering shall
have priority over any proposal by Hollinger Inc. to effect a public offering or
sale of the Company's equity securities by Hollinger Inc., unless a majority of
the disinterested members of an Independent Committee of the Company's Board of
Directors shall otherwise agree. For these purposes, an "Independent Committee"
means a committee of the Company's Board the majority of the members of which
are not employees or directors of Hollinger Inc. or employees of the Company, or
another committee of the Company's Board whose membership satisfies any more
restrictive requirements of independence of any securities exchange or market in
which the Company's equity securities are traded or listed. If during such
period Hollinger Inc. proposes to sell or otherwise dispose of any shares of
Series A Preferred Stock (other than certain transfers to Hollinger Inc.
subsidiaries or affiliates and pledges) or to offer or sell publicly any shares
of Class A Common Stock held by it or its affiliates, it shall first consult
with the Independent Committee so as not to interfere with any planned capital
market activities of the Company to be undertaken within this period.
The Share Exchange Agreement includes a covenant by Hollinger Inc. to limit
the exercise of its redemption rights as a holder of shares of Series A
Preferred Stock to a number of shares proportionate to the number of HTH shares
or Southam common shares that at the time of such exercise have been delivered
to FDTH free and clear of encumbrances. The Company also agreed that so long as
any of the HTH shares are subject to the pledge under the Southam-Linked
Debentures, the Company will use reasonable commercial efforts not to take any
action, without the consent of Hollinger Inc., which itself would constitute an
event of default by Hollinger Inc. under the trust indenture relating to the
Southam-Linked Debentures. Hollinger Inc. has agreed to deliver to FDTH legal
title to the HTH shares free and clear of pledges, liens or encumbrances other
than certain permitted encumbrances.
Under the agreement between the Company and Hollinger Inc. with respect to
the DTH and FDTH Preference Shares (the "DTH/FDTH Preference Share Agreement"),
the Company has agreed to compensate Hollinger Inc. for any payments made by
Hollinger Inc. to holders of the DTH and FDTH Preference Shares and to purchase
any DTH and FDTH Preference Shares which Hollinger Inc. is required to purchase
in accordance with the terms thereof. The timing of any such payments by the
Company to Hollinger Inc. will be determined by Hollinger Inc. See "Description
of Certain Indebtedness and Other Obligations."
Registration Rights Agreements. In connection with the Reorganization,
Hollinger Inc. entered into a letter agreement dated October 13, 1995 with a
Canadian bank as amended on May 24, 1996 in connection with the Southam
Facility, pursuant to which Hollinger Inc. has agreed that, in the event that
Hollinger Inc. or the Company is in default under any present or future
indebtedness and the bank intends to effect foreclosure upon such securities or
to exercise its power of sale rights under any applicable security documents,
Hollinger Inc. will, at the written request of the bank, use its reasonable best
efforts to cause the Company to effect the registration under the Securities Act
of all or part of such securities and the shares of Class A Common Stock into
which certain of such securities are convertible (but not less than 5,000,000
shares of Class A Common Stock), unless certain exemptions from the registration
provisions of the Securities Act are applicable. Hollinger Inc. has further
agreed to pay all registration expenses (other than any underwriting discounts
or commissions) in connection with such a registration. Hollinger Inc.'s
undertakings in such letter agreement are subject to Hollinger Inc.'s
obligations under the Share Exchange Agreement (including those described above)
and were modified by a subsequent registration rights agreement described below.
Hollinger Inc. and certain of its subsidiaries entered into a registration
rights agreement with certain Canadian lenders as of February 29, 1996, as
amended on May 24, 1996 in connection with the Southam Facility. The agreement
provides that Hollinger Inc. will use its reasonable best efforts to cause the
Company to, and the Company agrees to, effect a "shelf registration" under the
Securities Act of the shares of Class A Common Stock pledged under credit
facilities with such banks at the earliest possible date, but, in any case,
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not later than May 29, 1996. In connection with such registration, Hollinger
Inc. will pay all registration expenses (other than any underwriting discounts
or commissions), and all other selling expenses incurred by the lenders will be
borne by Hollinger Inc. and the Company. In accordance with the registration
rights agreement, a shelf registration statement was filed with the Securities
and Exchange Commission on May 29, 1996, but has not yet been declared
effective. The registration rights agreement also provides that with respect to
the shares of Class B Common Stock and the Series A Preferred Stock the
registration rights undertaking by Hollinger Inc. pursuant to the letter
agreement described above shall remain in full force and effect.
As indicated above, the registration rights agreements described above were
amended on May 24, 1996 in connection with the Southam Facility. In addition to
any changes to the registration rights agreements reflected above, the principal
effects of the May 24, 1996 amendment were (i) to make the Company a party to
each of the registration rights agreements, (ii) to provide that the
registration undertakings set forth in the registration rights agreements apply
to any default under any indebtedness of Hollinger Inc. or the Company to the
Canadian bank and the Canadian lenders secured by a pledge of the Company's
securities, including the Southam Facility, (iii) to reflect that 7,539,028
shares of Class A Common Stock and the 14,990,000 shares of Class B Common Stock
held by Hollinger Inc. were pledged to the lenders in connection with the
Southam Facility and (iv) to require that the shelf registration statement filed
with the Commission on May 29, 1996 be amended within 60 days of May 24, 1996 to
reflect that such registration statement extends to the 7,539,028 shares of
Class A Common Stock pledged to the lenders in connection with the Southam
Facility.
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Class A Common Stock owned by Hollinger Inc., the shares of
Class A Common Stock into which Hollinger Inc.'s Class B Common Stock are
convertible, and the shares of Class A Common Stock into which the Series A
Preferred Stock owned by Hollinger Inc. are convertible, will qualify for sale
by Hollinger Inc. in distributions registered under the Securities Act, or in
transactions exempt from registration thereunder, subject to Hollinger Inc.'s
agreement with the representatives of the Underwriters not to offer, sell,
contract to sell or otherwise dispose of such shares (or securities convertible
into or exchangeable or exercisable for such shares) for 90 days after the date
of this Prospectus, without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated. See "Underwriting." In addition, shares of Class A
Common Stock will be issued in connection with the PRIDES and the Company may
finance a portion of the cost of future newspaper acquisitions through
additional issuances of Class A Common Stock or other equity securities. The
Company also has granted stock options to executives and key employees of the
Company to purchase shares of Class A Common Stock. Sales of substantial amounts
of Class A Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Class A Common Stock and could
impair the Company's future ability to raise capital through an offering of
equity securities.
ISSUANCE OF PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock, in
one or more series, and to designate the rights, preferences, limitations and
restrictions of and upon shares of each series. In connection with the
Reorganization, 739,500 shares of Series A Preferred Stock were issued to
Hollinger Inc. Such shares are non-voting, are redeemable by the Company or the
holder under certain circumstances and are convertible into Class A Common Stock
by the holder at an initial conversion price of the Canadian dollar equivalent
of $14 per share. In this Offering, the Company plans to issue up to 7,500,000
shares of Preferred Stock (up to 8,625,000 shares if the Underwriters'
over-allotment option is exercised in full). In general, the effects of the
issuance of any other series of preferred stock upon the rights of holders of
Class A Common Stock may include, among other things, restricting dividends on
the Class A Common Stock, diluting the voting power of the Class A Common Stock
or impairing liquidation rights of such shares without further action by holders
of Class A Common Stock. See "Description of Capital Stock" and "Description of
the Securities--Convertible Preferred Stock."
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THE COMPANY
OVERVIEW
The Company, through subsidiaries and affiliated companies, is a leading
publisher of English-language newspapers in the United States, the United
Kingdom, Australia, Canada and Israel. Included among the 131 paid daily
newspapers which the Company owns or has an interest in are the Chicago
Sun-Times and The Daily Telegraph. These 131 newspapers have a world-wide daily
combined circulation of approximately 4,300,000 (including 2,100,000
attributable to the publications in which the Company has a minority equity
interest). In addition, the Company owns or has an interest in 379 non-daily
newspapers as well as magazines and other publications. The Company's strategy
is to achieve growth through acquisitions and improvements in the cash flow and
profitability of its newspapers, principally through cost reductions. Since the
Company's formation in 1986, the existing senior management team has acquired
over 410 newspapers and related publications (net of dispositions) in the United
States, The Telegraph in the United Kingdom and Jerusalem Post in Israel, and
has made significant investments in newspapers in Australia and Canada. Over
this period, the Company has achieved substantial growth in revenues to $965.0
million in 1995 and realized significant improvements in operating efficiencies
at its newspapers.
The operations of the Company consist of its United States Newspaper Group
and its International Newspaper Group, which accounted for 58.0% and 42.0%,
respectively, of the Company's total operating revenues of $965.0 million for
the year ended December 31, 1995 and for 56.1% and 43.9%, respectively, of the
Company's total operating revenues of $253.9 million for the three months ended
March 31, 1996. The Company also owns equity investments in newspaper publishing
companies in Australia and Canada which contributed approximately $16.4 million
to the Company's earnings before taxes in 1995 and approximately $3.4 million in
the first three months of 1996.
See "Recent Developments" for information concerning the pending proposal
of the Company to acquire the ordinary shares of The Telegraph not presently
controlled by the Company, the recent acquisition of additional common shares of
Southam, recent United States newspaper acquisitions and other developments.
UNITED STATES NEWSPAPER GROUP. The Company is the largest newspaper
publishing group in the United States, as measured by paid daily newspapers
owned and operated, and one of the twelve largest in terms of daily circulation.
The Company's United States operations consist of its Chicago Group, led by the
Chicago Sun-Times, the eighth largest circulation metropolitan daily newspaper
in the United States, and its Community Newspaper Group, consisting of 336
newspapers and related publications. As of June 1, 1996, the Company published a
total of 410 newspapers and related publications in the United States consisting
of 105 daily newspapers with a total paid circulation of approximately
1,220,000, 141 paid non-daily newspapers with a combined paid circulation of
approximately 1,224,000, and 164 free circulation publications with a combined
circulation of approximately 2,464,000, and a total combined circulation of
approximately 4,908,000. The Community Newspaper Group also includes, for
accounting and management purposes, the Company's wholly-owned subsidiary which
publishes The Jerusalem Post, Israel's only English-language daily newspaper,
with a paid daily circulation of approximately 17,000. The related weekend
edition of The Jerusalem Post and English and French-language international
weekly editions have paid circulations of approximately 37,600, 47,000 and
3,900, respectively. The Chicago Group and the Community Newspaper Group
accounted for 30.9% and 25.2%, respectively, of the Company's total operating
revenues for the three months ended March 31, 1996.
The Community Newspaper Group's daily newspapers have been published on
average for almost 100 years and are typically the only paid daily newspapers of
general circulation in their respective communities. In addition, the Community
Newspaper Group publishes weekly paid newspapers and Sunday editions of a number
of paid dailies which are typically the only paid non-daily newspapers of
general circulation serving their communities. Generally, the Company's daily
and non-daily community newspapers combine news, sports and features with
special emphasis on local information and provide one of the primary sources of
such community information for the towns in which they are distributed. The
Company also publishes free circulation publications in these communities,
including shoppers, with limited or no news or
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<PAGE> 33
editorial content. As a group, these publications provide the Company with a
stable and established circulation within the communities they serve, which it
believes provides an effective medium for advertisers to reach a significant
portion of the households in these communities.
INTERNATIONAL NEWSPAPER GROUP. The Company's International Newspaper Group
consists of its majority owned subsidiary, The Telegraph, and minority equity
investments in Fairfax and Southam. Upon consummation of the Scheme (described
below under "Recent Developments"), the Company will own 100% of The Telegraph.
The Telegraph publishes The Daily Telegraph, the leading quality (or broadsheet)
newspaper in the United Kingdom. The Telegraph also publishes The Sunday
Telegraph, The Weekly Telegraph, the Electronic Telegraph and The Spectator
magazine. The Daily Telegraph is the largest circulation quality daily newspaper
in the United Kingdom with an average daily circulation of approximately
1,044,000 representing a 38.5% share of the quality daily newspaper market. The
Daily Telegraph's Saturday edition has the highest average daily circulation
(approximately 1,196,000) among quality daily newspapers in the United Kingdom.
The Sunday Telegraph is the second largest circulation quality Sunday newspaper
in the United Kingdom with an average Sunday circulation of approximately
663,000. See "Recent Developments" below.
The Company has less than a majority equity investment in Fairfax, a
publicly traded Australian newspaper and magazine publisher with fiscal 1995
revenues of A$944.5 million ($699.0 million), and Southam, a publicly traded
Canadian newspaper publisher with 1995 revenues of Cdn.$1,022.3 million ($744.6
million). Fairfax is one of Australia's largest newspaper publishing companies
with seven daily newspapers (with a total paid circulation of approximately
654,000), 34 non-daily newspapers and 29 magazines. Fairfax's principal
publications are the leading quality newspapers in Australia's two largest
cities, The Sydney Morning Herald (circulation approximately 253,000) and The
Age (Melbourne--circulation approximately 215,000), and Australia's only
business newspaper, The Australian Financial Review (national--circulation
approximately 82,000). The Telegraph is the largest shareholder of Fairfax, with
an approximate 24.7% interest. The maximum currently permitted under Australian
foreign ownership rules is 25%. Southam is Canada's largest publisher of daily
newspapers with 17 daily newspapers and 33 non-daily newspapers with a total
daily circulation of approximately 1,400,000. Southam's principal publications
include The Gazette (Montreal), The Ottawa Citizen, the Calgary Herald, The
Vancouver Sun, The Province (Vancouver) and The Edmonton Journal. The Company
and The Telegraph indirectly hold an approximate 19.5% voting interest in
Southam and a Canadian subsidiary of Hollinger Inc. currently holds an
approximate 21.5% interest in Southam.
GENERAL. The Company was incorporated in the State of Delaware on December
28, 1990 and has its executive offices at 401 North Wabash Avenue, Chicago,
Illinois 60611, telephone number (312) 321-2999.
RECENT DEVELOPMENTS
THE TELEGRAPH. On April 24, 1996, the Boards of Directors of the Company
and The Telegraph announced a recommended proposal by the Company to acquire all
of the Telegraph Minority Shares pursuant to the Scheme. The consideration to be
paid to the holders of The Telegraph Minority Shares would consist of (i) a cash
payment of L5.60 per share ($8.68 based on the Noon Buying Rate) per share; (ii)
a special cash dividend of 10p ($0.15 based on the Noon Buying Rate); (iii) a
contingent cash payment to be made by FDTH if The Telegraph's approximate 25%
interest in Fairfax is sold within two years at a price in excess of a specified
amount; and (iv) an option to purchase new preference shares of The Telegraph,
each as more fully described below. In addition, outstanding Telegraph options,
to the extent permitted by their terms, may be exercised prior to the Scheme
becoming effective or if not exercised, will be cancelled in exchange for cash
payments as provided under the Scheme. The total consideration payable by the
Company (including the special dividend to be paid to the holders of the
Telegraph Minority Shares and the net amount payable in respect of outstanding
Telegraph options but not the contingent cash payment) is estimated at
approximately $453 million, based on the Noon Buying Rate. The acquisition will
be effected by means of the Scheme under Section 425 of the Companies Act 1985
of Great Britain. As a result, The Telegraph would become a wholly owned
subsidiary of the Company. The independent directors of The Telegraph and their
independent financial advisors have recommended approval of the Scheme. The
Scheme was approved by a statutory majority of the holders of Telegraph Minority
Shares present and voting at the shareholder meetings held on
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<PAGE> 34
June 26, 1996. In addition, on June 19, 1996, approval was obtained from each
class of option holders of The Telegraph to amend the terms of such options such
that the Scheme will not cause The Telegraph to breach its obligations to the
option holders. Following the approvals by the statutory majority of holders of
Telegraph Minority Shares and the amendments to the terms of the options, the
Scheme will be submitted to an English court for approval at a hearing scheduled
for July 24, 1996. It is expected that the Scheme, if approved, would become
effective on July 31, 1996 and payment of the cash consideration to holders of
Telegraph Minority Shares and the special dividend to all holders of Telegraph
shares (other than Company subsidiaries which will waive their entitlement
thereto) would be made on or about August 8, 1996.
The Company has entered into definitive agreements with certain financial
institutions for short term bank credit facilities and bridge financing in the
aggregate amount of approximately $625.0 million to provide the necessary
financing for the Scheme and to repay outstanding bank indebtedness of The
Telegraph. Upon the consummation of the Common Stock Offering and this Offering,
there will be $417.0 million outstanding in respect of such bank credit
facilities and bridge financing. See "Description of Certain Indebtedness and
Other Obligations."
Upon completion of the Scheme, The Telegraph will pay a special dividend of
10p per share in place of its normal interim dividend of about half that amount.
In lieu of an immediate cash payment of L5.60 per share, the holders of the
Telegraph Minority Shares outside of the United States, Canada and Australia
will be entitled to elect to receive payments under the Scheme over time through
a loan note due 2001 guaranteed by a financial institution as an alternative to
some or all of the cash consideration. The holders of the Telegraph Minority
Shares will be entitled to receive a further cash payment if The Telegraph's
approximate 25% interest in Fairfax is sold prior to the second anniversary of
the effective date of the Scheme (which is expected to be July 31, 1996) at a
price (net of any tax incurred in the disposal or distribution of disposal
proceeds and any reasonable costs of the Company associated with the disposal of
such Fairfax shares, the distribution of the proceeds of such disposal, and the
satisfaction by FDTH of the contingent cash payment) in excess of A$3.00 per
share. Since the holders of Telegraph Minority Shares own in the aggregate
approximately 36% of the outstanding ordinary shares of The Telegraph as of the
effective date of the Scheme, they would be entitled to receive approximately
36% of the aggregate net proceeds of such a disposal of Fairfax shares, payable
to them pro rata on the basis of the minority holder's interests in The
Telegraph as of the effective date of the Scheme. The closing market price of
the ordinary shares of Fairfax was A$2.90 per share on April 23, 1996, the date
prior to the announcement of the proposal to purchase the Telegraph Minority
Shares. The holders of the Telegraph Minority Shares also will receive a
Purchase Option, exercisable on the second anniversary of the effective date of
the Scheme (the "Purchase Date"), to purchase that number of new preference
shares of The Telegraph as will provide each shareholder with at least the same
percentage of voting rights of The Telegraph as each shareholder held prior to
the Scheme becoming effective, for a cash exercise price of L16.80 per new
preference share. FDTH will have the right to settle its obligations under any
exercised Purchase Option in cash rather than by delivery of new preference
shares of The Telegraph. The cash payment to be made by FDTH would be an amount
per new preference share equal to the product of (i) L5.60 and (ii) a fraction,
the numerator of which would be the weighted average of the closing prices of
the Company's Class A Common Stock on the New York Stock Exchange for the 21
trading days prior to the Purchase Date and the denominator of which is $12.375
(the closing price of the Company's Class A Common Stock on April 23, 1996). In
light of the cash cost to exercise the Purchase Option and the formula
applicable to FDTH's cash payment alternative described above, a holder of
Telegraph Minority Shares would not be able to receive an immediate cash profit
from FDTH at the time of exercise of the Purchase Option unless the weighted
average market price of the Class A Common Stock of the Company is above $37.125
(three times its market value at April 23, 1996) and FDTH elects to settle its
obligations under the Purchase Option in cash. If FDTH does not elect to settle
its obligations under the Purchase Option in cash, any new preference shares
received upon exercise will be shares in an unlisted company and there will be
no established market in these shares.
The Telegraph's ownership of Fairfax is limited at present by Australian
law to 25% of issued capital. The Australian government has proposed the
formation of a governmental committee to review media ownership rules, which is
expected to make its recommendations in early 1997. Depending upon the outcome
of the
33
<PAGE> 35
Australian government review of its foreign investment policies and other
relevant factors, the Company intends either to (i) increase its investment in
Fairfax possibly to a majority position or (ii) sell or otherwise dispose of its
interest in Fairfax, which should result in a substantial capital gain and
(depending upon the structure of any such transaction) use all or a portion of
the proceeds to reduce the Company's long term debt. The Company is also
considering the alternative of issuing a security designed to monetize its
investment in Fairfax (valued at approximately $392.2 million, or A$2.52 per
ordinary share, as of July 16, 1996), while retaining the option of maintaining
or increasing its indirect holdings in Fairfax.
SOUTHAM. On May 24, 1996 Hollinger Inc. announced that its wholly owned
Canadian subsidiary, 3230767 Canada Limited ("CanHoldco"), had purchased the
Power Shares, representing approximately 21.5% of Southam's outstanding common
shares, from a subsidiary of Power, at a price of Cdn.$18.00 per share. The
purchase increased the Company's and Hollinger Inc.'s combined holdings in
Southam to approximately 41% of Southam's outstanding common shares, including
19.4% which is held indirectly by the Company. The Company will have the right
to acquire a substantial equity interest in the subsidiary company which
purchased the Power Shares. Hollinger Inc. stated that it intends to further
increase its holdings in Southam through permissible transactions to or above
50% of Southam's outstanding common shares and that it may also, subject to
market and other conditions, seek to acquire all Southam common shares not owned
or controlled by Hollinger Inc. or the Company through an offer of the Company's
Class A common stock or securities convertible into or exchangeable for such
stock. Hollinger Inc. and the Company have agreed to combine their interests in
Southam so that the Company will hold indirectly non-voting common shares and
voting preference shares representing one-half of the voting power and all of
the common equity of their combined interests. Hollinger Inc. will hold voting
preference shares representing one-half of the voting power and with a nominal
amount of paid up capital which will not be entitled to any payments, including
dividends, other than a liquidation preference on the nominal amount. Hollinger
Inc. and the Company expect this transaction to occur promptly following the
July 22, 1996 Southam shareholders meeting. The Company has applied for a ruling
from Revenue Canada that would permit the Company to hold indirectly 100% of the
common equity interests in Southam held by the Company and Hollinger Inc.
without affecting Southam's status as a Canadian publisher of newspapers and
periodicals. If such a ruling is received, the full ownership of the equity
interests in Southam held by Hollinger Inc. and the Company would be transferred
to the Company. There can be no assurance, however, that such ruling will be
obtained or that the Company and Hollinger Inc. will not be required to effect a
different ownership structure for combining their interests in Southam. If the
Company acquires control of Southam (through share ownership or otherwise),
Southam's results of operations will be consolidated for accounting purposes.
The purchase of the Power Shares was financed through the Southam Facility
which is guaranteed by Hollinger Inc. and matures on November 25, 1996. The
funds under the Southam Facility (Cdn.$300 million) were advanced by the Company
to a Canadian subsidiary of Hollinger Inc. as an intercompany loan to finance
the purchase of the Power Shares. The Hollinger Inc. guarantee of the Southam
Facility is secured by a pledge of the Power Shares and 7,539,028 shares of
Class A Common Stock and 14,990,000 shares of Class B Common Stock of the
Company held by Hollinger Inc. Existing registration rights agreements and
security agreements entered into by Hollinger Inc. and its Canadian lenders have
been amended to reflect the pledges under the Southam Facility. See "Description
of Certain Indebtedness and Other Obligations--Southam Facility" for more
information regarding the Southam Facility.
Contemporaneous with the acquisition, Hollinger Inc. agreed to cause
CanHoldco to sell the Power Shares to the Company or its subsidiary or
associated company at the same price paid to Power, and CanHoldco delivered a
noninterest-bearing promissory note (the "CanHoldco Note") to the Company
evidencing the loan to it by the Company. The CanHoldco Note, which is
guaranteed by Hollinger Inc. on a subordinated basis, was pledged as additional
collateral under the Southam Facility. The Company's obligations under the
purchase agreement with Hollinger Inc. are subject to certain conditions,
including the Company's satisfaction that the acquisition of the Power Shares by
the Company or its subsidiary or associated company will not contravene the
constrained share provisions of Southam's articles and that after such
acquisition Southam will maintain its status as a publisher of Canadian
newspapers and periodicals for Canadian tax purposes. If that transaction
occurs, CanHoldco may elect to set off the Company's purchase
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<PAGE> 36
price obligations against the amount owing under the CanHoldco Note. Hollinger
Inc. and the Company also agreed that in lieu of such a purchase, the parties
may agree to restructure the capital of CanHoldco so that the Company receives
an economic interest as a shareholder of CanHoldco equivalent to its entitlement
as a purchaser of the Power Shares. Any such alternative arrangement is subject
to satisfaction of the conditions described above and the further consent of
Hollinger Inc. and the Company.
Following a request by Hollinger Inc., Southam has scheduled a special
shareholders meeting for July 22, 1996 to consider the election of five new
directors proposed by Hollinger Inc. to replace five of the existing directors
of Southam. Hollinger Inc. has advised that, if its nominees are elected, it
believes that the reconstituted Board of Directors of Southam should be in a
position to consider steps designed to enhance operating performance and improve
editorial quality at Southam.
RECENT UNITED STATES ACQUISITIONS. On April 30, 1996, the Company
consummated a trade of several newspapers with Garden State Newspapers, Inc. The
Company acquired the Tribune-Democrat in Johnstown, Pennsylvania, with a daily
paid circulation of 46,000, in exchange for six smaller daily newspapers and
several weekly newspapers from the Company's Community Newspaper Group, and
approximately $31.0 million in cash, subject to certain adjustments.
NEW CHICAGO PRINTING FACILITY. In December 1995, Chicago Sun-Times
initiated a preliminary phase of its planned development of a new printing
facility by submitting a bid to acquire approximately 29 acres of land from the
City of Chicago for approximately $4.4 million, subject to negotiation of a
definitive purchase agreement and satisfactory resolution of various conditions
to the bid and necessary municipal approvals. The Company anticipates that the
site acquisition and the selection of the vendor for the new printing presses
will be completed in 1996. Management of Chicago Sun-Times expects that the size
of the new facility will be approximately 300,000 square feet to permit combined
printing, inserting and distribution functions for the Chicago Sun-Times and the
Chicago Sunday Sun-Times. Management preliminarily estimates that the aggregate
cost of the acquisition of the site, the development of the new printing
facility and the purchase and installation of new printing presses will be
approximately $75.0 million and that the facility will be operational in late
1998.
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<PAGE> 37
USE OF PROCEEDS
The net proceeds from the sale of the PRIDES offered hereby (which at an
assumed per share price of $10.00 are estimated to be approximately $145.0
million and $166.8 million if the Underwriters' over-allotment option is
exercised in full) will be applied, together with the net proceeds of the Common
Stock Offering to (i) provide $218.0 million to FDTH to finance a portion of the
acquisition of the Telegraph Minority Shares ($100.0 million of which would be
in lieu of the Publishing Holdings Note Facility, which would be cancelled), to
repay outstanding indebtedness of The Telegraph and to pay related transaction
costs, and (ii) the balance for general corporate purposes, including working
capital. The Offering and the Common Stock Offering are not conditioned on one
another.
In addition to the Common Stock Offering and after the completion of this
Offering, the Company may, through a subsidiary or an affiliate, issue high
yield debt securities, or other debt or equity securities, possibly including a
security which would allow the Company to monetize its interest in Fairfax. The
Company anticipates that it would apply the net proceeds from any such offering
for one or more of the following: (i) the repayment of outstanding amounts under
the Southam Facility, the FDTH Credit Facility and the Amended Publishing Credit
Facility (or any extension or refinancing of any of the foregoing), (ii) the
redemption of the DTH and FDTH Preference Shares, and (iii) other corporate
purposes, including capital expenditures and acquisitions.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources," "Description of
Certain Indebtedness and Other Obligations" and "Pro Forma Condensed
Consolidated Financial Statements."
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<PAGE> 38
MARKET PRICES AND DIVIDEND POLICY
The Class A Common Stock is listed on the New York Stock Exchange under the
trading symbol "HLR." At March 31, 1996, there were 58,065,754 shares of Class A
Common Stock outstanding and held by approximately 200 holders of record and
approximately 3,500 beneficial owners. The Class A Common Stock traded on the
Nasdaq Stock Market from the Company's initial public offering on May 11, 1994
through January 15, 1996. The Class B Common Stock of the Company is not
publicly traded. As of the date of this Prospectus, 14,990,000 shares of Class B
Common Stock were outstanding and owned by Hollinger Inc.
The following table sets forth for the periods indicated the high and low
sales prices for the Class A Common Stock, as reported by the Nasdaq Stock
Market for the period from May 11, 1994 through January 15, 1996, and by the New
York Stock Exchange Composite Transactions Tape for the period since January 16,
1996, and the cash dividends declared per share on the Class A Common Stock.
<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDENDS
------------------ DECLARED
CALENDAR PERIOD HIGH LOW PER SHARE
- ---------------------------------------------------------- ------- ------- --------------
<S> <C> <C> <C>
1994
Second Quarter (from May 11, 1994)........................ $14.500 $12.750 --
Third Quarter............................................. 14.500 11.500 $0.025
Fourth Quarter............................................ 12.750 10.000 0.025
1995
First Quarter............................................. $12.750 $ 9.250 $0.025
Second Quarter............................................ 10.750 9.250 0.025
Third Quarter............................................. 13.000 9.750 0.025
Fourth Quarter............................................ 13.000 9.750 0.025
1996
First Quarter............................................. $12.375 $ 9.250 $ 0.10
Second Quarter............................................ 13.875 10.625 0.10
Third Quarter (through July 17, 1996)..................... 11.750 9.125 --
</TABLE>
The last sale price of the Class A Common Stock as reported on the NYSE
composite tape on July 17, 1996 was $9.875 per share.
Each share of Class A Common Stock and Class B Common Stock is entitled to
receive dividends if, as and when declared by the Board of Directors of the
Company. Since the third quarter of 1994 the Company has paid a quarterly
dividend of $0.025 per share of Common Stock. The quarterly dividend was
increased to $0.10 per share of Common Stock in the first quarter of 1996.
As an international holding company, the Company's ability to declare and
pay dividends in the future with respect to its Common Stock will be dependent,
among other factors, upon its results of operations, financial condition and
cash requirements, the ability of its United States and foreign subsidiaries
(principally The Telegraph) to pay dividends and make other payments to the
Company under applicable law and subject to restrictions contained in existing
and future loan agreements, the prior payment of dividends to holders of PRIDES
and Series A Preferred Stock, the preference share terms and other financing
obligations to third parties relating to such United States or foreign
subsidiaries of the Company, as well as foreign and United States tax
liabilities with respect to dividends and other payments from those entities.
See "Risk Factors--International Holding Company Structure," "--Restrictions in
Debt Agreements" and "--Dividend Policy."
For a description of certain existing restrictions on the payment of
dividends on the Common Stock under existing debt agreements and the redeemable
preferred stock, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Capital Stock," "Description of Certain Indebtedness and Other
Obligations," and "Description of the Securities."
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<PAGE> 39
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1996, (ii) the pro forma capitalization of the Company to give effect
to (a) the acquisition by FDTH of the Telegraph Minority Shares, the acquisition
by Publishing of newly issued Telegraph shares and related borrowings, (b) the
acquisition of the Power Shares and related bank borrowings by the Company, and
(c) adjustments to reflect (i) the Offering and the concurrent Common Stock
Offering and the application of total net proceeds therefrom (estimated to be
$239.5 million, assuming that the Underwriters do not exercise their over-
allotment options) as described under "Use of Proceeds," (ii) the repayment of
Telegraph bank indebtedness, and (iii) such pro forma capitalization as so
adjusted. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the information under "Selected
Consolidated Historical Financial Information and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Description of Capital Stock," "Description of Certain Indebtedness and Other
Obligations" and "Description of the Securities" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 (1)
-------------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
COMPANY (PARENT ONLY)
Short-term debt
Intercompany indebtedness owed to Hollinger Inc........... $ 3,974 $ 3,974
Southam Facility.......................................... -- 218,047(2) 218,047
---------- ----------
Total Company (parent only) debt........................ 3,974 -- 222,021
---------- ----------
PUBLISHING
Publishing Short-Term Credit Facility....................... -- 140,000(3) 140,000
Long-term debt
Senior Subordinated Notes due 2006........................ 250,000 250,000
---------- ----------
Total Publishing debt................................ 250,000 390,000
---------- ----------
U.S. SUBSIDIARIES
Short-term debt
Intercompany indebtedness to Hollinger Inc................ 100 100
Long-term debt including current maturities
Secured Notes due 1996-2001 (Senior Notes)................ 150,000 150,000
Other..................................................... 10,776 10,776
---------- ----------
Total U.S. Subsidiaries debt............................ 160,876 160,876
---------- ----------
Total Company, Publishing and U.S. Subsidiaries
debt............................................... 414,850 772,897
---------- ----------
INTERNATIONAL SUBSIDIARIES
THE TELEGRAPH
Short-term debt
Bank loan and overdraft (L6,000,000)...................... 9,157 (9,157)(4) --
Long-term debt including current maturities
Bank loans
Australian $45,100,000 due 1997......................... 35,271 (35,271)(4) --
L40,000,000 due 1998.................................... 61,048 (61,048)(4) --
Australian $53,750,000 due 1998......................... 42,036 (42,036)(4) --
Capital lease obligations................................. 15,880 15,880
FDTH
FDTH Credit Facility........................................ -- 277,000(5) 277,000
---------- ----------
Total International subsidiaries debt................... 163,392 292,880
---------- ----------
Total consolidated debt....................................... $ 578,242 $1,065,777
========== ==========
Minority interest in The Telegraph............................ 97,738 (97,738)(6) --
Redeemable preference shares of DTH and FDTH.................. 227,083 227,083
Series A Redeemable Stock..................................... 79,525 79,525
---------- ----------
$ 404,346 $ 306,608
========== ==========
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996 (1)
-------------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
EQUITY:Preferred Stock, $.01 par value
Authorized: 20,000,000 shares
Convertible Preferred Stock represented by PRIDES,
shares authorized, 7,500,000 shares issued
and outstanding (8)..................................... -- 145,000(7) 145,000
Class A Common Stock, $.01 par value
Authorized: 250,000,000 shares
Issued: 68,065,754 shares; as adjusted 71,065,754
shares............................................... 580 100(8) 680
Class B Common Stock, $.01 par value
Authorized: 50,000,000 shares
Issued: 14,990,000 shares............................... 150 150
Additional paid-in capital................................ 303,960 94,400(8) 398,360
Cumulative foreign currency translation account........... 5,373 5,373
Retained earnings......................................... 124,417 124,417
---------- ----------
Total stockholders' equity.................................... $ 434,480 $ 673,980
========== ==========
Total capitalization.......................................... $1,417,068 $2,046,365
========== ==========
</TABLE>
- ------------------
(1) Unless otherwise noted, all amounts have been converted to U.S. dollars at
the Noon Buying Rate on May 31, 1996.
(2) The Company borrowed Cdn.$298.8 million ($218.0 million at May 31, 1996)
pursuant to the Southam Facility and subsequently lent the proceeds to a
Canadian subsidiary of Hollinger Inc. to finance the purchase of the Power
Shares. Such borrowings are guaranteed by Hollinger Inc. and secured by a
pledge of the Power Shares acquired, among other collateral. The Southam
Facility is due November 25, 1996.
(3) The Amended Publishing Credit Facility was amended and restated on May 30,
1996 to increase the maximum borrowing limit to $125.0 million and
subsequently, the lender has agreed to amend the agreement to provide for a
maximum of $150.0 million of available credit. Of this amount, the Company
expects to use $140.0 million in connection with the Scheme to enable
Publishing to purchase newly issued shares of The Telegraph and The
Telegraph will use such proceeds to partially repay its bank loans.
(4) Represents the repayment of Telegraph bank loans using a portion of the
proceeds of the Amended Publishing and FDTH Credit Facilities. Telegraph
bank indebtedness as of the consummation of the Scheme is expected to be
$173.0 million.
(5) FDTH entered into a bank credit facility on May 30, 1996 in the amount of
L250 million ($387.4 million), of which the Company intends to borrow
L178.8 million ($277.0 million), provided that this Offering and the Common
Stock Offering are consummated. The facility will be used to repay The
Telegraph's bank loans and to partially finance the acquisition of the
Telegraph Minority Shares. Under the facility, L15 million ($23 million)
will be available for working capital needs of The Telegraph. The FDTH
Credit Facility is due six months after the Scheme has been consummated and
is expected to be paid or refinanced through the future issuance of
securities or replacement bank loan facilities.
(6) Represents the elimination of the minority stockholders' interest in The
Telegraph resulting from the acquisition of the Telegraph minority shares.
(7) Represents the net proceeds of $145.0 million from the issuance of PRIDES.
Each PRIDE is a depositary share representing one half share of Convertible
Preferred Stock of the Company that will mandatorily convert on ,
2000 into one share of Class A Common Stock, unless previously redeemed at
the option of the Company or converted at the option of the holder.
(8) Represents the net proceeds on the issuance of 10,000,000 shares of Class A
Common Stock at $10.00 per share in the Common Stock Offering (assuming the
underwriters do not exercise their over-allotment options for the Class A
Common Stock). A portion of the net proceeds will be used to finance the
acquisition of the Telegraph Minority Shares and the repayment of The
Telegraph's bank loans, and the remainder will be available for general
corporate purposes, including working capital.
39
<PAGE> 41
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA
The following sets forth the consolidated historical financial information
for the Company as of and for the periods noted. The historical balance sheet
and income statement data as of December 31, 1994 and 1995 and for each of three
years in the three-year period ended December 31, 1995 have been derived from
the Consolidated Financial Statements of the Company which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. The data as of
December 31, 1991 and 1992 and for each of the years in the two-year period
ended December 31, 1991 and for the three months ended March 31, 1995 and 1996
are unaudited but, in the opinion of the Company, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. The data for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," with the Company's Consolidated Financial
Statements, the related notes and the independent auditors' report, included
elsewhere in this Prospectus.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA(1)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- ---------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(2)
Operating revenues:
Advertising...................... $307,716 $325,165 $ 316,640 $ 522,381 $ 635,560 $151,621 $ 160,357
Circulation...................... 209,544 233,416 217,608 245,218 262,670 59,466 76,049
Job printing..................... 19,735 22,066 25,044 27,675 49,198 11,563 12,621
Other............................ 8,735 11,338 10,309 13,563 17,539 4,106 4,866
-------- -------- ---------- ---------- ---------- -------- ----------
Total operating revenues........... 545,730 591,985 569,601 808,837 964,967 226,756 253,893
Operating costs and expenses....... 450,797 473,368 447,262 693,108 857,091 198,620 229,179
Depreciation and amortization...... 32,037 35,226 34,545 45,200 52,388 12,603 12,841
-------- -------- ---------- ---------- ---------- -------- ----------
Operating income................... 62,896 83,391 87,794 70,529 55,488 15,533 11,873
Interest expense................... (20,886) (27,167) (26,264) (32,593) (43,189) (10,761) (12,564)
Equity in earnings of affiliates... 18 6,382 13,476 35,659 16,449 5,728 3,407
Other income, net(3)............... 14,499 89,543 36,989 91,886 18,199 12,499 2,501
-------- -------- ---------- ---------- ---------- -------- ----------
Earnings before income taxes,
minority interest, cumulative
effect of change in accounting
for income taxes and
extraordinary item............... 56,527 152,149 111,995 165,481 46,947 22,999 5,217
Income taxes....................... 14,320 39,132 36,475 41,300 18,108 7,314 1,700
-------- -------- ---------- ---------- ---------- -------- ----------
Earnings before minority interest,
cumulative effect of change in
accounting for income taxes and
extraordinary item............... 42,207 113,017 75,520 124,181 28,839 15,685 3,517
Minority interest.................. 11,166 14,848 25,475 21,409 22,637 7,944 5,421
-------- -------- ---------- ---------- ---------- -------- ----------
Earnings before cumulative effect
of change in accounting for
income taxes and extraordinary
item............................. 31,041 98,169 50,045 102,772 6,202 7,741 (1,904)
Cumulative effect of change in
accounting for income taxes...... -- -- (24,256) -- -- -- --
Extraordinary loss on debt
extinguishments.................. -- -- -- -- -- -- (2,150)
-------- -------- ---------- ---------- ---------- -------- ----------
Net earnings (loss)................ $ 31,041 $ 98,169 $ 25,789 $ 102,772 $ 6,202 $ 7,741 $ (4,054)
========= ========= ========== ========== ========== ========= ==========
Net earnings (loss) per common
share............................ $ 0.64 $ 2.02 $ 0.53 $ 1.90 $ 0.11 $ 0.14 $ (0.06)
========= ========= ========== ========== ========== ========= ==========
Average number of common shares
outstanding...................... 48,601 48,601 48,601 53,980 56,956 56,956 66,056
========= ========= ========== ========== ========== ========= ==========
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- ---------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:(4)
Working capital (deficit).......... $ 25,749 $ 58,259 $ (58,793) $ (10,621) $ (124,175) $ 38,868 68,763
Total assets(5).................... 855,692 748,843 1,034,155 1,463,755 1,570,105 1,440,979 1,652,602
Minority interest.................. 41,871 64,039 79,290 109,518 97,298 118,763 97,738
Total long-term debt............... 333,981 281,783 374,496 489,969 621,652 467,973 574,168
Redeemable preferred stock......... 80,966 208,767 206,846 204,101 306,452 204,185 306,608
Total stockholders' equity(6)...... 253,693 72,907 111,664 303,469 295,244 305,075 434,480
SEGMENT DATA:
Operating revenues:
United States Newspaper Group.... $157,397 $173,219 $ 185,043 $ 422,594 $ 559,929 $129,770 $ 142,347
International Newspaper Group.... 388,333 418,766 384,558 386,243 405,038 96,986 111,546
-------- -------- ---------- ---------- ---------- -------- ----------
Total operating revenues........... $545,730 $591,985 $ 569,601 $ 808,837 $ 964,967 $226,756 $ 253,893
========= ========= ========== ========== ========== ========= ==========
Operating income:
United States Newspaper Group.... $ 3,938 $ 11,778 $ 18,069 $ 39,566 $ 32,156 $ 7,139 $ 3,242
International Newspaper Group.... 58,958 71,613 69,725 30,963 23,332 8,394 8,631
-------- -------- ---------- ---------- ---------- -------- ----------
Total operating income............. $ 62,896 $ 83,391 $ 87,794 $ 70,529 $ 55,488 $ 15,533 $ 11,873
========= ========= ========== ========== ========== ========= ==========
EBITDA(7)
United States Newspaper Group.... $ 28,828 $ 38,386 $ 43,582 $ 76,576 $ 77,382 $ 16,861 $ 13,641
International Newspaper Group.... 80,604 99,421 87,208 50,447 36,725 11,275 11,073
-------- -------- ---------- ---------- ---------- -------- ----------
Total EBITDA....................... $109,432 $137,807 $ 130,790 $ 127,023 $ 114,107 $ 28,136 $ 24,714
========= ========= ========== ========== ========== ========= ==========
OTHER DATA:
Number of paid daily newspapers
(end of period)(8)............... 82 82 96 98 113 98 112
Market value of Fairfax equity
stake (end of period)(9)......... $ 423,989 $ 408,812 $ 437,380
Market value of Southam equity
stake (end of period)(9)......... 163,643 157,174 173,552
Capital expenditures............... $ 61,058 $ 14,882 $ 9,162 $ 27,795 $ 21,699 $ 5,764 $ 4,051
Acquisition expenditures(10)....... 49,350 36,952 20,638 227,321 97,232 -- 5,071
</TABLE>
- ------------------
(1) The financial data presented above is derived from the Consolidated
Financial Statements of the Company.
(2) The statement of operations data and other data include data for The
Telegraph, DTH, FDTH and Jerusalem Post for all periods presented, Chicago
Sun-Times from the date of its acquisition by the Company on March 31, 1994
and Daily Southtown from the date of its acquisition by the Company on
December 23, 1994.
(3) Other income, net includes gain on the sale of Telegraph shares, gain on
dilution of Fairfax interest, gain on the sale of marketable securities,
issuance costs of subsidiaries' redeemable preferred stock and foreign
currency gain (loss).
(4) The balance sheet data include The Telegraph, DTH, FDTH and Jerusalem Post
for all periods presented, the Chicago Sun-Times as at September 30, 1994
and thereafter and Daily Southtown as at December 31, 1994 and thereafter.
Long-term debt does not include intercompany indebtedness owed to Hollinger
Inc., which amounted to $24.6 million at December 31, 1995 and $4.1 million
at March 31, 1996.
(5) Includes intangible assets, net of accumulated amortization, which amounted
to $455,203,000 and $529,694,000 at December 31, 1994 and 1995 and
$526,972,000 assets consist of the value of acquired subscriber and
advertiser lists, noncompetition agreements, archives and goodwill. The
amortization periods for intangible assets range from three to 40 years.
(6) See Consolidated Statements of Stockholders' Equity.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and certain other income items. Among the other income items
excluded are gain on the sale of Telegraph shares, gain on the sale of
marketable securities, gain on dilution of Fairfax and issue costs of
subsidiaries' redeemable preferred stock of $70,353,000, $28,538,000,
$80,592,000 and $11,968,000 for the years ended December 31, 1992, 1993,
1994 and 1995, respectively. EBITDA is not intended to represent an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) as an indicator of the Company's operating
performance, or to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. The Company believes that EBITDA largely determines its ability
to fund current operations and to service debt due to the significant
number of acquisitions made
41
<PAGE> 43
by the Company which have resulted in non-cash charges for depreciation and
amortization. These non-cash charges have adversely affected net earnings,
but have not affected EBITDA.
(8) Number of paid daily newspapers owned by the Company and its subsidiaries
(excluding those newspapers published by Fairfax and Southam).
(9) Represents The Telegraph's 24.8%, 24.6% and 24.7% interest (196,374,606
shares and convertible debentures) in Fairfax on December 31, 1994 and 1995
and March 31, 1996, respectively, and the combined current 19.5% interest
of The Telegraph and FDTH in Southam (14,790,000 shares) at each period
end. See Note 3 to Supplemental Consolidated Financial Statements for
information concerning investments in affiliates.
(10) Represents costs of acquiring newspapers and investments in newspaper
companies. Such amounts do not include notes payable to former owners and
deferred amounts due under noncompetition agreements with former owners.
Such amounts do not include the cost of acquiring the Telegraph Minority
Shares (approximately $463 million, including the special dividend and
transaction costs) and the Power Shares (approximately $217 million,
including transaction costs).
42
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's business is concentrated in the publication of newspapers in
the United States and internationally. Its revenues are derived principally from
advertising and, to a lesser extent, paid circulation and job printing.
Approximately 58% of the Company's total operating revenues in 1995 were
attributable to the United States Newspaper Group and approximately 42% were
attributable to its International Newspaper Group, with approximately 56.1% and
43.9% of total operating revenues attributable to the United States Newspaper
Group and the International Newspaper Group, respectively, for the three months
ended March 31, 1996. The Company's United States Newspaper Group consists of
the Chicago Group (comprised of the Chicago Sun-Times and suburban newspapers in
the Chicago metropolitan area) and the Community Newspaper Group, which includes
Jerusalem Post. The Company's International Newspaper Group consists of the
operations of The Telegraph and its subsidiaries and affiliated companies,
including investments in Fairfax and Southam and two joint venture printing
companies which are accounted for by the equity method. In 1995, the Company's
share of earnings of its investments in Fairfax, Southam and the two printing
joint ventures amounted to $16.4 million, or 35% of the Company's earnings
before income taxes and minority interests.
The Company's revenues have grown substantially since 1986, principally
through acquisitions. Over that period, the Company acquired The Telegraph,
control of which was acquired by Hollinger Inc. in 1986; Jerusalem Post, which
was acquired by Hollinger Inc. in 1989; Chicago Sun-Times, 61 related newspapers
and Daily Southtown, which were acquired by the Company in 1994; 16 daily
newspapers, which were acquired by the Company from Thomson Newspapers
Corporation ("Thomson") in 1995; the Johnstown Tribune-Democrat, which was
acquired by the Company in 1996; and 86 paid daily community newspapers,
together with related publications. See "Recent Developments" for information
relating to the acquisition of the Telegraph Minority Shares and the acquisition
of additional shares of Southam and the related financings.
On October 13, 1995, the Company and Hollinger Inc. consummated the
Reorganization, which represented a combination of entities under common control
and has been accounted for on an "as-if" pooling-of-interests basis, with the
Company's financial statements restated for all periods presented. As part of
the Reorganization, the Company acquired all the outstanding shares of DTH
through which Hollinger Inc. indirectly owned a 58.4% interest in The Telegraph,
a 24.7% interest in Fairfax and a 19.3% interest in Southam. In exchange for all
of the ordinary shares of DTH, the Company issued to Hollinger Inc. 33,610,754
shares of Class A Common Stock and 739,500 shares of Series A Preferred Stock.
An additional $13.8 million was paid by the Company to Hollinger Inc. as an
adjustment to the purchase price of DTH based on the working capital of DTH and
its subsidiary, FDTH, at October 13, 1995.
An additional amount of approximately $8.0 million in costs and expenses
(including approximately $3.5 million of costs paid by and reimbursable to
Hollinger Inc.) has been incurred in connection with the Reorganization and is
reflected in the Company's results of operations for the year ended December 31,
1995. Subsequent to the Reorganization, on October 20, 1995 the Company acquired
for L31.5 million ($49.6 million), an additional 5.1% interest in The Telegraph
pursuant to the exercise of the Telegraph Option in a transaction accounted for
using the purchase method of accounting. On December 15, 1995 the Company
through an English subsidiary acquired for $6.9 million an additional 0.7%
interest in The Telegraph.
The Consolidated Financial Statements include the accounts of the Company
and its majority-owned subsidiaries. The Company's interest in The Telegraph was
64.0%, 58.6%, and 66.4% at December 31, 1995, 1994, and 1993, respectively.
Investments in less than majority-owned affiliated companies, including Fairfax,
Southam (since April 1, 1994) and printing joint ventures are accounted for
using the equity method of accounting. All significant intercompany balances and
transactions have been eliminated on consolidation.
43
<PAGE> 45
RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED WITH FIRST QUARTER ENDED MARCH
31, 1995
The Company experienced a loss of $4.1 million, or $0.06 per share, in the
first quarter of 1996. This compares with earnings of $7.7 million, or $0.14 per
share, in the comparable period of 1995. The net loss for the first quarter of
1996 before extraordinary items was $1.9 million, or $0.03 per share, compared
with earnings of $7.7 million, or $0.14 per share, in the first quarter of 1995.
The comparison of year over year net earnings was affected negatively by a
number of nonrecurring items, including a gain on the sale of an investment by
The Telegraph in 1995, net costs of a new magazine for The Sunday Telegraph, and
costs associated with the termination of senior executives and redundancy costs
related to the opening of a new printing plant at Fairfax. These nonrecurring
items caused a $5.8 million, or $0.10 per share reduction in net earnings in the
first quarter of 1996 compared to the first quarter of 1995. Earnings were also
negatively impacted by newsprint and other paper costs that escalated rapidly
during 1995. Newsprint costs in the first quarter of 1996 were at higher levels
than in the first quarter of 1995. The effect of the increase in newsprint and
other paper costs for publications that were included in both periods amounted
to approximately $10.1 million, or $0.15 per share. Excluding the effects of
nonrecurring items and increased newsprint and other paper costs, earnings
before extraordinary items would have been $9.3 million in the first quarter of
1996 and $3.0 million in 1995.
Total revenues for the Company's first quarter in 1996 increased 12% to
$253.9 million from $226.8 million in the first quarter of 1995, largely due to
increased cover prices in the United Kingdom and to revenue contributed by
community newspapers that were acquired in the last quarter of 1995.
Depreciation and amortization increased by $0.2 million, reflecting the 1995
purchase of community newspapers which was offset, in part, by a $1.8 million
decrease that results from a re-evaluation of the remaining useful life of
certain intangible assets.
OPERATING REVENUES. The following table shows the percentage (decrease)
increase in revenues between the first quarter of 1996 and the first quarter of
1995 by principal business group.
<TABLE>
<CAPTION>
1996 VERSUS 1995
----------------
<S> <C>
United States Newspaper Group:
Chicago Group........................................... (1.3)%
Community Newspaper Group............................... 27.1%
Total................................................... 9.7%
International Newspaper Group............................. 15.0%
Total Operating Revenues.................................. 12.0%
</TABLE>
United States Newspaper Group. Operating revenues in the United States
Newspaper Group were $142.3 million in the first quarter of 1996, an increase of
$12.6 million, or 9.7%, over the same period in 1995. The Chicago Group's
operating revenues of $78.5 million decreased $1.1 million, or 1.3%, due to a
$2.2 million, or 4.0%, decline in advertising revenues, reflecting weakness in
local economic activity. The Community Newspaper Group reported operating
revenues of $63.9 million, an increase of $13.6 million, or 27.1%, over the 1995
period. The community newspapers acquired during the fourth quarter of 1995
added $13.0 million to operating revenues, while existing community newspaper
operating revenues increased by $1.0 million. This increase was partially offset
by a decline of $.4 million at the Jerusalem Post due to decreased job printing
for the local "Golden Pages", Israel's equivalent of the "Yellow Pages,"
pursuant to the terms of the printing arrangement with the "Golden Pages."
International Newspaper Group. Operating revenues for the International
Newspaper Group were $111.5 million in the first quarter of 1996, an increase of
$14.6 million, or 15.0%, over 1995. Most of the increase can be attributed to
circulation revenue gains of $13.4 million and reflects an easing of the cover
price war involving The Daily Telegraph.
OPERATING COSTS AND EXPENSES. Operating costs and expenses are comprised
of (i) operating costs, (ii) general and administrative expenses, (iii)
depreciation and amortization expenses and (iv) allocable
44
<PAGE> 46
expenses from Hollinger Inc. The following table shows the percentage increase
in operating costs and expenses between the first quarter of 1996 and the first
quarter of 1995 by principal business group.
<TABLE>
<CAPTION>
1996 VERSUS 1995
----------------
<S> <C>
United States Newspaper Group:
Chicago Group........................................... 5.9%
Community Newspaper Group............................... 26.3%
Total................................................... 13.4%
International Newspaper Group............................. 16.2%
Total Operating Costs and Expenses........................ 14.6%
</TABLE>
United States Newspaper Group. Operating costs and expenses were $139.1
million, an increase of $16.5 million over the 1995 period. Higher newsprint
costs at existing publications caused $7.1 million of the increase. As a
percentage of United States Newspaper Group revenue, operating costs and
expenses were 97.7% in the 1996 period and 94.5% in the 1995 period. Excluding
the newsprint cost increase, operating costs and expenses would have been 92.8%
of United States Newspaper Group operating revenue in the first quarter of 1996,
compared with 94.5% in the prior year.
International Newspaper Group. Operating costs and expenses were $102.9
million for the period, an increase of $14.3 million from the 1995 period.
Higher newsprint costs caused $6.9 million of the increase. As a percentage of
International Newspaper Group revenue, operating costs and expenses were 92.3%
in the 1996 period and 91.3% in the 1995 period. Excluding the newsprint cost
increase, operating costs and expenses would have been 86.1% of International
Newspaper Group operating revenues in the first quarter of 1996, compared with
91.3% in the prior year. Costs and expenses also increased as a consequence of
the costs associated with product enhancements designed to strengthen The Daily
Telegraph's competitive marketing situation. This includes the new The Sunday
Telegraph Magazine, launched in September 1995 and the "Connected" supplement
with The Daily Telegraph on Tuesdays, launched in April 1996.
OPERATING INCOME. The above changes in operating revenues and operating
costs and expenses resulted in the following increases (decreases) in operating
income between the first quarter of 1996 and the first quarter of 1995 by
principal business group.
<TABLE>
<CAPTION>
1996 VERSUS 1995
----------------
<S> <C>
United States Newspaper Group:
Chicago Group........................................... (275.0)%
Community Newspaper Group............................... (34.4)%
Total................................................... (54.6)%
International Newspaper Group............................. 2.8%
Total Operating Income.................................... (23.6)%
</TABLE>
United States Newspaper Group. The United States Newspaper Group's
operating income decreased by $3.9 million to $3.2 million in the first quarter
of 1996, compared with $7.1 million in 1995. As a percentage of United States
Newspaper Group revenues, operating income was 2.3% in the 1996 period and 5.5%
in the 1995 period. The decline was principally due to higher newsprint costs
and, to a lesser extent, reduced advertising revenues within the Chicago Group,
which was partially offset by higher revenues and earnings in the Community
Newspaper Group.
International Newspaper Group. The International Newspaper Group's
operating income increased $0.2 million to $8.6 million in the first quarter of
1996, compared with $8.4 million in 1995. As a percentage of International
Newspaper Group revenues, operating income was 7.7% in the 1996 period and 8.7%
in the 1995 period. Higher revenues were partially offset by higher newsprint
costs of $6.9 million and product enhancement costs of $3.2 million.
NET INTEREST EXPENSE. Net interest expense increased $1.8 million to $12.6
million in the first quarter of 1996, compared with $10.8 million in the first
quarter of 1995. Most of the increase was the result of higher
45
<PAGE> 47
average debt levels related to the cost of community newspaper acquisitions
completed in the fourth quarter of 1995 and the purchases of additional ordinary
shares of The Telegraph in December 1995.
EQUITY IN EARNINGS OF AFFILIATES. Equity in the earnings of affiliates
declined by $2.3 million to $3.4 million in the first quarter of 1996, compared
with $5.7 million in the first quarter of 1995. The Company's share of higher
newsprint costs at Fairfax and Southam amounted to $2.3 million during the first
quarter of 1996. In addition, the Company's share of first quarter 1996 costs
recorded by Fairfax associated with the termination of senior executives and
redundancy costs related to the opening of a new printing plant totaled $1.4
million.
NON-OPERATING INCOME. Non-operating income decreased by $10.0 million to
$2.5 million in the first quarter of 1996, compared with $12.5 million in the
first quarter of 1995. The first quarter 1995 amount included a gain on the sale
of marketable securities of $11.9 million, with no comparable event in the first
quarter 1996.
INCOME TAXES. Income taxes of $1.7 million were recorded in the first
quarter of 1996, compared with income taxes of $7.3 million in the first quarter
of 1995. The change in tax provisions was essentially due to the change in
earnings for the respective periods.
MINORITY INTEREST. Minority interest was $5.4 million in the first quarter
of 1996, compared with $7.9 million in the first quarter of 1995. Most of the
decrease could be attributed to lower net earnings at The Telegraph, primarily
because first quarter 1995 included a gain on sale of marketable securities,
and, to a much lesser extent, a reduction in the minority interest in The
Telegraph following the Company's purchase of additional ordinary shares of The
Telegraph in December 1995.
EXTRAORDINARY LOSS. The extinguishment of three credit facilities during
the first quarter of 1996, prior to their expiration dates, required the
write-off of unamortized deferred financing costs of $3.5 million before taxes
with related tax benefits of $1.3 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
The Company had net earnings of $6.2 million in 1995, compared with net
earnings of $102.8 million in 1994. Net earnings per share were $0.11 per share
in 1995, compared with $ 1.90 per share in 1994. Earnings in 1995 were
unfavorably affected by a decrease of $19.3 million in equity in earnings of
affiliates (including the Company's share of a special restructuring charge and
loss on discontinued operations at Southam), an increase in interest expense of
$10.6 million and Reorganization expenses of $8.0 million. Moreover, in 1994 net
earnings were favorably affected by gains on the sale of ordinary shares of The
Telegraph (which had a net earnings effect of $66.4 million or $1.23 per share).
Excluding these gains, the Reorganization expenses and the Southam charges, the
Company would have reported net earnings of $0.38 per share in 1995, compared
with $0.67 per share in 1994.
The remaining net earnings decline was principally due to a decrease in
operating income (before giving effect to Reorganization expenses) of $7.0
million, or 10.0%, to $63.5 million in 1995 compared with $70.5 million in 1994.
The operating income of The Telegraph declined by 24.6%, to $23.3 million in
1995, from approximately $31.0 million in 1994, caused principally by a decline
in circulation revenues and higher newsprint costs. The United States Newspaper
Group's operating income increased $0.6 million, or 1.5%, to $40.3 million
(before giving effect to Reorganization expenses) from $39.6 million, due to an
increase by the Community Newspaper Group to $30.3 million from $23.4 million.
The Chicago Group experienced a decrease of 26.7% to $14.2 million, from
approximately $19.4 million, caused largely by an increase in newsprint costs.
The results in 1995 reflected a full year's operations of the Chicago Group
while results in 1994 reflected nine months operations for the Chicago Sun-Times
and related newspapers and exclude the results of the Daily Southtown.
46
<PAGE> 48
OPERATING REVENUES. The following table shows the percentage increase in
revenues between 1995 and 1994 by principal business group.
<TABLE>
<CAPTION>
1995 VERSUS 1994
----------------
<S> <C>
United States Newspaper Group:
Chicago Group (1)....................................... 53.6%
Community Newspaper Group............................... 10.3%
Total................................................... 32.5%
International Newspaper Group............................. 4.9%
Total Operating Revenues.................................. 19.3%
</TABLE>
- ------------------
(1) Formed on March 31, 1994 with the acquisition of the Chicago Sun-Times and
61 associated newspapers.
United States Newspaper Group. Operating revenues in the United States
Newspaper Group were $559.9 million in 1995 (or 58.0% of total operating
revenues), an increase of $137.3 million, or 32.5%, over the same period in
1994. Most of the increase was attributable to the Chicago Group, where
operating revenues for the Chicago Sun-Times were only included for nine months
in 1994 due to the March 31, 1994 acquisition date, and operating revenues for
the Daily Southtown were excluded from 1994 due to its December 23, 1994
acquisition. The Community Newspaper Groups' revenues increased $21.1 million,
or 10.3%. For newspapers in the Community Newspaper Group operated for both
periods, revenues increased $8.5 million, or 4.1%.
Advertising revenues in the United States Newspaper Group were $372.6
million in 1995, an increase of $86.0 million, or 30.0%, over 1994. The Chicago
Group increased $73.6 million, due primarily to the inclusion of Chicago
Sun-Times and Daily Southtown subsequent to their acquisitions, while the
Community Newspaper Group increased $12.4 million, or 9.5%. For newspapers
operated for both periods, advertising revenues increased $4.3 million, or 3.3%.
Circulation revenues in the United States Newspaper Group were $129.7
million in 1995, an increase of $27.7 million, or 27.2% over 1994. Circulation
revenues for the Chicago Group increased $22.8 million due primarily to
inclusion of Chicago Sun-Times and Daily Southtown for the full 1995 period,
while circulation revenues at the Community Newspaper Group increased $4.9
million, or 10.6%. For newspapers operated for both periods, circulation
revenues increased $2.0 million, or 4.4%.
Job printing revenues, derived from utilizing available press capacity for
printing unaffiliated newspapers, fliers, retail store advertisements and real
estate listings for third parties, increased $21.5 million, or 77.8%, to $49.2
million in 1995 from $27.7 million in the same period in 1994, primarily due to
the acquisition of Daily Southtown.
International Newspaper Group. Operating revenues in the International
Newspaper Group, which consist exclusively of The Telegraph's operating
revenues, were $405.0 million in 1995 (or 42.0% of total operating revenues), an
increase of $18.8 million, or 4.9%, from 1994. When expressed in British pounds
sterling, revenues increased by 1.1%, principally as a result of cover price
recoveries and improved advertising revenues in the fourth quarter.
Advertising revenues for 1995 increased $27.2 million to $263.0 million, or
11.5% over 1994. When expressed in British pounds sterling, advertising revenues
increased 8.0%. In local currency, classified advertising for The Daily
Telegraph showed a 21% increase due primarily to recruitment advertising, while
financial advertising revenues were 20% lower than in 1994 and display
advertising increased by approximately 3% over 1994.
Circulation revenues for 1995 were $133.0 million, a decline of $10.3
million, or 7.2%, from the 1994 period. When expressed in British pounds
sterling, circulation revenues declined by 10.1%, although average circulation
copies for The Daily Telegraph increased in 1995. When the weekday edition cover
price was reduced, there was no offsetting reduction in commissions paid to
wholesalers and retailers of The Daily Telegraph. Since circulation revenues are
recorded net of commissions paid to wholesalers and retailers, this resulted in
a decline in circulation revenue relating to weekday sales of The Daily
Telegraph from
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<PAGE> 49
approximately 31.5p to 13.5p per copy. The cover price of the Saturday edition,
The Daily Telegraph's highest circulation day, was left unaltered at 70p without
loss of circulation. The cover price of The Sunday Telegraph (average
circulation approximately 697,000) was left unaltered at 70p. Sunday edition
circulation benefitted from a weekend voucher program introduced in April 1994
which was discontinued in September 1995. The effect of the cover price
reduction on circulation revenues for 1994 was limited, but the full effect of
such reduction adversely affected circulation revenues for the first nine months
of 1995, notwithstanding a weekday cover price increase of 5p per copy announced
in July 1995. On November 20, 1995, The Daily Telegraph increased the cover
price of its weekday editions by an additional 5p to 40p and reduced its
recommended retail margin from 11.9p to 10.0p per copy, following a cover price
increase and a reduction of retail margin announced by its principal competitor.
Circulation revenues during the fourth quarter of 1995 improved by 40.1% in
United States dollars and 35.7% in British pounds sterling over the same period
in 1994.
OPERATING COSTS AND EXPENSES. Operating costs and expenses are comprised
of (i) operating costs, (ii) general and administrative expenses, (iii)
depreciation and amortization expenses and (iv) allocable expenses from
Hollinger Inc. The following table shows the percentage increase in operating
costs and expenses between 1995 and 1994 by principal business group.
<TABLE>
<CAPTION>
1995 VERSUS 1994
----------------
<S> <C>
United States Newspaper Group:
Chicago Group........................................... 61.4%
Community Newspaper Group............................... 7.8%
Total................................................... 37.8%
International Newspaper Group............................. 7.5%
Total Operating Costs and Expenses........................ 23.2%
</TABLE>
United States Newspaper Group. Total operating costs and expenses in the
United States Newspaper Group were $527.7 million, an increase of $144.6
million, or 37.8%, over 1994. This increase was due primarily to the inclusion
of costs and expenses attributable to the Chicago Group for the full year. As a
percentage of total United States Newspaper Group revenues, operating costs and
expenses increased to 94.2% from 90.6%.
Operating costs, which consist primarily of labor and, to a lesser extent,
newsprint costs, were $424.1 million in 1995, an increase of $131.9 million, or
45.1%, over 1994. As a percentage of United States Newspaper Group revenues,
operating costs increased to 75.8% in 1995 from 69.1% in 1994. Most of this
increase was due to the inclusion of the Chicago Group for the full 1995 period.
The balance was due principally to higher newsprint costs, which offset cost
saving measures initiated by the Company, including reduced pagination, reduced
page size, improved efficiencies in distribution and the on-going staff
reduction program. Within the Chicago Group, newsprint costs as a percentage of
Chicago Group revenues rose by approximately six percentage points to 21.5% of
such revenues. Within the Community Newspaper Group, lower cost inventories
moderated the impact of increased newsprint costs so that newsprint costs as a
percentage of Community Newspaper Group revenues increased to 12.5% in 1995 from
9.6% in 1994. Newsprint costs are expected to increase further in 1996.
General and administrative expenses decreased $2.0 million, or 3.8%, to
$49.4 million in 1995 from $51.4 million in 1994. As a percentage of United
States Newspaper Group revenues, general and administrative expenses decreased
to 8.8% from 12.2%. This decrease was the result of the implementation of the
Company's cost reduction program, mainly at the Chicago Group which improved
versus 1994 even though it did not record a full year in 1994.
Expenses associated with the Reorganization were $8.0 million in 1995 and
there were no comparable unusual expenses in 1994.
International Newspaper Group. Total operating costs and expenses at The
Telegraph were $381.9 million in 1995, an increase of $26.6 million, or 7.5%,
over 1994. When expressed in British pounds sterling, total operating costs and
expenses increased 4.1% over 1994. Total operating costs and expenses as a
percentage of Telegraph revenues, were 94.3% in 1995, compared with 92.0% in
1994, primarily as a result of higher newsprint costs and lower revenues due to
reduced cover prices of the weekday edition of The Daily
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<PAGE> 50
Telegraph. As a percentage of Telegraph revenues, newsprint costs increased to
22% in 1995 from 17% in 1994.
General and administrative expenses were $40.7 million in 1995, an increase
of $9.2 million, or 28.7%, over 1994. When expressed in British pounds sterling,
general and administrative expenses increased by 26.6% in 1995.
OPERATING INCOME. The above changes in operating revenues and operating
costs and expenses resulted in the following increases (decreases) in operating
income between 1995 and 1994 by principal business group.
<TABLE>
<CAPTION>
1995 VERSUS 1994
----------------
<S> <C>
United States Newspaper Group:
Chicago Group (1)....................................... (26.7)%
Community Newspaper Group............................... 29.5%
Total(2)................................................ 1.8%
International Newspaper Group............................. (24.6)%
Total Operating Income(2)................................. (10.0)%
</TABLE>
- ------------------
(1) Formed on March 31, 1994 with the acquisition of the Chicago Sun-Times and
61 associated newspapers.
(2) Excludes effect of reorganization expenses of $8.0 million in 1995.
United States Newspaper Group. Operating income in the United States
Newspaper Group was $32.3 million in 1995, a decrease of $7.3 million, or 18.4%,
from 1994, after Reorganization expenses of $8.0 million in 1995. Otherwise,
increased revenue, due largely to the full period recognition of the Chicago
Group, and benefits from cost reduction efforts, were largely offset by higher
newsprint costs. The Community Newspaper Group's performance, notwithstanding
newsprint cost increases, improved by 29.5%, while the Chicago Group experienced
a decline of 26.7% caused largely by newsprint cost increases. As a percentage
of total United States Newspaper Group revenues, operating income declined to
5.8% from 9.4%.
International Newspaper Group. Operating income at The Telegraph was $23.3
million in 1995, a decrease of $7.6 million, or 24.6%, from 1994. As a
percentage of Telegraph revenues, operating income declined to 5.7% from 8.0%.
When expressed in British pounds sterling, the operating income decrease was
23.3%. This decline was attributable to the reduced cover price for the weekday
editions of The Daily Telegraph. Total newsprint costs in 1995 increased 29%
over 1994 (when expressed in British pounds sterling), but were partially offset
by cost savings measures.
EQUITY IN EARNINGS OF AFFILIATES. Equity in the earnings of Fairfax,
Southam and the two joint venture printing companies was $16.4 million in 1995
compared with $35.7 million in 1994. Fairfax accounted for $24.7 million, a
decrease of $7.2 million from the prior period. The equity in the 1995 Southam
loss was $10.7 million, compared with earnings of $3.5 million in 1994. Southam
recorded restructuring charges of Cdn.$120 million in 1995 with the Company's
share being equivalent to $9.0 million in net earnings or $0.16 per share.
Southam also experienced a loss on discontinued operations which had an impact
on the Company equivalent to $1.7 million in net earnings, or $0.03 per share.
The restructuring charges consist of amounts for severance to be paid due to
downsizing and the write-down of fixed assets at a printing facility which will
be closed.
GAIN ON SALE OF SECURITIES. Other income of $14.7 million in 1995
consisted mostly of the gain on sale of subsidiary shares and marketable
securities in 1995 of $12.0 million. Comparable gains in 1994 consisted of a
gain of $80.6 million from the sale of 12.5 million ordinary shares of The
Telegraph in May 1994.
INTEREST EXPENSE. Interest expense increased by $10.6 million, or 32.5%,
to $43.2 million in 1995, compared with $32.6 million in 1994. Interest expense
related to the United States Newspaper Group increased by $6.9 million in 1995,
reflecting mainly the increase in long-term debt related to the acquisition of
the Daily Southtown in December 1994 and 16 paid daily community newspapers in
September and October 1995.
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<PAGE> 51
INCOME TAXES. Income tax expense for 1995 was $18.1 million, compared with
$41.3 million in 1994. Income tax expense for 1995 consisted of $2.8 million in
United States taxes and $15.3 million in foreign taxes, compared with $4.4
million United States taxes and $36.9 million in foreign taxes for 1994,
reflecting a substantial decline in operating income at The Telegraph in the
1995 period.
MINORITY INTERESTS. Minority interest reflects the interest of the
minority holders of ordinary shares of The Telegraph in the earnings of The
Telegraph and its affiliated companies and dividends on redeemable preferred
stock of two subsidiary companies. The amount attributable to minority interests
increased to $22.6 million in 1995, as compared with $21.4 million in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
The Company had net earnings for 1994 of $102.8 million compared with $25.8
million for 1993. Net earnings per share for 1994 were $1.90 compared with $1.03
for 1993, before the unfavorable effect of a cumulative change in accounting for
income taxes of $0.50 per share in 1993. The improvement was primarily the
result of a $80.6 million gain on the sale of ordinary shares in The Telegraph
in 1994 (which after tax was equivalent to $1.23 per share) which has been
included in other income. The gain on the sale of Telegraph shares in 1993 was
$7.3 million, or $0.15 per share. The Company also benefitted from the
acquisition in March 1994 of the Chicago Group, consisting of the Chicago
Sun-Times and 61 related suburban newspapers in the Chicago metropolitan area,
and from an increase in equity in earnings of affiliated companies (principally
Fairfax) of approximately $22.2 million, enhanced further by the full year
effect of the increase in The Telegraph's ownership interest in Fairfax to 24.8%
from 15%. Results of operations were adversely affected by a 55.6% decline in
operating income in The Telegraph due in large part to a decline in circulation
revenue following reductions in the cover price of the weekday edition of The
Daily Telegraph in June 1994 in response to price competition from its principal
competitor.
OPERATING REVENUES. The following table shows the percentage increases in
revenues between 1994 and 1993 by principal business group.
<TABLE>
<CAPTION>
1994 VERSUS 1993
----------------
<S> <C>
United States Newspaper Group:
Chicago Group (1)....................................... --
Community Newspaper Group............................... 11.1%
Total................................................... 128.4%
International Newspaper Group............................. 0.4%
Total Operating Revenues.................................. 42.0%
</TABLE>
- ------------------
(1) Formed on March 31, 1994 with the acquisition of the Chicago Sun-Times and
61 associated newspapers.
United States Newspaper Group. Operating revenues in the United States
Newspaper Group were $422.6 million in 1994 (or 52.2% of total operating
revenues), an increase of $237.6 million, or 128.4%, over 1993. This increase
resulted primarily from the addition of revenues of $217.0 million from the
acquisition of the Chicago Sun-Times and 61 associated newspapers in March 1994.
Revenues in the Community Newspaper Group were $205.5 million, an increase of
$20.5 million, or 11.1%, over 1993 principally as a result of acquisitions. For
newspapers operated in both periods, revenues increased $6.7 million, or 3.7%.
Advertising revenues in the United States Newspaper Group increased $171.6
million, or 149.2%, to $286.6 million in 1994 from $115.0 million in 1993. This
increase was primarily the result of the acquisition of the Chicago Sun-Times.
For newspapers operated in both periods, the increase was $5.4 million, or 4.9%.
Circulation revenues in the United States Newspaper Group increased $59.5
million, or 139.9%, to $102.0 million in 1994 from $42.5 million in 1993, almost
wholly as a result of acquisitions. Based on Company estimates, daily paid and
non-daily paid circulation of newspapers acquired during 1994 were approximately
577,000 and 815,000, respectively, which represented approximately 51% and 66%
of the
50
<PAGE> 52
aggregate to total paid circulation at December 31, 1994 for all newspapers in
the United States Newspaper Group. For newspapers operated in both periods,
circulation revenues increased $0.8 million, or 2.0%.
Job printing revenues increased $2.6 million, or 10.5%, to $27.7 million in
1994 from $25.0 million in 1993 as a result of targeted marketing efforts by the
Company in the geographic markets adjacent to the Company's principal production
facilities.
International Newspaper Group. Operating revenues at The Telegraph were
$386.2 million in 1994 (or 47.8% of total operating revenues), an increase of
$1.7 million, or 0.4%, over 1993. However, revenues expressed in British pounds
sterling declined 1.4% in 1994. Increases in advertising revenues were offset by
a decline in circulation revenues resulting from a period of intense price
competition initiated by The Daily Telegraph's principal competitor.
Advertising revenue increased $34.1 million, or 16.9%, to $235.8 million in
1994 from $201.6 million in 1993. When expressed in British pounds sterling,
newspaper advertising revenues increased 13.2% principally due to increases in
classified advertising and to a lesser extent in display advertising.
Circulation revenue declined $31.9 million, or 18.2%, to $143.2 million in
1994 from $175.1 million in 1993. When expressed in British pounds sterling,
circulation revenues declined 19.8% from 1993. This was primarily the result of
a reduction in the cover price of the weekday editions of The Daily Telegraph in
June 1994 from 48p to 30p in response to similar reductions by The Daily
Telegraph's principal competitor, without any offsetting reduction in
commissions paid to wholesalers and retailers.
OPERATING COSTS AND EXPENSES. Operating costs and expenses are comprised
of (i) operating costs, (ii) general and administrative expenses, (iii)
depreciation and amortization expenses and (iv) allocable expenses from
Hollinger Inc. The following table shows the percentage increases in operating
costs and expenses between 1994 and 1993 by principal business group.
<TABLE>
<CAPTION>
1994 VERSUS 1993
----------------
<S> <C>
United States Newspaper Group:
Chicago Group (1)....................................... --
Community Newspaper Group............................... 10.4%
Total................................................... 129.4%
International Newspaper Group............................. 12.8%
Total Operating Costs and Expenses........................ 53.2%
</TABLE>
- ------------------
(1) Formed on March 31, 1994 with the acquisition of Chicago Sun-Times and 61
associated newspapers.
United States Newspaper Group. Total operating costs and expenses in the
United States Newspaper Group were $383.0 million in 1994, an increase of $216.1
million, or 129.4%, over 1993. As a percentage of total United States Newspaper
Group revenues, however, such costs and expenses increased only slightly to
90.6% in 1994 from 90.2% in 1993.
Operating costs, which consist primarily of labor and, to a lesser extent,
newsprint costs, were $292.2 million, an increase of $183.1 million, or 167.8%,
over 1993, primarily as a result of acquisitions. As a percentage of United
States Newspaper Group revenues, operating costs increased to 69.2% in 1994 from
59.0% in 1993. This increase came principally from the acquired Chicago Group,
where operating costs amounted to 78.8% of Chicago Group revenues, as compared
to 58.9% of the Community Newspaper Group revenues. For newspapers operated in
both periods, operating costs increased $2.2 million, or 2.1%.
General and administrative expenses increased $21.9 million, or 74.1%, to
$51.4 million in 1994 from $29.5 million in 1993. As a percentage of United
States Newspaper Group revenues, general and administrative expenses decreased
to 12.2% in 1994 from 16.0% in 1993. This change came principally from the
acquired Chicago Group, where general and administrative expenses were 8.0% of
Chicago Group revenues, as compared to 16.6% of the Community Newspaper Group
revenues.
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<PAGE> 53
Depreciation and amortization expenses were $35.8 million, an increase of
$10.0 million, or 38.7%, over 1993, due primarily to the addition of $8.5
million in depreciation and amortization expenses relating to the acquisition of
Chicago Sun-Times in March 1994. As a percentage of United States Newspaper
Group operating revenues, depreciation and amortization was 8.5% in 1994 and
14.0% in 1993.
Expenses allocated from Hollinger Inc. were $3.6 million in 1994, an
increase of $1.1 million, or 43.2%, over 1993. This reflected the cost of
various additional management and administrative services provided by Hollinger
Inc. to the enlarged United States Newspaper Group in 1994.
International Newspaper Group. Total operating costs and expenses at The
Telegraph were $355.3 million in 1994, an increase of $40.4 million, or 12.8%,
over 1993. When expressed in British pounds sterling, total operating costs and
expenses increased 10.8% and, when viewed as a percentage of Telegraph revenue,
increased to 91.2% in 1994, from 81.2% in 1993. Most of the absolute increase in
costs occurred in operating costs, as the other category changes were nominal,
and most of the apparent shift in costs as a percentage of revenues was
attributable to the reduction in cover price in June 1994, which decreased the
revenue component of the calculation.
Operating costs at The Telegraph were $313.0 million in 1994, an increase
of $39.9 million, or 14.6%, from 1993, primarily due to increases in newsprint
costs and promotional expenditures. When expressed in British pounds sterling,
newsprint costs rose 15.1% over 1993 and promotional expenditures increased by
43.1%. As a consequence of the "price war," circulation was stimulated, which
increased the number of copies produced. At the same time, advertising volume
increased, which increased the number of pages per copy. Both factors
contributed to the increase in total operating costs. As a percentage of
Telegraph revenues (when expressed in British pounds sterling), labor costs
increased to 18.4% in 1994 from 17.5% in 1993, while newsprint costs increased
to 17.0% in 1994 from 14.6% in 1993.
General and administrative expenses were $31.5 million in 1994, an increase
of $0.2 million, or 0.5%, over the 1993 period. When expressed in British pound
sterling, general and administrative expenses declined by 1.6% in 1994.
OPERATING INCOME. The above changes in operating revenues and operating
costs and expenses resulted in the following increases (decreases) in operating
income between 1994 and 1993 by principal business group.
<TABLE>
<CAPTION>
1994 VERSUS 1993
----------------
<S> <C>
United States Newspaper Group:
Chicago Group (1)....................................... --
Community Newspaper Group............................... 17.0%
Total................................................... 119.0%
International Newspaper Group............................. (55.6)%
Total Operating Income.................................... (19.7)%
</TABLE>
- ------------------
(1) Formed on March 31, 1994 with the acquisition of the Chicago Sun-Times and
61 associated newspapers.
United States Newspaper Group. Operating income improved in 1994 by $21.5
million, or 119.0%, to $39.6 million. As a percentage of United States Newspaper
Group revenues, operating income declined slightly from 9.8% to 9.4%. The
Chicago Group represented $18.4 million of the improvement during the nine
months following the acquisition of the Chicago Sun-Times and its 61 associated
newspapers. The Chicago Group's lower operating margin as compared to that of
the Community Group accounted for the decline in margin; however, even in this
brief period the Chicago Group improved its operating income as a percentage of
Chicago Group operating revenues to 7.1%, compared with 2.9% in 1993 on a pro
forma basis. The Community Newspaper Group improved its operating income as a
percentage of Community Newspaper Group operating revenues to 10.3% in 1994,
compared with 9.8% in 1993.
International Newspaper Group. Operating income at The Telegraph was $31.0
million, a decline of $38.8 million, or 55.6%, from 1993. When expressed in
British pounds sterling, this represented a 54.0%
52
<PAGE> 54
decrease and was primarily due to the reduction in cover price of weekday
editions of The Daily Telegraph in June 1994.
EQUITY IN THE EARNINGS OF AFFILIATES. Equity in the earnings of Fairfax,
Southam and the two printing joint ventures increased $22.2 million to $35.7
million in 1994, compared with $13.5 million in 1993. This increase reflected a
$18.4 million increase in earnings from Fairfax and the first full year effect
of the increase in The Telegraph's holding in Fairfax from 15.0% to 24.8%.
Equity accounting for the Southam investment commenced April 1, 1994 and added
$3.5 million to income in 1994.
OTHER INCOME. Other income of $80.8 million in 1994 consisted mainly of
the gain of $80.6 million from the May 1994 public sale of 12.5 million ordinary
shares of The Telegraph. Applicable income taxes relating to the sale of shares
aggregated $14.2 million. The net earnings effect of this gain was $66.4
million, equivalent to $1.25 per share. In 1993, other income was $29.1 million
principally as a result of the gain on the sale of 2.0 million ordinary shares
of The Telegraph ($7.3 million), a gain on the sale of marketable securities
($17.6 million) and a gain on dilution with respect to The Telegraph stake in
Fairfax ($3.6 million).
INTEREST EXPENSE. Interest expense increased by $6.3 million, or 24.1%, to
$32.6 million in 1994 as compared with $26.3 million in 1993. Interest expense
related to the United States Newspaper Group increased by $4.4 million to $23.4
million in 1994, reflecting an increase in long-term debt due to the acquisition
of Chicago Sun-Times, which was partially offset by a lower interest rate for
borrowings under the United States subsidiaries' bank credit facilities.
Interest expense of The Telegraph increased by $2.0 million, or 27.4%, as a
result of the full year effect of borrowings related to investments in Fairfax
and Southam made during 1993.
INCOME TAXES. Income tax expense for 1994 of $41.3 million consisted of
$4.4 million in United States income taxes, and $36.9 million in foreign taxes,
as compared with $36.5 million in 1993 when no United States income taxes were
payable.
Effective January 1, 1993, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The cumulative effect of the change in the method of accounting for
income taxes is reported as a non-cash charge of $24.3 million in the
Supplemental Consolidated Statement of Operations for the year ended December
31, 1993. The Cumulative effect principally represents the recording of deferred
tax liabilities related to certain intangible assets associated with the
International Newspaper Group which have no tax bases.
MINORITY INTEREST. Minority interest reflects the interest of the minority
holders of ordinary shares of The Telegraph in the earnings of The Telegraph and
its affiliated companies and dividends on the DTH and FDTH Preference Shares,
net of related swap income. The amount attributable to minority interest in 1994
declined to $21.4 million from $25.5 million in 1993, primarily as a result of
The Telegraph's earnings decline in 1994. The holdings of the minority in The
Telegraph increased to 41.4% at December 31, 1994 from 33.6% at December 31,
1993.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital consists of current assets less current
liabilities. Current assets were $270.1 million, $197.6 million and $253.6
million at March 31, 1996, December 31, 1995 and 1994, respectively. The
increase was essentially due to a $68.9 million increase in cash equivalents
during the first quarter of 1996. Current liabilities, excluding debt
obligations, were $133.0 million, $124.8 million and $142.2 million,
respectively, at March 31, 1996, December 31, 1995 and 1994. The increase was
due mainly to increases in accrued expenses and deferred revenue. Short-term
debt was $68.4 million at March 31, 1996, $196.9 million at December 31, 1995
and $122.0 million at December 31, 1994, and decreased primarily as a result of
the consummation of the Company's Notes and Class A Common Stock offerings in
February 1996. Intercompany indebtedness and other amounts due Hollinger Inc.
were $4.1 million at March 31, 1996, $21.5 million at December 31, 1995 and
$100.1 million at December 31, 1994, reflecting $90.9 million paid by FDTH as
partial consideration for Hollinger's direct and indirect interest in Southam in
July 1995. The
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<PAGE> 55
Company's consolidated working capital was $68.8 million at March 31, 1996 and
the consolidated working (deficit) was $(124.2) million at December 31, 1995 and
$(10.6) million at December 31, 1994.
Subsequent to December 31, 1995, the Company issued 16,100,000 shares of
Class A Common Stock and, through Publishing, $250.0 million of 9 1/4% Senior
Subordinated Notes in February 1996. The aggregate net proceeds from these
offerings was $384.6 million, which were used to repay interim and long term
bank loans of $290.0 million and certain amounts due to Hollinger Inc. of $20.8
million. The remaining net proceeds were added to the Company's available cash,
which was used to finance the acquisition of certain United States community
daily newspapers in April 1996 for approximately $31.0 million in cash and for
general corporate purposes. The Publishing Credit Facility, which was entered
into in February 1996, has been amended to increase the amount available
thereunder to $125.0 million, which the lender has agreed to amend to provide
for a maximum of $150.0 million of available credit and of which $140.0 million
is expected to be used to finance in part the purchase of the Telegraph Minority
Shares with the balance available for general corporate purposes. See
"Description of Indebtedness and Certain Other Obligations" for a discussion of
certain financing arrangements entered into in connection with the Scheme and
the purchase of the Power Shares and certain other obligations of the Company.
In the near term, the Company plans to fund its working capital needs
through available cash, working capital lines under the Amended Publishing
Credit Facility and the FDTH Credit Facility, a portion of the proceeds from
this Offering and the Common Stock Offering and internally generated funds. The
Company is considering the issuance of additional debt and equity securities
after the completion of this Offering and the Common Stock Offering to repay
short term debt under the Southam Facility, the FDTH Credit Facility and the
Amended Publishing Credit Facility (or any extension or refinancing of the
foregoing). See "Future Financing Plans."
EBITDA. EBITDA, which represents the Company's earnings before interest
expense, income taxes, depreciation and amortization, minority interest, equity
in earnings of affiliates and certain other income items was $24.7 million in
the first quarter of 1996, $114.3 million, $127.0 million and $130.8 million in
1995, 1994 and 1993, respectively. EBITDA in the second quarter of 1996 is
expected to increase as compared to the second quarter of 1995. The Company
believes that EBITDA largely determines its ability to fund current operations
and to service debt due to the significant number of acquisitions made by the
Company which have resulted in non-cash charges for depreciation and
amortization. These non-cash charges have adversely affected net earnings but
have not affected EBITDA.
CASH FLOW. Cash flows on a consolidated basis from operating activities
(calculated in accordance with United States generally accepted accounting
principles) were $15.7 million in the first quarter of 1996 and $15.3 million,
$79.5 million and $93.4 million in 1995, 1994 and 1993, respectively. Excluding
changes in working capital (other than cash), cash from operating activities was
$13.6 million in the first quarter of 1996 and $64.8 million, $68.4 million and
$76.2 million for 1995, 1994, and 1993 respectively. The decline in these
amounts over the three years reflects the effects of period to period declines
in operating income that resulted mainly from the adverse effect of the cover
price war on the Telegraph's results offset partly by improved advertising
results at the Telegraph and by improved operating results in the United States.
Cash from operating activities (excluding changes in working capital) was $1.8
million less in the first quarter of 1996 than the comparable period in 1995 due
primarily to a $9.8 million (net of taxes) increase in newsprint and other paper
costs. Working capital changes provided cash of $2.1 million in the first
quarter of 1996, required cash of $49.5 million in 1995 and provided cash of
$11.0 million and $17.3 million in 1994 and 1993, respectively. The largest
single factor involved in these differences was taxes provided in 1994 on the
$80.6 million gain on sale of The Telegraph shares which were paid in 1995.
Other changes reflect normal variations from year to year in inventory, accounts
receivable, short term liabilities and other working capital items.
Cash flows provided by (used in) investing activities were $(2.9) million
in the first quarter of 1996, $(144.7) million in 1995, $(151.6) million in
1994, and $(182.0) million in 1993, reflecting principally the acquisition of 16
paid daily community newspapers and the purchase of additional Telegraph shares
in 1995, investments in Fairfax and Southam and the acquisition of the Chicago
Sun-Times in 1994, offset by the
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<PAGE> 56
proceeds from the sale of shares of The Telegraph and other marketable
securities. Cash flows provided by (used in) financing activities were $56.1
million in the first quarter of 1996, $37.0 million in 1995, $156.5 million in
1994, and $54.2 million in 1993. Subsequent to year end 1995, the Company
completed concurrent debt and equity offerings and applied the net proceeds
thereof as described above under "Working Capital." Cash flows in the prior
three years reflected changes in borrowings and proceeds from the sale of Class
A Common Stock and preference shares issued by DTH and FDTH, two English
subsidiaries of the Company, offset by dividend payments.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING. The United States
Newspaper Group and the International Newspaper Group have funded their capital
expenditures and acquisition and investment activities out of cash provided by
their respective operating activities, borrowings under their bank credit
facilities and, in the case of the United States Newspaper Group, borrowings
from institutional lenders, advances from Hollinger Inc., proceeds from the
Company's initial public offering in May 1994 and concurrent debt and equity
offerings in the February 1996. See "Working Capital."
In May 1996, Hollinger Inc. acquired the Power Shares. Such acquisition was
financed by Cdn. $300.0 million borrowings by the Company under the Southam
Facility which are guaranteed by Hollinger Inc. and mature on November 25, 1996.
The funds under the Southam Facility were advanced by the Company to a Canadian
subsidiary of Hollinger Inc. as an intercompany loan. The Hollinger Inc.
guarantee of the Southam Facility is secured by a pledge of the Power Shares and
7,539,028 shares of Class A Common Stock and 14,990,000 shares of Class B Common
Stock held by Hollinger Inc. See "The Company--Recent Developments--Southam."
In connection with the Scheme, the Company entered into definitive
agreements with certain financial institutions for short term bank credit
facilities and bridge financing in the aggregate amount of approximately $625.0
million to provide the necessary financing for the Scheme, which is expected to
cost approximately $463.0 million (including related transaction costs), and to
repay outstanding bank indebtedness of The Telegraph, which is expected to be
approximately $173.0 million at the time the Scheme is consummated. See "The
Company--Recent Developments--The Telegraph."
Reference is made to "Description of Indebtedness and Certain Other
Obligations" for a description of certain financing arrangements entered into in
connection with the Scheme and the purchase of the Power Shares.
United States Newspaper Group. The Company made capital expenditures of
$2.9 million in the first quarter of 1996 and $16.3 million, $16.4 million, and
$3.6 million in 1995, 1994, and 1993, respectively, primarily for purchases of
computerized pre-press and other production equipment and improvements to its
properties in the United States and Israel. The Company plans to acquire a new
site in Chicago and to construct a new printing facility in 1996 and 1997 at an
estimated cost of approximately $75.0 million, to be operational in mid-1998.
The Company's capital expenditure budget for 1996 is $34.0 million.
The Company acquired and disposed of newspapers and other publications in
the United States in the first quarter of 1996 for a net cost of $2.6 million
and in 1995, 1994 and 1993 for aggregate cash consideration of $334.9 million
primarily funded through bank borrowings. Such amount does not include notes
payable to former owners and amounts due under noncompetition agreements with
former owners. In 1995, the Community Newspaper Group acquired 16 paid daily
newspapers with an aggregate circulation of approximately 163,000, three paid
non-dailies with an aggregate circulation of approximately 37,000 and 20 free
non-daily publications with an aggregate circulation of approximately 277,000,
in nine states at an aggregate cash cost of approximately $95.0 million.
The Company's acquisition of Hollinger Inc.'s indirect interest in The
Telegraph, Fairfax, and Southam occurred in October 1995 and involved the
issuance to Hollinger Inc. of 33,610,754 shares of Class A Common Stock and
739,500 shares of Series A Preferred Stock. The acquisition of an additional
5.1% interest in The Telegraph at a cash cost of $49.6 million was accomplished
through the exercise of the Telegraph Option in October 1995.
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Upon consummation of the Scheme which, if approved, would become effective
on July 31, 1996, the Company will own 100% of the ordinary shares of The
Telegraph. The payment of the cash consideration to holders of Telegraph
Minority Shares and the special dividend to such holders (the Company's
subsidiaries having waived such dividend) would be made on or about August 8,
1996.
On April 30, 1996, the Company consummated a trade of several newspapers
with Garden State Newspapers, Inc. The Company acquired the Tribune-Democrat in
Johnstown, Pennsylvania, with a daily paid circulation of 46,000, in exchange
for six smaller daily newspapers and several weekly newspapers from the
Company's Community Newspaper Group and approximately $31.0 million in cash,
subject to certain adjustments.
International Newspaper Group. Capital expenditures at The Telegraph were
$1.2 million in the first quarter of 1996 and $5.4 million, $11.4 million, and
$5.6 million in 1995, 1994, and 1993, respectively. The Telegraph capital
expenditures in 1995 were principally for computer and related equipment and The
Telegraph expects to spend approximately $7.8 million in 1996, principally to
maintain its ongoing program to upgrade working assets. In the past two years,
The Telegraph increased its investment in Fairfax and acquired its indirect
interest in Southam. Such investment expenditures were $10.1 million and $203.6
million in 1994 and 1993. Not included in the capital expenditures of The
Telegraph are capital expenditures of the two joint venture printing companies,
which aggregated $13.4 million in the three years ended December 31, 1995. The
capital expenditures and depreciation charges of the joint venture printing
companies are not consolidated in the accounts of The Telegraph, but are
reflected in the amount included as equity in the earnings of affiliated
companies.
EXISTING DEBT OBLIGATIONS. The Company, Publishing and its principal
subsidiaries are parties to various debt agreements which have been entered into
to fund acquisitions, working capital requirements and other corporate purposes,
including the Scheme and the purchase of the Power Shares. At March 31, 1996,
the indebtedness of the Company was $574.2 million, consisting of long-term debt
($565.0 million) and current bank loans ($9.2 million) and at December 31, 1995,
the indebtedness of the Company was $621.7 million, consisting of long-term debt
($473.8 million) and current bank loans ($147.9 million). At March 31, 1996,
after giving effect to the Offering and the concurrent Common Stock Offering,
the Company's consolidated adjusted total debt, redeemable preferred stock and
stockholders' equity would have been $1,065.8 million, $306.6 million and $674.0
million, respectively, and total debt and redeemable preferred stock would
represent approximately 67.1% of its total capitalization. Of the Company's
consolidated adjusted total debt, $659.0 million is due within one year or less
of March 31, 1996. See "Description of Certain Indebtedness and Other
Obligations."
DIVIDENDS AND OTHER COMMITMENTS. As a result of this Offering and the
Common Stock Offering, the Company will have significantly increased dividend
obligations as a result of an increase in the number of shares of Common Stock
outstanding and the issuance of the PRIDES in addition to debt service
obligations, capital expenditures, management fees due to Hollinger Inc. and
dividends on its Series A Preferred Stock. The Company has also entered into an
agreement to compensate Hollinger Inc. for any payments made by Hollinger Inc.
to the holders of the DTH and FDTH Preference Shares in the event such holders
exercise their retraction rights and Hollinger Inc. purchases such shares
pursuant to contractual arrangements with the holders. The timing of any such
payments by the Company to Hollinger Inc. will be determined by Hollinger Inc.
The Company has been informed by Hollinger Inc. that, in light of the additional
debt financing to be incurred in connection with the acquisition of the
Telegraph Minority Shares, it will not be in compliance with the Debt to Equity
Ratio as of September 30, 1996. The aggregate retraction price for all DTH and
FDTH Preference Shares subject to possible retraction is approximately $125.6
million (other than in respect of shares held by Argsub).
The amount available for the payment of dividends and other obligations by
the Company at any time is a function of (i) restrictions in agreements binding
the Company limiting its ability to pay dividends, management fees and other
payments and (ii) restrictions in agreements binding the Company's subsidiaries
limiting their ability to pay dividends, management fees and other payments to
the Company. The Company is not a party to a debt agreement that restricts the
payment of dividends. However, certain agreements binding
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Publishing and other subsidiaries of the Company contain such restrictive
provisions. As of March 31, 1996, after giving effect to the adjustments set
forth under "Capitalization," the total amount of funds that would be
unrestricted as to payment of dividends, management fees and other payments by
the Company under its debt instruments would have been, under the more
restrictive provisions, approximately $26 million if this Offering and the
Common Stock Offering are completed. The foregoing calculation is based on the
sum of the following for the period January 1, 1996 to March 31, 1996: (i) 50%
of the sum of (x) consolidated net income of Publishing and its restricted
subsidiaries (principally its United States subsidiaries), or if it is a loss,
100% of such loss, and (y) amortization expense of Publishing and such
subsidiaries; (ii) 50% of the cash dividends received by Publishing and its
restricted subsidiaries from any unrestricted subsidiaries, including The
Telegraph; and (iii) $25 million. In addition, the amount available for
dividends is permitted to be increased, among other provisions, by the amount of
net cash proceeds from capital contributions made to Publishing. See
"Description of Certain Indebtedness and Other Obligations." In addition, the
Company's subsidiaries, American Publishing (1991) Inc. and FDTH, are parties to
agreements that limit their respective abilities to pay dividends and make other
payments to the Company.
FUTURE FINANCING PLANS. In addition to this Offering and the Common Stock
Offering, the Company, may, through a subsidiary or an affiliate, issue high
yield debt securities, or other debt or equity securities, possibly including a
security which would allow the Company to monetize its interest in Fairfax. The
Company anticipates that it would apply the net proceeds from any such offering
for one or more of the following: (i) the repayment of outstanding amounts under
the Southam Facility, the FDTH Credit Facility and the Amended Publishing Credit
Facility (or any extension or refinancing of any of the foregoing), (ii) the
redemption of the DTH and FDTH Preference Shares, and (iii) other corporate
purposes, including capital expenditures and acquisitions.
INFLATION. During the past three years, inflation has not had a material
effect on the Company's newspaper business in the United States, United Kingdom,
Australia and Canada. However, operations of Jerusalem Post, in local currency
terms, have been affected by inflation amounting to 8.1%, 14.5%, and 11.2%
annually in 1995, 1994, and 1993, respectively, which to a certain extent have
been offset by the devaluation of the NIS in relation to the United States
dollar in each of these years by 3.9%, 1.1%, and 8.0%, respectively.
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BUSINESS
The Company, through subsidiaries and affiliated companies, is a leading
publisher of English-language newspapers in the United States, the United
Kingdom, Australia, Canada and Israel. Included among the 131 paid daily
newspapers in which the Company has an interest are the Chicago Sun-Times and
The Daily Telegraph. These 131 newspapers have a world-wide daily combined
circulation of approximately 4,300,000 (including 2,100,000 attributable to the
publications in which the Company has a minority equity interest). In addition,
the Company owns or has an interest in 379 non-daily newspapers as well as
magazines and other publications. The Company's strategy is to achieve growth
through acquisitions and improvements in the cash flow and profitability of its
newspapers, principally through cost reductions. Since the Company's formation
in 1986, the existing senior management team has acquired over 410 newspapers
and related publications (net of acquisitions) in the United States, The
Telegraph in the United Kingdom and Jerusalem Post in Israel, and has made
significant investments in newspapers in Australia and Canada. Over this period,
the Company has achieved substantial growth in revenues to $965.0 million in
1995 and realized significant improvements in operating efficiencies at its
newspapers.
The operations of the Company consist of its United States Newspaper Group
and its International Newspaper Group. The Company also owns equity investments
in newspaper publishing companies in Australia and Canada which contributed
approximately $16.4 million to the Company's income before taxes in 1995 and
approximately $3.4 million for the six months ended March 31, 1996.
BUSINESS STRATEGY
ACQUISITIONS
The Company's strategy is to achieve growth in its newspaper business
principally through acquisitions, improvements in the cash flow and
profitability of its acquired newspapers principally through cost reductions.
Management also expects that additional revenue sources, including an increase
in the availability of color advertising and an expansion of the Company's
publications into electronic media, will contribute to the Company's future
growth in revenues and cash flows. The Company plans to install new printing
facilities in Chicago within the next two years, which should increase the
availability of color advertising, lower production costs, improve operating
efficiencies and enhance product quality. In addition, the Company recently
started selling advertising space on the Chicago Sun-Times' new homepage on the
Internet, and in November 1994, The Telegraph created the Electronic Telegraph
on the Internet. The Jerusalem Post and many of the Company's community
newspapers are also available electronically.
The Company expects that its future acquisitions will be principally of
community newspapers with daily circulation ranging from 10,000 to 25,000;
however, the Company may consider the acquisition of selected larger circulation
publications that meet the Company's acquisition criteria. Such larger
circulation publications may include metropolitan or other significant
newspapers, as well as community daily newspapers with circulation ranging from
25,000 to 75,000 (such as the Johnstown Tribune-Democrat), to the extent they
become available and meet the Company's acquisition criteria. The Company
constantly seeks newspaper acquisition candidates that are underperforming in
terms of cash flow but have a long history of publishing within a community and,
from the Company's point of view, possess strong readership and advertiser
loyalty; have the potential for increased gross operating profit through cost
reductions, revenue enhancements and synergies with the Company's existing
operations; and are available at attractive prices. The Company's strategy is to
operate newspapers in regional clusters where feasible, which enables the
Company to market advertising on a regional basis and allows for cost savings
from reduction in overhead, centralized purchasing and, to the extent
practicable, regionalized printing.
The Company expects the Scheme to be completed in early August 1996 as a
result of which The Telegraph would become indirectly wholly owned by the
Company. The Company believes that, as a consequence, it will have greater
access to the cash flow of The Telegraph and will have enhanced financing and
corporate flexibility. In late May 1996 Hollinger Inc. acquired a 21.5% interest
in Southam, which together with the 19.5% interest indirectly owned by the
Company, provides Hollinger Inc. and the Company with a combined 41% interest in
Southam. Hollinger Inc.'s stated plans are to increase its ownership interest
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by permissible purchases to or above 50% and may, subject to market and other
conditions, seek to acquire all Southam common shares not then owned or
controlled by Hollinger Inc. or the Company through an offer of the Company's
Class A Common Stock or securities convertible into or exchangeable for such
stock. See "Recent Developments."
Hollinger Inc. and the Company have agreed to combine their interests in
Southam so that the Company will hold indirectly non-voting common shares and
voting preference shares representing one half of the voting power and all of
the equity of their combined interests. Hollinger Inc. will hold voting
preference shares representing one-half of the voting power and with nominal
amount of paid-up capital which will not be entitled to any payments, including
dividends, other than a liquidation preference on the nominal amount. Hollinger
Inc. and the Company expect this transaction to occur promptly following the
July 22, 1996 Southam shareholders meeting. In addition, the Company intends to
seek a ruling from Revenue Canada that would permit the Company to hold
indirectly 100% of the equity interests in Southam held by the Company and
Hollinger Inc. without affecting Southam's status as a Canadian publisher of
newspapers and periodicals. If such ruling is received and approval is obtained
under the Investment Act Canada, the full ownership of the equity interests in
Southam held by Hollinger Inc. and the Company would be transferred to the
Company. If the Company obtains control of Southam (through share ownership or
otherwise), Southam's results of operation will be consolidated for accounting
purposes. Senior management of Hollinger Inc. and the Company believes that,
although Southam has undertaken in the past two years to focus on its core
businesses and improve operating efficiencies, there are significant additional
opportunities for enhanced operating performance and improvements in editorial
quality to be realized at Southam. Senior management of Hollinger Inc. also
believes that the combined approximately 41% interest in Southam, together with
the changes in Southam's Board of Directors proposed by Hollinger Inc., should
enable it to have greater influence in assisting Southam to achieve these
objectives. However, there can be no assurance as to the timing or ultimate
ability of the Company and Hollinger Inc. to achieve these objectives.
The Telegraph's approximate 25% ownership minority interest in Fairfax
cannot be increased under existing Australian foreign ownership regulations. An
Australian governmental committee is currently reviewing media ownership rules
and is expected to make its recommendations in early 1997. Management has stated
that the outcome of the Australian government review will be taken into account
in determining The Telegraph's strategy in relation to its investment in
Fairfax. Depending upon the outcome of the Australian government review of its
foreign investment policies and other relevant factors, the Company intends
either to (i) increase its investment in Fairfax possibly to a majority position
or (ii) sell or otherwise dispose of its interest in Fairfax, which should
result in a substantial capital gain and (depending upon the structure of any
such transaction) use all or a portion of the proceeds to reduce the Company's
long term debt.
The Company and Hollinger Inc. have agreed that the Company will be
Hollinger Inc.'s principal vehicle for engaging in and effecting acquisitions in
the newspaper business and in related media businesses in the United States,
Israel, Canada (through Southam) and, through The Telegraph, the Telegraph
Territory. Hollinger Inc. has reserved to itself the ability to pursue all media
(including newspaper) acquisition opportunities outside the United States,
Israel and the Telegraph Territory, and all media acquisition opportunities
unrelated to the newspaper business in the United States, Israel and the
Telegraph Territory.
IMPROVING PROFITS OF ACQUIRED NEWSPAPERS
The Company's approach to improving profitability depends on the particular
newspaper acquired but typically includes the introduction of measures to reduce
costs, improve efficiency and enhance product quality, including the visual
quality of printed pages. Generally, the most immediate contribution to
profitability is cost reductions and the most significant source of savings is
labor costs. For its community newspapers, the Company's objective is to achieve
employee costs as a percentage of annual newspaper revenues of not more than
30%. In 1995 employee costs (including salaries, wages, fringe benefits,
employment-related taxes and other direct employee costs) as a percentage of
revenues for all publications in the Community Newspaper Group were 33%.
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The Company has achieved additional cost savings through the centralization
of newsprint purchasing and certain other functions, such as accounting and
personnel. To achieve greater product quality and cost reductions, the Company
has also introduced modern and efficient computerized pre-press facilities and,
where justified by economic and operational criteria, has regionalized
production operations at its community newspapers. The installation of a new
printing plant at Chicago Sun-Times, with an estimated completion date in
mid-1998, is expected to result in production efficiencies and increased color
printing capability in addition to improved printing quality.
The Company also seeks to increase revenues of acquired newspapers by,
among other things, offering co-op and national advertising programs not
typically available to locally owned newspapers. Potential new revenue sources
include national classified advertising, niche publications (such as specialized
"total market coverage" publications) and the provision of distribution services
to other publishers of printed matter. Management believes that it can
capitalize on its existing sales, editorial and distribution capabilities in the
communities it now serves by pursuing these and other sources of new revenue.
Management also believes that there may be opportunities resulting from
technological changes in the assembly and dissemination of information and that
the Company's newspapers are well positioned, in terms of geographic diversity
and as a primary source of information, to act as sources of local and regional
news to be delivered by other information-gathering networks. The timing and
extent of any such opportunities, however, are uncertain.
Community Newspaper Group. To evaluate the operating performance of its
United States community newspapers, and to assist in the annual budgeting
process and in targeting capital expenditures, management assesses each of its
publications on the basis of its gross operating profit and operating profit
margins. Gross operating profit ("G.O.P.") is defined as revenues less operating
costs and general and administrative expenses, excluding certain immaterial
corporate overhead charges. By comparison, as a measure of operating
performance, EBITDA represents income before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and certain other income items. Operating profit margin ("Margin") is
determined by dividing G.O.P. by total operating revenues (before intercompany
eliminations). In 1995, the Company achieved a Margin of 28.8% for community
newspapers acquired in 1986, as compared to a Margin of 16.8% and (35.2)% for
community newspapers acquired in 1993 and 1994, respectively.
Chicago Group. Management of the Company has developed a business strategy
for each of the Chicago Group newspapers, including the Chicago Sun-Times, to
improve circulation, advertising revenue and market share by emphasizing local
coverage, differentiating areas of circulation to improve home subscription
sales, particularly for the Chicago Sun-Times, and developing advertising
strategies that focus on each newspaper's natural circulation or readership
advantage. It has been a major objective of management over the past three years
to differentiate the Chicago Sun-Times from its principal daily metropolitan
competitor, the Chicago Tribune, in the areas of editorial content and style and
in its distinctive tabloid format. In addition, steps have been taken to enhance
product quality through capital investments in new pre-press technology, to
improve the newspaper delivery system and to improve the quality of the
workforce. The Company plans to acquire an additional site and purchase and
install a new printing facility on that site for the Chicago Sun-Times at a cost
estimated to be approximately $75.0 million. The Company expects that the new
facility will be operational in mid-1998.
The Company has consolidated certain administrative and corporate functions
at the Chicago Group in order to achieve greater efficiencies, implemented an
employee buyout program for those employees displaced by new technology and
increased capital investment in production technology which, over time, is
expected to result in improved operating efficiencies, labor cost savings and
enhanced product quality. For the twenty-six weeks ended December 26, 1993,
prior to its acquisition by the Company, Chicago Sun-Times had operating income
of $5.9 million and an operating margin of 2.2%. For the twelve months ended
December 31, 1995, the operating income of Chicago Sun-Times was $13.8 million,
an improvement of approximately 134%, with an operating margin of 4.2%.
The Telegraph. The Telegraph's newspaper operating strategy for 1996 is to
improve circulation and advertising revenues while maintaining circulation
levels at The Daily Telegraph. Management also believes that The Telegraph can
build upon the circulation strength of its Saturday edition and improve its
Sunday
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circulation. Following the cover price increase of its principal competitor, on
November 20, 1995, The Telegraph increased the weekday cover price of The Daily
Telegraph by 5p to 40p per copy and reduced its recommended retail margin for
its weekday editions to 10p per copy from 11.9p per copy. The Daily Telegraph
retains its position as market leader in the quality daily market despite
selling at a premium cover price over The Times. The future cover price policy
for The Daily Telegraph will be reviewed from time to time in light of
constantly changing market conditions. The pricing policy for The Sunday
Telegraph, currently selling at 70p, 30p less than the market leader, is likely
to be reviewed in the near future. On June 3, 1996, The Times reduced its cover
price to 10p on Mondays only, as part of its "summer sport promotion." To
promote its "summer of sport," The Daily Telegraph launched a voucher promotion
beginning Saturday, June 8 enabling readers to redeem vouchers to purchase The
Daily Telegraph on Mondays for 10p.
Development of New Revenue Sources. Management also expects that additional
revenue sources, including an increase in the availability of color advertising
and an expansion of the Company's publications into electronic media will
contribute to the Company's future growth in revenues and cash flows. For
example, the Company is selling advertising space on the Chicago Sun-Times' new
homepage on the Internet and, in November 1994, The Telegraph created the
Electronic Telegraph on the Internet. The Jerusalem Post and many of the
Company's community newspapers are also available electronically.
UNITED STATES NEWSPAPER OPERATIONS
The Company is the largest newspaper publishing group in the United States,
as measured by paid daily newspapers owned and operated, and one of the twelve
largest in terms of daily circulation. As of June 1, 1996, the Company published
a total of 410 newspapers and related publications in the United States
consisting of 105 paid daily newspapers with a combined paid circulation of
approximately 1,220,000, 141 paid non-daily newspapers with a combined paid
circulation of approximately 1,224,000 and 163 free circulation publications
with a combined circulation of approximately 2,464,000. The Company's United
States operations consist of the Chicago Group and the Community Newspaper
Group, which for accounting and management purposes includes Jerusalem Post.
CHICAGO GROUP
On March 31, 1994, the Company acquired all of the capital stock of Chicago
Sun-Times which, with its subsidiaries, publishes the Chicago Sun-Times, the
eighth largest metropolitan daily newspaper in the United States, and 61
suburban weekly and biweekly newspapers in the Chicago area.
The Chicago Sun-Times, which has an average daily paid circulation of
approximately 501,000 and is published in a tabloid format, is the largest daily
circulation newspaper in Cook County, Illinois, which includes the City of
Chicago. As part of this acquisition, the Company acquired 41 weekly newspapers
published by Pioneer Newspapers Inc. ("Pioneer Press") in Chicago's north and
northwest suburbs, and 20 biweekly newspapers published by Star Publications,
Inc. ("Star Publications") in Chicago's south and southwest suburbs.
On October 31, 1994, the Company purchased a group of Chicago area suburban
weekly papers from Des Plaines Publishing Company that are now managed by
Pioneer Press. On December 23, 1994, the Company acquired Daily Southtown, which
publishes the Daily Southtown and News Marketer.
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage such sources represent of total revenues for the Chicago
Group operations (including revenues of Chicago Sun-
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Times and Daily Southtown prior to their acquisition by the Company) during the
past three years and for the three months ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising........... $185,600 69 % $201,957 72 % $230,328 69 % $ 54,313 68 % $ 52,155 67 %
Circulation........... 77,668 29 74,661 26 78,824 24 19,686 25 20,655 26
Other................. 3,950 2 5,618 2 24,135 7 5,538 7 5,669 7
-------- --- -------- --- -------- --- -------- --- -------- ---
Total............. $267,218 100 % $282,236 100 % $333,287 100 % $ 79,537 100 % $ 78,479 100 %
======== === ======== === ======== === ======== === ======== ===
</TABLE>
ADVERTISING. Substantially all of the advertising revenues in the year
ended December 31, 1995 were derived from local and national retailers and
classified advertisers. Advertising rates and rate structures vary among the
publications and are based, among other things, on circulation, penetration and
type of advertising (whether classified or display and national or retail). In
1995, retail advertising accounted for the largest share of advertising revenues
(53%), followed by classified (32%) and national (12%).
The Chicago Sun-Times offers a variety of advertising alternatives,
including full-run advertisements, geographically zoned issues, special interest
pull-out sections and advertising supplements in addition to regular sections of
the newspaper targeted to different readers, such as arts, food, real estate, TV
listings, weekend and special sections. The Chicago area suburban newspapers
also offer weekly separate sections and special sections. Management has also
developed the Sun-Times Newspaper Network, an advertising vehicle which can
reach the combined readership base of the Chicago Sun-Times and the 72 Chicago
area suburban newspapers, including the Daily Southtown, News Marketer and the
Des Plaines newspapers.
CIRCULATION. Circulation revenues are derived from single copy newspaper
sales made through retailers and vending racks and home delivery newspaper sales
to subscribers. Approximately 68% of the copies of the Chicago Sun-Times sold in
1995 were single copy sales. Approximately 73% of 1995 circulation revenues of
the 71 Chicago area suburban newspapers was derived from subscription sales.
The average paid daily and Sunday circulation of the Chicago Sun-Times is
approximately 501,000 and 469,000 respectively, the daily and Sunday paid
circulation of the Daily Southtown is approximately 58,000 and 67,000,
respectively, and the aggregate non-daily paid and free circulation of the
Chicago area suburban newspapers is approximately 259,000 and 436,000,
respectively. The aggregate non-daily paid circulation for the Pioneer Press
newspapers is approximately 196,000 and the aggregate non-daily paid circulation
for the Star Publications newspapers is approximately 63,000.
COMPETITION. Each of the Company's Chicago area newspapers competes in
varying degrees with radio, television, direct marketing and other
communications and advertising media as well as with other newspapers having
local, regional or national circulation. The Chicago metropolitan region is
comprised of Cook County and six surrounding counties and is served by six daily
newspapers.
The Chicago Sun-Times competes in the Chicago region with the Chicago
Tribune, a large established metropolitan daily and Sunday newspaper, which is
the fifth largest metropolitan newspaper in the country. In addition, the
Chicago Sun-Times and other Chicago Group newspapers face competition from other
newspapers published in adjacent or nearby locations and circulated in the
Chicago metropolitan area market.
EMPLOYEES AND LABOR RELATIONS. As of December 31, 1995, the Chicago Group
(including Daily Southtown) employed approximately 2,961 employees (including
approximately 645 part-time employees). Approximately 1,410 employees are
represented by 17 collective bargaining units. Collective bargaining agreements
with three unions expired at various times in 1995 and the Chicago Group is
engaged in active negotiations with one of these unions. Although the collective
bargaining agreements with these unions have not been finalized, the Company
expects to reach agreements with these unions. Employee costs (including
salaries, wages, fringe benefits, employment-related taxes and other direct
employee costs) equalled approximately 38% of the Chicago Group's revenues in
the year ended December 31, 1995. There have been no
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strikes or general work stoppages at any of the Chicago Group's newspapers in
the past five years. The Chicago Group believes that its relationships with its
employees are generally good.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint costs equalled approximately 22% of the Chicago Group's revenues in
the year ended December 31, 1995. Since March 1994, the cost of newsprint has
been increasing at a rapid pace. Newsprint prices have moderated since early
1996. Overall, the Chicago Group's cost of newsprint per metric ton increased
45% in 1995 compared to the previous year. The Chicago Group is not dependent
upon any single newsprint supplier and currently obtains newsprint from four
principal suppliers. To ensure an adequate supply of newsprint, Chicago
Sun-Times has newsprint supply contracts with certain minimum purchase
requirements. The Chicago Group believes that its newsprint sources of supply
are adequate for its anticipated needs.
PRINTING AND PRODUCTION. The Chicago Group has seven operating and
production facilities. All editorial, pre-press, press, marketing, sales and
administrative activities for the Chicago Sun-Times are conducted in its main
facility in Chicago. New press facilities are being planned for Chicago
Sun-Times, at a cost estimated to be approximately $75.0 million, to be
operational in late 1998.
Daily Southtown operates a majority of its editorial, pre-press, press,
marketing, sales and administrative activities out of four adjoining sites.
Pioneer Press uses its facility in north suburban Chicago for editorial, pre-
press, sales and administrative activities. Production activities occur in a
neighboring suburb. Star Publications owns a facility in Chicago's south suburbs
in which all but its pressroom operations are conducted. Star Publications
newspapers are printed by Daily Southtown.
COMMUNITY NEWSPAPER GROUP
The Community Newspaper Group consists of publications in the United States
and Israel. The Community Newspaper Group's United States daily newspapers have
been published on average for almost 100 years and are typically the only paid
daily newspapers of general circulation in their respective communities.
Circulation for community newspapers ranges from 1,300 to 46,000 for paid
dailies and from 100 to 53,000 for paid non-dailies. Generally, the Company's
community newspapers combine news, sports and features with a special emphasis
on local information and provide one of the primary sources of such community
information for the towns in which they are distributed. In addition to reaching
the local population through paid daily and non-daily community newspapers, the
Company also publishes free circulation "total market coverage" publications,
including shoppers, with limited or no news or editorial content. As a group,
these publications provide the Company with a stable and established circulation
within the communities they serve, which it believes provides an effective
medium for advertisers to reach a significant portion of the households in these
communities.
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage that such sources represent of total revenues for the
Community Newspaper Group, including Jerusalem Post, during the past three years
and for the three months ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising........... $115,012 62 % $129,886 63 % $142,269 63 % $ 30,239 61 % $ 40,706 64 %
Circulation........... 42,508 23 45,966 23 50,861 22 11,929 23 14,116 22
Other................. 27,523 15 29,696 14 33,512 15 8,065 16 9,046 14
-------- --- -------- --- -------- --- -------- --- -------- ---
Total............. $185,043 100 % $205,548 100 % $226,642 100 % $ 50,233 100 % $ 63,868 100 %
======== === ======== === ======== === ======== === ======== ===
</TABLE>
UNITED STATES COMMUNITY NEWSPAPERS. Advertising, circulation and job
printing revenues for the Company's United States community newspapers, as well
as competition, employees and labor relations and raw materials with respect to
such newspapers, are discussed below.
Advertising. Substantially all of the advertising revenues in 1995 were
derived from local retailers and classified advertisers, which management
believes are less subject to fluctuation than national advertising.
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Advertising rates and rate structures vary among the publications and are based,
among other things, on circulation, penetration and type of advertising (whether
classified or display and national or retail). In 1995, local and regional
advertising accounted for the largest share of advertising revenues (60%),
followed by classified (19%), preprinted inserts (18%) and national (3%).
Management believes that the Company's strategy of acquiring and operating
community newspapers in regional clusters parallels an emerging trend of larger
retailers to advertise on a regional basis and positions the Company to benefit
from this trend.
Management intends to continue to develop new advertising revenue sources
such as regional and national display advertising, co-op advertising, national
classified advertising and other targeted advertising. The Company believes its
existing sales, editorial and distribution resources provide it with significant
cost advantages in developing new shoppers, other "total market coverage" and
targeted publications in these markets.
Circulation. Circulation revenues in the Community Newspaper Group are
derived from home delivery sales of newspapers to subscribers and single copy
sales made through retailers and vending racks. Approximately 78% of 1995
circulation revenue was derived from subscription sales. When possible, the
Company increases subscription and single copy sales rates in an effort to
increase circulation revenues. Single copy sales rates currently range from 35c
to 50c per copy.
Job Printing. Job printing revenues are derived from utilizing available
press capacity for printing customers' orders for newspapers, fliers, retail
store advertisements and real estate listings. The Company currently has a
substantial number of printing customers and believes that its growth potential
exists mainly in low volume (less than 100,000 copies) offset printing.
Competition. Each of the Company's United States community newspapers and
total market coverage publications competes in varying degrees with radio,
television, direct marketing and other communications and advertising media as
well as with other newspapers having local, regional or national circulation.
The Company also competes with other commercial printers for job printing
orders.
The Company's United States community publications are located in small
towns which, for the most part, are not suburbs of larger cities but are either
county seats or are located on significant transportation corridors. The
Company's community dailies are typically the only paid daily newspapers of
general circulation published in their respective communities. The Company
believes that distribution of its total market coverage publications with nearly
100% penetration levels in conjunction with community daily or non-daily
newspapers strengthens its competitive position in the relevant market areas.
Some of the Company's dailies face competition from dailies published by others
in adjacent or nearby locations and circulated in markets where the Company
publishes a newspaper.
The Company's total market coverage publications, including shoppers,
compete primarily with direct mail advertising, shared mail packages and other
private advertising delivery services. The Company believes that because of its
significant presence in the small towns served by its community publications,
which are predominantly in rural areas, not close to metropolitan areas, and its
established distribution network, it has been able to compete effectively.
Employees and Labor Relations. As of December 31, 1995, the Company
employed approximately 4,800 employees at its community publications (including
approximately 1,500 part-time employees). Approximately 2% of these employees
are represented by unions. Employee costs (including salaries, wages, fringe
benefits, employment-related taxes and other direct employee costs) equalled
approximately 35% of the Community Newspaper Group's revenues in fiscal year
1995. There have been no strikes or general work stoppages at any of the
Company's community newspapers in the past five years. The Company believes that
its relationships with its employees are generally good.
Raw Materials. The basic raw material for newspapers is newsprint.
Newsprint costs equalled approximately 13% of the revenues for the United States
Community Newspaper Group in 1995. In common with other newspapers, the cost of
newsprint increased significantly since the latter part of 1994 and continued to
increase throughout 1995. Newsprint prices have moderated since early 1996. The
average cost per metric ton of newsprint was substantially higher in the first
quarter of 1996 than in the first quarter of 1995. Major
64
<PAGE> 66
newsprint producers recently rescinded their previous planned price increase and
have reduced prices. The Community Newspaper Group is not dependent upon any
single newsprint supplier and does not have long-term fixed price contracts with
newsprint suppliers for its community publications. It currently obtains
newsprint from a number of suppliers, foreign and domestic. The Company believes
that its newsprint sources of supply are adequate for its anticipated needs.
JERUSALEM POST. At the time of acquisition by Hollinger Inc. in 1989,
Jerusalem Post was suffering operating losses. Since then, a turnaround strategy
has been implemented by senior officers of the Company and Jerusalem Post to
reduce operating and labor costs and upgrade printing capability and the
physical plant. In the years ended December 31, 1993, 1994 and 1995 and for the
three months ended March 31, 1996, Jerusalem Post had operating margins of 7.2%,
9.1%, 6.3% and (7.4)%, respectively.
Over 41% of Jerusalem Post's revenues of $21.9 million in 1995 were derived
from circulation, with 32% from job printing and 24% from advertising. Jerusalem
Post derives a greater percentage of its revenues from job printing than the
Company's United States newspapers. Jerusalem Post has entered into a long-term
contract to print and bind copies of the "Golden Pages," Israel's equivalent of
the "Yellow Pages" telephone directory. Newsprint costs relating to publication
of The Jerusalem Post equalled approximately 12% of Jerusalem Post's revenues in
1995. Newsprint used in producing the "Golden Pages" is furnished by the owners
of that publication.
Newspapers in Israel are required by law to obtain a license from the
country's interior minister, who is authorized to restrain publication of
certain information if, among other things, it may endanger the public safety.
To date, Jerusalem Post has not experienced any difficulties in maintaining its
license to publish or been subject to any efforts to restrain publication. In
addition, all written media publications in Israel are reviewed by Israel's
military censor prior to publication in order to prevent the publication of
information that could threaten national security. Such censorship is considered
part of the ordinary course of business in the Israeli media and has not
adversely affected Jerusalem Post's business in any significant way.
MANAGEMENT ORGANIZATION
The senior management of the United States Newspaper Group is responsible
for developing operating strategies, approving business plans and significant
capital expenditures, identifying acquisition opportunities, negotiating
acquisitions and overseeing the integration of acquired newspapers and other
newspapers into the Company. Financial management of the Company, including the
arrangement of newspaper financing to fund acquisitions and working capital
needs of the Company, and accounting, payroll and other financial functions and
newsprint purchases, are centralized and undertaken by corporate staff at the
Company's principal executive offices. Each of the principal newspaper
operations of the United States Newspaper Group--the Community Newspaper Group,
Jerusalem Post and the Chicago Group--has a separate management structure and
team which is responsible for operational and editorial matters affecting the
publications under their supervision.
UNITED STATES REGULATION
Paid circulation newspapers that are delivered by second class mail are
required to obtain permits from, and to file an annual statement of ownership
and circulation with, the United States Postal Service. Free circulation
publications such as shoppers are delivered to subscribers and nonsubscribers
both by mail and without the use of the mails. Second class mail costs for the
Company's community newspapers were $3.5 million in 1995, or 1.6% of the
Community Newspapers Group's revenues, and third class mail costs were $5.1
million in 1995, or 2.3% of that group's revenues. The Company is developing a
program to reduce over time its reliance on the use of third class mail for its
free circulation publications through private delivery services. There is no
significant regulation with respect to acquisitions of newspapers, other than
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 if
certain threshold requirements under such act are satisfied.
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<PAGE> 67
ENVIRONMENTAL
The Company, in common with other newspaper companies engaged in similar
operations, is subject to a wide range of federal, state and local environmental
laws and regulations pertaining to air and water quality, storage tanks and the
management and disposal of wastes at its major printing facilities. These
requirements are becoming increasingly more stringent. The Company believes that
compliance with these laws and regulations will not have a material adverse
effect on the Company.
INTERNATIONAL NEWSPAPER OPERATIONS
The Company's international newspaper operations consist of The Telegraph
and its investments in Fairfax, Southam and its joint venture printing
companies.
THE TELEGRAPH
The Telegraph is the leading publisher of quality (or broadsheet)
newspapers in the United Kingdom, publishing The Daily Telegraph, The Sunday
Telegraph, The Weekly Telegraph, the Electronic Telegraph and The Spectator
magazine. Its most important property, The Daily Telegraph, was launched in 1855
and is the largest circulation quality daily newspaper in the United Kingdom.
The Daily Telegraph's average daily circulation of approximately 1,044,000
represents a 38.5% share of the quality daily national newspaper market, a
substantially greater share than that of its nearest direct competitor. The
Daily Telegraph's Saturday edition has the highest circulation (1,196,000) among
quality daily newspapers in the United Kingdom. The Sunday Telegraph is the
second largest circulation quality Sunday newspaper in the United Kingdom with a
Sunday circulation of approximately 663,000.
The Telegraph also owns an approximate 24.7% interest in Fairfax, one of
the major newspaper and magazine publishing groups in Australia, a 9.7% interest
in Southam (which, together with the 9.7% interest held by the Company through
FDTH, provides the Company with a 19.5% voting interest), the largest newspaper
publishing group in Canada, and 50% interests in each of two newspaper printing
joint ventures in England. Hollinger Inc. also owns indirectly an approximate
21.5% interest in Southam. See "International Investments" below. Management of
The Telegraph believes that The Telegraph and the Company are able to exert
significant influence over the financial and operating policy decisions of these
affiliated companies.
THE UNITED KINGDOM NATIONAL NEWSPAPER INDUSTRY. The national newspaper
market in the United Kingdom is segmented and, within each segment, is highly
competitive. The market segment in which The Daily Telegraph competes is
generally known as the quality (or broadsheet) daily newspaper segment. This
segment consists of all the broadsheets but none of the tabloid daily
newspapers. The Daily Telegraph and its competitors in this market segment
appeal to the middle and upper end of the demographic scale and also compete on
the basis of price.
Newspapers in the United Kingdom differ from their counterparts in North
America in several respects. First, they have substantially fewer pages. In
1995, The Daily Telegraph averaged 56 pages per issue, printed in one section on
Wednesdays and Fridays, two sections on Mondays, Tuesdays and Thursdays, and six
sections plus a magazine and television guide on Saturdays. Second, pre-printed
advertising inserts, which have been a major source of revenue growth in North
America, are less common in the United Kingdom. Third, the advertising to news
ratio in British newspapers is far lower. Fourth, British national newspapers
more closely resemble North American magazines in that they have broad
distribution and readership across the country and derive a much larger portion
of their advertising revenue from national advertisers. Finally, newspapers in
the United Kingdom generally have charged higher cover prices which in turn
leads to higher circulation revenues than North American newspapers with similar
circulation bases. However, since September 1993, when The Times first
substantially reduced its cover price on its weekday newspaper, the national
newspaper market in the United Kingdom has experienced intense cover price
competition. Since July 1995, The Daily Telegraph and The Times have increased
their respective cover prices. However, in June 1996, The Times began a summer
sports promotion and reduced its cover price to 10p on Mondays only. See
"Circulation" below.
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<PAGE> 68
The following chart illustrates the circulation trends of The Daily
Telegraph and its principal competitors in the United Kingdom for the three
years ended December 31, 1995 and the six month periods from October through
March 1995 and 1996:
CIRCULATION: MARKET SHARE AND AVERAGE DAILY SALES(1)(2)
<TABLE>
<CAPTION>
SIX MONTH PERIOD
YEAR ENDED DECEMBER 31, OCTOBER TO MARCH
----------------------------------------------------- ----------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
MARKET DAILY MARKET DAILY MARKET DAILY MARKET DAILY MARKET DAILY
SHARE SALES SHARE SALES SHARE SALES SHARE SALES SHARE SALES
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(AVERAGE SALES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Daily
Telegraph.......... 42% 1,021 41% 1,040 39% 1,060 40% 1,065 39% 1,044
The Times............ 16 390 21 542 24 658 23 619 25 672
The Guardian......... 17 407 16 401 15 397 15 403 15 402
The Independent...... 14 335 11 281 11 295 11 287 10 288
Financial Times...... 11 289 11 292 11 294 11 293 11 305
--- ----- --- ----- --- ----- --- ----- --- -----
100% 2,442 100% 2,556 100% 2,704 100% 2,667 100% 2,711
=== ===== === ===== === ===== === ===== === =====
</TABLE>
- ------------------
(1) Circulation is defined as average sales of a newspaper per issue, net of
returns.
(2) Derived from the twelve-month average circulation and market share index
information published by Audit Bureau of Circulations Limited.
The following chart illustrates the circulation trends of The Sunday
Telegraph and its principal competitors in the United Kingdom for the three
years ended December 31, 1994 and the six month periods from October through
March 1995 and 1996:
CIRCULATION: MARKET SHARE AND AVERAGE DAILY SALES(1)(2)
<TABLE>
<CAPTION>
SIX MONTH PERIOD
YEAR ENDED DECEMBER 31, OCTOBER TO MARCH
----------------------------------------------------- ----------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
MARKET SUNDAY MARKET SUNDAY MARKET SUNDAY MARKET SUNDAY MARKET SUNDAY
SHARE SALES SHARE SALES SHARE SALES SHARE SALES SHARE SALES
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(AVERAGE SALES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Sunday Times..... 46% 1,228 46% 1,237 46% 1,253 47% 1,289 47% 1,286
The Sunday
Telegraph.......... 22 591 24 650 25 683 24 673 24 663
Observer............. 19 502 18 493 17 463 18 487 17 465
The Independent on
Sunday............. 13 374 12 323 12 327 11 315 12 317
--- ----- --- ----- --- ----- --- ----- --- -----
100% 2,695 100% 2,703 100% 2,726 100% 2,764 100% 2,731
=== ===== === ===== === ===== === ===== === =====
</TABLE>
- ------------------
(1) Circulation is defined as average sales of a newspaper per issue, net of
returns.
(2) Derived from the twelve-month average circulation and market share index
information published by Audit Bureau of Circulations Limited.
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<PAGE> 69
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and their percentage of total revenues for The Telegraph (including its
subsidiaries) during the past three years and for the three months ended March
31, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)(2) THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
(IN THOUSANDS OF BRITISH POUNDS STERLING)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising............. L133,347 52 % L150,930 60 % L162,720 64 % 41,870 68 % 44,082 61 %
Circulation............. 116,732 46 93,618 37 83,666 33 17,597 29 26,959 37
Other................... 5,622 2 7,527 3 8,440 3 1,812 3 1,810 2
-------- --- -------- --- -------- --- -------- --- -------- ---
Total............... L255,701 100 % L252,076 100 % L254,826 100 % 61,279 100 % 72,851 100 %
======== === ======== === ======== === ======== === ======== ===
</TABLE>
- ------------------
(1) Does not include revenues from Fairfax, Southam or joint venture printing
companies.
(2) All financial data have been prepared in accordance with U.K. GAAP.
ADVERTISING. Advertising is the largest source of revenue at The Telegraph,
representing approximately 64% of newspaper revenue in 1995. Between 1990 and
1994 the combined share of display advertising volume of The Daily Telegraph and
The Sunday Telegraph in the quality newspaper sector has held constant at a
level of 22%. Similarly, classified advertising's share has also held at a
constant 22%. Management believes that because The Daily Telegraph is able to
charge advertisers a premium rate over that of its competitors in the quality
daily sector by virtue of the size of its readership, The Telegraph is able to
achieve a higher market share in terms of revenue.
The rates charged by The Telegraph for display and classified
advertisements are determined in part by the total number of people in the
various demographic groupings who read each publication. Readership is measured
by a continuous independent survey conducted for National Readership Surveys
Limited ("NRS"). NRS estimates of readership are based upon the number of people
responding to the NRS survey who report having read or looked at one or more
issues of a given newspaper or magazine during a particular period.
According to NRS, The Daily Telegraph's readers are primarily in the top
three of the six socio-economic groupings designated by NRS as A, B and C1
(collectively, "ABC1"). The Daily Telegraph has a readership of over 2.1 million
ABC1 adults, more than any other broadsheet daily newspaper, and 682,000 more
than its nearest competitor for the six month period ended March 1996.
Management believes The Daily Telegraph readership position is highly
advantageous in attracting advertisers, thereby permitting it to charge higher
advertising rates per page than its direct competitors.
The Daily Telegraph's display advertising strengths are in the financial,
automobile and travel sections. Display advertising revenue grew to L59 million
in 1995 from L57 million in 1994. Financial advertising markets declined in 1995
and, although The Daily Telegraph is holding its market leadership position in
terms of volume, advertising revenues in this segment declined to L13 million in
1995, compared with L16 million in 1994.
The level of classified advertisements, especially from recruitment
advertisements, fluctuates with the economy. The Daily Telegraph's revenue from
this source increased to L46 million in 1995 compared with L38 million in 1994.
The Telegraph's strategy with respect to classified advertising is to improve
volume and yield in four sectors: recruitment, property, travel and automobiles.
Recruitment advertising is the largest classified advertising category,
representing over two-thirds of all classified advertising in terms of revenue.
In common with other national newspapers in the United Kingdom, The
Telegraph's newspapers compete for advertising revenue with other forms of
media, particularly television, magazine, direct mail, posters and radio. In
addition, total gross advertising expenditures, including financial, display and
recruitment classified advertising, are affected by economic conditions in the
United Kingdom.
CIRCULATION. The target audience of The Telegraph's newspapers is generally
conservative, middle and upper income readers, with an increased emphasis on
gaining new younger readers. The editorial strengths of The Telegraph's
newspapers are national and international news, financial news and features and
comprehensive sports coverage.
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<PAGE> 70
Net circulation revenue for The Daily Telegraph and The Sunday Telegraph
for the three years ended December 31, 1995 and the six months ended March 31,
1995 and 1996 is set forth below:
NET NEWSPAPER CIRCULATION REVENUE(1)(2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)(2) THREE MONTHS ENDED MARCH 31,
---------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF BRITISH POUNDS STERLING)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Daily Telegraph............. L100.3 88 % L78.5 87 % L68.9 86 % L14.1 84 % L22.6 87 %
The Sunday Telegraph............ 13.2 12 11.5 13 10.8 14 2.6 16 3.3 13
------ --- ------ --- ------ --- ------ --- ------ ---
Total....................... L113.5 100 % L90.0 100 % L79.7 100 % L16.7 100 % L25.9 100 %
Proportion of The Telegraph's
newspaper revenue............. 46 % 37 % 33 % 29 % 37 %
</TABLE>
- ------------------
(1) Net newspaper circulation revenue is shown as a proportion of The
Telegraph's newspaper revenue, not total revenue.
(2) All financial data have been prepared in accordance with U.K. GAAP.
Between 1986 and 1993, The Telegraph's strategy was to enhance circulation
revenue by increasing cover prices annually, at least in line with inflation,
and generally before its competitors. Since Hollinger Inc. acquired control of
The Telegraph in 1986, the cover price of The Daily Telegraph was increased from
25p to 48p for the weekday edition and to 70p for the Saturday edition. At the
same time, the cover price of The Sunday Telegraph was increased from 40p to
70p. Aggregate newspaper circulation revenue for all of The Telegraph's
publications increased during that period by 53% from L74 million in 1988 to
L113.5 million in 1993, an important factor contributing to the relative
stability of The Telegraph's operating revenue during that period.
In September 1993, The Times, the principal competitor of The Daily
Telegraph, reduced the cover price of its weekday edition from 45p to 30p and
its Saturday edition from 50p to 40p. The Telegraph did not respond initially
but rather pursued a strategy of increasing its promotional activities, which
proved successful in maintaining The Telegraph's circulation levels. However,
the strategy failed to stem the growth in circulation of The Times. In order to
protect The Daily Telegraph's market leadership and to secure its premium
advertising position in the longer term, management of The Telegraph decided in
June 1994 to reduce the cover price on its weekday edition from 48p to 30p. The
Times responded by a further reduction in the cover price of its weekday edition
from 30p to 20p and its Saturday edition to 30p.
In addition, The Telegraph launched a joint promotion involving the
Saturday edition of The Daily Telegraph and The Sunday Telegraph, whereby
readers could use a voucher to purchase both weekend titles for L1.00 (later
reduced to 80p) compared to a combined cover price of L1.40. The strategy was to
use its circulation dominance on Saturday to increase circulation of The Sunday
Telegraph and place pressure on its competitors' weekend titles.
For the period April to September 1995, circulation of The Daily Telegraph
was approximately 1,065,000 and circulation of The Sunday Telegraph was
approximately 697,000. The Daily Telegraph has maintained profitability although
at a reduced level and, despite selling at a premium to The Times, has retained
its position as the leading quality daily newspaper in the United Kingdom.
On July 3, 1995, The Times increased the cover price on its weekday edition
by 5p to 25p and The Telegraph immediately responded by increasing the cover
price on its weekday edition 5p to 35p. The value of the discount voucher for
The Sunday Telegraph was reduced from 60p to 40p. The Telegraph ended this
voucher promotion in September 1995.
On November 20, 1995, The Times increased the cover price on its weekday
and Saturday editions by 5p to 30p per copy on weekdays and 40p on Saturdays.
The Telegraph responded by increasing the cover price of the weekday edition of
The Daily Telegraph by 5p to 40p per copy. The price of the Saturday issue of
The Daily Telegraph remained at 70p. Management believes that maintaining the
weekday cover price difference of 10p per copy above that of The Times has not
led to any significant erosion of its circulation levels. The
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<PAGE> 71
Daily Telegraph retains its position as market leader in the quality daily
market despite selling at a premium cover price over The Times. The future cover
price policy for The Daily Telegraph will be reviewed from time to time in light
of constantly changing market conditions. The pricing policy for The Sunday
Telegraph, currently selling at 70p, 30p less than the market leader, is likely
to be reviewed in the near future. On June 3, 1996, The Times reduced its cover
price to 10p on Mondays only, as part of its "summer sport promotion." To
promote its "summer of sport," The Daily Telegraph launched a 12-week voucher
promotion beginning Saturday, June 8 enabling readers to redeem vouchers to
purchase The Daily Telegraph on Mondays for 10p.
OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Telegraph is involved in
several other publications and business enterprises, including The Spectator,
The Weekly Telegraph, the Electronic Telegraph and Readers' Offers.
EMPLOYEES AND LABOR RELATIONS. During 1995 The Telegraph and its
subsidiaries employed an average of 1,059 persons and the two joint venture
printing companies employed an additional 872 persons in total. Collective
agreements between The Telegraph and the trade unions representing certain
portions of The Telegraph's workforce expired on June 30, 1990 and have not been
renewed or replaced. The absence of such collective agreements has had no
adverse effect on The Telegraph's operations and, in management's view, is
unlikely to do so in the foreseeable future.
The Telegraph's joint venture printing companies, West Ferry Printers and
Trafford Park Printers, each have "in-house" collective agreements with the
unions representing their employees and certain provisions of these collective
agreements are incorporated into the employees' individual employment contracts.
In contrast to the union agreements that prevailed on Fleet Street, these
collective agreements provide that there shall be flexibility in the duties
carried out by union members and that staffing levels and the deployment of
staff are the sole responsibility of management. Binding arbitration and joint
labor-management standing committees are key features of each of the collective
agreements. These collective agreements may be terminated by either party by six
months' prior written notice.
There have been no strikes or general work stoppages involving employees of
The Telegraph or the joint venture printing companies in the past five years.
Management of The Telegraph believes that its relationships with its employees
and the relationships of the joint venture printing companies with their
employees are good.
RAW MATERIALS. Newsprint currently represents the single largest raw
material expense of The Telegraph's newspapers and, together with employee
costs, is one of the most significant operating costs. Up to 134,000 metric tons
are consumed annually and in 1995 the total cost was approximately L55.1
million, or 22% of its newspaper revenues. The overall increase in demand for
newsprint has been caused in part by greater pagination resulting from a rise in
advertising and competitive pressure among the national newspaper publishers in
the United Kingdom. Newsprint requirements have also grown in other parts of the
world with the result that prices have risen dramatically.
Newsprint is ordinarily purchased by The Telegraph from eight to ten
manufacturers and delivered to The Telegraph's joint venture printing companies,
West Ferry Printers and Trafford Park Printers, from mills in Canada, Sweden,
Finland and the United Kingdom. The Telegraph generally enters into fixed term
contracts with its main suppliers for periods of 12 months or longer. The joint
venture printing plants normally hold sufficient newsprint for a full week's
production. In addition, a further four to five weeks' requirements are
generally available to each of the printing plants from the suppliers' stock
held in the United Kingdom.
The ten newsprint supply agreements that The Telegraph entered into for
1995 provided for delivery by individual suppliers of between 5,000 and 36,000
metric tons each. The price terms of a majority of these supply contracts were
fixed through the first six months of 1995 and were on average almost 15% higher
than 1994. Newsprint manufacturers imposed a further price increase effective
July 1, 1995 of approximately 30%. These two increases in price during 1995
added approximately L12 million to The Telegraph's newsprint cost in 1995 as
compared to 1994. While newsprint prices in the first half of 1996 are higher
compared to the first half of 1995, they are expected to decline in the second
half of 1996.
PRINTING. All copies of The Daily Telegraph and The Sunday Telegraph are
printed by The Telegraph's two 50% owned joint venture printing companies, West
Ferry Printers and Trafford Park Printers, both of
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<PAGE> 72
which commenced production in 1986. The Telegraph has a very close involvement
in the management of the joint venture companies and regards them as being
important to The Telegraph's day-to-day operations. The Saturday magazine
section of the Saturday edition of The Daily Telegraph is printed under contract
by an external magazine printer. West Ferry Printers has sixteen presses, six of
which are configured for The Telegraph's newspapers and the remainder for the
newspapers published by The Telegraph's joint venture partner, a subsidiary of
United News & Media plc. Trafford Park Printers has four presses, two of which
are used primarily for The Telegraph's newspapers.
The managements of both joint venture printing companies continually seek
to improve production performance. Major capital expenditures require the
approval of the boards of directors of the joint venture partners. The presses
used to print The Telegraph's newspapers were upgraded in 1992 by the addition
of two further color satellites for each press, enabling color to be printed on
up to 12 pages of a 48 page newspaper on each print run. More recently, a
further capital expenditure of around L1 million has been incurred in the
addition of "balloon formers" to the presses. These permit The Telegraph's
weekend newspapers to be printed in multiple sections.
There is high utilization of the plant at Trafford Park Printers, with
little spare capacity. Revenue earned by the joint venture company from contract
printing for third parties has a marginal effect on The Telegraph's printing
costs and is mainly reflected in its equity earnings.
West Ferry Printers also undertakes some contract printing for third
parties, which results in increased profitability, but its presses are not fully
utilized during the day. The management of West Ferry Printers is actively
seeking further contract printing business to absorb the spare capacity
available. In April 1995 West Ferry Printers entered into a 13-year printing
contract with Pearson plc, the media group that owns the Financial Times, to
print the Financial Times' southern editions (160,000 copies) Monday to Saturday
which commenced beginning April 1996. Pearson plc is closing its London printing
plant that prints the Financial Times and one of this plant's two Rockwell Goss
Headliner web-offset presses has been dismantled and sold along with ancillary
equipment to West Ferry Printers for L6 million in cash and L3 million in
redeemable preference shares of West Ferry Printers which are supported by
guarantees of the joint venture partners. There are also various third party
printing contracts, which could contribute up to a further L750,000 per annum,
which may be transferred to West Ferry Printers along with the main contract.
Decisions on the use of spare capacity take account of the production demands of
The Telegraph's newspapers and those of its joint venture partner.
Following a decision by the Guardian Media Group to cease printing at its
London site, an agreement has been reached to print the southern editions of
their newspapers at West Ferry Printers. The printing contract will commence on
July 8, 1996 and will involve extensive modifications to existing presses and
some new equipment over the next 18 months, with the eventual allocation of two
presses to the Guardian. The introduction of this major printing contract is
expected to increase substantially the utilization of West Ferry's printing
capacity.
DISTRIBUTION. Since 1988, The Telegraph's newspapers have been distributed
to wholesalers by truck under a contract with a subsidiary of TNT Express (UK)
Limited, resulting in lower distribution costs compared with distribution by
rail. Under the distribution arrangements, some vehicles are dedicated solely to
The Telegraph while others are shared with other newspaper publishers.
Management believes there are opportunities to reduce The Telegraph's
distribution costs still further through better utilization of vehicles and
routes. The Telegraph's arrangements with wholesalers contain performance
monitoring provisions related to minimum standards as to sufficiency of copies
for sale while controlling the number of unsold copies for return.
Wholesalers distribute newspapers to retail news outlets. The number of
retail news outlets throughout the United Kingdom has increased as a result of a
1994 ruling by the British Department of Trade and Industry that prohibits
wholesalers from limiting the number of outlets in a particular area. More
outlets do not necessarily mean more sales and The Telegraph's circulation
department has continued to develop its control of wastage while taking steps to
ensure that copies remain in those outlets with high single copy sales.
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<PAGE> 73
In addition to single copy sales, many retail news outlets offer home delivery
services. In 1995 home deliveries accounted for 48% of sales of The Daily
Telegraph and 41% of sales of The Sunday Telegraph.
Historically, wholesalers and retailers have been paid commissions based on
a percentage of the cover price. Prior to June 1994 when competitive pressures
caused The Telegraph to reduce its cover price, wholesaler and retailer
commissions amounted to approximately 34% of the then cover price.
Notwithstanding the reduction of the cover price, the commissions paid were not
reduced. In line with other national newspapers, The Telegraph has recently
moved away from a commission paid on a percentage of cover price to a fixed
price in pence per copy and has reduced the amount paid to wholesalers and
retailers in terms of pence per copy.
Following an announcement by the owner of The Times that, together with the
increase in the cover price of The Times, it was reducing its recommended retail
margin for the weekday edition to 10p per copy, the Telegraph announced on
November 17, 1995 that the recommended retail margin for Monday to Friday issues
of The Daily Telegraph was reduced to 10p per copy from 11.9p per copy.
MANAGEMENT. The Telegraph's management consists of six executive directors:
Conrad M. Black, Executive Chairman; Daniel W. Colson, Deputy-Chairman and Chief
Executive; The Hon. Jeremey Deedes, Managing Director; Christopher J. Haslum,
Deputy Managing Director and Circulation Director; Leonard M. Sanderson,
Advertisement Sales Director; and Anthony R. Hughes, Finance Director, as well
as 16 non-executive directors, including F. David Radler. Mr. Black is Chairman
and Chief Executive Officer of the Company and Hollinger Inc., a Director and
Deputy Chairman of the Executive Committee of Fairfax and Co-Chairman and a
Director of Southam. Mr. Colson is a Director of the Company and Hollinger Inc.,
and a Director and Deputy Chairman of Fairfax. Mr. Radler is President, Chief
Operating Officer and a Director of the Company and Hollinger Inc. and a
Director of Southam.
REGULATORY AND ENVIRONMENTAL MATTERS. United Kingdom companies are subject
to various competition laws, including the Restrictive Trade Practices Act
1956-1976 (the "RTPA"), which requires the registration of certain restrictive
or information-sharing agreements with the Office of Fair Trading and, under
certain circumstances, prohibits such agreements. In common with other major
newspaper publishers. The Telegraph has given undertakings in proceedings under
the RTPA to the Restrictive Practices Court in respect of, among other things,
both daily and Sunday papers. These undertakings include a general undertaking
not to enter into any kind of agreement registrable under the RTPA of which
particulars are not furnished to the Office of Fair Trading within the
prescribed period. The Telegraph has also given a number of specific
undertakings (concerning pricing, wholesaler discounts and other conditions upon
which newspapers may be supplied) which prohibit the entering of agreements
containing the restrictions specified in the undertakings or any agreements to
the like effect. A breach of any of the undertakings may result in The Telegraph
(and potentially any individuals involved) being held in contempt of court. The
Telegraph has instituted procedures designed to ensure that all personnel in
relevant managerial positions are required to acknowledge quarterly that they
have been reminded of the requirements of the RTPA, the meaning and scope of the
undertakings given, the necessity of obtaining legal advice in cases of doubt
and the consequences and seriousness of any breach. A code of conduct which
contains this information has been circulated among relevant personnel.
Special provisions of the Fair Trading Act 1973 apply to certain newspaper
mergers (in addition to the general merger control system). In particular, where
a proprietor of newspapers circulating in the United Kingdom acquires a
controlling interest in a newspaper or newspaper assets such that total sales of
all the newspapers concerned are 500,000 or more copies per day of publication,
such transfer is unlawful and void unless made with the written consent of the
Secretary of State for Trade and Industry. That consent can, with limited
exceptions, be given only after a Monopolies and Mergers Commission
investigation.
The Telegraph and its joint venture printing companies, West Ferry Printers
and Trafford Park Printers, in common with other newspaper publishers and
printers, are subject to a wide range of environmental laws and regulations
promulgated by United Kingdom and European authorities. These laws are becoming
increasingly more stringent. Management of The Telegraph believes that
compliance with these laws and regulations will not have a material adverse
effect on The Telegraph.
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<PAGE> 74
PRICE RANGE OF ORDINARY SHARES AND DIVIDENDS. The ordinary shares of The
Telegraph are listed on the London Stock Exchange. The twelve month high and low
closing prices for the ordinary shares of The Telegraph as of July 16, 1996 were
L5.67 ($8.83) and L3.93 ($6.10) per share, respectively, with a closing price as
of July 16, 1996 of L5.67 ($8.83) per share. A final dividend of 7.5p per
ordinary share was announced on March 25, 1996 and was declared payable on May
9, 1996 to holders of record on April 12, 1996. As part of the Scheme a special
dividend of 10p will be paid to the holders of Telegraph Minority Shares. The
subsidiaries of the Company, FDTH and TelHoldco Inc., have waived their rights
to receive the special dividend. The declaration and payment by The Telegraph of
future dividends on its ordinary shares and the amount thereof will depend upon
The Telegraph's results of operations, financial condition, cash requirements,
restrictions imposed by its lenders, future prospects and other factors deemed
relevant by the Board of Directors of The Telegraph.
INTERNATIONAL INVESTMENTS
FAIRFAX. The Telegraph is the single largest shareholder of Fairfax and now
owns an approximate 25% interest in Fairfax. The Telegraph's ownership of
Fairfax is limited at present by the Australian Foreign Acquisitions and
Takeovers Act of 1975 to 25% of issued capital. See "Regulatory Matters" below.
The Telegraph's investment in Fairfax is accounted for by the equity
method. Based on the market price of Fairfax's shares of A$2.80 per share at
December 31, 1995, The Telegraph's interest in Fairfax has a current market
value of approximately A$549.8 million. The acquisition cost of The Telegraph's
current interest is approximately A$277.0 million. The Company is also
considering the alternative of issuing a security designed to monetize its
investment in Fairfax (valued at approximately $392.2 million, or A$2.52 per
ordinary share, as of July 16, 1996), while retaining the option of maintaining
or increasing its indirect holdings in Fairfax.
Business of Fairfax. Fairfax is one of Australia's largest newspaper
publishing companies. Fairfax's main publications are the leading quality
newspapers in Australia's two largest cities, The Sydney Morning Herald
(circulation approximately 253,000) and The Age (Melbourne -- circulation
approximately 215,000) and Australia's only weekday business newspaper, The
Australian Financial Review (national -- circulation approximately 82,000).
Fairfax also publishes a number of national and local newspapers and magazines,
regional and community newspapers, and specialized investment and finance
magazines.
Fairfax derives the majority of its revenue from advertising, which
accounted for approximately 73% of Fairfax's consolidated revenue in fiscal 1994
(ending June 30) and 74% for fiscal 1995. Both The Sydney Morning Herald and The
Age are market leaders in their respective classified advertising markets,
achieving a fiscal 1995 market share by volume of 79% and 75% of the Sydney and
Melbourne metropolitan daily newspaper classified advertising markets,
respectively. The Sydney Morning Herald, The Age and The Australian Financial
Review all maintain a high percentage readership of the upper income, well
educated socioeconomic market typically targeted by advertisers. This readership
profile is an integral part of Fairfax's strategy in maintaining its share of
classified and display advertising volumes in their respective markets.
Since 1993, Fairfax has undertaken an A$500 million capital improvement
program. This program has included a new A$315 million printing facility at
Chullora, N.S.W. which was operational in early 1996, a recently completed
editorial and communications center at Darling Park in Sydney, and A$50 million
dedicated to re-equipping systems and upgrading presses at the Melbourne
facility.
Fairfax is also evaluating a wide range of opportunities in the emerging
electronic multimedia industries in Australia and elsewhere. Current projects
include providing archival copies of its publications through CD-ROM or on-line
computer networks, and a joint venture with the Australian Stock Exchange to
provide a live share price and market information service.
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<PAGE> 75
The following table sets forth the trading revenue mix for Fairfax for the
three fiscal years ended June 30, 1995 and the nine months ended March 31, 1995
and 1996:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS ENDED MARCH 31,
------------------------------------------------------- -----------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS OF AUSTRALIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Newspapers......... A$652,983 85% A$716,265 85% A$798,041 84% A$593,846 85% A$603,969 80%
Magazines.......... 72,617 9 76,661 9 80,534 9 56,807 8 66,612 9
Other.............. 41,086 6 48,857 6 65,939 7 49,280 7 79,821 11
--------- --- --------- --- --------- --- --------- --- --------- ---
Total.............. A$766,686 100% A$841,783 100% A$944,514 100% A$699,933 100% A$750,402 100%
========= === ========= === ========= === ========= === ========= ===
</TABLE>
Regulatory Matters. The Telegraph's ownership of Fairfax is limited to 25%
of issued capital by applicable Australian law, in particular the Foreign
Acquisitions and Takeovers Act 1975 ("FATA"). Foreign and cross-media ownership
restrictions are contained in FATA and the Broadcasting Act 1942 and foreign
owners, such as The Telegraph, are also subject to regulation by the Foreign
Investment Review Board. The two other principal shareholders of Fairfax are
subject to FATA or the Broadcasting Act 1942 and are subject to Australian
statutory or regulatory limitations on ownership.
In addition, the Australian Corporations Law limits the ability of persons
such as The Telegraph who hold in excess of 20% of the voting shares in an
Australian company from acquiring additional shares in that company without
making a general offer to all of its other shareholders. An exception to this
requirement exists if the person limits its acquisition of additional voting
securities to no more than 3% in any six month period.
The Australian government has proposed the formation of a governmental
committee to review media ownership rules, which is expected to make its
recommendations in early 1997. Management has stated that the outcome of the
Australian government review will be taken into account in determining The
Telegraph's strategy in relation to its investment in Fairfax. Depending upon
the outcome of the Australian government review of its foreign investment
policies and other relevant factors, the Company intends either to (i) increase
its investment in Fairfax possibly to a majority position or (ii) sell or
otherwise dispose of its interest in Fairfax, which should result in a
substantial capital gain and (depending upon the structure of any such
transaction) use all or a portion of the proceeds to reduce the Company's long
term debt.
Price Range of Ordinary Shares and Dividends. The ordinary shares of
Fairfax are listed on the Australian Stock Exchange Limited. The twelve month
high and low closing prices for the ordinary shares of Fairfax as of July 16,
1996 were A$3.05 ($2.28) and A$2.52 ($2.00), respectively, with a closing price
as of July 16, 1996 of A$2.52 ($2.00) per share. A cash dividend of A$0.060 per
ordinary share was declared in the third quarter ended March 31, 1996. The
payment and the amount of future dividends will be determined by the Board of
Directors of Fairfax based on considerations such as earnings from operations,
capital requirements and Fairfax's financial condition and other relevant
factors.
Relationship with The Telegraph. In view of its ownership position and
close involvement with the management of Fairfax, management of The Telegraph
believes that The Telegraph is able to exert significant influence over the
financial and operating policy decisions of Fairfax. While The Telegraph has no
contractual entitlement to board representation, it is closely involved in the
management of Fairfax and has offered to provide from time to time such industry
and technical expertise as may be helpful to Fairfax's existing management team.
Two members of the Board of Directors of Fairfax are also Directors of The
Telegraph and of the Company. Mr. Conrad M. Black, Chairman of the Board and
Chief Executive Officer of Hollinger Inc. and the Company, Chairman and Director
of The Telegraph and Co-Chairman and a Director of Southam, is a Director and
Deputy Chairman of the Executive Committee of Fairfax and Mr. Colson, Deputy
Chairman and Chief Executive of The Telegraph and a Director of Hollinger Inc.
and the Company, is a Director and Deputy Chairman of Fairfax.
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<PAGE> 76
SOUTHAM. The Company, through The Telegraph and FDTH, has an approximate
19.5% interest in Southam, which is accounted for on the equity method. In late
May 1996 Hollinger Inc. acquired a 21.5% interest in Southam, which together
with the 19.5% interest indirectly owned by the Company, provide Hollinger Inc.
and the Company with a combined approximate 41% interest in Southam. Hollinger
Inc.'s stated plans are to increase its ownership interest by permissible
purchases toward or beyond 50% and may thereafter seek to acquire all Southam
common shares not then owned or controlled by Hollinger Inc. or the Company
through an offer of the Company's securities involving, directly or indirectly,
the issuance of the Company's Class A Common Stock. See "Recent Developments."
Hollinger Inc. and the Company will pool their interests in Southam in a manner
that maintains Southam's tax status as a publisher of Canadian newspapers and
periodicals while ensuring that the maximum possible equity interest in Southam
will continue to be owned by the Company. If the Company obtains control of
Southam (through share ownership or otherwise), Southam's results of operations
will be consolidated for accounting purposes.
Business of Southam. Southam is a diversified publicly held enterprise in
the communications and information industry with continuing operations in two
principal business segments: newspaper publishing and business communications
(83% and 17% of Southam's consolidated revenue, respectively, of Cdn.$1.0
billion in 1995). Southam is Canada's largest publisher of daily newspapers.
Effective April 1, 1995, Southam sold its book retailing division. The book
retailing division represented 18.8% of consolidated revenue in 1994. As part of
the transaction, Southam received a minority interest in the common equity of
FICG Inc. In early October 1995, Southam sold the last of its graphic
businesses, Dittler Brothers, Incorporated.
Newspapers published by Southam account for approximately 28% of Canada's
total daily newspaper circulation (approximately 1.4 million) and include 17
daily and 33 weekly newspapers. Southam's principal publications include The
Gazette (Montreal), The Ottawa Citizen, the Calgary Herald, The Vancouver Sun,
The Province (Vancouver) and The Edmonton Journal.
Southam has two operating divisions which provide communications and
information services to business, government and the professions mainly in
Canada and also in the United States. The Southam Magazine and Information Group
publishes Canadian and United States business magazines and tabloids in the
automotive, trucking, construction, national resources, manufacturing and other
markets. The Southam Show Group operates Canadian and United States trade and
consumer shows and show support services. On May 16, 1996, Southam announced a
proposed sale of its Southam Show Group, also known as Southex Exhibitions,
pursuant to an agreement in principle with the Daily Mail and General Trust plc,
a media company based in London. Southam stated that the transaction is expected
to close in July 1996, but did not disclose the terms of the transaction.
The following table sets forth the revenue mix for Southam for the three
years ended December 31, 1995 and the three months ended March 31, 1995 and
1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
---------------- ---------------- ---------------- -------------- --------------
(CANADIAN DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Newspapers............ $ 810,714 69 % $ 808,471 67 % $ 846,262 83 % $197,529 84 % $206,204 83 %
Business
Communications...... 157,395 13 166,700 14 176,083 17 38,616 16 42,804 17
Book Retailing........ 208,049 18 226,188 19 -- -- -- -- -- --
---------- --- ---------- --- ---------- --- ----------
--- ----------
---
Total............. $1,176,158 100 % $1,202,359 100 % $1,022,345 100 % $236,145 100 % $249,008 100 %
========== === ========== === ========== === ========== === ========== ===
</TABLE>
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<PAGE> 77
The following table sets forth selected financial information for Southam
for the three years ended December 31, 1995 and the three months ended March 31,
1995 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- --------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(CANADIAN DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:(1)(2)
Revenue...................................... $1,176,158 $1,202,359 $1,022,345 $236,145 $249,008
Operating income (loss) before unusual items
and income taxes (3)....................... 34,184 70,498 59,411 9,651 3,873
Net income (loss) in accordance with Canadian
GAAP....................................... 21,568 44,008 (53,422) 3,410 2,401
Earnings (loss) per share in accordance with
Canadian GAAP.............................. 0.29 0.58 (.70) 0.04 0.03
BALANCE SHEET DATA:(1)(2)
Working capital
(deficiency)............................... $ (14,475) $ 5,064 $ 11,431 $ 61,408 $ 5,366
Total assets................................. 914,241 898,933 823,115 867,235 818,215
Long-term debt............................... 117,922 124,500 179,491 168,100 178,586
Shareholders' equity in accordance with
Canadian GAAP.............................. 433,397 454,803 359,264 454,369 358,233
</TABLE>
- ------------
(1) See "Exchange Rates" for certain information concerning the exchange rates
between Canadian and U.S. dollars for the periods indicated.
(2) The consolidated financial statements of Southam have been prepared in
accordance with Canadian GAAP.
(3) Southam recorded restructuring charges of $120.0 million in 1995 and had a
loss from discontinued operations of $14.5 million in 1995.
Southam Restructuring Plans. On January 16, 1996, Southam announced that
it would take a pretax charge against its 1995 earnings of Cdn.$120 million
($88.1 million) as part of a three year business plan. Approximately Cdn.$40
million of the charge relates to the writedown of redundant assets at its
Pacific Press facility, with the remaining Cdn.$80 million relating to employee
termination costs and will result from the elimination of 750 positions over the
next three years.
Regulatory Matters. The publication, distribution and sale of newspapers
and magazines in Canada is regarded as a "cultural business" under the
Investment Canada Act and consequently, any acquisition of control of Southam by
a non-Canadian investor would be subject to the prior review and approval by the
Minister of Industry of Canada.
Constrained Share Provisions. Southam is a constrained share corporation
under the Canada Business Corporations Act. The general effects of its
constrained share status are to restrict the holding or ownership of its shares
by non-Canadians, either individually or in the aggregate, within limits set
from time to time by the Board of Directors; to prevent the issue or transfer of
its shares in circumstances where these limits would be exceeded; and to limit
the voting rights attached to its shares in circumstances where these limits are
exceeded. These provisions were enacted in order to ensure the ability of
advertisers in Southam's newspapers and other periodicals to deduct, for
Canadian income tax purposes, the cost of advertising in their publications.
The Board of Directors of Southam determined that the "constrained class"
includes: (i) individuals other than Canadian citizens and (ii) corporations
that are controlled directly or indirectly by citizens or subjects of a country
other than Canada. The Board of Directors also has determined that the maximum
aggregate holdings of members of the constrained class will be 25% and that the
maximum individual holdings of members of the constrained class will be 25%.
Because 18.9% of the Company's indirect 19.5% interest in Southam is held by
HTH, a Canadian corporation which is controlled directly or indirectly by
Hollinger Inc., a Canadian corporation, and a wholly owned Canadian subsidiary
of Hollinger Inc. currently holds a 21.5%
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<PAGE> 78
interest, Southam's constrained share provisions should not restrict the
Company's or Hollinger Inc.'s investment in Southam. Accordingly, so long as the
Company's investment maintains its current or a similar structure and assuming
no more restrictive provisions are adopted by Southam, the Company would be free
to make additional indirect investments in Southam.
Price Range of Common Shares and Dividends. The ordinary shares of Southam
are listed on the Toronto and Montreal stock exchanges. The twelve month high
and low closing sales prices for the ordinary shares of Southam on the Toronto
Stock Exchange as of July 16, 1996 were Cdn.$17.00 ($12.42) and Cdn.$12.25
($9.06), respectively, with a closing price as of July 16, 1996 of Cdn.$16.00
($11.66). A cash dividend in the amount of Cdn.$0.05 was declared per ordinary
share payable June 15, 1996 to shareholders of record June 1, 1996. The payment
and the level of future dividends will be determined by the Board of Directors
of Southam based on considerations such as earnings from operations, capital
requirements and the financial condition of Southam.
Relationship with Hollinger Inc. and The Telegraph. In April 1993 Hollinger
Inc. and The Telegraph entered into the Hollinger-Telegraph Joint Venture
Agreement governing their joint investment in HTH and Southam. The agreement
provides, among other things, that (i) each of Hollinger Inc. and The Telegraph
is entitled to appoint two directors to the board of HTH; (ii) 572872 Alberta
Inc. ("Alberta Holdco"), a wholly owned Canadian subsidiary of HTH, is entitled
to designate for nomination for election to the board of directors of Southam a
certain number of directors pursuant to the Southam Agreement and Hollinger Inc.
and The Telegraph are entitled to designate an equal number of such nominees and
in the case of an odd number, HTH is entitled to designate one nominee; (iii)
the approval of both Hollinger Inc. and The Telegraph is required for certain
significant transactions; and (iv) Hollinger Inc. and The Telegraph have
"buy-sell," "first refusal" and "carry along" rights that govern their ability
to deal with their shares in HTH. To secure their respective obligations
referred to in (iv) above, Hollinger Inc. and The Telegraph have granted each
other a security interest in their respective holdings of HTH. As a result of
the Reorganization, FDTH became subject to the Hollinger-Telegraph Joint Venture
Agreement. In January 1996, Alberta Holdco amalgamated with HTH and the
amalgamated corporation became entitled to the rights and subject to the
obligations of the amalgamating corporations under such agreement.
Mr. Conrad M. Black, Chairman of the Board and Chief Executive Officer of
Hollinger Inc. and the Company, Chairman and a Director of The Telegraph and a
Director and Deputy Chairman of the Executive Committee of Fairfax, is
Co-Chairman and a Director of Southam. Mr. F. David Radler, President and Chief
Operating Officer and a Director of Hollinger Inc. and the Company and a
Director of The Telegraph is a Director of Southam. Mr. Peter G. White, a
Director of Hollinger Inc., is a Director of Southam. Mr. Stephen A.
Jarislowsky, a Director of The Telegraph, has been nominated for election as a
Director of Southam at the July 22, 1996 special shareholders' meeting.
JOINT VENTURE PRINTING COMPANIES. All copies of The Daily Telegraph and The
Sunday Telegraph are printed by The Telegraph's two 50% owned joint venture
printing companies, West Ferry Printers and Trafford Park Printers. See
"Business--International Newspaper Operations--The Telegraph--Printing."
LEGAL PROCEEDINGS
The Company becomes involved from time to time in various claims and
lawsuits incidental to the ordinary course of its business, including such
matters as libel, defamation and invasion of privacy actions. The Telegraph does
not carry libel insurance. Management of The Telegraph believes that the cost of
such insurance is not warranted by the insignificant nature of the libel claims
against The Telegraph in recent years. The decision not to carry libel insurance
has been, and will continue to be, reviewed periodically based on any changed
circumstances. In addition, the Company is involved from time to time in various
governmental and administrative proceedings with respect to employee
terminations and other labor matters, environmental compliance, tax and other
matters.
Management believes that the outcome of any pending claims or proceedings
will not have a material adverse effect on the Company taken as a whole. See
Note 16 to the Consolidated Financial Statements.
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<PAGE> 79
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages (as of June 12, 1996) of
each of the Company's current executive officers and directors, followed by a
description of their principal occupations during the past five years and
current directorships of public reporting companies and investment companies in
the United States, Canada, the United Kingdom and Australia. Unless otherwise
indicated, each of the executive officers has held his or her position with the
Company, or a similar position with the Company, for at least the past five
years.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------ ---- -------------------------------------------------------
<S> <C> <C>
The Hon. Conrad M. Black,
P.C., O.C................... 51 Chairman of the Board of Directors, Chief Executive
Officer and Director
F. David Radler............... 54 President, Chief Operating Officer and Director
J.A. Boultbee................. 52 Vice President and Chief Financial Officer
Barbara Amiel Black........... 55 Vice President, Editorial and Director
Paul B. Healy................. 32 Vice President, Investor Relations and Corporate
Development
Kenneth L. Serota............. 34 Vice President--Law and Finance and Secretary
Frederick A. Creasey.......... 46 Group Corporate Controller
Dwayne O. Andreas............. 78 Director
Richard Burt.................. 49 Director
Raymond G. Chambers........... 53 Director
Daniel W. Colson.............. 49 Chief Executive of The Telegraph and Director
Dr. Henry A. Kissinger........ 73 Director
Marie-Josee Kravis............ 46 Director
Shmuel Meitar................. 52 Director
Richard N. Perle.............. 54 Director
The Hon. Robert S. Strauss.... 77 Director
Alfred Taubman................ 72 Director
James R. Thompson............. 60 Director
Lord Weidenfeld............... 76 Director
Leslie H. Wexner.............. 58 Director
</TABLE>
THE HON. CONRAD M. BLACK, P.C., O.C., Chairman of the Board of Directors,
Chief Executive Officer and Director. Mr. Black has served as Chairman of the
Board of Directors and Chief Executive Officer of the Company since October 25,
1995, and has served as a Director of the Company since 1985. Mr. Black served
as Deputy Chairman of the Board of Directors of the Company from 1991 to October
25, 1995. Mr. Black has served for the past five years as the Chairman of the
Board and Chief Executive Officer of Hollinger Inc. He currently serves as the
Chairman and as a Director of The Telegraph, as a Director and Deputy Chairman
of the Executive Committee of Fairfax, and as Chairman of the Board, Chief
Executive Officer and as a Director of Argus, as a Director of Brascan Limited
and the Canadian Imperial Bank of Commerce, and as Co-Chairman and as a Director
of Southam, all of which are public reporting companies in Canada, and as a
Member of the Advisory Board of Gulfstream Aerospace Corporation.
F. DAVID RADLER, President, Chief Operating Officer and Director. Mr.
Radler has served as President and Chief Operating Officer of the Company since
October 25, 1995 and a Director of the Company since 1984. Mr. Radler was
Chairman of the Board of Directors of the Company from 1990 to October 25, 1995.
Mr. Radler has served for the past five years as President and Chief Operating
Officer and a Director of Hollinger Inc. He currently serves as a Director of
The Telegraph, and as a Director of Argus, Dominion Malting Limited, Southam and
West Fraser Timber Co. Ltd., all of which are Canadian public reporting
companies.
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<PAGE> 80
J. A. BOULTBEE, Vice President and Chief Financial Officer. Mr. Boultbee
has served as Vice President and Chief Financial Officer since June 1996, as
Vice President, Finance and Treasury of the Company from October 25, 1995 to
June 1996, and as a Vice President of the Company since 1987. Mr. Boultbee
served as a Director of the Company from 1988 to October 25, 1995. Mr. Boultbee
has served for the past five years as a Director and as the Vice-President,
Finance and Treasury of Hollinger Inc. Mr. Boultbee also serves as a Director of
Argus and Consolidated Enfield Corporation, which are Canadian public reporting
companies.
BARBARA AMIEL BLACK, Vice President, Editorial and Director. Mrs. Black has
served as Vice President, Editorial of the Company since September 1995 and as a
Director of the Company since February 1996. Mrs. Black is the wife of Mr.
Conrad M. Black. After an extensive career in both on and off air television
production, Mrs. Black was the editor of The Toronto Sun from 1982 to 1984, a
columnist of The Times and The Sunday Times of London from 1986 to 1994 and a
columnist of Maclean's magazine since 1976. Mrs. Black also serves as Vice
President, Editorial and as a Director of Hollinger Inc.
PAUL B. HEALY, Vice President, Investor Relations and Corporate
Development. Mr. Healy has served as Vice President, Investor Relations of the
Company since October 25, 1995. Mr. Healy was a Vice President of The Chase
Manhattan Bank, N.A. for more than five years prior to October 1995, serving as
a corporate finance specialist in the media and communications sector.
KENNETH L. SEROTA, Vice President--Law and Finance and Secretary. Mr.
Serota has served as Vice President--Law and Finance since June 1996, Secretary
of the Company since May 1995 and as Vice President from October 25, 1995 to
June 1996. Mr. Serota served as Vice President, General Counsel and Secretary of
Mama Tish's International Foods, a frozen dessert manufacturer, from June 1992
to March 1995. Mr. Serota was associated with Holleb & Coff, attorneys at law,
from 1986 through June 1992.
FREDERICK A. CREASEY, Group Corporate Controller. Mr. Creasey has served as
Group Corporate Controller since May 1996. Mr. Creasey has also served as
Controller of Hollinger Inc. for the last five years.
DWAYNE O. ANDREAS, Director. Mr. Andreas has served as a Director of the
Company since February 1996. Mr. Andreas has served as the Chairman and Chief
Executive Officer of Archer-Daniels-Midland Co., a publicly traded Fortune Five
Hundred company, since 1970. Mr. Andreas was Chairman of President Reagan's Task
Force on International Private Enterprise from 1983 to 1985. He currently serves
as a Director of Salomon, Inc., an investment banking firm in New York.
RICHARD BURT, Director. Mr. Burt has served as a Director of the Company
since September 1994. Mr. Burt has served as Chairman of International Equity
Partners, an emerging markets investment banking and advisory services firm,
since 1994. He was a partner with McKinsey & Company, Inc. from 1991 to 1994.
Mr. Burt has served as Chief Negotiator in Strategic Arms Reduction Talks from
1989 to 1991 and as the United States Ambassador to the Federal Republic of
Germany from 1985 to 1989. Mr. Burt currently serves as a director of Video
Lottery Technologies, Inc., a United States public reporting company.
RAYMOND G. CHAMBERS, Director. Mr. Chambers has served as a Director of
the Company since February 1996. Mr. Chambers has served as a Trustee of the
Amelior Foundation for "at risk youth" since 1988. He is Founding Chairman of
the Points of Light Foundation and is Co-Chairman of the New Jersey Performing
Arts Center and the One to One Partnership.
DANIEL W. COLSON, Director. Mr. Colson has served as a Director of the
Company since February 1995. Mr. Colson served as Vice Chairman of The Telegraph
from 1992 to 1995 and as Deputy Chairman of The Telegraph since 1995 and Chief
Executive of The Telegraph since 1994. Prior thereto, Mr. Colson was a partner
of Stikeman, Elliott, attorneys at law, for more than five years. Mr. Colson
currently serves as a Director of Hollinger Inc. and Argus, which are Canadian
public reporting companies, as a Director of The Telegraph and as a Director and
Deputy Chairman of Fairfax.
DR. HENRY A. KISSINGER, Director. Dr. Kissinger has served as a Director
of the Company since February 1996. Dr. Kissinger has served as Chairman of
Kissinger Associates Inc., an international consulting firm, since 1982. Dr.
Kissinger served as the 56th Secretary of State from 1973 to 1977. He also
served as Assistant to the President for National Security Affairs from 1969 to
1975 and as a member of the President's Foreign
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Intelligence Advisory Board from 1984 to 1990. Dr. Kissinger currently serves as
Counselor to the Chase Manhattan Bank and as a member of its International
Advisory Committee, as Chairman of the International Advisory Board of American
International Group, Inc., and as a Director of Continental Grain Company, The
Revlon Group, Inc. and Freeport-McMoRan Inc., all of which are United States
public reporting companies.
MARIE-JOSEE KRAVIS, Director. Mrs. Kravis has served as a Director of the
Company since February 1996. She has served as a Senior Fellow of the Hudson
Institute Inc. since 1994. She has served as a Director of The Seagram Company
Ltd. since 1988, a Canadian public reporting company, and as a Director of
Hasbro Inc. since 1995 and Ford Motor Company since 1995, both of which are
United States public reporting companies. Mrs. Kravis also served as an
Executive Director of the Hudson Institute of Canada Inc. from 1979 to 1994 and
as a Director of Hollinger Inc. from June 1994 until 1995.
SHMUEL MEITAR, Director. Mr. Meitar has served as a Director of the
Company since February 1996. Mr. Meitar also serves as Vice Chairman of Aurec
Ltd., a leading provider of communications, media and information services since
1991. Prior to 1991, Mr. Meitar served as President of the Aurec Group which
includes Golden Channels, the largest cable television franchise in Israel, and
Golden Pages, the Israeli Yellow Pages.
RICHARD N. PERLE, Director. Mr. Perle has served as a Director of the
Company since June 1994. Mr. Perle has served as Resident Fellow of the American
Enterprise Institute for Public Policy Research since 1987. He was the Assistant
Secretary for the United States Department of Defense, International Security
Policy from 1981 to 1988. Mr. Perle is a member of the International Advisory
Board of Hollinger Inc.
THE HON. ROBERT S. STRAUSS, Director. Mr. Strauss has served as a Director
of the Company since February 1996. Mr. Strauss was a founder of, and is
currently a Partner of, Akin, Gump, Strauss, Hauer & Feld, a national law firm.
Mr. Strauss served as United States Ambassador to the Soviet Union beginning in
1991, and following the dissolution of the Soviet Union, as United States
Ambassador to the Russian Federation until 1992 when he resigned and rejoined
his former law firm. He has also served as a Director of General Instrument
since 1991 and as a Director of Archer-Daniels-Midland Co. since 1981, both of
which are United States public reporting companies. From 1983 to 1988 he served
as a Director of Pepsico, Inc., from 1981 to 1989 he served as a Director of
Xerox Corp., and he served as a Director of Hollinger Inc. from September 1994
until 1995.
ALFRED TAUBMAN, Director. Mr. Taubman has served as a Director of the
Company since February 1996. Since 1983, Mr. Taubman has been the largest
shareholder, Chairman and a Director of Sotheby's Holdings Inc., the
international art auction house. Mr. Taubman also serves as Chairman of The
Taubman Company and Taubman Centers, Inc., companies engaged in the regional
retail shopping center business, and as a Director of Live Entertainment of
Canada Inc., a company involved with theatrical productions.
JAMES R. THOMPSON, Director. Mr. Thompson has served as a Director of the
Company since June 1994. Mr. Thompson has served as the Chairman of Winston &
Strawn, attorneys at law, since 1991. Mr. Thompson served as the Governor of the
State of Illinois from 1977 to 1991. Mr. Thompson currently serves as a director
of FMC Corporation, Prime Retail, Inc. and Jefferson Smurfit Corporation, which
are United States public reporting companies. Mr. Thompson was a Director of The
Sun-Times Company prior to its acquisition by the Company.
LORD WEIDENFELD, Director. Lord Weidenfeld has served as a Director of the
Company since February 1996. Lord Weidenfeld has served as Chairman of
Weidenfeld & Nicolson Ltd., a book publisher, since 1975. Lord Weidenfeld served
as a Director of Hollinger Inc. from September 1993 until 1995.
LESLIE H. WEXNER, Director. Mr. Wexner has served as a Director of the
Company since February 1996. Mr. Wexner has served as Chairman and Chief
Executive Officer of The Limited, Inc., a company whose activities include the
retail of apparel and personal care items, since 1963. He also currently serves
as a Director of Intimate Brands Inc. and as Chairman of the Board of Trustees
of The Ohio State University. Mr. Wexner served as a Director of Sotheby's
Holdings Inc. from 1983 to 1995 and as a Director of Bank One from 1986 to 1994.
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CERTAIN RELATIONSHIPS
RELATIONSHIP WITH HOLLINGER INC.
Agreements Related to the Reorganization. In connection with the October
1995 Reorganization, Hollinger Inc. and the Company entered into several
contractual arrangements. Under the Share Exchange Agreement, Hollinger Inc. has
agreed that, for a period of two years following the closing of the Share
Exchange Agreement, it will consult with an Independent Committee (as defined in
the agreement) of the Company's Board of Directors with respect to any proposed
sale or disposition of any shares of Series A Preferred Stock or any public
offer or sale of Class A Common Stock, so as not to interfere with any planned
capital market activities of the Company. Hollinger Inc. has also agreed not to
propose or undertake a Going Private Transaction (as defined in the agreement)
concerning the Company during such period unless approved by a majority of
disinterested members of the Independent Committee. Hollinger Inc. has also
agreed that so long as any shares of Series A Preferred Stock are held by
Hollinger Inc. or any of its affiliates, the Company may not reduce the
conversion price of such shares, redeem any shares or amend or modify the terms
thereof, unless such action is approved by a majority of the disinterested
members of such Independent Committee.
The Share Exchange Agreement includes a covenant by Hollinger Inc. that it
will exercise its redemption rights as a holder of shares of Series A Preferred
Stock only with respect to a number of shares proportionate to the number of HTH
Shares or the underlying Southam common shares that at the time of such exercise
have been delivered to FDTH free and clear of encumbrances as provided in the
Share Exchange Agreement, and that Hollinger Inc. will cause any transferee of
shares of Series A Preferred Stock to agree to be bound by the same covenant.
The Company also agreed that so long as any of the HTH Shares are subject to the
pledge under the Southam-Linked Debentures, the Company will use its reasonable
commercial efforts not to take any action, without the consent of Hollinger
Inc., which itself would constitute an event of default by Hollinger Inc. under
the indenture relating to such debentures. In addition, under the related
HTH/FDTH Share Exchange Agreement to which the Company is a third party
beneficiary and subject to its terms, Hollinger Inc. has agreed to deliver to
FDTH legal title to the HTH Shares free and clear of the pledge under the
indenture related to the Southam-Linked Debentures and any other pledges, liens
or encumbrances other than permitted encumbrances. If Hollinger Inc. fails to so
deliver clear legal title by April 1, 1999, Hollinger Inc. has agreed to pay an
amount equal to the greater of the aggregate purchase price paid by FDTH for the
HTH Shares or the fair market value of the HTH Shares which have not been
delivered to FDTH calculated by reference to the then market value of the
underlying Southam shares. Upon payment in full of the amount due from Hollinger
Inc., FDTH is obligated to reconvey to Hollinger Inc. FDTH's interest in the HTH
Shares not previously delivered unencumbered by Hollinger Inc.
The Company's equity interests in The Telegraph, Southam and Fairfax are
held through intermediate English holding companies, DTH and FDTH, whose only
significant long-term assets are their direct or indirect interests in The
Telegraph, Southam and Fairfax. DTH and FDTH have outstanding preference shares
held by persons other than the Company and its affiliates with an aggregate
redemption amount of $227.1 million (as of March 31, 1996) and which require the
payment of quarterly dividends with a current effective dividend cost of 5.5%
per annum (after giving effect to certain interest rate and currency exchange
agreements). In addition, DTH owns all 165,000,000 non-cumulative redeemable
preference shares of L1 per share issued by FDTH and 23,801,420 non-cumulative
redeemable preference shares of Cdn. $1 per share issued by FDTH which were
transferred by Hollinger Inc. to DTH in July 1995.
The DTH Preference Shares are redeemable at the option of the holder at any
time on four days' notice at a redemption price discounted in accordance with an
agreed formula, and the FDTH Preference Shares and the DTH Preference Shares are
redeemable by the issuer or the holders on the fifth anniversary of their
issuance (May or June 1997, respectively), each five year anniversary thereafter
and at other prescribed times and in prescribed circumstances, including where
the consolidated debt of Hollinger Inc. is more than two times its consolidated
equity. This debt to equity ratio is affected by, among other things, Hollinger
Inc.'s consolidated results of operations, as well as changes in the levels of
consolidated debt of Hollinger Inc. and its subsidiaries, including the Company.
The Company has been informed by Hollinger Inc. that, based on preliminary
calculations as of June 30, 1996, Hollinger Inc. believes that it is in
compliance with the Debt to Equity Ratio at June 30, 1996. Final calculations
will be made when the interim consolidated financial
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statements of Hollinger Inc. become available. However, in light of the
contemplated additional debt financing to be incurred in connection with the
acquisition of the Telegraph Minority Shares, Hollinger Inc. has indicated that
it will not be in compliance with the Debt to Equity Ratio as of September 30,
1996. Accordingly, there can be no assurance that holders of the DTH or FDTH
Preference Shares will not exercise their retraction rights against DTH or FDTH
or against Hollinger Inc. pursuant to contractual arrangements with the holders
under which Hollinger Inc. has agreed to purchase the DTH Preference Shares and
the FDTH Preference Shares. If Hollinger Inc. does not satisfy its purchase
obligations, the DTH Preference Shares and the FDTH Preference Shares are
exchangeable at the holders' option for Hollinger Inc. common shares at an
exchange price equal to 95% of the then current market price of Hollinger Inc.
common shares. Pursuant to the DTH/FDTH Preference Share Agreement entered into
at the time of the Reorganization, in the event Hollinger Inc. is required to
purchase any DTH and FDTH Preference Shares under these circumstances, Hollinger
Inc. shall have the right, following written notice, to require the Company to
purchase such shares at the then retraction price. The aggregate amount of any
such payments by the Company to Hollinger Inc. (other than in respect of shares
held by Argsub) would be a maximum of approximately $125.6 million.
"Consolidated Debt" is defined as the sum of short term debt, long term debt,
long term lease obligations and convertible debentures and similar liabilities
of Hollinger Inc. and also including the aggregate liability of Hollinger Inc.
under any guarantees provided by it in respect of the obligations of any entity
not consolidated with it in its financial results, all as determined in
accordance with generally accepted accounting principles in Canada.
"Consolidated Equity" is defined as the sum of the capital stock and retained
earnings of Hollinger Inc. as determined in accordance with generally accepted
accounting principles in Canada, which capital stock shall include the sum of
the nominal or par value of all outstanding DTH and FDTH Preferences Share minus
the nominal or par value of all outstanding DTH and FDTH Preference Shares held
by the other or by Hollinger Inc. or any affiliate.
Hollinger Inc. and Southam entered into an agreement (the "Southam
Agreement") in January 1993 that provides, among other things, that: (1) a
majority of directors on the board of directors of Southam and each board
committee must be independent of Hollinger Inc. and Southam's management; (ii)
Hollinger Inc. is entitled to representation on the Southam board of directors
proportionate to its shareholding (currently three directors); and (iii)
independent director and, in certain cases, shareholder approvals are required
for major transactions between Hollinger Inc. and Southam. The Southam Agreement
remains in effect as long as Hollinger Inc. owns at least 15% of the then
outstanding common shares in the capital of Southam. The Southam Agreement
ceases to have effect if Hollinger Inc. becomes the majority shareholder of
Southam. The Southam Agreement was assigned by Hollinger Inc. to Alberta Holdco,
a wholly owned Canadian subsidiary of HTH, which is the entity which holds
substantially all of the interests of FDTH and The Telegraph in Southam. In
January 1996, Alberta Holdco amalgamated with HTH. As a result of the
Reorganization, FDTH has the rights and obligations of Hollinger Inc. under the
Southam Agreement.
In connection with the Reorganization, the Company entered into interest
rate and currency exchange arrangements with Hollinger Inc. for the period
ending June 30, 1997 (the "Supplemental Swap Arrangements"), that are intended
to permit the Company to receive benefits that correspond to those obtained by
Hollinger Inc. under its interest rate and currency exchange arrangements dated
as of June 11, 1992 (the "Original Swap Arrangements") with a Canadian chartered
bank. The Original Swap Arrangements were intended to effectively convert
substantially all of the DTH Preference Share dividends to United States dollar
obligations payable at a variable rate derived from LIBOR for the period ending
June 30, 1997, and to convert Cdn. $60 million of the capital amount of Series 1
of the DTH Preference Shares to United States $50.3 million payable June 30,
1997. Under the terms of the DTH Preference Shares, all amounts on Series 1 of
the DTH Preference Shares are payable in Canadian dollars, with dividends at a
fixed rate of 7.748%, while all amounts on Series 2 of the DTH Preference Shares
are payable in United States dollars, with dividends at a fixed rate of 6.829%
(subject in either case to potential increases in the dividend rate to adjust
for reductions in income tax credits or any additional income tax liabilities
affecting holders of preference shares). The Company has agreed to make variable
rate interest payments and a currency payment to Hollinger Inc. that correspond
to Hollinger Inc.'s obligations to the Canadian chartered bank under the
Original Swap Arrangements, and Hollinger Inc. has agreed to pay fixed rate
interest payments and a currency payment to the Company that correspond to the
bank's obligations to it under the Original Swap Arrangements. These
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arrangements, after giving effect to certain tax indemnities to holders of DTH
Preference Shares which would have raised the dividend cost, permitted the
Company to lower the effective dividend cost for financial reporting purposes to
5.8% for Series 1 of the DTH Preference Shares and to 6.3% for Series 2 of the
DTH Preference Shares using December 31, 1995 rates.
Other Arrangements. Hollinger Inc. has guaranteed the Senior Notes issued
by American Publishing (1991) Inc. ("AP-91"), a subsidiary of the Company. The
amount of Hollinger Inc.'s guarantee varies and is limited pursuant to a
formula, which at December 31, 1995 was zero. The Company was indebted to
Hollinger Inc. in the amount of $24.6 million at December 31, 1995. Following
repayment of a significant portion of intercompany indebtedness owed to
Hollinger Inc. on February 7, 1996 from the proceeds of the Company's equity and
debt offerings, owed Hollinger Inc. approximately $4.1 million as of March 31,
1996.
Additional or modified arrangements and transactions may be entered into in
the future by the Company and Hollinger Inc. and their respective subsidiaries.
Any such future arrangements and transactions will be determined through
negotiation between the Company and Hollinger Inc. and it is possible that
conflicts of interest will be involved. In general, the Audit Committee of the
Board of Directors of the Company is responsible for recommending to the Board
of Directors policies and procedures for dealing with conflicts of interest and
reviews any such arrangements and transactions.
MANAGEMENT SERVICES AND BUSINESS OPPORTUNITIES
Concurrently with the consummation of the Company's initial public
offering, the Company and Hollinger Inc. entered into agreements for the purpose
of defining their ongoing relationships, including a Services Agreement and a
Business Opportunities Agreement. These agreements, which remain in effect, were
developed in the context of a parent-subsidiary relationship and, therefore,
were not the result of arms-length negotiations between independent parties. The
agreements were subsequently amended, with the approval of the Audit Committee,
in connection with the Reorganization and again on February 7, 1996.
Management Services. Historically, Hollinger Inc. provided various
management and administrative services to the Company and continued such
relationship pursuant to the Services Agreement. Although the primary purpose of
the agreement relates to the provision of services by Hollinger Inc. to the
Company, the agreement also contemplates that the Company may provide services
to Hollinger Inc. The services to be provided pursuant to the Services Agreement
include, among other things, strategic advice and planning and financial
services (including advice and assistance with respect to acquisitions);
assistance in operational matters; participation in group insurance programs;
and guarantees of indebtedness of the Company or other forms of credit
enhancements. The party receiving the services has agreed to reimburse the party
rendering the services for its allocable costs in providing those services, as
determined by the provider thereof or, in the case of a guarantee, for an amount
equal to the cost to the Company of obtaining a bank letter of credit in the
amount of such guarantee. The party allocating its costs will consider the
salaries or other compensation payable to directors, officers and employees
actually providing services, out-of-pocket costs, the cost of obtaining
substantially equivalent services from a third party and other factors as may be
deemed appropriate. The Services Agreement will remain in effect for so long as
Hollinger Inc. holds at least 50% of the voting power of the Company, subject to
termination by either party under certain specified circumstances.
The services agreement between The Telegraph and Hollinger Inc. (the
"Hollinger-Telegraph Services Agreement") sets forth the basis on which
Hollinger Inc. and The Telegraph may provide services to each other. So long as
Mr. Black remains Chairman of the Board of The Telegraph, The Telegraph will
bear 66.7% of the cost of Mr. Black's office at Hollinger Inc., or such other
proportion as may be agreed from time to time by the Audit Committee of The
Telegraph and senior management of Hollinger Inc. Other services are provided at
cost and typically include the arrangement of insurance; assistance in the
arrangement of financing required by The Telegraph; and assistance and advice on
acquisitions, disposals and joint venture arrangements. The amount of the
charges in respect of these other services is submitted to the Audit Committee
of The Telegraph for approval. Hollinger Inc. has assigned its rights and
obligations under the Hollinger-Telegraph Services Agreement to the Company on
May 9, 1996 with the consent of The Telegraph.
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Pursuant to the Services Agreement, the Company has paid Hollinger Inc. and
affiliates (including Messrs. Black, Boultbee, Colson, Cowan and Radler and Mrs.
Black who are officers and/or directors of both Hollinger Inc. and of the
Company and who do not receive compensation in their capacities as executive
officers of the Company directly from the Company) for an allocated portion of
Hollinger Inc.'s costs relating to such services in the aggregate amounts of
$3,555,000 in 1994 and $4,113,300 in 1995. For the years ended December 31, 1994
and 1995, Hollinger Inc. provided services to The Telegraph for which it
received payment of $1,282,965 and $1,464,665, respectively. The Company
anticipates that the total amount to be received by Hollinger Inc. under the
Services Agreement and the Hollinger-Telegraph Services Agreement will increase
from approximately $5.6 million in 1995 to approximately $8.4 million in 1996
and reflects additional services to be rendered as a result of the acquisition
by the Company of a majority interest in The Telegraph and its equity
investments in Fairfax and Southam.
Business Opportunities. The Business Opportunities Agreement provides that
the Company is Hollinger Inc.'s principal vehicle for engaging in and effecting
acquisitions in the newspaper business and in related media business in the
United States, Israel, and, through The Telegraph, the Telegraph Territory.
Hollinger Inc. has reserved to itself the ability to pursue all media (including
newspaper) acquisition opportunities outside the United States, Israel and the
Telegraph Territory and all media acquisition opportunities unrelated to the
newspaper business in the United States, Israel and the Telegraph Territory. As
newspaper acquisition opportunities arise in the United States, Israel and the
Telegraph Territory, the Company has the right to pursue such opportunities
directly or through The Telegraph. If Hollinger Inc. acquires a newspaper
business in the United States or Israel, Hollinger Inc. will be obligated to
offer such business for sale to the Company on terms no less favorable to the
Company than those obtained by Hollinger Inc. Hollinger Inc. is prohibited from
acquiring newspapers or media businesses in the Telegraph Territory under a
co-operation agreement with The Telegraph (the "Co-operation Agreement"). As
newspaper or media acquisitions arise in Canada, Hollinger Inc. has the right to
pursue such opportunities, except that the Company is permitted to increase its
investment in Southam. Likewise, if the Company acquires a newspaper business in
Canada (other than an increase in its indirect investment in Southam), the
Company will be obligated to offer such business for sale to Hollinger Inc. on
terms no less favorable to Hollinger Inc. than those obtained by the Company.
Hollinger Inc. expects to continue to acquire newspapers in Canada, as the
Company is not permitted to increase its presence in Canada except through an
increase in its ownership interest in Southam, and to explore the acquisition of
media businesses elsewhere in the world subject to the provisions of the
Business Opportunities Agreement and the Co-operation Agreement with The
Telegraph. Any decision by the Company with respect to a particular acquisition
shall be subject to the review and approval of the Audit Committee. In addition,
the Business Opportunities Agreement does not restrict newspaper companies in
which Hollinger Inc. has a minority investment from acquiring newspaper or media
businesses in the United States or Israel, nor does it restrict subsidiaries of
Hollinger Inc. from acquiring up to 20% interests in publicly-held newspaper
businesses in the United States. For the purposes of the Business Opportunities
Agreement, "newspaper business" means the business of publishing and
distributing newspapers, magazines and other paid or free publications having
national, regional, local or targeted markets, including publications having
limited or no news or editorial content such as shoppers or other total market
coverage publications and similar publications. "Media business" means the
business of broadcasting radio, television, cable and satellite programs
(including national, regional or local radio, television, cable and satellite
programs). The Business Opportunities Agreement will remain in effect so long as
Hollinger Inc. holds at least 50% of the voting power of the Company, subject to
termination by either party under certain specified circumstances.
In connection with the listing of The Telegraph's shares on the London
Stock Exchange, Hollinger Inc. and its subsidiaries and The Telegraph entered
into several agreements to govern their continuing relationship, including,
among others, the Co-operation Agreement and the Hollinger-Telegraph Services
Agreement. Under the Co-operation Agreement, The Telegraph and Hollinger Inc.
have agreed not to engage in, or hold a significant interest in an enterprise
engaging in, the newspaper, magazine, radio or television business where the
other has existing operations, without the other's prior written consent except
in specified circumstances. For purposes of this agreement, The Telegraph's
areas of operations are the United Kingdom, the rest of the European Community,
Australia and New Zealand, and Hollinger Inc.'s are the United States, Canada,
the Caribbean and Israel. The Co-operation Agreement permits joint ventures
anywhere in the world, subject to
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the consent of the minority shareholders of The Telegraph, unless the London
Stock Exchange agrees the joint venture is of immaterial size. Mr. Black entered
into a similar undertaking with The Telegraph. Pursuant to the Business
Opportunities Agreement, the Company has agreed not to violate the Co-operation
Agreement. The Co-operation Agreement will remain in effect until Hollinger Inc.
ceases to control The Telegraph.
The Company and Hollinger Inc. also have acknowledged that, pursuant to the
Co-operation Agreement with The Telegraph, Hollinger Inc. has undertaken to
restrict its activities in respect of the newspaper business and the media
business (defined to include radio, television, cable and satellite programs) in
the Telegraph Territory. So long as Hollinger Inc. has beneficial ownership of
50% or more of the voting power of the Company's outstanding securities, the
Company and Hollinger Inc. have agreed that neither shall, without the other's
prior written consent, violate the provisions of the Co-operation Agreement. In
addition, Hollinger Inc. has agreed not to amend or modify the Co-operation
Agreement and will not waive any benefit or right hereunder without the prior
written consent of the Company. Hollinger Inc. is prohibited from directly
acquiring beneficial ownership of any voting securities of The Telegraph.
OTHER TRANSACTIONS
See the Company's Annual Proxy Statement dated April 26, 1996, incorporated
herein by reference, for a description of certain other transactions.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 250,000,000 shares
of Class A Common Stock, $.01 par value per share, 50,000,000 shares of Class B
Common Stock, $.01 par value per share, and 20,000,000 shares of Preferred
Stock. After giving effect to the Offering (assuming the Underwriters'
over-allotment option is not exercised and that the Series A Preferred Stock is
not converted into Class A Common Stock), there will be 71,065,754 shares of
Class A Common Stock outstanding and 14,990,000 shares of Class B Common Stock
outstanding. Hollinger Inc. will hold 33,610,754 shares of Class A Common Stock
and 14,990,000 shares of Class B Common Stock or 58.5% of the outstanding Common
Stock and 84.2% of the combined voting power of the outstanding Common Stock,
and 49.6% of the outstanding Common Stock and 78.8% of the combined voting power
of the outstanding Common Stock upon the issuance of 15,000,000 shares of Class
A Common Stock in connection with the PRIDES. See "Risk Factors--Control by
Hollinger Inc. and Disproportionate Voting Rights" and "Principal Stockholders."
CLASS A AND CLASS B COMMON STOCK
VOTING RIGHTS
Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share. Holders of
Class A Common Stock and Class B Common Stock are not entitled to vote
cumulatively for the election of Directors. Hollinger Inc. presently retains, by
virtue of its ownership of all outstanding shares of Class B Common Stock,
effective control of the Company through its ownership of 88.2% of the combined
voting power of the outstanding Common Stock.
Directors may be removed with or without cause by the holders of the Common
Stock. A vacancy on the Board created by the removal or resignation of a
Director or by the expansion of the authorized number of Directors may be filled
by the remaining Directors then in office.
The holders of Class A Common Stock and Class B Common Stock vote together
as a single class on all matters on which stockholders may vote, except when
class voting is required by applicable law.
DIVIDENDS
Each share of Class A Common Stock and Class B Common Stock is entitled to
receive dividends if, as and when declared by the Board of Directors of the
Company. Under the Delaware General Corporation Law, the Company may declare and
pay dividends only out of its surplus, or in case there shall be no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding year. Under the Delaware General Corporation Law,
surplus is defined as the excess, if any, at any given time, of the net assets
of the Company over the amount determined to be capital. Capital represents the
aggregate par value of the Company's capital stock. No dividends may be
declared, however, if the capital of the Company has been diminished by
depreciation, losses or otherwise to any amount less than the aggregate amount
of capital represented by any issued and outstanding stock having a preference
on distribution. Dividends must be paid on both the Class A Common Stock and the
Class B Common Stock at any time that dividends are paid on either. Any dividend
so declared and payable in cash, capital stock of the Company (other than Class
A Common Stock or Class B Common Stock) or other property will be paid equally,
share for share, on the Class A Common Stock and Class B Common Stock. Dividends
and distributions payable in shares of Class A Common Stock may be paid only on
shares of Class A Common Stock and dividends and distributions payable in shares
of Class B Common Stock may be paid only on shares of Class B Common Stock. If a
dividend or distribution payable in Class A Common Stock is made on the Class A
Common Stock, the Company must also make a simultaneous dividend or distribution
on the Class B Common Stock. If a dividend or distribution payable in Class B
Common Stock is made on the Class B Common Stock, the Company must also make a
simultaneous dividend or distribution on the Class A Common Stock. Pursuant to
any such dividend or distribution, each share of Class B Common Stock will
receive a number of shares of Class B Common Stock equal to the number of shares
of Class A Common Stock payable on each share of Class A Common Stock.
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TRANSFERABILITY AND CONVERTIBILITY OF CLASS B COMMON STOCK
Each share of Class B Common Stock is convertible at any time at the option
of the holder into one share of Class A Common Stock and is transferable by
Hollinger Inc. to a subsidiary or an affiliate. In addition, each share of Class
B Common Stock is automatically convertible into a share of Class A Common Stock
at the time it is sold, transferred or otherwise disposed of by Hollinger Inc.
or a subsequent permitted transferee to any third party (other than a subsidiary
or an affiliate of Hollinger Inc. or such subsequent permitted transferee)
unless such purchaser or transferee offers to purchase all shares of Class A
Common Stock from the holders thereof for an amount per share equal to the
amount per share received by the holder of the Class B Common Stock. Any such
offer shall be subject to the requirements of applicable securities laws.
Any holder of Class B Common Stock may pledge his or its shares of Class B
Common Stock to a pledgee pursuant to a bona fide pledge of such shares as
collateral security for indebtedness due to the pledgee, provided that such
shares shall not be transferred to or registered in the name of the pledgee and
shall remain subject to the transfer restrictions described in the foregoing
paragraph. In the event that shares of Class B Common Stock are so pledged, the
pledged shares shall not be converted automatically into Class A Common Stock.
However, if any such pledged shares become subject to any foreclosure,
realization or other similar action of the pledgee, they shall be converted
automatically into shares of Class A Common Stock unless they are sold in a
permitted transaction. Hollinger Inc. has pledged all shares of Class A Common
Stock, Class B Common Stock and Series A Preferred Stock owned by it to Canadian
chartered banks as collateral for outstanding indebtedness of Hollinger Inc. and
the Southam Facility.
OTHER PROVISIONS
There are no preemptive rights to subscribe for any additional securities
which the Company may issue, and there are no redemption provisions or sinking
fund provisions applicable to either class, nor is the Class A Common Stock or
the Class B Common Stock subject to calls or assessments by the Company. All
outstanding shares are, and all shares to be outstanding upon completion of the
Offerings will be, legally issued, fully paid and nonassessable.
In the event of the liquidation, dissolution or winding up of the Company,
holders of the shares of Class A Common Stock and Class B Common Stock are
entitled to share equally, share for share, in the assets available for
distribution.
LISTING OF CLASS A COMMON STOCK
The Class A Common Stock is listed on the New York Stock Exchange under the
trading symbol "HLR."
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 20,000,000 shares of Preferred Stock. The Board of Directors has the
authority under the Restated Certificate to establish voting rights, liquidation
preferences, redemption rights, conversion rights and other rights with respect
to such Preferred Stock without the approval of the Company's stockholders.
SERIES A PREFERRED STOCK
The Company's Series A Preferred Stock consists of 739,500 shares of Series
A Preferred Stock, all of which is held by Hollinger Inc. The number of shares
of the Series A Preferred Stock is equal to 1/10 of the 7,395,000 Southam common
shares directly or indirectly included in the Hollinger Southam Interest
(namely, 250,000 Southam common shares owned directly by FDTH plus one-half of
the 14,290,000 Southam common shares owed indirectly by HTH). The shares of the
Series A Preferred Stock are entitled to receive cumulative cash dividends,
payable quarterly. The amount of each dividend per share will be equal to the
aggregate amount (if any) of ordinary course cash dividends paid during the
preceding calendar quarter on such Southam shares divided by 739,500. If at any
time full cumulative dividends on the shares of the Series A Preferred Stock
have not been and are not being contemporaneously paid, no dividend or
distribution shall be
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declared or paid on the Common Stock or any Preferred Stock ranking junior to
the Series A Preferred Stock as to dividend or liquidation rights, and no shares
of Common Stock or Preferred Stock (except shares senior to the Series A
Preferred Stock as to dividend and liquidation rights) shall be purchased,
redeemed or acquired by the Company, subject to certain exceptions including
stock dividends payable in shares of junior capital stock, the acquisition of
stock ranking junior to the Series A Preferred Stock as to dividend or
liquidation rights in exchange for or out of the net cash proceeds from the
contemporaneous sale of junior stock, the redemption in whole of the shares of
the Series A Preferred Stock, offers to purchase shares made on the same terms
to all holders of shares of the Series A Preferred Stock and each other series
of Preferred Stock ranking on a parity with the Series A Preferred Stock, and
dividends on Preferred Stock ranking junior as to dividend rights if full
cumulative dividends on the shares of the Series A Preferred Stock to the next
preceding dividend date for the Series A Preferred Stock (or the date of the
payment on the junior Preferred Stock, if identical to a dividend date for the
Series A Preferred Stock) have been or are contemporaneously declared and paid
or set apart for payment.
The shares of the Series A Preferred Stock are redeemable in whole or in
part, at any time and from time to time, subject to restrictions in the
Company's existing credit facilities, by the Company or by a holder of such
shares. Hollinger Inc., the holder of all of the outstanding shares of Series A
Preferred Stock, has agreed pursuant to the Share Exchange Agreement to limit
the exercise of its redemption rights to a number of HTH shares or Southam
common shares that at the time of such exercise have been delivered to FDTH free
and clear of encumbrances other than certain permitted encumbrances. The
redemption price and liquidation preference per share of the Series A Preferred
Stock will be Cdn.$146.625 (10 times the average closing market price per share
of the Southam common shares on the Toronto Stock Exchange during the 20
business days preceding the date of the Share Exchange Agreement) plus an amount
equal to accrued and unpaid dividends. A holder exercising redemption rights
must give notice to the Company not less than 180 and not more than 240 days
prior to the redemption date if the aggregate redemption price of the shares to
be so redeemed and shares of the Series A Preferred Stock redeemed or to be
redeemed prior to such redemption date will exceed Cdn.$10,000,000. Shares of
Common Stock or of any other stock ranking junior to the Series A Preferred
Stock as to dividend or liquidation rights may not be purchased, redeemed or
acquired by the Company if after giving effect thereto the remaining net assets
of the Company would be less than the aggregate liquidation preference of the
Series A Preferred Stock and each series of Preferred Stock ranking, as to
liquidation rights, on a parity with or senior to the Series A Preferred Stock,
or if at the time thereof the Company is insolvent or would become so as a
result thereof.
A holder or holders of shares of the Series A Preferred Stock may convert
such shares at any time into shares of Class A Common Stock of the Company. The
conversion price will initially be based upon the Canadian dollar equivalent of
$14.00 per share of Class A Common Stock, subject to adjustment upon the
occurrence of any of the following events: the subdivision, combination or
reclassification of outstanding shares of Common Stock; a distribution or
dividend to holders of Common Stock paid in shares of Common Stock or other
capital stock of the Company; the distribution of rights or warrants to all
holders of Common Stock entitling them for a period expiring within 60 days to
acquire shares of Common Stock at a price per share less than the then Current
Market Price Per Share (as defined) of the Common Stock; and the distribution to
all holders of Common Stock of any assets or debt securities or any rights or
warrants to purchase securities of the Company, not including dividends or
distributions paid in cash out of consolidated current or retained earnings per
the Company's books, and not including rights or warrants mentioned above. In
the event of any capital reorganization, reclassification, consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of the Company's assets to another corporation, each holder of
shares of the Series A Preferred Stock is to have the right to convert such
shares into such shares of stock, securities or assets as such holder would have
owned immediately after the transaction if the shares had been converted
immediately prior to the effective date of the transaction, and adjustments are
to be provided for events subsequent to such transaction. In addition, the
Company will be permitted to make such reductions in the conversion price as it
considers to be advisable in order that any event treated for federal income tax
purposes as a dividend of stock or stock rights will not be taxable to the
holders of Common Stock or to diminish any income taxes payable because of such
event.
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The shares of Series A Preferred Stock are non-voting, rank on a parity
with each other series of Preferred Stock except as specified by the Board of
Directors when such other series is created, and are subject to certain
restrictions on transfer.
Any holder of Series A Preferred Stock may pledge such shares to a pledgee
pursuant to a bona fide pledge of such shares as collateral security for
indebtedness or other obligations due to the pledgee, provided that such shares
shall remain subject to, and upon foreclosure, realization or other similar
action by the pledgee, shall be transferred only in accordance with, the
transfer restrictions set forth in the Restated Certificate of Incorporation.
PRIDES AND SERIES B CONVERTIBLE PREFERRED STOCK
See "Description of the Securities--PRIDES Deposit Agreement" for
description of the PRIDES and "Description of the Securities-Convertible
Preferred Stock" for description of the Series B Convertible Preferred Stock
represented by the PRIDES.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
The Company's Restated Certificate of Incorporation and By-laws contain
certain provisions that could make more difficult a change in control of the
Company not having approval of the Board of Directors. The Restated Certificate
of Incorporation authorizes the issuance of "blank check" Preferred Stock. The
Board of Directors may establish voting rights, liquidation preferences,
redemption rights, conversion rights and other rights relating to such Preferred
Stock, all or some of which may be senior to the Common Stock, without the
approval of the Company's stockholders. In some circumstances, the Preferred
Stock could be issued and have the effect of preventing a merger, tender offer
or other takeover attempt which the Board of Directors opposes. Issuance of
Preferred Stock, however, may be subject to certain rules of the Nasdaq Stock
Market and upon listing with the New York Stock Exchange to certain rules of
that Exchange. The Company's By-laws also provide that a special meeting of the
stockholders of the Company may only be called by the Board of Directors, a duly
designated committee of the Board of Directors, the Chairman of the Board of
Directors, or the President of the Company. No other person may call a special
meeting of the stockholders.
The Publishing Bank Facility contains certain provisions that could make
more difficult a change in control of the Company. The facility provides that an
event of default shall occur if any person other than Hollinger Inc. becomes the
beneficial owner, directly or indirectly, of more than 49% of the total voting
power of all classes of capital stock outstanding of the Company or if certain
changes occur in the composition of the Company's Board of Directors and result
in a change in the majority of the Board of Directors. The Notes contain a
provision that upon a change of control (as defined in the indenture relating
thereto), each holder will have the right to require that Publishing purchase
all or any portion of such holder's Notes. See "Description of Certain
Indebtedness and Other Obligations."
Certain transactions with the Company may be subject to Section 203 of the
Delaware General Corporation Law. Section 203 prohibits certain "business
combinations" between an "interested stockholder" and a corporation for three
years after a stockholder becomes interested, unless one of the statute's
exceptions applies. Section 203(c)(5) defines an interested stockholder as a
person, broadly defined to include a group, who owns at least 15% of a company's
outstanding voting stock. The statute defines business combinations expansively
to include any merger or consolidation of, with, or caused by the interested
stockholder. Section 203(a) provides three exceptions to the business
combination prohibition. First, there is no constraint if the interested
stockholder obtains prior board approval for the business combination or the
transaction resulting in ownership of 15% of the target's voting stock. Second,
the statute does not apply if, in completing the transaction that crosses the
15% threshold, the stockholder becomes the owner of 85% of the corporation's
voting stock outstanding as of the time the transaction commenced. Any shares
owned by directors who are officers, and shares owned by certain stock option
plans are excluded from the calculation. This exception applies most
particularly to a tender offeror who has less than 15% of the target's stock and
receives tenders that satisfy the 85% requirement. Finally, the statute does not
apply if the interested stockholder's business combination is approved by the
board of directors and affirmed by at least 66 2/3% of the outstanding voting
stock not owned by the interested stockholder.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND OTHER OBLIGATIONS
EXISTING OBLIGATIONS
The Company, Publishing and its principal subsidiaries are parties to
various debt agreements which have been entered into to fund acquisitions,
working capital requirements and other corporate purposes. In connection with
the acquisition of the Telegraph Minority Shares pursuant to the Scheme,
Publishing, FDTH and Publishing Holdings have entered into certain financing
arrangements. The Company also entered into the Southam Facility in connection
with the purchase of the Power Shares. Upon consummation of this Offering and
the concurrent Common Stock Offering, these financing arrangements may be
replaced or repaid in part or in full as described under "Use of Proceeds."
SENIOR SECURED NOTES. American Publishing (1991) Inc. ("AP-91"), a wholly
owned subsidiary of Publishing, issued $150.0 million in senior secured notes
(collectively, the "Senior Notes") which are held by 19 insurance companies. The
Senior Notes were issued in five series which are due on September 1, 1996,
September 1, 1997, September 1, 1998, September 1, 1999, and September 1, 2000,
in the principal amounts of $15.0 million, $30.0 million, $30.0 million, $20.0
million and $55.0 million, respectively, and bear interest at rates ranging from
10.24% to 10.53%. The Senior Note agreements require AP-91 to maintain certain
financial ratios and place limitations on payment of dividends and other amounts
to the Company. AP-91 is currently in compliance with the financial ratios and
other provisions under the Senior Notes. Under the Senior Notes, approximately
$6.1 million, as of December 31, 1995, was not restricted and could be paid to
the Company in the form of dividends, management fees or other payments with
respect to outstanding capital stock of AP-91 and thus would be available for
use by the Company. The amount that is not restricted will be reduced by any
payments to the Company and will be increased by the future cash flow of AP-91
and its operating subsidiaries. The Senior Notes are secured by (i) a pledge of
the capital stock, promissory notes and intangible properties of the
subsidiaries of AP-91 and (ii) a guarantee by Hollinger Inc. The amount of
Hollinger Inc.'s guarantee varies and is limited pursuant to a formula, which at
December 31, 1995 was zero. Optional prepayment of the Senior Notes in whole or
in part is permitted, provided that AP-91 pays a prepayment premium equal to a
"makewhole premium." As defined in the agreements relating to the Senior Notes,
the makewhole premium is equivalent to the excess of the sum of the present
values of (i) the principal balance of the Senior Notes at maturity intended to
be prepaid and (ii) the interest payments required to be made during the
remainder of the term to maturity on such Senior Notes over the principal
balance of the Senior Notes to be repaid. As of December 31, 1995, the makewhole
premium on the Senior Notes was $18.7 million.
SENIOR SUBORDINATED NOTES. Publishing sold $250.0 million aggregate
principal amount of the Notes on February 7, 1996. The Notes mature on February
1, 2006, and will be unsecured senior subordinated obligations of Publishing.
Each Note bears interest at the rate of 9 1/4% per annum from the date of
issuance of the Notes, or from the most recent interest payment date to which
interest has been paid, payable semiannually on February 1 and August 1 of each
year, commencing on August 1, 1996. The Notes are subject to redemption at any
time on or after February 1, 2001, at the option of Publishing, in whole or in
part, at a price of 104.625% of the principal amount thereof, declining ratably
to par on or after February 1, 2004, together with accrued and unpaid interest
thereon, if any, to the redemption date. Payment of the principal of, premium,
if any, and interest on the Notes is guaranteed by the Company on a senior
subordinated basis (the "Guarantee"). The Notes and the Guarantee are expressly
subordinated to all senior indebtedness of Publishing and the Company,
respectively, including all indebtedness and other obligations under the
Publishing Credit Facility and the Company's guarantee thereof.
The indenture relating to the Notes (the "Indenture") contains covenants
that, among other things, restrict the ability of Publishing and the Restricted
Subsidiaries (defined to include the United States subsidiaries of Publishing
and Jerusalem Post) to, subject in each case to certain exceptions: (i) incur or
permit to exist additional debt unless the Consolidated Cash Flow Ratio (as
defined in the Indenture) of Publishing and the Restricted Subsidiaries is not
greater than 6.0:1.0; (ii) pay dividends or distributions on the Common Stock,
purchase or redeem any shares of the Common Stock, retire subordinated
indebtedness, make investments (other than certain Permitted Investments (as
defined in the Indenture) or take certain
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other actions to the extent that the aggregate of all such payments declared or
made after the date of the Indenture would exceed the sum of, without
duplication, (a) the sum of (x) 50% of consolidated net income of Publishing and
the Restricted Subsidiaries and (y) 50% of amortization expense of Publishing
and the Restricted Subsidiaries, in each case after the date of the Indenture,
(b) 50% of the aggregate cumulative cash dividends or distributions received by
Publishing or the Restricted Subsidiaries from any unrestricted subsidiaries
(excluding dividends received in respect of Publishing's indirect interest in
Southam and due on the Series A Preferred Stock after the date of the
Indenture), (c) net cash proceeds received after the date of the Indenture from
the issuance or sale (other than to Restricted Subsidiaries) of capital stock,
including upon the exercise of any warrants or options, or from cash
contributions, (d) the amount by which any debt is reduced after the date of the
Indenture as a result of the conversion or exchange of debt securities or
redeemable capital stock for non-redeemable capital stock of Publishing and (e)
$25,000,000; (iii) enter into transactions with affiliates; (iv) incur an
indebtedness that is subordinate in right of payment to any senior indebtedness
unless such indebtedness is pari passu with or subordinate in right of payment
to the Notes; (v) create or assume any liens securing any indebtedness that is
pari passu with or subordinate in right of payment to the Notes without securing
the Notes; (vi) guarantee, assume or otherwise become liable with respect to any
indebtedness that is pari passu with or subordinate in right of payment to the
Notes without guaranteeing payment of the Notes; (vii) sell any of its assets
unless at least 80% of the net proceeds of such asset sale is received in cash
or in other newspaper assets; (viii) sell any capital stock in any Restricted
Subsidiary or, in the case of any Restricted Subsidiary, issue any capital
stock; (ix) create any encumbrance on the ability of any Restricted Subsidiary
to pay dividends or make any other distribution on its capital stock, to pay any
indebtedness owed to Publishing or any Restricted Subsidiary or to take certain
other actions; and (x) in the case of Publishing, the Company and certain
Restricted Subsidiaries that become guarantors of the Notes, sell, assign,
convey, transfer, lease or otherwise dispose of any or substantially all of its
properties and assets to any person or group of affiliated persons. The
Indenture also contains covenants with respect to (i) provision of financial
statements; (ii) designation of Restricted Subsidiaries; and (iii) certain other
customary matters.
The Indenture provides that upon a Change of Control (as defined below),
each holder of the Notes has the right to require that Publishing purchase all
or any portion of such holder's Notes at a purchase price in cash equal to 101%
of the principal amount of such Notes, plus accrued and unpaid interest, if any,
to the date of purchase. A "Change of Control" is defined in the Indenture to
include, among other things, (i) any person other than Conrad M. Black
beneficially owning voting stock representing more than 50% of the total voting
power of Hollinger Inc. or the Company, (ii) the Company ceasing to directly or
indirectly own 100% of the voting stock of Publishing, (iii) the occurrence of a
business combination in which either (a) Publishing or the Company is not the
surviving corporation or (b) there shall be a reclassification of the voting
stock of Publishing or the Company in which the holders of 50% of the voting
stock of Publishing prior to such transaction shall no longer hold at least 50%
of the voting stock of Publishing or the Company, or (iv) any person shall own
or control a greater percentage of the voting stock of the Company than Conrad
M. Black and a Rating Decline (as defined in the Indenture) shall occur.
Hollinger Inc. has pledged all shares of Common Stock and Series A Preferred
Stock owned by it to Canadian chartered banks as collateral for outstanding bank
indebtedness of Hollinger Inc. A default under such indebtedness and foreclosure
upon such shares could result in a Change of Control.
The following events, among others, will constitute Events of Default under
the Indenture: (i) a default continuing for 30 days in payment when due of any
interest on any Note; (ii) a default in the payment when due of any principal of
any Note (whether at maturity or otherwise); (iii) (x) a breach of the covenant
relating to consolidations, mergers or sales of assets, (y) failure of
Publishing to purchase or offer to purchase the Notes upon a Change of Control
or (z) a default for 30 days in the performance of any other covenant or
agreement of Publishing under the Indenture; (iv) a default under any agreement
or indenture under which Publishing, the Company or any Restricted Subsidiary
then has outstanding indebtedness in excess of $5,000,000 in the aggregate and
such indebtedness shall have matured or been accelerated; (v) the guarantee of
the Company or any Restricted Subsidiary that has guaranteed the payment of the
Notes shall cease to be enforceable; (vi) Publishing, the Company or any
Restricted Subsidiary shall experience an adverse judgment in excess of
$5,000,000; or (vii) Publishing, the Company or any material Restricted
Subsidiary shall become
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insolvent or shall institute or become subject to certain bankruptcy,
insolvency, liquidation or dissolution proceedings.
TELEGRAPH BANK FACILITIES. The Telegraph has three floating rate unsecured
medium term bank facilities under which an aggregate of $135.7 million was
outstanding at December 31, 1995 (representing the full amount available under
these facilities which mature in 1997 and 1998), the proceeds of which were used
partly to fund investments in Fairfax and Southam. The Telegraph also has three
bank credit facilities for working capital purposes in the aggregate principal
amount of $62.1 million, of which $17.9 million was outstanding at December 31,
1995.
None of these short term and medium term debt facilities is secured but
all, with the exception of the bank overdraft facility, are subject to financial
covenants, including a leverage ratio, an interest coverage ratio and a minimum
net worth requirement. In addition, all, with the exception of the bank
overdraft facility, prohibit the payment of dividends in excess of after-tax
profits in any financial year or half-year. Medium term debt is repayable on the
sale or disposition of The Telegraph's investments in Fairfax or Southam, as the
case may be, or the sale or disposal of any other major asset of The Telegraph.
The medium term debt facilities and the revolving bank credit facilities each
contain an event of default provision triggered by a decline in Hollinger Inc.'s
ownership, directly or indirectly, to less than 51% of the issued equity share
capital of The Telegraph. The Telegraph is currently in compliance with its
financial covenants and other provisions of these debt facilities. Interest on
borrowings, except the bank overdraft facility, is based on LIBOR, or the
acceptance discount rate in the case of bills of exchange, plus an applicable
margin. Overdraft interest is charged at the bank's base rate plus 1%.
REDEEMABLE PREFERRED STOCK. The Company's equity interests in The
Telegraph, Southam and Fairfax are held through intermediate English holding
companies, DTH and FDTH, whose only significant long-term assets are their
direct or indirect interests in The Telegraph, Southam and Fairfax. DTH and FDTH
have outstanding preference shares held by persons other than the Company and
its affiliates with an aggregate redemption amount of $227.1 million (as of
March 31, 1996) and which require the payment of quarterly dividends with a
current effective dividend cost of 5.5% per annum (after giving effect to
certain interest rate and currency exchange agreements). In addition, DTH owns
all 165,000,000 non-cumulative redeemable preference shares of L1 per share
issued by FDTH and 23,801,420 non-cumulative redeemable preference shares of
Cdn.$1 per share issued by FDTH which were transferred by Hollinger Inc. to DTH
in July 1995.
In order to fund these dividends, which aggregated approximately $9.3
million in 1995, currently FDTH must receive dividends on its ordinary shares of
The Telegraph at the rate of 7.0p per share per annum, based on ownership,
interest and exchange rates as of December 31, 1995. This funding requirement
could change as a result of the fluctuations in interest and exchange rates as
well as changes in tax rates, laws, and treaties. The timing and amount of
dividend payments by The Telegraph will be determined in light of results of its
operations, financial condition, cash requirements, restrictions imposed by its
lenders, future prospects and other factors deemed relevant by the Board of
Directors of The Telegraph. Since 1992, the interim dividend has been paid in
October and the final dividend paid in May of the following year. The annual per
share dividends paid on The Telegraph ordinary shares were 13.0p in 1993, 13.0p
in 1994 and 13.0p in 1995.
The DTH Preference Shares are redeemable at the option of the holder at any
time on four days' notice at a redemption price discounted in accordance with an
agreed formula, and the FDTH Preference Shares and the DTH Preference Shares are
redeemable by the issuer or the holders on the fifth anniversary of their
issuance (May or June 1997, respectively), each five-year anniversary thereafter
and at other prescribed times and in prescribed circumstances, including where
the consolidated debt of Hollinger Inc. is more than two times its consolidated
equity. This debt to equity ratio is affected by, among other things, Hollinger
Inc.'s consolidated results of operations, as well as changes in the levels of
consolidated debt of Hollinger Inc. and its subsidiaries, including the Company.
The Company has been informed by Hollinger Inc. that, based on preliminary
calculations as of June 30, 1996, Hollinger Inc. believes that it is in
compliance with the Debt to Equity Ratio at June 30, 1996. Final calculations
will be made when the interim consolidated financial statements of Hollinger
Inc. become available. However, in light of the contemplated additional debt
financing to be incurred in connection with the acquisition of the Telegraph
Minority Shares, Hollinger Inc. has
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indicated that it will not be in compliance with the Debt to Equity Ratio as of
September 30, 1996. Accordingly, there can be no assurance that holders of the
DTH or FDTH Preference Shares will not exercise their retraction rights against
DTH or FDTH or against Hollinger Inc. pursuant to contractual arrangements with
the holders under which Hollinger Inc. has agreed to purchase the DTH Preference
Shares and the FDTH Preference Shares. If Hollinger Inc. does not satisfy its
purchase obligations, the DTH Preference Shares and the FDTH Preference Shares
are exchangeable at the holder's option for Hollinger Inc. common shares at an
exchange price equal to 95% of the then current market price of Hollinger Inc.
common shares. In the event Hollinger Inc. is required to purchase any DTH and
FDTH Preference Shares under these circumstances, Hollinger Inc. shall have the
right, following written notice, to require the Company to purchase such shares
at the then retraction price. The aggregate amount of any such payments by the
Company to Hollinger Inc. (other than in respect of shares held by Argsub) would
be a maximum of approximately $125.6 million. "Consolidated Debt" is defined as
the sum of short term debt, long term debt, long term lease obligations, and
convertible debentures and similar liabilities of Hollinger Inc. and also
including the aggregate liability of Hollinger Inc. under any guarantees
provided by it in respect of the obligation of any entity not consolidated with
it in its financial results, all as determined in accordance with generally
accepted accounting principles in Canada. "Consolidated Equity" is defined as
the sum of the capital stock and retained earnings of Hollinger Inc. as
determined in accordance with generally accepted accounting principles in Canada
which capital stock shall include the sum of the nominal or par value of all
outstanding DTH and FDTH Preference Shares minus the nominal or par value of all
outstanding DTH and FDTH Preference Shares held by the other or by Hollinger
Inc. or any affiliate.
Hollinger Inc. has indemnified the holders of the DTH and FDTH Preference
Shares and agreed to purchase these Preference Shares if DTH or FDTH fails to
pay the full amount of dividends or redemption prices on such shares and in
certain other events. The Company has entered into an agreement to compensate
Hollinger Inc. for any payments made by Hollinger Inc. to holders of the DTH and
FDTH Preference Shares and to purchase any DTH and FDTH Preference Shares which
Hollinger Inc. is required to purchase in accordance with the terms thereof. The
timing of any such payments by the Company to Hollinger Inc. will be determined
by Hollinger Inc.
In addition, the Company has issued to Hollinger Inc. in connection with
the Reorganization 739,500 shares of Series A Preferred Stock. The shares of
Series A Preferred Stock are redeemable in whole or in part, at any time and
from time to time, subject to restrictions in the Company's credit facilities,
by the Company or by a holder of such shares. Hollinger Inc. has agreed to limit
the exercise of its redemption rights to a number of shares of
Hollinger-Telegraph Holdings Inc., a Canadian holding company which is owned
equally by FDTH and The Telegraph, or Southam common shares that at the time of
such exercise have been delivered to FDTH free and clear of encumbrances other
than certain permitted encumbrances. The redemption price of the Series A
Preferred Stock was $79.5 million at December 31, 1995.
AMENDED PUBLISHING CREDIT FACILITY. Publishing entered into the Amended
Publishing Credit Facility on May 30, 1996 with a certain lender, which consists
of a secured, non-amortizing revolving credit facility which the lender has
agreed to amend to provide for a maximum of $150 million of available credit to
be used principally to finance Publishing's acquisition of newly-issued
Telegraph ordinary shares (and for working capital). The Telegraph will apply
the proceeds of this issuance to repay a portion of its outstanding bank
indebtedness. See "The Company--Recent Developments--The Telegraph." Under the
terms of the Amended Publishing Credit Facility, the aggregate of outstanding
loans and letters of credit pursuant to the Amended Publishing Credit Facility
may not exceed $10 million prior to consummation of the Scheme and the
satisfaction of certain conditions related thereto, at which time the closing
under the Amended Publishing Credit Facility shall occur. The conditions to
closing include, among other things, (i) the lenders' satisfaction with the
terms of the Scheme, (ii) the Scheme's approval by The Telegraph's board and
(iii) its sanction by English courts. The commitment of the lenders under the
Amended Publishing Credit Facility shall expire on September 30, 1996 if the
closing has not occurred on or prior to such date or on the date which is the
earlier of six months from the closing or upon the occurrence of an event of
default. The Amended Publishing Credit Facility requires the prior or
contemporaneous funding of the FDTH Credit Facility and of the Publishing
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Holdings Note Facility and/or the use of the proceeds of the Common Stock
Offering and this Offering in lieu of the Publishing Holdings Note Facility and
a portion of the FDTH Credit Facility.
Interest. Loans under the Amended Publishing Credit Facility will bear
interest at a floating rate per annum equal, at Publishing's option, to either
the Base Rate (equal to the higher of (x) a specified publicly announced
commercial lending rate and (y) the federal funds effective rate plus 0.5%) plus
a margin of 1.25% or the reserve adjusted Eurocurrency rate plus a margin of
2.25%.
Guarantees. Amounts owed with respect to the Amended Publishing Credit
Facility are the direct obligations of Publishing and are unconditionally
guaranteed by the Company and by each of the United States subsidiaries other
than Jerusalem Post, subject, in the case of AP-91, to a formula designed to
comply with the terms of the AP-91 Senior Notes. The guarantee by the Company of
Publishing's obligations under the Amended Publishing Credit Facility is
expressly senior to its guarantee in respect of the Notes. Such guarantees
contain various covenants, representations and warranties acceptable to the
lenders.
Security. The obligations under the Amended Publishing Credit Facility are
secured by a pledge of the shares of capital stock of Publishing held by
Publishing Holdings and by a pledge of the capital stock and the intercompany
notes of each of the United States subsidiaries other than AP-91 and its
subsidiaries. Upon payment in full of the AP-91 Senior Notes, Publishing will be
obligated to pledge all of the capital stock of AP-91 and its subsidiaries as
additional collateral under the Amended Publishing Credit Facility. If the
Southam Facility and the Publishing Holdings Note Facility are terminated, the
Company is required to pledge or cause the Power Shares of Southam to be
pledged. In addition, the obligations under the Amended Publishing Credit
Facility will be secured by the shares of the capital stock of The Telegraph to
be held by Publishing.
Covenants. The Amended Publishing Credit Facility contains affirmative and
negative covenants, including restrictions on Publishing's and its United States
subsidiaries' ability to (a) create, incur, assume or guaranty additional
indebtedness, other than the Notes and certain other permitted indebtedness; (b)
create liens or other encumbrances on assets of Publishing and its United States
subsidiaries, other than certain permitted liens; (c) sell assets of Publishing
or its United States subsidiaries when the sale price exceeds $5 million for
each such asset sale and $8 million for all asset sales in the aggregate,
excluding certain other permitted asset sales; (d) make investments, loans or
advances to acquire other entities and for other purposes, other than certain
permitted investments; (e) engage in sale-leaseback transactions; (f) merge,
consolidate or participate in similar business combinations; (g) enter into
transactions with affiliates other than certain permitted transactions; (h)
retire outstanding capital stock; (i) make changes in its lines of business; (j)
make or commit to make any capital expenditures exceeding $4.5 million in
aggregate amount in any fiscal quarter ($1 million in the case of AP-91 and its
subsidiaries) other than certain permitted capital expenditures relating to the
Sun-Times Plant (as defined in the Amended Publishing Credit Facility) and the
Southtown/Star Facility (as defined in the Amended Publishing Credit Facility);
and (k) enter into operating leases requiring payments in excess of $5 million
per year. Publishing and its United States subsidiaries are not permitted to
make acquisitions other than those relating to the Scheme or of the assets of a
wholly owned subsidiary, or acquisitions of entities where (x) the total
purchase price of all acquisitions made after the execution of the Amended
Publishing Credit Facility does not exceed the sum of $10 million plus permitted
asset sales plus the aggregate amount of mandatory prepayments, and (y) in the
case of any acquisition having a purchase price in excess of $10 million,
Publishing has obtained approval of the lenders and certified its compliance
with the financial covenants and that, if such acquisition was made in reliance
on prepayments, the total leverage ratio does not exceed 5.00x. The Amended
Publishing Credit Facility also restricts payment of dividends, principal or
redemption payments, management fees (if, in the aggregate, in excess of the
lesser of excess cash flow and $2.25 million per quarter) or similar
distributions by Publishing and its subsidiaries, other than regular quarterly
dividends equal to the sum of the amount of (x) dividends declared by the
Company and (y) interest payable pursuant to the Publishing Holdings Note
Facility which FDTH is not permitted to pay under certain limitations set forth
in the FDTH Credit Facility, provided, in either case, in addition to the
proviso below, that the Company's quarterly dividend payment does not exceed
$.10 per share, and (A) dividends paid to the Company not in excess of dividends
received from shares of Southam, (B) loans, advances dividends or distributions
by certain subsidiaries to Publishing or certain other subsidiaries and by
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FDTH, DTH or Publishing to the Company for the purpose of redeeming Series A
Preferred Stock and (C) tax payments made by Publishing and certain subsidiaries
pursuant to a tax allocation agreement not in excess of certain amounts,
provided, in each case, that no event of default pursuant to the Amended
Publishing Credit Facility has occurred or would occur as a result thereof and
no holders of debt of Publishing or certain subsidiaries would have an
acceleration right.
The Amended Publishing Credit Facility also includes various financial
covenants applicable to Publishing on a consolidated basis, including required
maintenance of (i) a total leverage ratio (funded debt to operating cash flow),
(ii) a senior leverage ratio (funded debt, excluding the Notes, to operating
cash flow), and (iii) a minimum ratio of operating cash flow to interest
expense. The total leverage ratio prior to the closing of the Amended Publishing
Credit Facility of Publishing and its United States subsidiaries for the four
fiscal quarters then most recently ended shall not at any time be greater than
6.50x and after the closing and through maturity, shall not exceed 6.00x. The
senior leverage ratio shall not at any time exceed 3.25x and the minimum ratio
of operating cash flow to interest expense shall not at any time be less than
2.00x.
Events of Default. The Amended Publishing Credit Facility contains
customary events of default, including, without limitation, failure to pay
interest or principal; failure to comply with any covenant; insolvency,
bankruptcy, dissolution and liquidation events of Publishing and any guarantor;
cross default to other indebtedness or other material obligation in excess of $5
million of the Company, Publishing or Publishing Holdings or $2 million of any
of its United States subsidiaries; unsatisfied final judgments in excess of
specified amounts; the occurrence or existence of an event or condition that the
required lenders have reasonably determined in good faith has had or will have a
material adverse effect on Publishing and its United States subsidiaries taken
as a whole; the failure of Publishing Holdings to execute a guaranty of the
Amended Publishing Credit Facility upon repayment of the Publishing Holdings
Note Facility or the Company's failure to assume Publishing Holdings pledge
agreement upon Publishing Holdings dissolution into the Company; and certain
change of control provisions. A change of control is defined in the Amended
Publishing Credit Facility to include, among other things, (i) any person other
than Conrad M. Black beneficially owning voting stock representing more than 50%
of the total voting power of Hollinger Inc. or the Company, (ii) the Company
ceasing to directly or indirectly own 100% of the voting stock of Publishing or
TelHoldco Inc., or on and after the closing of the Amended Publishing Credit
Facility, The Telegraph (excluding certain preference shares and ordinary shares
issued pursuant to options), and (iii) any person shall own or control a greater
percentage of the voting stock of the Company than Conrad M. Black.
Mandatory Commitment Reduction/Prepayment. The Amended Publishing Credit
Facility requires reductions to amounts outstanding under the facility by 100%
of (i) the net cash proceeds from any equity issuance by Publishing; (ii) the
net cash proceeds from the issuance of permitted subordinated debt of
Publishing; (iii) the net cash proceeds from asset sales; and (iv) any special
dividends received by TelHoldco Inc. in connection with the Scheme. In addition,
the Amended Publishing Credit Facility requires that prepayments be made in the
amount of 50% of the aggregate net cash proceeds from any issuance of equity or
debt by the Company or Publishing Holdings after the Publishing Holdings Note
Facility is repaid in full, $75 million of the FDTH Credit Facility is repaid
and the Southam Facility is repaid in full, provided, however, that such
prepayments shall not be required if at such time the total leverage ratio is
5.00x or less.
FDTH CREDIT FACILITY. FDTH entered into the short term FDTH Credit Facility
on May 30, 1996 with certain lenders, which consists of a secured,
non-amortizing revolving credit facility with a maximum of L250 million of
available credit to be used to finance the Scheme. See "The Company--Recent
Developments--The Telegraph." Under the terms of the FDTH Credit Facility, funds
shall become available only upon consummation of the Scheme and the satisfaction
of certain conditions related thereto, at which time the closing under the FDTH
Credit Facility shall occur. The conditions to closing include, among other
things, (i) the lenders' satisfaction with the terms of the Scheme, the Scheme's
approval by The Telegraph's board and its sanction by English courts, (ii) the
repayment of the existing debt facilities of The Telegraph, and (iii) the
amendment of the terms attaching to the FDTH Preference Shares and the Telegraph
Preference Shares to prevent the holders from redeeming them prior to March 2006
or the agreement of affiliates of FDTH owning such shares to such effect. The
commitment of the lenders under the FDTH Credit Facility shall expire on
September 30, 1996 if the closing of the Facility has not occurred on or prior
to such date or on
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the date which is the earlier of six months from the closing or upon the
occurrence of an event of default. The FDTH Credit Facility requires the prior
or contemporaneous funding of the Amended Publishing Credit Facility and/or the
Publishing Holdings Note Facility and/or the use of the proceeds of the Common
Stock Offering and this Offering in lieu of the Publishing Holdings Note
Facility and a portion of the FDTH Credit Facility.
Interest. Loans under the FDTH Credit Facility will bear interest at a
floating rate per annum equal to the reserve adjusted LIBOR rate, plus 2.50%.
Guarantees. Amounts owed with respect to the FDTH Credit Facility are the
direct obligations of FDTH and are unconditionally guaranteed by the Company and
TelHoldco Inc. and, upon consummation of the Scheme by each of FDTH's
subsidiaries other than HTH and certain other subsidiaries. Such guarantees
contain certain covenants, representations and warranties acceptable to the
lenders.
Security. The obligations under the FDTH Credit Facility are secured by a
pledge of the shares of capital stock of FDTH. Upon consummation of the Scheme,
additional security shall include the shares of The Telegraph held by TelHoldco
Inc. and FDTH and the shares of Fairfax and certain other subsidiaries of The
Telegraph and the shares of Southam owned by FDTH and Deedtask Limited.
Covenants. The FDTH Credit Facility contains affirmative and negative
covenants, including restrictions on FDTH's and its subsidiaries' ability to (a)
create, incur, assume or guaranty additional indebtedness, other than certain
debt of The Telegraph, certain debt relating to the Scheme and certain other
permitted indebtedness; (b) create liens or other encumbrances on assets of FDTH
and its subsidiaries, other than certain permitted liens; (c) sell assets of
FDTH or its subsidiaries, except to a wholly-owned subsidiary; (d) make
investments, loans or advances to acquire other entities and for other purposes,
other than certain permitted investments; (e) engage in sale-leaseback
transactions; (f) merge, consolidate or participate in similar business
combinations; (g) enter into transactions with affiliates other than certain
permitted transactions; (h) retire outstanding capital stock; (i) make changes
in its lines of business; (j) make or commit to make any capital expenditures
exceeding L2 million in aggregate amount in any fiscal quarter other than
capital expenditures by The Telegraph; and (k) enter into operating leases
requiring payments in excess of L5 million per year. FDTH and its subsidiaries
are not permitted to make acquisitions other those relating to the Scheme or of
the assets of a wholly-owned subsidiary. The FDTH Credit Facility also restricts
payment of dividends, principal or redemption payments, management fees (if, in
the aggregate, in excess of the lesser of excess cash flow and $3.75 million per
quarter) or similar distributions by FDTH and its subsidiaries, other than
regular quarterly dividends equal to the sum of the amounts (x) payable on the
DTH Preference Shares and certain FDTH Preference Shares and (y) interest
payable pursuant to the Publishing Holdings Note Facility, provided, in either
case, in addition to the proviso below, that the interest/restricted payment
coverage ratio as defined in the FDTH Credit Facility is 1.0x or greater and (A)
dividends paid not in excess of dividends received from shares of Southam, (B)
loans, advances dividends or distributions by a subsidiary to Publishing or
certain of its subsidiaries and by FDTH, DTH or Publishing to the Company for
the purpose of redeeming Series A Preferred Stock, (C) payments and dividends
required pursuant to the Scheme. (D) tax payments under certain tax indemnity
agreements and (E) redemption of shares of The Telegraph in certain limited
circumstances, provided, in each case, that no event of default pursuant to the
FDTH Credit Facility has occurred or would occur as a result thereof and no
holders of debt of FDTH or any subsidiary would have an acceleration right.
The FDTH Credit Facility also includes various financial covenants
applicable to FDTH on a consolidated basis, including required maintenance of
(i) an asset coverage ratio, defined as the ratio of the sum of 5.5 multiplied
by operating cash flow excluding dividends received from Fairfax or Southam plus
88% (such percentage to be adjusted upward in the event that more than 88% of
the capital stock of The Telegraph is pledged as security) of the United States
dollar equivalent of the closing price for Fairfax shares to the aggregate
amount of loan commitments, capital leases and guarantee obligations, and (ii) a
minimum ratio of operating cash flow to interest expense. The asset coverage
ratio of FDTH shall not prior to the closing of the FDTH Credit Facility be less
than 1.25x and after the closing and through maturity, shall not be less than
1.50x, in either case for any three consecutive business days unless within
three business days of such failure to
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maintain the asset coverage ratio, FDTH makes a repayment of debt under the FDTH
Credit Facility required as a result of the mandatory commitment reduction
triggered by such failure.
Events of Default. The FDTH Credit Facility contains customary events of
default, including, without limitation, failure to pay interest or principal;
failure to comply with any covenant; insolvency, bankruptcy, dissolution and
liquidation events of FDTH, the Company or any other obligor under the FDTH
Credit Facility; cross default to other indebtedness or other material
obligation in excess of L2 million of the Company, FDTH and The Telegraph or in
excess of L500,000 of any of FDTH's other subsidiaries; unsatisfied final
judgments in excess of specified amounts; the occurrence or existence of an
event or condition that the lenders have reasonably determined in good faith has
had or will have a material adverse effect on FDTH and its subsidiaries taken as
a whole; and certain change of control provisions. A change of control is
defined in the FDTH Credit Facility to include, among other things, (i) any
person other than Conrad M. Black beneficially owning voting stock representing
more than 50% of the total voting power of Hollinger Inc. or the Company, (ii)
the Company ceasing to directly or indirectly own 100% of the voting stock of
FDTH (other than the DTH Preference Shares and the FDTH Preference Shares owned
by third parties) or TelHoldco Inc., or, on and after the closing, The Telegraph
(excluding certain preference shares and ordinary shares issued pursuant to
options), and (iii) any person shall own or control a greater percentage of the
voting stock of the Company than Conrad M. Black.
Mandatory Commitment Reduction/Prepayment. The FDTH Credit Facility
requires that prepayments be made in the amount of 100% of (i) the net cash
proceeds (after tax) received by FDTH, The Telegraph or any of FDTH's
subsidiaries from any sale or other disposition of any shares of capital stock
of Fairfax, Southam or any other assets; (ii) the net cash proceeds from any
equity issuance by FDTH or DTH; (iii) the net cash proceeds from the issuance of
permitted subordinated debt of FDTH and DTH; and (iv) any special dividends
received by TelHoldco Inc. in connection with the Scheme. In addition, the FDTH
Credit Facility requires that if the asset coverage ratio is less than 1.50x
prepayments be made in the amount necessary to cure such default. Further, the
FDTH Credit Facility requires that prepayments be made in the amount of (a) up
to $75 million from the aggregate net cash proceeds from any issuance of equity
or debt by the Company or Publishing Holdings after the Publishing Holdings Note
Facility is repaid in full and (b) 50% of the aggregate net cash proceeds from
any issuance of equity or debt by the Company or Publishing Holdings after the
Publishing Holdings Note Facility is repaid in full, the mandatory reduction in
clause (a) above is made and the Southam Facility is repaid in full, provided,
however, that such prepayments shall not be required if at such time the total
leverage ratio (excluding any special dividends received by FDTH in connection
with the Scheme) is 4.50x or less.
PUBLISHING HOLDINGS NOTE FACILITY. Publishing Holdings and the Company
entered into the Publishing Holdings Note Facility on May 30, 1996 with a
purchaser, which relates to the $100 million aggregate principal amount of the
Publishing Holdings Notes which shall be guaranteed by the Company and used to
finance the Scheme, if necessary. See "The Company--Recent Developments--The
Telegraph." It is expected that this facility will be cancelled upon
consummation of the Offering and the Common Stock Offering. Under the terms of
the Publishing Holdings Note Facility, Publishing Holdings may deliver a notice
of borrowing to the purchaser prior to September 30, 1996, provided no event of
default has occurred. The closing under the Publishing Holdings Note Facility
shall occur three business days following delivery of such notice to the
purchaser. The Publishing Holdings Notes mature six months following the
closing. If necessary, the proceeds of the Publishing Holdings Note Facility
would be borrowed from Publishing Holdings by FDTH to provide funds for the
Scheme.
Interest. The Publishing Holdings Notes bear interest at the reserve
adjusted Eurodollar rate, plus a margin of 4.00% from the closing of the
facility to and including the 90th day after the closing or plus a margin of
5.00% from and after the 91st day following the closing, provided no event of
default has occurred and is continuing, in which case an additional margin shall
be applicable.
Guarantees. Amounts payable with respect to the Publishing Holdings Notes
are unconditionally guaranteed by the Company, but are subordinate to the
Company's guarantees of the Amended Publishing Credit Facility and the FDTH
Credit Facility and no payments may be made by the Company to holders of
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the Publishing Holdings Notes in the event of a default under either credit
facility or in the event of insolvency, bankruptcy or any similar proceeding
involving the Company.
Security. The obligations under the Publishing Holdings Note Facility will
be secured by a pledge of the shares of capital stock of Publishing Holdings and
of a $100 million promissory note from FDTH to Publishing Holdings.
Covenants. The Publishing Holdings Note Facility contains affirmative and
negative covenants, including restrictions on Publishing Holdings and the
Company's ability to create, incur, assume or guaranty additional indebtedness,
other than the Notes, the Amended Publishing Credit Facility and the FDTH Credit
Facility and certain other permitted indebtedness. The Company also agrees to
reserve shares of its Class A Common Stock for issuance upon exchange of the
Publishing Holdings Notes. Publishing Holdings and the Company also agree to
perform most of the covenants of Publishing and FDTH, as applicable, set forth
in the Amended Publishing Credit Agreement and the FDTH Credit Agreement,
including those relating to the creation of liens, the sale of assets,
acquisitions, investments, mergers, consolidations and similar combinations,
operating leases and capital expenditures. The Publishing Holdings Notes
Facility also restricts payment of dividends, principal or redemption payments,
management fees (to the extent permitted under the Amended Publishing Credit
Facility and the FDTH Credit Facility) or similar distributions by Publishing
Holdings, the Company or any subsidiary, other than regular quarterly dividends
declared by the Company, provided, in addition to the proviso below, that the
Company's quarterly dividend payment does not exceed $.10 per share and (A)
dividends paid to the Company not in excess of the lesser of dividends received
from shares of Southam and dividend payments paid or payable on the Series A
Preferred Stock to the extent received by Publishing Holdings, (B) loans,
advances dividends or distributions by any subsidiary to Publishing Holdings or
any subsidiary and by Publishing Holdings, FDTH, DTH or Publishing to the
Company for the purpose of redeeming Series A Preferred Stock, (C) tax payments
pursuant to a tax allocation agreement not in excess of a certain amount,
provided, in each case, that no event of default has occurred or would occur as
a result thereof and no holders of debt of Publishing Holdings or any subsidiary
would have an acceleration right.
The Publishing Holdings Note Facility also requires that the Amended
Publishing Credit Facility and the FDTH Credit Facility shall be in full force
and effect, and the maintenance of a leverage ratio (funded debt to operating
cash flow) of 7.75x for the four previous fiscal quarters, calculated at each
fiscal quarter.
Events of Default. Upon the occurrence of an event of default, the
Publishing Holdings Notes are exchangeable at any time for shares of the
Company's Class A Common Stock at the option of the holder. The Publishing
Holdings Note Facility contains customary events of default, including, without
limitation, failure to pay interest or principal; failure to comply with certain
covenants in the Publishing Holdings Note Facility, the Publishing Credit
Agreement and the FDTH Credit Agreement; insolvency, bankruptcy, dissolution and
liquidation events of the Company, Publishing Holdings or any subsidiary; cross
default to other indebtedness in excess of specified amounts of the Company or
any subsidiary; unsatisfied final judgments in excess of specified amounts; the
occurrence or existence of an event or condition that the required lenders have
reasonably determined in good faith has had or will have a material adverse
effect on the Company, Publishing Holdings and its subsidiaries taken as a
whole; the revocation or invalidation of the Company's guarantee under the
Publishing Holdings Note Facility; the public market equity value of the Company
falls below $500.0 million; and certain change of control provisions. A change
of control is defined in the Publishing Holdings Note Facility to include, among
other things, (i) any person other than Conrad M. Black beneficially owning
voting stock representing more than 50% of the total voting power of Hollinger
Inc. or the Company, (ii) the Company ceasing to directly or indirectly own 100%
of the voting stock of Publishing Holdings, and (iii) any person shall own or
control a greater percentage of the voting stock of the Company than Conrad M.
Black.
SOUTHAM FACILITY. The Company entered into the Southam Facility on May 24,
1996 with a Canadian chartered bank, which consists of a secured, non-amortizing
credit facility guaranteed by Hollinger Inc. in the amount of Cdn.$300 million.
The proceeds of the Southam Facility were advanced by the Company to CanHoldco
as an intercompany loan to finance CanHoldco's purchase of the Power Shares. See
"The Company--Recent Developments--Southam." The Southam Facility is repayable
on or prior to Novem-
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ber 25, 1996. The Company and the bank are negotiating a detailed loan agreement
to reflect the terms of the Southam Facility.
Interest. Loans under the Southam Facility will be made either as prime
rate advances or bankers' acceptances. Prime rate advances shall bear interest
at the Canadian bank's prime rate used for commercial loans in Canada plus 125
basis points. Bankers' acceptances shall be in minimum amounts of Cdn.$10
million and multiples of Cdn.$1 million for a period of not less than 30 and not
more than 180 days and shall bear interest at the bank's Canadian dollar
bankers' acceptance rate plus 3% per annum.
Guarantees. Amounts owed with respect to the Southam Facility are
guaranteed by Hollinger Inc. and three subsidiaries of Hollinger Inc., 1159670
Ontario Limited, 3184081 Canada Limited and CanHoldco. Such guarantees contain
various covenants, representations and warranties acceptable to the bank.
Security. The obligations under the Southam Facility are secured by a
pledge from CanHoldco of the Power Shares, a pledge from 3184081 Canada Limited
of 7,539,028 shares of Class A Common Stock (providing a 1.00x coverage ratio)
and a pledge from 1159670 Ontario Limited of all of the shares of Class B Common
Stock.
Covenants. The Southam Facility contains affirmative and negative covenants
customary in similar transactions, including (a) that collateralization
requirements relating to the pledged shares of the Company and Southam be
maintained and that cash collateral be provided in the event of any shortfall,
and (b) that neither the Company, Hollinger Inc. nor any subsidiaries enter into
any reorganization, merger or amalgamation without the consent of the bank.
The Southam Facility requires that a 2.00x collateral to loan ratio be
maintained at all times and that the Company cash collateralize any shortfall.
Events of Default. The Southam Facility contains customary events of
default, including, without limitation, failure to pay interest or principal;
failure to comply with any covenant; insolvency, bankruptcy, dissolution and
liquidation events of Hollinger Inc. and any of its subsidiaries; cross default
to other indebtedness of Hollinger Inc., the Company or any of their
subsidiaries; unsatisfied final judgments; and the prohibition of a change of
control of Hollinger Inc., the Company and any of their subsidiaries without the
prior written approval of the bank.
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DESCRIPTION OF THE SECURITIES
The summaries of certain provisions of documents described below do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of such documents (including the
definitions therein of certain terms), forms of which are on file with the
Commission. Wherever particular Sections of, or terms defined in, such documents
are referred to herein, such Sections or defined terms are incorporated by
reference herein.
PRIDES DEPOSIT AGREEMENT
GENERAL
Each PRIDE will constitute a depositary share representing one half of a
share of Convertible Preferred Stock deposited under the Deposit Agreement (the
"Deposit Agreement") between the Company and , as depositary (the
"Depositary"), acting from time to time on behalf of the holders of the PRIDES
issued thereunder. Subject to the terms of the Deposit Agreement, each holder of
a PRIDE is entitled, proportionately, to cause the Depositary to exercise on
behalf of such holder, as the owner of a beneficial interest in shares of the
Convertible Preferred Stock, all of the rights and preferences of the
Convertible Preferred Stock (including dividend, voting, conversion, redemption
and liquidation rights), contained in the Certificate of Designations for the
Convertible Preferred Stock and summarized herein.
Reference is made to the form of Deposit Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part and is
incorporated herein by reference, for a complete statement of the provisions
relating to the PRIDES.
ISSUANCE OF PRIDES
Immediately following the transfer and delivery of the Convertible
Preferred Stock by or on behalf of the holders thereof to the Depositary, the
Depositary will issue the appropriate number of PRIDES and deliver, subject to
the terms of the Deposit Agreement, certificates to the holders thereof.
WITHDRAWAL OF CONVERTIBLE PREFERRED STOCK
Upon surrender of PRIDES at the corporate trust offices of the Depositary
(unless the shares of Convertible Preferred Stock represented by the PRIDES have
previously been converted or redeemed), an owner of the PRIDES is entitled to
delivery at such office, to or upon his order, of the shares of Convertible
Preferred Stock represented by such PRIDES. Upon such surrender, an owner of the
PRIDES will be entitled to receive whole shares of Convertible Preferred Stock
on the basis of one share of Convertible Preferred Stock for every two PRIDES so
surrendered and, if applicable, PRIDES for any fractional interests in
denominations of one half of a share of Convertible Preferred Stock and integral
multiples thereof, and cash for fractional interests other than in the foregoing
denominations and integral multiples thereof.
CONVERSION
Each record holder of the PRIDES will have the right, at his option, to
surrender at the offices of the Depositary PRIDES for conversion of the shares
of Convertible Preferred Stock attributable thereto into shares of the Company's
Class A Common Stock, subject to the terms of the Certificate of Designations
for the Convertible Preferred Stock. No adjustment in respect of dividends on
the Company's Class A Common Stock issued upon conversion thereof will be made
upon any conversion of the Convertible Preferred Stock represented by the
PRIDES, except as provided in the Certificate of Designations for the
Convertible Preferred Stock.
In addition, unless previously redeemed by the Company or converted at the
option of the holder, the PRIDES will automatically convert on the Mandatory
Conversion Date into the right to receive the number of shares of Class A Common
Stock into which the shares of Convertible Preferred Stock represented by such
PRIDES are automatically converted on such date.
For a description of the optional and mandatory conversion provisions of
the Convertible Preferred Stock, see "Description of the Securities--Convertible
Preferred Stock."
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OPTIONAL REDEMPTION
The PRIDES will be redeemed, upon not less than 15 nor more than 60 days'
notice, from the proceeds received by the Depositary in respect of the
redemption by the Company, in whole or part, of the shares of Convertible
Preferred Stock held by the Depositary. The redemption price per PRIDES will be
equal to one half of the redemption price per share paid by the Company with
respect to the shares of Convertible Preferred Stock. Whenever the Company
redeems the shares of Convertible Preferred Stock held by the Depositary, the
Depositary will redeem as of the same redemption date the number of PRIDES in
respect of the number of shares of the Convertible Preferred Stock that were
redeemed by the Company. If less than all of the PRIDES are to be redeemed by
the Depositary, the PRIDES to be redeemed by the Depositary shall be selected in
the same manner as that determined by the Company with respect to the redemption
by the Company of the shares of Convertible Preferred Stock. Upon redemption,
the PRIDES so redeemed will no longer be deemed to be outstanding and all rights
of the holders of such PRIDES will cease, except the right to receive the Class
A Common Stock of the Company issuable on such redemption and any money to which
the holder of such PRIDES was entitled upon such redemption upon surrender to
the Depositary of the PRIDES.
For a description of the redemption provisions of the Convertible Preferred
Stock, see "Description of the Securities--Convertible Preferred Stock--Optional
Redemption."
DIVIDENDS
The Depositary will distribute all cash dividends received in respect of
the shares of Convertible Preferred Stock as promptly as practicable to the
record holders of the PRIDES in proportion, insofar as practicable, to the
number of PRIDES owned by such holders. The amount distributed will be reduced
by any amounts required to be withheld by the Company or the Depositary on
account of taxes.
For a description of the dividend provisions of the PRIDES, see
"Description of the Securities-- Convertible Preferred Stock--Dividends."
VOTING THE UNDERLYING STOCK
Holders of PRIDES will be entitled to direct the voting of the shares of
Convertible Preferred Stock represented by the PRIDES. As a result, holders of
PRIDES will, in effect, have the right with the holders of Common Stock to vote
in the election of Directors and upon each other matter coming before any
meeting of the holders of Common Stock on the basis of 4/5 of a vote for each
half share of Convertible Preferred Stock represented by the PRIDES held. The
holders of shares of Convertible Preferred Stock and the holders of Common Stock
will vote together as one class on such matters except as otherwise provided by
law or the Amended and Restated Certificate of Incorporation of the Company.
For a description of the voting rights of the Convertible Preferred Stock,
see "Description of the Securities--Convertible Preferred Stock--Voting Rights."
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The form of the PRIDES and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Depositary. No
amendment may impose any additional fees or charges upon holders of the PRIDES.
Any amendment that is prejudicial to any substantial existing right of holders
of the PRIDES will not become effective as to outstanding PRIDES until the
holders of PRIDES representing 66 2/3% of the number of PRIDES then outstanding
shall have consented thereto. In no event may any amendment impair the right of
any owner of the PRIDES, subject to the conditions specified in the Deposit
Agreement, to surrender his PRIDES and receive shares of Convertible Preferred
Stock or to convert the shares of Convertible Preferred Stock represented by
such PRIDES into the Company's Class A Common Stock, except as provided in the
Certificate of Designations for the Convertible Preferred Stock or in order to
comply with mandatory provisions of applicable law.
The Company will be entitled to terminate the Deposit Agreement at any
time, in its discretion, so long as authorized one-half share denominations of
Convertible Preferred Stock are listed or admitted for trading
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on any national securities exchange. Whenever the Company shall be entitled to
terminate the Deposit Agreement, the Depositary, when so directed by the
Company, will terminate the Deposit Agreement by mailing notice of such
termination to the record holders of all PRIDES then outstanding at least 60
days prior to the date fixed in that notice for termination of the Deposit
Agreement. If any PRIDES remain outstanding after the date of termination, the
Depositary thereafter will discontinue the transfer of PRIDES, will suspend the
distribution of dividends to the owners thereof, and will not give any further
notices (other than notice of such termination) or perform any further acts
under the Deposit Agreement, except that the Depositary will continue (i) to
collect dividends on the shares of Convertible Preferred Stock and (ii) to
deliver or cause to be delivered shares of Convertible Preferred Stock together
with such dividends and distributions and the net proceeds of any sales of
rights, preferences, privileges or other property in exchange for any PRIDES
surrendered. At any time after the expiration of two years from the date of
termination, the Depositary may sell the shares of Convertible Preferred Stock
then held by it at public or private sale at such place or places and upon such
terms as it deems proper and may thereafter hold the net proceeds of any such
sale, together with any other cash then held by it, without liability for
interest, for the pro rata benefit of the owners of the PRIDES which have not
theretofore been surrendered.
CHARGES OF DEPOSITARY
All reasonable charges of the Depositary in connection with the initial
issuance of the PRIDES, all withdrawals of the shares of Convertible Preferred
Stock by the owners of the PRIDES, the conversion or redemption of the shares of
Convertible Preferred Stock represented by the PRIDES and all subsequent
deposits of the shares of Convertible Preferred Stock in exchange for PRIDES and
all other reasonable charges of the Depositary, except in each case for transfer
taxes, if any, and such telegram, telex and delivery charges as are expressly
provided in the Deposit Agreement to be at the expense of holders of the PRIDES
or of shares of Convertible Preferred Stock, will be borne by the Company.
OTHER PROVISIONS
The Depositary will make available for inspection by owners of the PRIDES
at its corporate trust offices, currently located at , copies of the
Deposit Agreement and of all reports and communications from the Company which
are made generally available to the holders of the shares of Convertible
Preferred Stock. In addition, the Depositary will send to owners of the PRIDES
copies of all notices and reports required to be sent to the owners of the
shares of Convertible Preferred Stock. The registrar for the PRIDES will keep
books for the transfer of the PRIDES, which at all reasonable times will be open
for inspection by holders of the PRIDES to the same extent as a record holder of
the shares of Convertible Preferred Stock may inspect books for the transfer
thereof.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstances beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement are limited to performance in their best
judgment and good faith of their duties thereunder and they are not obligated to
appear in, prosecute or defend any legal proceeding in respect of any PRIDES or
the shares of Convertible Preferred Stock unless satisfactory indemnity is
furnished. Each of the Depositary and the Company may rely upon advice or
information from counsel, accountants or other persons believed to be competent
and on documents believed to be genuine. The Depositary will not be responsible
for any failure to carry out any instructions to vote shares of the Convertible
Preferred Stock deposited with it, provided it acts in good faith.
CONVERTIBLE PREFERRED STOCK
GENERAL
The Company's Board of Directors will adopt resolutions authorizing the
issuance of up to 8,625,000 shares of Convertible Preferred Stock, par value
$.01 per share. The Convertible Preferred Stock will be deposited with the
Depositary and each PRIDES will represent one half of a share of Convertible
Preferred Stock. See "Description of the Securities--PRIDES Deposit Agreement."
The Convertible Preferred Stock will be issuable in whole or half share
denominations.
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The following summary is qualified in its entirety by reference to the form
of Certificate of Designations for the Convertible Preferred Stock filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
DIVIDENDS
Holders of PRIDES, as beneficial owners of the shares of Convertible
Preferred Stock, will be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available therefor, cash dividends on
the Convertible Preferred Stock from , 1996, the date of initial
issuance of the Convertible Preferred Stock, at the rate of per annum of
the stated liquidation preference per half share (equivalent to $ per
annum or $ per quarter for each half share represented by a PRIDE),
payable quarterly in arrears on each , , , and or,
if any such date is not a business day, on the next succeeding business day;
provided, however, that, with respect to any dividend period during which a
redemption occurs, the Company may, at its option, declare accrued dividends to,
and pay such dividends on, the date fixed for redemption, in which case such
dividends would be payable in cash to the holders of the Convertible Preferred
Stock represented by such PRIDES as of the record date for such dividend payment
and would not be included in the calculation of the related Call Price as set
forth below. The first dividend period will be from , 1996, the date of
initial issuance of the PRIDES and the Convertible Preferred Stock, to but
excluding , 1996, and the first dividend will be payable on ,
1996 to holders of record of PRIDES at the close of business on , 1996.
Dividends will cease to accrue in respect of the Convertible Preferred Stock
represented by such PRIDES on the Mandatory Conversion Date or on the date of
their earlier conversion or redemption.
Dividends will be payable by the Depositary to the holders of record of
PRIDES on such record date, not less than 10 days (except as provided above with
respect to the first dividend payment) nor more than 60 days preceding the
payment date thereof, as shall be fixed by the Board of Directors. Dividends
payable for any period less than a full quarterly dividend period will be
computed on the basis of a 360-day year of twelve 30-day months and the actual
number of days elapsed in any period less than one month.
Dividends on the Convertible Preferred Stock will accrue whether or not
there are funds legally available for the payment of such dividends and whether
or not such dividends are declared. Accrued but unpaid dividends on the
Convertible Preferred Stock shall cumulate as of the dividend payment date on
which they first become payable, but no interest shall accrue on accrued but
unpaid dividends on the Convertible Preferred Stock.
The Convertible Preferred Stock will rank junior, both as to payment of
dividends and distribution of assets upon liquidation, to the outstanding shares
of Series A Preferred Stock and any future series of preferred stock ranking
senior to the Convertible Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation ("Senior Stock"), and will rank on a
parity, both as to payment of dividends and distribution of assets upon
liquidation, with any future preferred stock issued by the Company that by its
terms ranks on a parity with the Convertible Preferred Stock ("Parity Stock").
See "Description of Capital Stock--Series A Preferred Stock."
As long as any shares of Convertible Preferred Stock are outstanding, no
dividends for any dividend period (other than dividends payable in shares of, or
warrants, rights or options exercisable for or convertible into shares of,
Common Stock or any other capital stock of the Company ranking junior to the
Convertible Preferred Stock as to the payment of dividends and the distribution
of assets upon liquidation ("Junior Stock") and cash in lieu of fractional
shares of such Junior Stock in connection with any such dividend) will be paid
in cash or otherwise, nor will any other distribution be made (other than a
distribution payable in Junior Stock and cash in lieu of fractional shares of
such Junior Stock in connection with any such distribution), on any Junior Stock
unless (i) full dividends on the Convertible Preferred Stock and any Parity
Stock, have been paid or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such Junior Stock dividend or
distribution payment to the extent such dividends are cumulative; (ii) dividends
in full, in the case of a dividend payment with respect to Junior Stock or for
any Parity Stock dividend period commencing on or prior to the date of such
Junior Stock dividend payment or, in the case of any other distribution with
respect to Junior Stock, for the current quarterly dividend period, have been
paid,
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or declared and set aside for payment, on all Parity Stock to the extent such
dividends are cumulative; (iii) the Company has paid or set aside all amounts,
if any, then or theretofore required to be paid or set aside for all purchase,
retirement, and sinking funds, if any, for any Parity Stock; and (iv) the
Company is not in default on any of its obligations to redeem any Parity Stock.
In addition, as long as any shares of Convertible Preferred Stock are
outstanding, no shares of any Junior Stock may be purchased, redeemed, or
otherwise acquired by the Company or any of its subsidiaries (except in
connection with the reclassification or exchange of any Junior Stock through the
issuance of other Junior Stock (and cash in lieu of fractional shares of such
Junior Stock in connection therewith) or the purchase, redemption, or other
acquisition of any Junior Stock with any Junior Stock (and cash in lieu of
fractional shares of such Junior Stock in connection therewith)) nor may any
funds be set aside or made available for any sinking fund for the purchase or
redemption of any Junior Stock unless: (i) full dividends on the Convertible
Preferred Stock and any Parity Stock have been paid, or declared and set aside
for payment, for all dividend periods terminating on or prior to the date of
such purchase, redemption or acquisition to the extent such dividends are
cumulative; (ii) the Company has paid or set aside all amounts, if any, then or
theretofore required to be paid or set aside for all purchase, retirement, and
sinking funds, if any, for the Convertible Preferred Stock and any Parity Stock;
and (iii) the Company is not in default on any of its obligations to redeem the
Convertible Preferred Stock and any Parity Stock.
Subject to the provisions described above, such dividends or other
distributions (payable in cash, property or Junior Stock) as may be determined
by the Board of Directors may be declared and paid on the shares of any Junior
Stock from time to time and Junior Stock may be purchased, redeemed or otherwise
acquired by the Company or any of its subsidiaries from time to time. In the
event of the declaration and payment of any such dividends or other
distributions, the holders of such Junior Stock will be entitled, to the
exclusion of holders of any Parity Stock, to share therein according to their
respective interests.
As long as any shares of Convertible Preferred Stock are outstanding,
dividends for any dividend period or other distributions may not be paid on any
Parity Stock (other than dividends or other distributions payable in Junior
Stock and cash in lieu of fractional shares of such Junior Stock in connection
therewith), unless either: (a)(i) full dividends on Parity Stock have been paid,
or declared and set aside for payment, for all dividend periods terminating on
or prior to the date of such Parity Stock dividend or distribution payment to
the extent such dividends are cumulative; (ii) dividends in full, in the case of
a dividend payment with respect to Parity Stock, for any Parity Stock dividend
period commencing on or prior to the date of such Parity Stock dividend payment
or, in the case of any other distribution with respect to Parity Stock, for the
current Parity Stock dividend periods, have been paid, or declared and set aside
for payment, on all Parity Stock to the extent such dividends are cumulative;
(iii) the Company has paid or set aside all amounts, if any, then or theretofore
required to be paid or set aside for all purchase, retirement, and sinking
funds, if any, for any Parity Stock; and (iv) the Company is not in default on
any of its obligations to redeem any Parity Stock, or (b) any such dividends are
declared and paid pro rata so that the amounts of any dividends declared and
paid per share of Convertible Preferred Stock and each other share of such
Parity Stock will in all cases bear to each other the same ratio that accrued
and unpaid dividends (including any accumulation with respect to unpaid
dividends for prior dividend periods, if such dividends are cumulative) per
share of Convertible Preferred Stock and such other shares of Parity Stock bear
to each other.
In addition, as long as any shares of Convertible Preferred Stock are
outstanding, the Company may not purchase, redeem or otherwise acquire any
Parity Stock (except with any Junior Stock and cash in lieu of fractional shares
of such Junior Stock in connection therewith) unless: (i) full dividends on the
Convertible Preferred Stock have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the date of such
Parity Stock purchase, redemption or other acquisition payment to the extent
such dividends are cumulative; (ii) the Company has paid or set aside all
amounts, if any, then or theretofore required to be paid or set aside for all
purchase, retirement, and sinking funds, if any, for any Parity Stock; and (iii)
the Company is not in default on any of its obligations to redeem any
Convertible Preferred Stock.
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MANDATORY CONVERSION
Unless previously redeemed or converted at the option of the holder into
Class A Common Stock, as hereinafter described, on the Mandatory Conversion
Date, each half share of Convertible Preferred Stock represented by a PRIDES
will mandatorily convert into (i) shares of Class A Common Stock at the Common
Equivalent Rate (as defined herein) in effect on such date and (ii) the right to
receive cash in an amount equal to all accrued and unpaid dividends thereon
(other than previously declared dividends payable to a holder of record as of a
prior date) to the Mandatory Conversion Date, whether or not declared, out of
funds legally available for the payment of dividends, subject to the right of
the Company to redeem the Convertible Preferred Stock represented thereby on or
after , 1999 and prior to the Mandatory Conversion Date, as
described below, and subject to the conversion of the Convertible Preferred
Stock represented thereby at the option of the holder at any time prior to the
Mandatory Conversion Date, as described below. The "Common Equivalent Rate" is
initially one share of Class A Common Stock for each half share of Convertible
Preferred Stock and is subject to adjustment as described below. Dividends will
cease to accrue on the Mandatory Conversion Date in respect of the PRIDES then
outstanding.
Because the price of the Class A Common Stock is subject to market
fluctuations, the value of the Class A Common Stock that may be received by
holders of PRIDES upon mandatory conversion may be more or less than the amount
paid for the PRIDES offered hereby.
OPTIONAL REDEMPTION
Neither the PRIDES nor the shares of Convertible Preferred Stock
represented by the PRIDES are redeemable by the Company prior to ,
1999. At any time and from time to time on or after that date until immediately
prior to the Mandatory Conversion Date, the Company will have the right to
redeem, in whole or in part, the Convertible Preferred Stock represented by the
PRIDES. Upon any such redemption, the Company will deliver to the holders
thereof in exchange for each half share of Convertible Preferred Stock
represented by a PRIDE which is subject to redemption, the greater of (i) the
number of shares of Class A Common Stock equal to the applicable Call Price in
effect on the redemption date divided by the Current Market Price of the Class A
Common Stock, determined as of the second trading day immediately preceding the
Notice Date (as defined herein), or (ii) of a share of Common Stock
(subject to adjustment in the same manner as the Optional Conversion Rate (as
defined herein) is adjusted). Dividends will cease to accrue on the Convertible
Preferred Stock on the date fixed for their redemption.
The "Call Price" applicable to each half share of Convertible Preferred
Stock represented by a PRIDE is the sum of (i) $ on and after ,
1999, to and including , 1999, $ on and after , 19 , to
and including , 19 , $ on and after , 19 , to and
including , 19 , $ on and after , 19 , to and
including , 19 , and $ (being the price to the public per PRIDE
appearing on the cover page of this Prospectus), on and after , 2000 to
and including , 2000, and (ii) all accrued and unpaid dividends thereon
to but not including the date fixed for redemption (other than previously
declared dividends payable to a holder of record as of a prior date).
The "Current Market Price" per share of the Class A Common Stock on any
date of determination means the lesser of (x) the average of the Closing Prices
(as defined below) of the Class A Common Stock for the 15 consecutive trading
days ending on and including such date of determination and (y) the Closing
Price of the Class A Common Stock for such date of determination; provided,
however, that, with respect to any redemption of Convertible Preferred Stock, if
any event resulting in an adjustment of the Common Equivalent Rate occurs during
the period beginning on the first day of such 15-day period and ending on the
applicable redemption date, the Current Market Price as determined pursuant to
the foregoing will be appropriately adjusted to reflect the occurrence of such
event. The "Notice Date" with respect to any notice given by the Company in
connection with a redemption of the PRIDES (and the Convertible Preferred Stock
represented thereby) means the earlier of the date of the public announcement of
such redemption or the commencement of mailing of such notice to the holders of
PRIDES. The term "Closing Price" on any day means the last reported sales price
on the New York Stock Exchange or, if not listed thereon, the Nasdaq National
Market or the average of the bid and asked prices on the over the counter
market, as appropriate.
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If fewer than all the outstanding shares of Convertible Preferred Stock
represented by PRIDES are to be called for redemption, the shares to be called
will be selected by the Company from outstanding shares of Convertible Preferred
Stock not previously called by lot or pro rata (as nearly as may be) or by any
other method determined by the Board of Directors in its sole discretion to be
equitable.
The Company will provide notice of any call for redemption of Convertible
Preferred Stock represented by PRIDES to holders of record of the PRIDES to be
called for redemption not less than 15 days nor more than 60 days prior to the
date fixed for redemption. Accordingly, the earliest Notice Date for any call
for redemption of Convertible Preferred Stock represented by PRIDES will be
, 1999. Any such notice will be provided by mail, sent to each holder of
record of the PRIDES to be called at such holder's address as it appears on the
register of the Company, first class postage prepaid; provided, however, that
failure to give such notice or any defect therein shall not affect the validity
of the proceeding for redemption except as to the holder to whom the Company has
failed to give said notice or whose notice was defective. On or after the
redemption date, all rights of the holders of the PRIDES representing shares of
Convertible Preferred Stock called for redemption shall terminate except the
right to receive the redemption price (unless the Company defaults on the
payment of the redemption price). A public announcement of any call for
redemption will be made by the Company prior to, or at the time of, the mailing
of such notice for redemption.
Each holder of PRIDES representing Convertible Preferred Stock called for
redemption must surrender the certificates evidencing such PRIDES to the Company
at the place designated in the notice of redemption and will thereupon be
entitled to receive certificates for shares of Class A Common Stock and cash for
any fractional share amount.
CONVERSION AT THE OPTION OF THE HOLDER
The shares of Convertible Preferred Stock represented by the PRIDES are
convertible, in whole or in part, at the option of the holders thereof, at any
time prior to the Mandatory Conversion Date, unless previously redeemed, into
shares of Class A Common Stock at the rate of shares of Class A Common
Stock for each half share of Convertible Preferred Stock represented by a PRIDES
(the "Optional Conversion Rate"), equivalent to a conversion price of $
per share of Class A Common Stock (the "Conversion Price"), subject to
adjustment as described below. The right to convert shares of Convertible
Preferred Stock represented by PRIDES called for redemption will terminate
immediately prior to the close of business on the relevant redemption date.
Conversion of the shares of Convertible Preferred Stock represented by
PRIDES at the option of the holder may be effected by delivering certificates
evidencing such PRIDES, together with written notice of conversion and a proper
assignment of such certificates to the Company or in blank (and, if applicable,
cash payment of an amount equal to the dividend attributable to the current
quarterly dividend accrued on the Convertible Preferred Stock represented by
such PRIDES), to the office of any transfer agent for PRIDES or to any other
office or agency maintained by the Company for that purpose and otherwise in
accordance with conversion procedures established by the Company. Each optional
conversion shall be deemed to have been effected immediately prior to the close
of business on the date on which the foregoing requirement shall have been
satisfied. The conversion shall be at the Optional Conversion Rate in effect at
such time and on such date.
Holders of PRIDES at the close of business on a record date for any payment
of declared dividends will be entitled to receive the dividend payable on the
Convertible Preferred Stock represented by such PRIDES on the corresponding
dividend payment date notwithstanding the optional conversion of the Convertible
Preferred Stock represented by such PRIDES following such record date and prior
to the corresponding dividend payment date. However, PRIDES surrendered for
conversion after the close of business on a record date for any payment of
declared dividends and before the opening of business on the next succeeding
dividend payment date must be accompanied by payment in cash of an amount equal
to the dividend attributable to the current quarterly dividend period payable on
such date (unless the Convertible Preferred Stock represented by such PRIDES are
subject to redemption on a redemption date between such record date and such
dividend payment date). A holder of PRIDES representing Convertible Preferred
Stock called for redemption on , 1999 or any other dividend payment
date thereafter will receive the dividend on such Convertible
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Preferred Stock payable on that date and will be able to convert the Convertible
Preferred Stock represented by such PRIDES after the record date for such
dividend without paying an amount equal to such dividend to the Company upon
conversion. Except as provided above, upon any optional conversion of
Convertible Preferred Stock represented by PRIDES, the Company will make no
payment of or allowance for unpaid dividends, whether or not in arrears, on such
Convertible Preferred Stock, or for previously declared dividends or
distributions on the shares of Class A Common Stock issued upon such conversion.
ENHANCED DIVIDEND YIELD; LESS EQUITY APPRECIATION THAN COMMON STOCK
Dividends will accrue on each half share of the Convertible Preferred Stock
represented by the PRIDES at a higher rate than the rate at which dividends are
currently paid on the Class A Common Stock. The opportunity for equity
appreciation afforded by an investment in the PRIDES is less than the
opportunity for equity appreciation afforded by a direct investment in the Class
A Common Stock because the Class A Common Stock receivable by a holder of the
PRIDES on the Mandatory Conversion Date, upon earlier redemption of the
Convertible Preferred Stock represented by the PRIDES by the Company or upon
earlier conversion at the option of the holder will only exceed the per share
amount paid for the PRIDES offered hereby if, as the case may be, the Current
Market Price of the Class A Common Stock exceeds such amount paid, the Current
Market Price exceeds the Call Price by at least % (which represents an
appreciation of % over the per share price to the public of the PRIDES) or the
Current Market Price exceeds the Conversion Price by at least % (which
represents an appreciation of % over the per share price to the public of the
PRIDES). The per share value of the Class A Common Stock received by holders of
the PRIDES may be more or less than the per share price to the public paid for
the PRIDES offered hereby, due to market fluctuations in the price of the Class
A Common Stock.
As a result of these provisions, holders of PRIDES would be expected to
realize no equity appreciation if the Current Market Price of the Class A Common
Stock is below the Conversion Price, and less than all of such appreciation if
the Current Market Price of the Common Stock is above the Conversion Price.
Holders of PRIDES will realize the entire decline in equity value if the market
price of the Class A Common Stock is less than the price paid for a PRIDE.
CONVERSION ADJUSTMENTS
The Common Equivalent Rate and the Optional Conversion Rate are each
subject to adjustment as appropriate in certain circumstances, including if the
Company shall (a) pay a stock dividend or make a distribution with respect to
its Class A Common Stock in shares of Class A Common Stock, (b) subdivide or
split its outstanding Class A Common Stock, (c) combine its outstanding Class A
Common Stock into a smaller number of shares, (d) issue by reclassification of
its shares of Class A Common Stock any shares of Class A Common Stock, (e) issue
certain rights or warrants to all holders of its Class A Common Stock unless
such rights or warrants are issued to each holder of PRIDES on a pro rata basis
with the shares of Class A Common Stock based on the Common Equivalent Rate in
effect on the date immediately preceding such issuance, or (f) pay a dividend or
distribute to all holders of its Class A Common Stock evidences of its
indebtedness, cash or other assets (including capital stock of the Company but
excluding any cash dividends or distributions, other than Extraordinary Cash
Distributions (as defined below), and dividends referred to in clause (a) above)
unless such dividend or distribution is made to each holder of PRIDES on a pro
rata basis with the shares of Class A Common Stock based on the Common
Equivalent Rate in effect on the date immediately preceding such dividend or
distribution. In addition, the Company will be entitled (but will not be
required) to make upward adjustments in the Common Equivalent Rate, the Optional
Conversion Rate and the Call Price as the Company, in its sole discretion, shall
determine to be advisable, in order that any stock dividend, subdivision or
split of shares, distribution of rights to purchase stock or securities, or
distribution of securities convertible into or exchangeable for stock (or any
transaction which could be treated as any of the foregoing transactions pursuant
to Section 305 of the Internal Revenue Code of 1986, as amended (the "Code")),
hereafter made by the Company to its shareholders will not be taxable.
"Extraordinary Cash Distributions" means, with respect to any cash dividend or
distribution paid on any date, the amount, if any, by which all cash dividends
and cash distributions on the Class A Common Stock paid during the consecutive
12-month period ending on and including such date (other than cash dividends and
cash
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distributions for which an adjustment to the Common Equivalent Rate or the
Optional Conversation Rate was previously made) exceeds, on a per share of
Common Stock basis, 10% of the average of the daily Closing Prices of the Common
Stock over such consecutive 12-month period. All adjustments to the Common
Equivalent Rate and the Optional Conversion Rate will be calculated to the
nearest 1/100th of a share of Class A Common Stock. No adjustment in the Common
Equivalent Rate or the Optional Conversion Rate will be required unless such
adjustment would require an increase or decrease of at least one percent in the
Common Equivalent Rate; provided, however, that any adjustments which, by reason
of the foregoing, are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All adjustments will be made
successively.
Whenever the Common Equivalent Rate and the Optional Conversion Rate are
adjusted as provided in the preceding paragraph, the Company will file with the
transfer agent for the PRIDES a certificate with respect to such adjustment,
make a prompt public announcement thereof and mail a notice to holders of the
PRIDES providing specified information with respect to such adjustment.
ADJUSTMENT FOR CERTAIN CONSOLIDATIONS OR MERGERS
In the case of (i) any consolidation or merger to which the Company is a
party (other than a merger or consolidation in which the Company is the
surviving or continuing corporation and in which the shares of Class A Common
Stock outstanding immediately prior to the merger or consolidation remain
unchanged), (ii) any sale or transfer to another corporation of the property of
the Company as an entirety or substantially as an entirety, or (iii) any
statutory exchange of securities with another corporation (other than in
connection with a merger or acquisition), each share of Convertible Preferred
Stock shall, after consummation of such transaction, be subject to (A)
conversion at the option of the holder into the kind and amount of securities,
cash or other property receivable upon consummation of such transaction by a
holder of the number of shares of Class A Common Stock into which such shares of
Convertible Preferred Stock might have been converted immediately prior to
consummation of such transaction, (B) conversion on the Mandatory Conversion
Date into the kind and amount of securities, cash or other property receivable
upon consummation of such transaction by a holder of the number of shares of
Class A Common Stock into which such shares of Convertible Preferred Stock would
have been converted if the conversion on the Mandatory Conversion Date had
occurred immediately prior to the date of consummation of such transaction, plus
the right to receive cash in an amount equal to all accrued and unpaid dividends
on such shares of Convertible Preferred Stock (other than previously declared
dividends payable to a holder of record as of a prior date), and (C) redemption
on any redemption date in exchange for the kind and amount of securities, cash
or other property receivable upon consummation of such transaction by a holder
of the number of shares of Class A Common Stock that would have been issuable,
using the Call Price in effect on such redemption date, upon a redemption of
such shares of Convertible Preferred Stock immediately prior to consummation of
such transaction, assuming that, if the Notice Date for such redemption is not
prior to such transaction, the Notice Date had been the date of such
transaction; and assuming in each case that such holder of shares of Class A
Common Stock failed to exercise rights of election, if any, as to the kind or
amount of securities, cash, or other property receivable upon consummation of
such transaction (provided that, if the kind or amount of securities, cash or
other property receivable upon consummation of such transaction is not the same
for each non-electing share, then the kind and amount of securities, cash, or
other property receivable upon consummation of such transaction for each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). The kind and amount of
securities into or for which the shares of Convertible Preferred Stock shall be
convertible or redeemable after consummation of such transaction shall be
subject to adjustment as described above under the caption "Conversion
Adjustments" following the date of consummation of such transaction. The Company
may not become a party to any such transaction unless the terms thereof are
consistent with the foregoing or the last sentence of the third paragraph under
"--Voting Rights" below.
For purposes of the preceding paragraph, any sale or transfer to another
corporation of property of the Company which did not account for at least 50% of
the consolidated net income of the Company for its most recent fiscal year
ending prior to the consummation of such transaction will not in any event be
deemed to be a sale or transfer of the property of the Company as an entirety or
substantially as an entirety.
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FRACTIONAL SHARES
No fractional shares of Class A Common Stock will be issued upon redemption
or conversion of the Convertible Preferred Stock. In lieu of any fractional
share otherwise issuable in respect of the aggregate number of shares of
Convertible Preferred Stock of any holder that are redeemed or converted on any
redemption date or upon mandatory conversion or any optional conversion, such
holder shall be entitled to receive an amount in cash equal to the same fraction
of the (i) Current Market Price of the Class A Common Stock, determined as of
the second trading day immediately preceding the Notice Date, in the case of
redemption, or (ii) Closing Price of the Class A Common Stock determined (A) as
of the fifth trading day immediately preceding the Mandatory Conversion Date, in
the case of mandatory conversion, or (B) as of the second trading day
immediately preceding the effective date of conversion, in the case of an
optional conversion by a holder.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, and subject to the rights of holders of any other
series of Preferred Stock, the holders of outstanding shares of Convertible
Preferred Stock are entitled to receive an amount equal to the per share price
to the public of the PRIDES shown on the cover page of this Prospectus, plus
accrued and unpaid dividends on the Convertible Preferred Stock, out of the
assets of the Company available for distribution to shareholders, before any
distribution of assets is made to holders of Junior Stock upon liquidation,
dissolution, or winding up.
If upon any voluntary or involuntary liquidation, dissolution, or winding
up of the Company, the assets of the Company are insufficient to permit the
payment of the full preferential amounts payable with respect to Convertible
Preferred Stock and all other series of Parity Stock, the holders of shares of
Convertible Preferred Stock and of all other series of Parity Stock will share
ratably in any distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of shares of Convertible Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Company. A
consolidation or merger of the Company with one or more corporations (whether or
not the Company is the corporation surviving such consolidation or merger), or a
sale, lease or transfer or exchange of all or substantially all of the assets of
the Company shall not be deemed to be a voluntary or involuntary liquidation,
dissolution, or winding up of the Company.
VOTING RIGHTS
The holders of shares of Convertible Preferred Stock represented by the
PRIDES shall have the right with the holders of Common Stock to vote in the
election of Directors and upon each other matter coming before any meeting of
the holders of Common Stock on the basis of 4/5 of a vote for each half share of
Convertible Preferred Stock. The holders of Convertible Preferred Stock
represented by the PRIDES and the holders of Common Stock will vote together as
one class on such matters except as otherwise provided by law or the Amended and
Restated Certificate of Incorporation of the Company.
In the event that dividends on the shares of Convertible Preferred Stock or
any other series of Preferred Stock are in arrears and unpaid for six quarterly
dividend periods, or if any other series of Preferred Stock is entitled for any
other reason to exercise voting rights, separate from the Common Stock, to elect
any Directors of the Company ("Preferred Stock Directors"), the holders of
shares of Convertible Preferred Stock (voting separately as a class with holders
of all other series of Preferred Stock upon which like voting rights have been
conferred and are exercisable), with each share of Convertible Preferred Stock
represented by the PRIDES entitled to one vote on this and other matters on
which Preferred Stock votes as a group, will be entitled to vote for the
election of two Preferred Stock Directors, such Directors to be in addition to
the number of Directors constituting the Board of Directors immediately prior to
the accrual of such right. Such right, when vested, shall continue until all
dividends in arrears on the shares of Convertible Preferred Stock and such other
series of Preferred Stock shall have been paid in full and the right of any
other series of Preferred Stock to exercise voting rights, separate from the
Common Stock, to elect Preferred Stock Directors terminates or has
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terminated, and, when so paid and any such termination occurs or has occurred,
such right of the holders of Convertible Preferred Stock will cease. The term of
office of any Preferred Stock Director elected by the holders of Convertible
Preferred Stock and such other series will terminate on the earlier of (i) the
next annual meeting of shareholders at which a successor shall have been elected
and qualified or (ii) the termination of the right of holders of Convertible
Preferred Stock and such other series to vote for such Directors. Vacancies on
the Board of Directors of the Company (including with respect to a Preferred
Stock Director) resulting from death, resignation or other cause shall be filled
exclusively by no less than 66 2/3% of the remaining directors and the Director
so elected shall hold office until a successor is elected and qualified.
The Company will not, without the affirmative vote or consent of the
holders of at least 66 2/3% of the shares of Convertible Preferred Stock
actually voting (voting separately as a class): (i) amend, alter, or repeal any
of the provisions of the Amended and Restated Certificate of Incorporation of
the Company so as to affect adversely the powers, preferences, or rights of the
holders of the shares of Convertible Preferred Stock then outstanding or reduce
the minimum time required for any notice to which only the holders of the shares
of Convertible Preferred Stock then outstanding may be entitled (an amendment of
the Amended and Restated Certificate of Incorporation to authorize or create, or
to increase the authorized amount, of Junior Stock or any stock of any class
ranking on a parity with the shares of Convertible Preferred Stock shall not be
deemed to affect adversely the powers, preferences, or rights of the holders of
shares of Convertible Preferred Stock), (ii) authorize or create, or increase
the authorized amount of, any capital stock, or any security convertible into
capital stock, of any class ranking senior to the shares of Convertible
Preferred Stock as to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the Company, or (iii) merge or
consolidate with or into any other corporation, unless each holder of the shares
of Convertible Preferred Stock immediately preceding such merger or
consolidation shall have the right either to (A) receive or continue to hold in
the resulting corporation the same number of shares, with substantially the same
rights and preferences as corresponds to the shares of Convertible Preferred
Stock so held or (B) convert into shares of Class A Common Stock at the Common
Equivalent Rate in effect on the date immediately preceding the announcement of
any such merger or consolidation.
There is no limitation on the issuance by the Company of Parity Stock or of
any class of stock ranking junior to the shares of Convertible Preferred Stock.
Notwithstanding the provisions summarized in the preceding two paragraphs,
however, no such approval described therein of the holders of the shares of
Convertible Preferred Stock shall be required to authorize an increase in the
number of authorized shares of Preferred Stock if, at or prior to the time when
such amendment, alteration, or repeal is to take effect or when the
authorization, creation or increase of any such Senior Stock or such security is
to be made, or when such consolidation or merger, liquidation, dissolution or
winding up is to take effect, as the case may be, provision is made for the
redemption of all shares of Convertible Preferred Stock at the time outstanding.
BOOK-ENTRY SYSTEM
The Depositary Trust Company ("DTC") will act as securities depositary for
the PRIDES. The PRIDES will be issued only as fully-registered securities
registered in the name of Cede & Co. (DTC's nominee). One or more
fully-registered global security certificates ("Global Security Certificates"),
representing the total aggregate number PRIDES, will be issued and will be
deposited with DTC and will bear a legend regarding the restrictions on
exchanges and registration of transfer thereof referred to below.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the PRIDES so long as
such PRIDES are represented by Global Security Certificates.
The DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The DTC holds securities that its
participants ("Partici-
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pants") deposit with DTC. DTC also facilitates the settlement among Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations ("Direct
Participants"). DTC is owned by a number of its Direct Participants and by the
NYSE, the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the Depositary system is also available to
others, such as securities brokers and dealers, banks and trust companies that
clear transactions through or maintain a direct or indirect custodial
relationship with a Direct Participant either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission (the "Commission").
No PRIDES represented by Global Security Certificates may be exchanged in
whole or in part for PRIDES registered, and no transfer of Global Security
Certificates in whole or in part may be registered, in the name of any person
other than DTC or any nominee of DTC unless DTC has notified the Company that it
is unwilling or unable to continue as depositary for such Global Security
Certificates.
As long as DTC, or its nominee, is the registered owner of the Global
Security Certificates, DTC or such nominee, as the case may be, will be
considered the sole owner and holder of the Global Security Certificates and all
PRIDES represented thereby for all purposes. Except in the limited circumstances
referred to above, owners of beneficial interests in Global Security
Certificates will not be entitled to have such Global Security Certificates or
the PRIDES represented thereby registered in their names, will not receive or be
entitled to receive physical delivery of PRIDES Certificates in exchange
therefor and will not be considered to be owners or holders of such Global
Security Certificates or any PRIDES represented thereby for any purpose. All
payments on the PRIDES represented by the Global Security Certificates and all
transfers and deliveries of Class A Common Stock with respect thereto will be
made to DTC or its nominee, as the case may be, as the holder thereof.
Ownership of beneficial interests in the Global Security Certificates will
be limited to Participants or persons that may hold beneficial interests through
institutions that have accounts with DTC or its nominee. Ownership of beneficial
interests in Global Security Certificates will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by DTC or its nominee (with respect to Participants' interests) or
any such Participant (with respect to interests of persons held by such
Participants on their behalf). Procedures for conversion or redemption of the
PRIDES will be governed by arrangements among DTC, Participants and persons that
may hold beneficial interests through Participants designed to permit such
conversion or redemption without the physical movement of certificates.
Payments, transfers, deliveries, exchanges and other matters relating to
beneficial interests in Global Security Certificates may be subject to various
policies and procedures adopted by DTC from time to time. Neither the Company
nor any agent of the Company will have any responsibility or liability for any
aspect of DTC's or any Participant's records relating to, or for payments made
on account of, beneficial interests in Global Security Certificates, or for
maintaining, supervising or reviewing any of DTC's records or any participant's
records relating to such beneficial ownership interests.
LISTING OF THE SECURITIES
The PRIDES have been approved for listing on the NYSE, subject to notice of
issuance, under the symbol "HLR PrP."
NYSE SYMBOL OF CLASS A COMMON STOCK
The Class A Common Stock of the Company is listed on the NYSE under the
symbol "HLR."
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal
income tax consequences of the ownership and disposition of the PRIDES. The
summary represents the opinion of Kirkpatrick & Lockhart LLP, Pittsburgh,
Pennsylvania, counsel to the Company, as to certain United States federal income
tax consequences with respect to the PRIDES under the Internal Revenue Code of
1986, as amended (the "Code"). This summary provides only a general discussion
and does not represent a complete analysis of the tax consequences that may vary
with or be contingent upon individual circumstances, such as a holder of the
PRIDES being subject to certain special provisions of the Code (for example,
banks, dealers in securities, life insurance companies and tax-exempt
organizations). Moreover, this summary does not address any aspects of state,
local or foreign tax laws or of any federal tax laws other than those pertaining
to the income tax.
This summary is based on the Code, Treasury Regulations promulgated
thereunder and their judicial and administrative interpretation as of the date
hereof. No assurance can be given that future legislation, regulations,
administrative pronouncements or court decisions will not significantly change
the law and materially affect the conclusions expressed herein. Any such change,
even though made after the sale of the PRIDES, could be applied retroactively.
This summary is intended for general information only and deals only with
holders who are initial holders of the PRIDES and who hold the PRIDES as capital
assets within the meaning of Section 1221 of the Code. For purposes of this
summary, "U.S. Holder" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized under the laws of
the United States or of any State, or an estate or trust, the income of which is
subject to United States federal income taxation regardless of its source and
"non-U.S. Holder" means a holder other than a U.S. Holder. Certain aspects of
United States federal income and estate tax relevant to a non-U.S. Holder are
discussed separately below.
The Company has not requested a ruling from the Internal Revenue Service
(the "Service") with respect to the matters discussed in this summary and does
not intend to do so. Although this summary represents counsel's best judgment as
to the matters discussed in this summary, it does not in any way bind the
Service or the courts or in any way constitute an assurance that the United
States federal income tax consequences discussed herein will be accepted by the
Service or the courts.
PERSONS CONSIDERING THE PURCHASE OF THE PRIDES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
DIVIDENDS
Dividends paid on the PRIDES out of the Company's current or accumulated
earnings and profits will be taxable as ordinary income. Corporate U.S. Holders
will generally qualify for the 70% intercorporate dividends-received deduction
subject to satisfaction of the minimum holding period (generally at least 46
days) and other applicable requirements. Generally, the amount of any such
dividends-received deduction is taken into account by a corporate holder for
purposes of calculating its alternative minimum taxable income.
Under certain circumstances, a corporation that receives an "extraordinary
dividend," as defined in Section 1059(c) of the Code, is required to reduce its
stock basis by the non-taxed portion of such dividend. Generally, quarterly
dividends not in arrears paid to an original holder of the PRIDES will not
constitute extraordinary dividends. Under Section 105(f), any dividend with
respect to "disqualified preferred stock" is treated as an "extraordinary
dividend." While there is no authority directly on point, and the issue is not
free from doubt, based on the accuracy of certain factual representations made
by the Company, the PRIDES should not constitute "disqualified preferred stock."
REDEMPTION PREMIUM
Under certain circumstances, Section 305(c) of the Code requires that any
excess of the redemption price of preferred stock over its issue price be
includible in income, prior to receipt, as a constructive dividend. However,
while there is no authority directly on point, and the issue is not free from
doubt, based on the
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accuracy of certain factual representations made by the Company, a holder of the
PRIDES should not be required to include any redemption premium in income under
Section 305(c).
REDEMPTION OR MANDATORY OR OPTIONAL CONVERSION INTO CLASS A COMMON STOCK
As a general rule, gain or loss will not be recognized by a holder upon the
redemption of the PRIDES for shares of Class A Common Stock or the conversion of
the PRIDES into shares of Class A Common Stock if no cash is received. Income
may be recognized, however, to the extent Class A Common Stock or cash is
received in payment of accrued and unpaid dividends upon a redemption or
conversion. Such income would likely be characterized as dividend income
although some uncertainty exists as to the appropriate characterization of
payments in satisfaction of undeclared, accrued and unpaid dividends. In
addition, a holder who receives cash in lieu of a fractional share of Class A
Common Stock will be treated as having received such fractional share and as
having exchanged it for cash. Under Section 302 of the Code, such an exchange
should generally result in capital gain or loss measured by the difference
between the cash received and the holder's adjusted tax basis in the fractional
share interest.
Generally, a holder's basis in the Class A Common Stock received upon the
redemption or conversion of the PRIDES, other than shares of Class A Common
Stock taxed upon receipt, will equal the adjusted tax basis of the redeemed or
converted the PRIDES (exclusive of any basis allocable to a fractional share
interest) plus the amount of gain (if any) recognized, minus the amount of cash
(if any) received, and the holding period of such Class A Common Stock will
include the holding period of the redeemed or converted the PRIDES. As a general
rule, a holder's basis in shares of Class A Common Stock taxed upon receipt will
equal the fair market value thereof and the holding period for such Class A
Common Stock will begin on the day following the redemption or conversion.
ADJUSTMENT OF CONVERSION RATE
Certain adjustments to the Common Equivalent Rate and the Optional
Conversion Rate to reflect the Company's distribution of certain rights,
warrants, evidences of indebtedness, securities or other assets to holders of
Class A Common Stock may result in constructive distributions taxable as
dividends to the holders of the PRIDES. Any such dividends would be taken into
account for purposes of determining whether they (and other dividends)
constitute "extraordinary dividends" to corporate holders as described above.
CONVERSION OF PRIDES AFTER DIVIDEND RECORD DATE
If a holder, whose the PRIDES have not been called for redemption,
surrenders such the PRIDES for optional conversion into shares of Class A Common
Stock after a dividend record date but before payment of the dividend, such
holder will be required to pay the Company an amount equal to such dividend upon
conversion. The holder would likely recognize the dividend payment which is
received as income, and would increase the basis of the Class A Common Stock
received by the amount paid to the Company in connection with the receipt of
such dividend.
BACKUP WITHHOLDING
Certain U.S. Holders may be subject to backup withholding at a rate of 31%
on dividends or certain consideration received upon the redemption or conversion
of the PRIDES unless such holders provide proof of an applicable exemption or a
correct taxpayer identification number, and otherwise comply with applicable
requirements of the backup withholding rules.
NON U.S.-HOLDERS
DIVIDENDS
Dividends (including constructive distributions taxable as dividends)
received by a non-U.S. Holder on the PRIDES will be subject to United States
withholding tax at a 30% rate except as described below and except where an
applicable tax treaty provides for the reduction or elimination of such
withholding tax. A non-
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U.S. Holder generally will be taxed in the same manner as a United States
corporation or resident with respect to such dividend income and such income
will not be subject to United States withholding tax if it is effectively
connected with the conduct of a trade or business in the United States or, if an
income tax treaty applies, is attributable to a U.S. permanent establishment of
such non-U.S. Holder. Such effectively connected income received by a non-U.S.
Holder that is a corporation may in certain circumstances be subject to an
additional "branch-profits tax" at a 30% rate, or if applicable, a lower treaty
rate.
Under currently effective United States Treasury Regulations, the payor of
dividends may generally rely on a payee's address outside the United States in
determining that the withholding tax discussed above applies and, under the
Service's current interpretation of the United States Treasury Regulations, for
purposes of determining the applicability of a treaty rate. Under proposed
United States Treasury Regulations not currently in effect and proposed to be
effective January 1, 1998 (the "Proposed Regulations"), a non-U.S. Holder who
wishes to claim the benefit of an applicable treaty rate would be required to
satisfy certain certification and other requirements. The Proposed Regulations
also would provide special certification requirements for the PRIDES held by a
non-U.S. partnership.
A non-U.S. Holder of the PRIDES that is eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Service. A non-U.S. Holder also must satisfy certain reporting and
certification requirements to claim an exemption from the United States
withholding tax discussed above by reason of the dividends being effectively
connected with a United States trade or business of the non-U.S. holder.
GAIN ON REDEMPTION OR CONVERSION INTO CLASS A COMMON STOCK
A non-U.S. Holder generally will not be subject to United States federal
income or withholding tax in respect of gain recognized on the disposition,
redemption or conversion (a "Disposition") of a PRIDE unless (i) such gain is
treated as dividend income, (ii) the non-U.S. Holder is an individual who holds
the PRIDE as a capital asset and was present in the United States for 183 days
or more during the taxable year and either (a) such non-U.S. Holder has a "tax
home" in the United States or (b) the gain is attributable to an office or other
fixed place of business maintained in the United States by such non-U.S. Holder,
(iii) the gain is effectively connected with a United States trade or business
of the non-U.S. Holder, (iv) the non-U.S. Holder is subject to tax pursuant to
provisions of the Code applicable to certain U.S. expatriates, or (v) the
Company is or has been a United States real property holding corporation
("USRPHC") for United States federal income tax purposes and, so long as the
PRIDES continue to be regularly traded on an established securities market, the
non-U.S. Holder has held actually or constructively more than 5% of the PRIDES
at some time during the shorter of (a) the five-year period ending on the
Disposition of such PRIDE or (b) the period during which the non-U.S. Holder
held such PRIDES. The Company does not believe that it is or has been a USRPHC,
and for purposes of this discussion it is assumed that the Company is not a
USRPHC.
UNITED STATES FEDERAL ESTATE TAXES
If an individual non-U.S. Holder holds the PRIDES at the time of his or her
death or has made certain lifetime transfers of an interest in the PRIDES, then
the value of such PRIDES will be included in such holder's gross estate for
United States federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividends paid to non-U.S. Holders that are subject to the withholding tax
described above will generally be exempt from United States backup withholding
(which is a withholding tax imposed at a 31% rate on certain payments to persons
that fail to furnish certain information under United States information
reporting requirements), but the payor must report annually to the Service and
to each non-U.S. Holder the amount of dividends paid to such non-U.S. Holder and
the tax withheld from such payment, regardless of whether withholding was
required. Generally, the payor of the dividends may rely on the payee's address
outside the United States (absent knowledge to the contrary) in determining that
the backup withholding provisions do not apply. Under the Proposed Regulations,
however, dividend payments generally would be subject to information reporting
and backup withholding unless applicable certification requirements are met.
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The payment of proceeds from the sale of the PRIDES to or through the
United States office of a broker will be subject to information reporting and
possible backup withholding unless the owner certifies its non-U.S. status under
penalties of perjury or otherwise establishes an exemption. The payment of
proceeds from the sale of the PRIDES through a foreign office of a broker
generally will not be subject to this backup withholding tax. While regulations
currently in effect reserve on the question of whether reportable payments made
through foreign offices of a broker that is a United States person or "United
States related person" (defined below) will be subject to backup withholding,
proposed regulations state that backup withholding will not apply to such
payments absent actual knowledge that the payee is a United States person. In
the case of the payment of proceeds from the disposition of the PRIDES through a
foreign office of a broker that is a United States person or a "United States
related person," existing regulations require information reporting on the
payment unless the broker has documentary evidence in its files that the owner
is a non-U.S. person and the broker has no actual knowledge to the contrary or
the holder otherwise establishes an exemption. For this purpose, a "United
States related person" is (i) a "controlled foreign corporation" for United
States federal income tax purposes, or (ii) a foreign person 50% or more of
whose gross income for a specified period is derived from activities that are
effectively connected with the conduct of a United States trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. Holder will be allowed as a refund or a credit against such non-U.S.
Holder's United States federal income tax, provided that the required
information is furnished to the Service.
TAX PROPOSALS
On December 7, 1995, the Treasury Department proposed legislation, which
was submitted to Congress on March 19, 1996 (the "Proposed Legislation"). Under
the Proposed Legislation the dividends-received deduction currently available to
corporate shareholders for dividends received from another corporation in which
the shareholder owns less than 20 percent would be reduced from 70 percent to 50
percent with respect to dividends paid or accrued more than 30 days after the
date that the Proposed Legislation is enacted. In addition, the 46-day holding
period would be extended to cover the period immediately before or immediately
after the corporate shareholder becomes entitled to receive the dividend. This
provision likewise would be effective for dividends paid or accrued more than 30
days after the date that the Proposed Legislation is enacted. It should be noted
that if the dividends-received deduction is reduced in accordance with the
Proposed Legislation or for any other reason, the amount of dividends payable
with respect to the PRIDES will not be adjusted.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER OF THE PRIDES IS URGED TO CONSULT WITH HIS/HER OWN TAX
ADVISOR WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE PRIDES ON SUCH
HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF
FOREIGN, STATE AND LOCAL INCOME AND OTHER TAX LAWS.
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UNDERWRITING
Subject to the terms and conditions set forth in a Purchase Agreement (the
"Purchase Agreement") between the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Bear, Stearns & Co. Inc., and Donaldson, Lufkin & Jenrette
Securities Corporation, who are acting as representatives (the
"Representatives"), for the underwriters named below (the "Underwriters"), the
Company has agreed to sell to the Underwriters, and each of the Underwriters
severally has agreed to purchase from the Company, the number of Securities set
forth opposite each Underwriter's name. In the Purchase Agreement, the several
Underwriters severally have agreed, subject to the terms and conditions set
forth therein, to purchase all of the PRIDES offered hereby if any of the PRIDES
are purchased. In the event of default by an Underwriter, the Purchase Agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting Underwriters may be increased or the Underwriting Agreement may be
terminated.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SECURITIES
- ------------------------------------------------------------------------------ -------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................
Bear, Stearns & Co. Inc.......................................................
Donaldson, Lufkin & Jenrette Securities Corporation...........................
-------------
Total............................................................ 15,000,000
=========
</TABLE>
The Representatives have advised the Company that they propose initially to
offer the PRIDES to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per PRIDE. The Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per PRIDE on
sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days following the date of this Prospectus, to purchase up to 2,250,000
additional PRIDES at the price to the public set forth on the cover page of this
Prospectus, less the underwriting discount. The Underwriters may exercise this
option only to cover over-allotments, if any, made on the sale of the PRIDES
offered hereby. If the Underwriters exercise their over-allotment option, each
of the Underwriters has severally agreed, subject to certain conditions, to
effect the foregoing transactions with respect to approximately the same
percentage of such PRIDES that the respective number of PRIDES set forth
opposite its name in the foregoing table bears to the PRIDES offered hereby.
The Company has agreed, for a period of 90 days after the date of this
Prospectus, to not, without the prior written consent of Merrill Lynch, Pierce,
Fenner and Smith Incorporated, directly or indirectly, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, or enter into any
agreement to sell, any PRIDES or Class A Common Stock or any securities of the
Company similar to the PRIDES or Class A Common Stock or any security
convertible into or exchangeable or exercisable for PRIDES or Class A Common
Stock other than to the Underwriters pursuant to the Purchase Agreement, other
than the Common Stock Offering, shares of Class A Common Stock or options for
shares of Class A Common Stock issued pursuant to or sold in connection with any
employee benefit, dividend reinvestment and stock option and stock purchase
plans of the Company and its subsidiaries, shares of Class A Common Stock
issuable upon early settlement of the PRIDES or exercise of stock options and
the shares under a shelf registration statement relating to the shares of Class
A Common Stock of the Company owned by Hollinger Inc. and pledged to certain
lenders.
Prior to this Offering, there has been no public market for the Securities.
The public offering price for the Securities was determined in negotiations
between the Company and the Representatives. In determining the
116
<PAGE> 118
terms of the Securities, including the public offering price, the Company and
the Representatives considered the market price of the Company's Class A Common
Stock and also considered the Company's recent results of operations, the future
prospects of the Company and the industry in general, market prices and terms
of, and yields on, securities of other companies considered to be comparable to
the Company and prevailing conditions in the securities markets. There can be no
assurance that an active trading market will develop for the Securities or that
the Securities will trade in the public market subsequent to the Offering at or
above the initial public offering price.
The Company has agreed to indemnify the Underwriters against, or to
contribute to payments that the Underwriters may be required to make in respect
of, certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
Merrill Lynch performs investment banking services for the Company,
Hollinger Inc. and their affiliates, for which it receives customary
compensation.
LEGAL MATTERS
The validity of the Class A Common Stock issuable upon redemption or
conversion of the PRIDES will be passed upon for the Company by Kirkpatrick &
Lockhart LLP, Pittsburgh, Pennsylvania. Certain legal matters will be passed
upon for the Underwriters by Cravath, Swaine & Moore, New York, New York.
117
<PAGE> 119
EXCHANGE RATES
The following table sets forth certain exchange rates based on the noon
buying rate in The City of New York for cable transfers in United States dollars
as certified for custom purposes by the Federal Reserve Bank of New York. Such
rates are set forth as Canadian dollars per U.S. $1.00 and the inverse rates
quoted by the Federal Reserve Bank of New York for U.S. dollars per Cdn.$1.00.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31
----------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
(CDN.$ PER U.S.$1.00)
<S> <C> <C> <C> <C> <C> <C> <C>
Highest exchange rate during period....... 1.165 1.289 1.344 1.408 1.424 1.424 1.382
Lowest exchange rate during period........ 1.120 1.142 1.243 1.310 1.328 1.394 1.353
Exchange rate at end of period............ 1.156 1.271 1.326 1.403 1.366 1.399 1.364
Average exchange rate during period(1).... 1.146 1.214 1.294 1.370 1.373 1.401 1.369
</TABLE>
- ------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
The following tables set forth certain information concerning the noon
rates of exchange as reported by the Federal Reserve Bank of New York for United
States dollars per L1.00 and A$1.00, respectively.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31
----------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
(U.S.$ PER L1.00)
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange rate at end of period............ 1.866 1.513 1.478 1.567 1.554 1.619 1.526
Average exchange rate during period(1).... 1.763 1.756 1.497 1.539 1.579 1.588 1.530
</TABLE>
- ------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31
----------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
(U.S.$ PER A$1.00)
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange rate at end of period............ 0.759 0.689 0.678 0.775 0.7432 0.733 0.782
Average exchange rate during period(1).... 0.773 0.731 0.679 0.735 0.7407 0.751 0.746
</TABLE>
- ------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
The financial information in this Prospectus has been translated into
United States dollars from Canadian dollars, British pounds sterling, or
Australian dollars, as the case may be, using exchange rates at the end of the
period for which the relevant statements are prepared for assets, liabilities
and minority interest and for items in the statement of operations translated at
the weighted average exchange rates for the relevant period.
118
<PAGE> 120
The following table sets forth rates of exchange used to translate DTH's,
FDTH's and The Telegraph's United Kingdom, Fairfax's Australian and Southam's
Canadian results of operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31
------------------------------------ ------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED KINGDOM
(US$ PER L1.00)
Balance sheet................................. 1.87 1.51 1.48 1.57 1.55 1.58 1.53
Statement of earnings......................... 1.77 1.76 1.50 1.53 1.59 1.52 1.53
AUSTRALIA
(US$ PER A$1.00)
Balance sheet................................. 0.76 0.69 0.69 0.78 0.74 0.74 0.78
Statement of earnings......................... N/A 0.73 0.67 0.72 0.74 0.74 0.76
CANADA
(US$ PER CDN.$1.00)
Balance sheet................................. 0.86 0.79 0.76 0.71 0.73 0.74 0.73
Statement of earnings......................... 0.88 0.83 0.78 0.73 0.73 0.73 0.73
</TABLE>
EXPERTS
The consolidated financial statements of Hollinger International Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, included in this Prospectus and
incorporated herein by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 have been so included or incorporated by
reference in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files periodic reports, proxy solicitation
materials and other information with the Commission. Such reports, proxy
solicitation materials and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Seven World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy, information
statements and other information regarding registrants that file electronically
with the Commission. Such reports, proxies, information statements and other
information may be found on the Commission's site address, http://www.sec.gov.
The Class A Common Stock is listed on the NYSE. Such reports, proxy solicitation
materials and other information can also be inspected and copied at the NYSE at
20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the offering
made hereby. This Prospectus does not contain all of the information set forth
in the Registration Statement, certain portions of which are omitted in
accordance with the rules and regulations of the Commission. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. as set forth above. For further information, reference is
hereby made to the Registration Statement, including the exhibits filed as a
part thereof or otherwise incorporated herein. Statements made in this
Prospectus as to the contents of any documents referred to are not necessarily
complete, and in each
119
<PAGE> 121
instance reference is made to such exhibit for a more complete description and
each such statement is modified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-24004) pursuant to the Exchange Act are incorporated herein by reference:
1. the Company's Annual Report on Form 10-K for the year ended December 31,
1995;
2. the Company's Proxy Statement for the Annual Meeting of Stockholders
held May 28, 1996;
3. the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996;
4. the Company's Current Reports on Form 8-K dated February 7, 1996 and
April 24, 1996; and
5. the description of the Class A Common Stock contained in the Company's
Registration Statement on Form 8-A, as the same may be amended.
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering made by this Prospectus
shall be deemed to be incorporated by reference herein. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents that are incorporated herein by reference,
other than exhibits to such information (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Hollinger International Inc., 401 North Wabash Avenue, Chicago, Illinois 60611,
Attention: Secretary, telephone number (312) 321-3000.
120
<PAGE> 122
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Independent Auditors' Report..................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995..................... F-3
Consolidated Statements of Operations for the three years ended December 31,
1995.......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1995............................................................. F-5
Consolidated Statements of Cash Flows for the three years ended December 31,
1995.......................................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
INTERIM FINANCIAL INFORMATION (UNAUDITED)
Condensed Consolidated Balance Sheet as of March 31, 1996........................ F-30
Condensed Consolidated Statements of Operations for the three months ended March
31, 1995 and 1996............................................................. F-31
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 1995 and 1996............................................................. F-32
Notes to Condensed Consolidated Financial Statements............................. F-33
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996.............. F-36
Pro Forma Condensed Consolidated Statement of Operations for the three months
ended March 31, 1996.......................................................... F-37
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1995............................................................. F-38
Notes to Pro Forma Condensed Consolidated Financial Statements................... F-39
</TABLE>
F-1
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hollinger International Inc:
We have audited the accompanying consolidated balance sheets of Hollinger
International Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hollinger
International Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 1 of Notes to Consolidated Financial Statements, the
Company adopted the provisions of FASB Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1993.
/s/KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 27, 1996
F-2
<PAGE> 124
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 117,425 $ 23,810
Accounts receivable, net of allowance for doubtful accounts of
$13,170,000 in 1994 and $12,558,000 in 1995..................... 118,625 134,511
Inventories........................................................ 10,429 25,684
Prepaid expenses and other current assets.......................... 7,089 13,562
---------- ----------
Total current assets................................................. 253,568 197,567
Marketable securities, at market value............................... 17,036 --
Investments in affiliates, at equity (note 3)........................ 461,492 463,527
Other investments, at cost (note 4).................................. 78,875 178,337
Property, plant and equipment, net of accumulated depreciation (note
5)................................................................. 191,990 193,407
Intangible assets, net of accumulated amortization of $129,562,000 in
1994 and $155,195,000 in 1995...................................... 455,203 529,694
Deferred financing costs and other assets............................ 5,591 7,573
---------- ----------
$1,463,755 $1,570,105
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 7).................... $ 5,436 $ 27,552
Bank loans (note 6)................................................ 16,448 147,866
Accounts payable................................................... 32,333 38,646
Accrued expenses................................................... 62,432 50,874
Income taxes payable............................................... 28,819 12,390
Deferred revenue................................................... 18,597 22,902
Due to Hollinger Inc. (note 19).................................... 100,124 21,512
---------- ----------
Total current liabilities............................................ 264,189 321,742
Long-term debt, less current installments (note 7)................... 468,085 446,234
Deferred income taxes (note 9)....................................... 85,112 72,290
Accrued pension (note 11)............................................ 13,071 10,519
Other................................................................ 16,210 20,326
---------- ----------
Total liabilities.................................................... 846,667 871,111
---------- ----------
Minority interest.................................................... 109,518 97,298
---------- ----------
Redeemable preferred stock (note 12)................................. 204,101 306,452
---------- ----------
Stockholders' Equity: (note 13)
Class A common stock, $0.01 par value. Authorized 250,000,000
shares; issued and outstanding 41,965,754 shares in 1994 and
1995............................................................ 420 420
Class B common stock, $0.01 par value. Authorized 50,000,000
shares;
issued and outstanding 14,990,000 shares in 1994 and 1995....... 150 150
Additional paid-in capital......................................... 162,898 162,610
Cumulative foreign currency translation adjustment................. (1,212) (3,987)
Unrealized gain on marketable securities........................... 7,825 --
Retained earnings.................................................. 133,388 136,051
---------- ----------
Total stockholders' equity........................................... 303,469 295,244
---------- ----------
$1,463,755 $1,570,105
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 125
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Advertising............................................. $316,640 $522,381 $635,560
Circulation............................................. 217,608 245,218 262,670
Job printing............................................ 25,044 27,675 49,198
Other................................................... 10,309 13,563 17,539
-------- -------- --------
Total operating revenues.................................. 569,601 808,837 964,967
-------- -------- --------
Operating costs and expenses
Operating costs......................................... 382,291 605,263 753,312
General and administrative.............................. 60,902 82,934 90,174
Reorganization expenses................................. -- -- 8,000
Depreciation and amortization........................... 34,545 45,200 52,388
Allocable expenses from Hollinger Inc. ................. 4,069 4,911 5,605
-------- -------- --------
Total operating costs and expenses........................ 481,807 738,308 909,479
-------- -------- --------
Operating income.......................................... 87,794 70,529 55,488
-------- -------- --------
Other income (expense):
Interest expense........................................ (26,264) (32,593) (43,189)
Equity in earnings of affiliates (note 3)............... 13,476 35,659 16,449
Interest and dividend income............................ 6,414 6,290 4,590
Foreign currency gains (losses) net..................... 1,462 4,776 (1,089)
Other income, net (note 14)............................. 29,113 80,820 14,698
-------- -------- --------
Total other income (expense).............................. 24,201 94,952 (8,541)
-------- -------- --------
Earnings before income taxes, minority interest and
cumulative effect of change in accounting for income
taxes................................................... 111,995 165,481 46,947
Income taxes (note 9)..................................... 36,475 41,300 18,108
-------- -------- --------
Earnings before minority interest and cumulative effect of
change in accounting for income taxes................... 75,520 124,181 28,839
Minority interest (note 15)............................... 25,475 21,409 22,637
-------- -------- --------
Earnings before cumulative effect of change in accounting
for income taxes........................................ 50,045 102,772 6,202
Cumulative effect of change in accounting for income
taxes................................................... (24,256) -- --
-------- -------- --------
Net earnings.............................................. $ 25,789 $102,772 $ 6,202
======== ======== ========
Earnings per common share:
Earnings before cumulative effect of change in
accounting for income taxes.......................... $ 1.03 $ 1.90 $ 0.11
======== ======== ========
Cumulative effect of change in accounting for income
taxes................................................ $ 0.50 $ -- $ --
======== ======== ========
Net earnings............................................ $ 0.53 $ 1.90 $ 0.11
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 126
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON UNREALIZED
STOCK STOCK ADDITIONAL CUMULATIVE GAIN ON RETAINED
CLASS CLASS PAID-IN TRANSLATION MARKETABLE EARNINGS
A B CAPITAL ADJUSTMENT SECURITIES (DEFICIT) TOTAL
------ ------ ---------- ----------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.......... $336 $ $ (10,331) $ (16,627) $ $ 99,529 $ 72,907
Capital contribution................ -- -- 1,458 -- -- -- 1,458
Acquisition of Southam interest from
Hollinger Inc. (note 19).......... -- -- 26,938 -- -- -- 26,938
Translation adjustments............. -- -- -- 1,347 -- -- 1,347
Deemed dividend to Hollinger Inc.... -- -- -- -- -- (16,775) (16,775)
Net earnings........................ -- -- -- -- -- 25,789 25,789
---- ---- --------- --------- -------- -------- ---------
Balance at December 31, 1993.......... 336 -- 18,065 (15,280) -- 108,543 111,664
---- ---- --------- --------- -------- -------- ---------
Issuance of 8,355,000 Class A
Common shares..................... 84 -- 98,538 -- -- -- 98,622
Issuance of 14,990,000 Class B
Common shares..................... -- 150 46,295 -- -- -- 46,445
Translation adjustments............. -- -- -- 14,068 -- -- 14,068
Unrealized holding gain............. -- -- -- -- 7,825 -- 7,825
Cash dividends -- Class A and
Class B, $0.05 per share.......... -- -- -- -- -- (1,167) (1,167)
Deemed dividend to Hollinger Inc.... -- -- -- -- -- (76,760) (76,760)
Net earnings........................ -- -- -- -- -- 102,772 102,772
---- ---- --------- --------- -------- -------- ---------
Balance at December 31, 1994.......... 420 150 162,898 (1,212) 7,825 133,388 303,469
Jerusalem Post adjustment........... -- -- (288) -- -- -- (288)
Translation adjustments............. -- -- -- (2,775) -- -- (2,775)
Unrealized holding gain............. -- -- -- -- (7,825) -- (7,825)
Cash dividends--Class A and
Class B, $0.10 per share.......... -- -- -- -- -- (3,175) (3,175)
Dividends on redeemable
preferred stock................... -- -- -- -- -- (271) (271)
Deemed dividend to Hollinger Inc.... -- -- -- -- -- (93) (93)
Net earnings........................ -- -- -- -- -- 6,202 6,202
---- ---- --------- --------- -------- --------- ---------
Balance at December 31, 1995.......... $420 $150 $ 162,610 $ (3,987) $ -- $ 136,051 $ 295,244
==== ==== ========= ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 127
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................................ $ 25,789 $ 102,772 $ 6,202
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization..................................... 34,545 45,200 52,388
Deferred income taxes............................................. 9,048 13,816 (4,348)
Cumulative effect of change in accounting for income taxes........ 24,256 -- --
Minority interest................................................. 25,475 21,409 22,637
Equity in earnings of affiliates, net of dividends received....... (7,779) (29,833) 1,418
Gain on sale of investments....................................... (24,929) (80,592) (11,968)
Gain on dilution of Fairfax interest.............................. (3,609) -- --
Gain (loss) on sale of assets..................................... (615) -- 290
Amortization of deferred gain..................................... (1,616) (1,616) (1,616)
Unrealized foreign exchange gain on redeemable preferred stock.... (1,921) (2,745) (257)
Other............................................................. (2,489) -- --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable............................................... (5,051) (10,206) (5,584)
Inventories....................................................... 2,679 22,721 (12,537)
Prepaid expenses and other current assets......................... 510 633 (10,041)
Accounts payable.................................................. (837) (13,880) 7,779
Accrued expenses.................................................. 7,471 (7,620) (8,013)
Accrued pension................................................... -- 1,314 (1,351)
Income taxes payable.............................................. 11,710 17,241 (14,586)
Deferred revenue and other........................................ 774 837 (5,154)
--------- --------- ---------
Cash provided by operating activities................................. 93,411 79,451 15,259
--------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment........................... (9,162) (27,795) (21,699)
Proceeds from sale of property, plant and equipment................. 3,067 3,163 1,625
Proceeds on disposal of marketable securities....................... 37,050 -- 17,700
Purchase of subsidiaries' stock and other investments............... (213,711) (12,889) (57,283)
Acquisitions, net of cash acquired.................................. (20,368) (227,321) (97,232)
Repayment of long-term receivables.................................. 9,566 10,295 10,393
Proceeds on disposal of subsidiaries' stock and other investments... 12,703 110,583 --
Other............................................................... (1,128) (7,682) 1,832
--------- --------- ---------
Cash used in investing activities..................................... (181,983) (151,646) (144,664)
--------- --------- ---------
Cash flows from financing activities:
Repayment of debt................................................... (13,925) (121,407) (15,907)
Proceeds from issuance of bank debt................................. 97,091 221,710 20,000
Proceeds from bank loans............................................ -- -- 131,589
Change in borrowings from Hollinger Inc. ........................... 2,152 55,203 (78,961)
Net proceeds from issuance of Class A Common Stock.................. -- 98,622 --
Issuance of common shares by a subsidiary........................... 1,419 2,193 4,131
Dividends paid...................................................... -- (1,167) (3,175)
Deemed dividend to Hollinger Inc.................................... (16,775) (76,760) (93)
Dividends paid by subsidiaries to minority stockholders,
net of related swap income........................................ (13,152) (16,711) (20,890)
Other............................................................... (2,618) (5,210) 257
--------- --------- ---------
Cash provided by financing activities................................. 54,192 156,473 36,951
--------- --------- ---------
Effect of exchange rate changes on cash............................... 4,189 8,096 (1,161)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. (30,191) 92,374 (93,615)
Cash and cash equivalents at beginning of year........................ 55,242 25,051 117,425
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 25,051 $ 117,425 $ 23,810
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 128
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Presentation and Consolidation
Hollinger International Inc. (the "Company"), formerly named American
Publishing Company, is an 85% owned subsidiary of Hollinger Inc., a Canadian
corporation.
On October 13, 1995, the Company and Hollinger Inc. consummated a
reorganization of their international newspaper operations (the
"Reorganization"). The Reorganization consisted principally of the Company's
acquisition of the outstanding shares of DT Holdings Limited ("DTH"), a
subsidiary of Hollinger Inc., through which Hollinger Inc. owned an indirect
58.2% interest in The Telegraph plc ("The Telegraph") and a 19.5% interest in
Southam Inc. ("Southam"). In exchange for all of the ordinary shares of DTH, the
Company issued to Hollinger Inc. 33,610,754 shares of Class A Common Stock, and
739,500 shares of Series A Redeemable Convertible Preferred Stock (Series A
Preferred Stock), and was obligated to pay Hollinger Inc. $13,832,000 in cash as
a working capital adjustment under the terms of the Reorganization. As part of
the Reorganization the name of the Company was changed to "Hollinger
International Inc."
Under the terms of the Reorganization, on July 27, 1995, a subsidiary of
DTH, First DT Holdings Limited ("FDTH") acquired from Hollinger Inc. its direct
and indirect interest in Southam in exchange for cash consideration of
L46,000,000 ($73,437,000) and preference shares of FDTH (which Hollinger Inc.
subsequently transferred to DTH in exchange for one ordinary share of DTH which
was subsequently transferred to the Company).
The Reorganization represents a combination of entities under common
control and has been accounted for on an "as-if" pooling-of-interests basis,
with the accompanying financial statements restated for all periods presented.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. The Company's interest in The Telegraph was
66.4%, 58.6% and 64.0% at December 31, 1993, 1994 and 1995, respectively.
Investments in less than majority-owned affiliated companies, including printing
joint ventures, are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated on consolidation.
(b) Description of Business
The Company is engaged in the publishing, printing and distribution of
newspapers and magazines in the United States, the United Kingdom, Australia,
Canada and Israel through subsidiaries and affiliates. The Company's raw
materials, mainly newsprint and ink, are available and not dependent on a single
or limited number of suppliers. Customers range from individual subscribers to
local and national advertisers.
(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) Cash and Cash Equivalents
Cash equivalents consist of certain highly liquid investments with original
maturities of three months or less.
F-7
<PAGE> 129
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) 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) method, except for newsprint inventories of certain
subsidiaries which are accounted for using the last-in, first-out method (LIFO).
At December 31, 1995, approximately 26% of the Company's newsprint inventories
were valued using LIFO. If the FIFO method had been used, such newsprint
inventories would have been $1,953,000 higher.
(f) Impairment of Long-lived Assets
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. The assessment of recoverability
is based on management's estimate of undiscounted future operating cash flows of
its long-lived assets. If the assessment indicates that the 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 statement of operations if such
a difference arose. The Company determined that no permanent impairments had
occurred at December 31, 1995.
(g) Derivatives
The Company is a limited user of derivative financial instruments to manage
risks generally associated with interest rate and foreign exchange rate market
volatility. The Company does not hold or issue derivative financial instruments
for trading purposes. Amounts receivable under the interest rate cap agreement
are accrued as a reduction of interest expense and amounts payable are accrued
as interest expense. The interest rate differential on the swap arrangements
related to the preferred stock of the subsidiaries is treated as an adjustment
to the underlying dividends which are disclosed as minority interest. Interest
rate differentials on all other swap arrangements are accrued as interest rates
change over the contract period.
(h) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Routine maintenance and
repairs are expensed as incurred. Depreciation is calculated under the
straight-line method over the estimated useful lives of the assets, principally
25 to 40 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 estimated useful life of the asset and the lease
term.
(i) 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 3 to 40 years.
(j) Deferred Financing Costs
Deferred financing costs consist of certain costs incurred in connection
with debt financings. Such costs are amortized on a straight-line basis over the
remaining term of the related debt, up to seven years.
F-8
<PAGE> 130
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Deferred Revenue
Deferred revenue represents subscription payments which have not been
earned and are recognized on a straight-line basis over the term of the related
subscription. Costs incurred in connection with the procurement of subscriptions
are expensed in the period incurred.
(l) Income Taxes
Effective January 1, 1993, the Company adopted on a prospective basis
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). Under the asset and liability method of FAS 109, 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 bases. 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. Under FAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The cumulative effect of the change in the method of accounting for income
taxes is reported as a non-cash charge of $24,256,000 in the consolidated
statement of operations for the year ended December 31, 1993.
The cumulative effect principally represents the recording of deferred tax
liabilities related to certain intangible assets which have no tax bases. These
deferred tax liabilities would be paid only in the event the related newspapers
were sold in taxable transactions.
(m) Foreign Currency Translation
Foreign operations of the Company have been translated into U.S. dollars in
accordance with the principles prescribed in Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation" (FAS 52). All assets,
liabilities and minority interest are translated at year-end exchange rates,
stockholders' equity is translated at historical rates, and revenues and
expenses are translated at the average rates of exchange prevailing throughout
the year. These exchange gains or losses are not included in earnings unless
they are actually realized through a reduction of the Company's net investment
in the foreign subsidiary. Foreign currency gains and losses arising from
transactions are reflected in net earnings.
(n) Earnings Per Share
Net earnings per common share was determined by dividing net earnings,
adjusted by the aggregate amount of dividends on the Company's preferred stock,
by the applicable weighted average number of shares of common stock outstanding,
which for the year ended December 31, 1993, 1994 and 1995 was 48,600,754,
53,980,001 and 56,955,754, respectively. When dilutive, unexercised stock
options of the Company are included as common stock equivalents using the
treasury stock method.
(o) Reclassifications
Certain 1994 and 1993 amounts in the consolidated financial statements have
been reclassified to conform to the 1995 presentation.
2. ACQUISITIONS AND DISPOSITIONS
All acquisitions are accounted for using the purchase method of accounting.
Based on estimated fair values of the acquired assets and liabilities,
acquisition costs have been allocated to working capital, property, plant and
equipment, and intangible assets. The former owners of the acquired businesses
have, within
F-9
<PAGE> 131
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
specified limits, generally indemnified the Company with respect to any
litigation or loss contingencies that may arise in relation to the operations of
the businesses prior to acquisition by the Company.
(a) On March 31, 1994 the Company acquired all of the capital stock of The
Sun-Times Company which, with its subsidiaries (Chicago Sun-Times), publishes
the Chicago Sun-Times and 61 suburban weekly and bi-weekly newspapers in the
Chicago area. The purchase price of approximately $180,000,000 was paid in cash,
of which $168,000,000 was applied to retire all existing long-term bank
indebtedness of Chicago Sun-Times and the remaining $12,000,000 was paid to
former equity holders of Chicago Sun-Times. Using the purchase method of
accounting, the purchase price was allocated to assets acquired based on their
estimated fair values. This treatment resulted in the excess of the purchase
price over the estimated fair value of the tangible assets acquired being
recorded as identifiable intangibles and goodwill of $153,000,000. The results
of Chicago Sun-Times have been included in the consolidated results of
operations since the date of acquisition.
On December 23, 1994 the Company acquired for approximately $32,000,000 in
cash all of the capital stock of Pulitzer Community Newspapers, Inc. (the "Daily
Southtown") which publishes The Daily Southtown, a daily newspaper, and News
Marketer, a weekly free circulation publication, in south and south suburban
Chicago. Using the purchase method of accounting, the purchase price was
allocated to assets acquired based on their estimated fair values. This
treatment resulted in the excess of the purchase price over the estimated fair
value of the tangible assets acquired being recorded as identifiable intangibles
and goodwill of $11,000,000. The results of the Daily Southtown have been
included in the consolidated results of operations for the year ended December
31, 1995.
On September 20, 1995, October 3, 1995 and October 16, 1995, the Company
consummated three separate agreements resulting in the acquisition of a total of
16 United States daily newspapers and related publications for approximately
$95,000,000. These acquisitions were financed through the Company's then
existing credit facility and new interim bank arrangements entered into on
September 28, 1995. Using the purchase method of accounting, the purchase price
was allocated to assets acquired based on their estimated fair values. This
treatment resulted in the excess of the purchase price over the estimated fair
value of tangible assets acquired being recorded as identifiable intangibles and
goodwill of $74,758,000. The results of the newspapers acquired have been
included in the consolidated results of operations since the date of the
acquisitions.
The following summarized, unaudited pro forma consolidated results of
operations for the years ended December 31, 1995 and 1994 assume the above five
acquisitions occurred as the beginning of the respective periods:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenue...................................... 974,724 $1,003,113
Net earnings..................................... 109,328 11,404
Net earnings per common share.................... 2.03 0.20
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the purchases occurred at the
beginning of each year presented, or future results of operations of the
consolidated companies.
(b) During 1993 the Company also acquired certain other U.S. newspaper
businesses for approximately $20,368,000 in cash and the assumption of vendor
and non-compete obligations.
(c) In 1993 the Company sold 2,000,000 shares of The Telegraph for cash of
$12,703,000 resulting in a gain of $7,328,000. In 1994 the Company sold
12,500,000 shares of The Telegraph for cash of $110,583,000 resulting in a gain,
net of related costs, of $80,592,000 (note 14). In addition, in 1994 the Company
acquired 2,270,000 shares of The Telegraph for cash consideration of
$12,102,000.
F-10
<PAGE> 132
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 13, 1995, the Company exercised its option to purchase from the
Trustee of The Telegraph Newspaper Trust, 7,000,000 ordinary shares of The
Telegraph at a price of L4.50 per share for an aggregate purchase price of
L31,500,000 ($49,663,000). The purchase was made on October 20, 1995 and
financed through interim bank indebtedness of the Company. In addition, in
December 1995, the Company acquired an additional 995,000 ordinary shares of The
Telegraph at a price per share of L4.50, aggregating approximately $6,956,000.
3. INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
John Fairfax Holdings Limited (Fairfax)............... $250,946 $264,554
Southam Inc. (Southam)................................ 202,499 191,099
Printing joint ventures............................... 8,047 7,874
-------- --------
$461,492 $463,527
======== ========
</TABLE>
(a) JOHN FAIRFAX HOLDINGS LIMITED
During 1993 The Telegraph increased its interest in Fairfax by purchasing
both common shares and options to acquire common shares and exercising all
options held for a total cash cost of $112,211,000. The original acquisition
cost by Fairfax was revised in 1993 by $21,732,000 as a result of the payment of
certain contingent purchase consideration. In addition, Fairfax issued shares to
a third party which diluted The Telegraph's ownership interest and resulted in a
gain to The Telegraph in 1993 of $3,609,000 (note 14). The net effect of these
transactions was to increase The Telegraph's interest in Fairfax to 24.7% from
15.0% in 1992. The fair value of The Telegraph's ownership interest in Fairfax
based on the market value of stock at December 31, 1995 was $408,312,000.
While Fairfax has a June 30 year end for its financial reporting purposes,
the Company's equity in the earnings of Fairfax is for the 12 months ended
December 31. Selected financial information in Australian dollars and in
accordance with Australian generally accepted accounting principles reported by
Fairfax in its annual report for the years ended June 30, 1993, 1994 and 1995 is
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues................... A $ 771,354 A $ 846,592 A $ 948,433
Operating income*.................... 114,070 168,573 216,491
Net earnings......................... 67,243 185,672 147,078
Balance Sheet Data:
Current assets....................... 162,469 162,460
Total assets......................... 1,864,056 2,072,841
Current liabilities.................. 138,899 210,176
Total liabilities.................... 856,598 999,155
Stockholders' equity................. 1,007,458 1,073,686
</TABLE>
- ---------
*Before abnormal items, income tax and minority interest.
(b) SOUTHAM INC.
On January 8, 1993 the Company acquired 14,290,000 common shares of Southam
for $202,997,000. One-half of the Company's aggregate investment in Southam is
owned by The Telegraph.
F-11
<PAGE> 133
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 26, 1993, the Company entered into a 15-year agreement with an
unrelated investment holding company, Power Corporation of Canada ("Power"),
which owns approximately 14,300,000 Common Shares of Southam. The agreement
provides, among other things, for voting parity between the Company and Power in
most circumstances and reciprocal rights of first refusal should either party
decide to sell any of its Southam common shares.
In 1994 the Company and The Telegraph each acquired an additional 250,00
common shares of Southam for an aggregate price of $5,350,000. Shares
representing 9.4% of the Company's indirect interest in Southam are pledged as
collateral securing certain Hollinger Inc. debentures in the principal amount of
Cdn$125,000,000 due November 1, 1998 (Southam-Linked Debentures). In the event
that Hollinger Inc. does not deliver clear legal title to such shares on or
prior to April 1, 1999, or upon demand, approximately one-half of the Company's
indirect equity interest in Southam would be subject to the rights of the
Holders of the Southam-Linked Debentures.
The Company indirectly held an 18.7%, 19.4% and 19.5% interest in Southam
at December 31, 1993, 1994 and 1995, respectively. The fair value of the
Company's indirect interest in Southam based on the market value of stock at
December 31, 1995 was $157,174,000.
Equity accounting for the Southam investment commenced April 1, 1994, being
the date on which the Company was able to exercise significant influence over
Southam.
Selected financial information in Canadian dollars and in accordance with
generally accepted accounting principles in Canada as reported by Southam in its
annual report for 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues................... C $1,176,158 C $1,202,359 C $1,022,345
Operating income (loss).............. 99,701 131,948 (60,589)
Net earnings (loss).................. 21,568 44,008 (53,422)
Balance Sheet Data:
Current assets....................... 293,953 229,066
Total assets......................... 898,933 823,115
Current liabilities.................. 288,889 217,635
Total liabilities.................... 444,130 463,851
Stockholders' equity................. 454,803 359,264
</TABLE>
(c) PRINTING JOINT VENTURES
The Telegraph has a 50% interest in two printing joint ventures, West Ferry
Printers and Trafford Park Printers, both of which commenced production in 1986.
These joint ventures operate printing plants in which The Telegraph and the
other joint venturers' newspapers are printed at cost.
(d) EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fairfax........................................ $13,476 $31,847 $ 24,662
Southam........................................ -- 3,522 (10,968)
Printing joint ventures........................ -- 290 2,755
------- ------- --------
$13,476 $35,659 $ 16,449
======= ======= ========
</TABLE>
F-12
<PAGE> 134
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity in earnings of Fairfax are computed as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Share of net earnings as reported by
Fairfax..................................... $14,320 $33,821 $ 22,779
Consolidation and U.S. GAAP adjustments....... (844) (1,974) 1,883
------- ------- --------
$13,476 $31,847 $ 24,662
======= ======= ========
</TABLE>
Equity in earnings of Southam for the year ended December 31, 1995 and for
the nine months ended December 31, 1994 are computed as follows:
<TABLE>
<CAPTION>
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Share of operating results as reported by Southam:
Income before special charge........................... $ 9,179 $ 8,426
Special charge......................................... -- (17,324)
Tax (expense) benefit.................................. (3,363) 3,189
Loss from discontinued operations, net of tax.......... -- (2,084)
Consolidation and U.S. GAAP adjustments.................. (2,294) (3,175)
------- --------
$ 3,522 $(10,968)
======= ========
</TABLE>
4. OTHER INVESTMENTS
<TABLE>
<CAPTION>
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Investment in Argsub Limited............................. $ -- $102,606
Note receivable from West Ferry.......................... 47,751 36,968
Advances under printing contracts with joint ventures.... 28,729 31,242
Other.................................................... 2,395 $ 7,521
------- --------
$78,875 $178,337
======= ========
</TABLE>
(i) On December 29, 1995, DTH transferred all outstanding FDTH preference
shares which it then held (with an aggregate redemption amount of Cdn.$140
million ($102.6 million)), to Argsub Limited (Argsub), in exchange for newly
issued preference shares (with an aggregate redemption of Cdn.$140 million
($102.6 million)), of Argsub. Other than these preference shares, Argsub is a
wholly owned English subsidiary of Argus Corporation Limited, a Canadian
corporation, all the voting stock of which is indirectly owned or controlled by
the principal shareholder by Hollinger Inc.
(ii) The note receivable from West Ferry represents amounts due to The
Telegraph following the granting of rights to West Ferry equivalent to ownership
of certain of The Telegraph's fixed assets. These fixed assets have been treated
as if they had been sold outright with the long-term element of the note
receivable included in investments. The current portion of the note receivable
was $10,241,000 and $10,388,000 for 1994 and 1995, respectively, and is included
in accounts receivable. The income related to this note is computed based on the
effective interest rate method.
(iii) Advances under printing contract represent loans to the joint venture
by way of amounts prepaid under The Telegraph's printing contracts.
F-13
<PAGE> 135
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................................. $ 23,671 $ 26,774
Building and leasehold interests..................................... 78,047 86,468
Machinery and equipment.............................................. 169,254 182,471
-------- --------
270,972 295,713
Less -- Accumulated depreciation and amortization............... 78,982 102,306
-------- --------
$191,990 $193,407
======== ========
</TABLE>
Depreciation and amortization of property, plant and equipment totalled
$18,314,000, $20,522,000 and $25,174,500 in 1993, 1994 and 1995, respectively.
6. BANK LOANS
On September 28, 1995, the Company entered into an agreement with two banks
that provided for up to $130,000,000 in borrowings under a revolving credit
facility terminating September 6, 1996. At December 31, 1995, borrowings under
this facility were $130,000,000. Interest on the bank loan is based on the
bank's prime rate or a rate based on those offered in the Eurodollar interbank
borrowing market in London, England, plus, in each case, an applicable margin.
The interest rate at December 31, 1995 was 7.625%. The bank loan is secured by a
pledge of the common stock and assets of certain of the Company's subsidiaries
and guarantees of certain new subsidiaries of the Company. This loan was repaid
in February, 1996.
The Telegraph has a revolving short-term bank agreement which terminates in
November 1996. Borrowings under this agreement were L10,500,000 ($16,448,000)
and L11,500,000 (17,866,000) at December 31, 1994 and December 31, 1995,
respectively. Interest is based on LIBOR plus an applicable margin. The interest
rate at December 31, 1995 was 6.9%.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Hollinger International Inc.
Senior secured notes due 1996-2000................................... $150,000 $150,000
Bank loans due 1996-2001............................................. 150,000 160,000
Amounts due under non-interest bearing non-competition agreements
due 1996-2004..................................................... 12,914 10,584
Other due 1996-2001 (at varying interest rates up to 10%)............ 741 788
The Telegraph
Bank loans........................................................... 139,432 135,714
Obligations under capital leases (note 8).............................. 20,434 16,700
-------- --------
473,521 473,786
Less current portion included in current liabilities................... 5,436 27,552
-------- --------
$468,685 $446,234
======== ========
</TABLE>
(a)(i) Senior Secured Notes (Notes) are secured by (1) a pledge of the
capital stock and certain promissory notes of the subsidiaries of American
Publishing (1991) Inc., (2) the general intangibles of such subsidiaries, and
(3) a guarantee by Hollinger Inc. The Notes are repayable in annual installments
from September 1, 1996 through September 1, 2000 and bear interest at rates
ranging from 10.24% to 10.53%.
F-14
<PAGE> 136
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ii) A subsidiary of the Company entered into an agreement with six banks
providing for maximum borrowings of $100,000,000. At December 31, 1995 and 1994
borrowings under this facility were $94,000,000 and $80,000,000, respectively.
Principal repayments are quarterly commencing June 30, 1997 until December 31,
2000, with a final principal repayment of 25% on December 31, 2001. Interest on
the bank loans is based on the bank's prime rate, a rate based on those offered
in the Eurodollar interbank market in London, England or the federal funds rate,
plus, in each case, an applicable margin. The interest rate at December 31, 1995
was 7.0%. The bank loan is secured by a pledge of the common stock and assets of
certain of the Company's subsidiaries and a guarantee by the Company. This loan
was repaid in February 1996.
Pursuant to a requirement in the financing arrangement, the Company has
entered into an interest rate swap contract of $25,000,000 of bank debt through
June 29, 2000. The effect of this contract is to fix the effective interest rate
on $25,000,000 of this debt at 7.79%. This swap agreement is still in effect.
(iii) Chicago Sun-Times entered into an agreement with two banks that provided
for up to $80,000,000 in borrowings under a two year revolving credit facility.
At December 31, 1995 and 1994, borrowings under the revolving credit agreement
were $66,000,000 and $70,000,000, respectively. The revolving credit agreement
automatically converts into a five-year secured term loan on March 31, 1996 with
quarterly principal repayments commencing June 30, 1996 through March 31, 2001.
Under the revolving credit agreement, commencing April 15, 1997, the Chicago
Sun-Times is required to make mandatory principal repayments in an amount equal
to 50% of its operating cash flow (as defined) for the immediately preceding
fiscal year. Interest on the bank loan is based on the bank's prime rate or a
rate based on those offered in the Eurodollar interbank borrowing market in
London, England plus, in each case, an applicable margin. The interest rate at
December 31, 1995 was 7.18%. The revolving credit agreement is secured by a
pledge of the capital stock and assets of Chicago Sun-Times and a guarantee by
the Company. This loan was repaid in February 1996.
Pursuant to a requirement in the financing arrangement, the Company has
entered into an interest rate swap contract on $25,000,000 of bank debt through
June 19, 2000. The effect of this contract is to fix the effective interest rate
on $25,000,000 of this debt at 7.77%. The Company has also entered into a
financing arrangement which caps the effective interest rate on $40,000,000 of
this debt at 11.45% through June 21, 1996. These agreements are still in effect.
(b) The Telegraph had the following separate unsecured bank loans:
(i) A loan of A$45,100,000 (1994 A$45,100,000), repayable in 1997. The
interest rate is based on LIBOR plus 0.5%. The interest rate at December
31, 1995 was 7.913%.
(ii) A loan of L40,000,000 (1994 L40,000,000), repayable in 1998. The
interest rate is based on LIBOR plus an applicable margin. The interest
rate at December 31, 1995 was 7.167%.
(iii) A loan of A$53,750,000 (1994 A$53,750,000) repayable in 1998.
The interest rate is based on LIBOR plus an applicable margin. The interest
rate at December 31, 1995 was 7.875%.
(c) The Company's agreements with banks contain various restrictive
provisions relating to maintenance of certain financial ratios, restrictions on
additional indebtedness, occurrence of certain corporate transactions, and
limitations on the amount of capital expenditures and restricted payments (which
generally include dividends and management fees). At December 31, 1995, the
Company was in compliance with the aforementioned restrictive provisions.
F-15
<PAGE> 137
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Principal amounts payable on long-term debt, excluding obligations
under capital leases, for each of the five years subsequent to December 31, 1995
are as follows:
<TABLE>
<CAPTION>
HOLLINGER
TOTAL INTERNATIONAL INC. TELEGRAPH
-------- ------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1996.................................. $ 25,320 25,320 --
1997.................................. 87,489 53,922 33,567
1998.................................. 166,153 64,006 102,147
1999.................................. 54,251 54,251 --
2000.................................. 94,731 94,731 --
-------- ------- --------
</TABLE>
(e) Interest paid for 1993, 1994 and 1995 was $26,065,000, $33,194,000 and
$39,234,000 respectively.
8. LEASES
The following summarizes assets held under capital leases which are
included in property, plant and equipment:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment.................................... $9,911 $6,270
Less -- accumulated depreciation......................... 6,653 6,270
------ ------
$3,258 $ --
====== ======
</TABLE>
The Company also leases various facilities and equipment under
noncancelable operating lease arrangements. Rental expense under all operating
leases was approximately $9,057,000, $11,072,000 and $11,387,000 in 1993, 1994
and 1995, respectively.
Minimum lease commitments together with the present value of obligations at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996.................................................... $ 3,917 $ 9,950
1997.................................................... 3,917 9,082
1998.................................................... 3,917 8,165
1999.................................................... 3,917 7,622
2000.................................................... 3,917 7,048
Later years............................................. 2,937 101,288
------- ---------
22,522 $ 143,155
=========
Less imputed interest and executory costs............... 5,822
-------
Present value of net minimum payments................... 16,700
Less current portion included in current liabilities.... 2,232
-------
Long-term obligations................................... $14,468
=======
</TABLE>
Minimum lease payments have been reduced for rental income from
noncancelable subleases by approximately $88,500 in 1996 and lesser amounts
thereafter (total reductions $440,000).
F-16
<PAGE> 138
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
U.S. and foreign components of earnings (loss) before income taxes,
minority interest, and cumulative effect of change in accounting for income
taxes are presented below:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S.......................................... $ (1,037) $ 16,457 $ 3,462
Foreign...................................... 113,032 149,024 43,485
-------- -------- --------
$111,995 $165,481 $ 46,947
======== ======== ========
</TABLE>
Income tax expense for the periods shown below consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1993:
U.S. Federal.................................. $ -- $ -- $ --
Foreign....................................... 27,296 9,048 36,344
State and local............................... 131 -- 131
------- ------- -------
$27,427 $ 9,048 $36,475
======= ======= =======
Year ended December 31, 1994:
U.S. Federal.................................. $ 3,667 $ -- $ 3,667
Foreign....................................... 23,065 13,816 36,881
State and local............................... 752 -- 752
------- ------- -------
$27,484 $13,816 $41,300
======= ======= =======
Year ended December 31, 1995:
U.S. Federal.................................. $ 2,844 $ (749) $ 2,095
Foreign....................................... 18,817 (3,492) 15,325
State and local............................... 795 (107) 688
------- -------- -------
$22,456 $(4,348) $18,108
======= ======== =======
</TABLE>
F-17
<PAGE> 139
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34% for 1993 and 35% for 1994 and 1995 as a result of
the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense.................... $38,078 $57,918 $16,431
Increase (reduction) in income taxes resulting
from:
Nondeductible expenses for income tax purposes... 2,647 2,403 3,170
Resolution of foreign tax issues................. -- -- (3,492)
Results of foreign subsidiaries for which income
tax benefit (expense) has not been
recognized.................................... 106 (1,856) 3,327
Alternative minimum tax.......................... -- 771 --
Additional U.S. taxes on foreign earnings........ -- -- 1,050
U.S. state and local income taxes, net of federal
benefit....................................... 131 496 447
Impact of taxation at different foreign rates,
repatriation and other........................ (3,217) (14,764) (945)
Utilization of net operating loss carryforwards
and investment tax credits for which no
previous benefit has been recognized.......... (276) (2,631) (1,520)
Other............................................ (994) (1,037) (360)
------- ------- -------
$36,475 $41,300 $18,108
======= ======= =======
</TABLE>
F-18
<PAGE> 140
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts.......................................................... $ 1,016 $ 1,181
Accrued compensation including vacation, bonus, severance and
deferred compensation............................................. 5,671 3,717
Alternative minimum tax credit carryforwards......................... 1,010 --
Net operating loss carryforwards..................................... 8,845 2,109
Accrued medical and workers' compensation claims..................... 963 3,075
Basis in subsidiaries, tax in excess of book......................... -- 5,257
Advance Corporation Tax receivable................................... 13,600 10,382
------- -------
Gross deferred tax assets.............................................. 31,105 25,721
Less valuation allowance............................................... 15,524 4,566
------- -------
Net deferred tax assets................................................ 15,581 21,155
------- -------
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in
depreciation...................................................... 22,411 15,663
Intangible assets, principally due to differences in basis and
amortization...................................................... 39,579 30,300
Foreign exchange basis differences................................... 9,110 8,567
Long term advances under printing contract........................... 7,543 3,466
Prepaid expenses..................................................... -- 10,310
Unremitted earnings of a foreign equity investment................... 14,500 19,776
Unrealized gain on marketable securities............................. 3,900 --
Other................................................................ 3,650 5,363
------- -------
Gross deferred tax liabilities......................................... 100,693 93,445
------- -------
Net deferred taxes..................................................... $85,112 $72,290
======= =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred assets will not be realized. In 1994, the Company
established a valuation allowance primarily for net operating loss carryforwards
and other deferred tax assets. From 1994 to 1995 the valuation allowance
decreased by a net $10,958,000. The change was primarily the result of the
utilization of net operating losses and the resolution of certain issues.
Jerusalem Post has net operating loss and other credit carryforwards of
approximately $5,700,000 for Israeli tax purposes which do not have expiration
dates and may be used to reduce future Israeli income taxes.
Total income taxes paid in 1993, 1994 and 1995 amounted to $9,089,000,
$17,776,000, and $34,180,000 respectively.
10. FINANCIAL INSTRUMENTS
The Company has entered into various types of financial instruments in the
normal course of business. Fair value estimates are made at a specific point in
time, based on assumptions concerning the amount and timing of estimated future
cash flows and assumed discount rates reflecting varying degrees of perceived
risk and the country of origin. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, may
not represent actual values of the financial instruments that could be realized
in the future.
F-19
<PAGE> 141
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994 and 1995, the comparison of the carrying value and the
estimated fair value of the Company's financial instruments was as follows:
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Marketable securities................. $ 17,036 $ 17,036 -- --
Long-term debt........................ 469,535 467,983 457,086 461,434
Redeemable preferred stock............ 204,101 193,655 306,452 297,128
Interest rate and currency swaps...... -- 9,296 -- 8,907
</TABLE>
The fair value of the interest rate and currency swaps is the estimated
amount that the Company would receive or pay to terminate the agreements (note 7
and 12). The carrying value of all other financial instruments at December 31,
1994 and 1995 approximate their estimated fair values, except for investments in
affiliates (note 3).
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors six domestic defined contribution plans, one of which
has provisions for Company matching contributions. Under the Company's matching
program for the one plan, $185,000 and 225,000 was contributed for the nine
months ended December 31, 1994 and the year ended December 31, 1995.
The Telegraph sponsors a defined contribution plan, The Telegraph Staff
Pension Plan, for the majority of its employees, as well as a defined
contribution plan to provide pension benefits for senior executives.
Contributions to each of the plans were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
The Telegraph Staff Pension Plan................... $4,436 $4,719 $6,970
The Telegraph Executive Pension Scheme............. 1,025 1,267 805
</TABLE>
The Telegraph plans' assets consist principally of United Kingdom and
overseas equities, unit trusts and bonds.
Defined Benefit Plans
The Company has six domestic single-employer defined benefit plans and
contributes to various union-sponsored, collectively bargained domestic
multi-employer pension plans which together cover certain employees of the
Chicago Sun-Times and the Daily Southtown.The Company's contribution to these
plans for the nine months ended December 31, 1994 and for the year ended
December 31, 1995 were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Single-employer plans........................... $ 1,367 $2,467
Multi-employer plans............................ 1,343 1,900
</TABLE>
The Telegraph has a defined benefit plan, which was closed on July 1, 1991
and provides only benefits accrued up to that date. The liabilities of the
scheme have been actuarially valued as at December 31, 1995. At that date the
market value of the scheme's assets was $60,748,000, representing 101% of the
estimated cost of purchasing the plan's benefits from an insurance company. The
actuary assumed a discount rate of 7.68%.
F-20
<PAGE> 142
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Increases to pension payments are discretionary and are awarded by the trustees,
with The Telegraph's consent, from surpluses arising in the fund from time to
time. The Telegraph agreed to make ex gratia payment to pensioners equivalent to
a 2.2% increase for the year commencing April 1, 1995. Contributions to the
trust were $2,405,000, $751,000 and $2,480,000 for 1993, 1994 and 1995,
respectively.
Pursuant to the West Ferry joint venture agreement, The Telegraph has a
commitment to fund 50% of the obligation under West Ferry's defined benefit
plan.
Single-Employer Pension Plans
The benefits under the Company's single-employer pension plans are based
primarily on years of service and compensation levels. The Company funds the
annual provision deductible for income tax purposes. The plans' assets consist
principally of marketable equity securities and corporate and government debt
securities.
Pension expense for the plans includes the following components:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
period........................................ $ -- $ 947 $ 1,084
Interest on projected benefit obligation........ 4,358 7,084 8,819
Expected return on assets....................... (4,290) (6,685) (7,987)
Net amortization and deferral................... (449) (283) (139)
-------- ------- -------
Net periodic pension expense.................... $ (381) $ 1,063 $ 1,777
======== ======= =======
</TABLE>
The funded status of the plans and the amounts recognized in the Company's
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations --
vested benefit obligation.......................... $ (98,759) $(108,772)
========= =========
Accumulated benefit obligation....................... $(100,896) $(111,376)
========= =========
Projected benefit obligation......................... $ 103,640 $ 115,931
Plan assets at fair value............................ 92,866 103,518
--------- ---------
Projected benefit obligation in excess of plan
assets............................................. (10,774) (12,413)
Unrecognized net (gain)/loss......................... (2,297) 1,894
--------- ---------
Accrued pension liability............................ $ (13,071) $ (10,519)
========= =========
</TABLE>
The projected benefit obligation related to the Company's domestic plans
was determined using the following assumptions:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Discount rate........................................ 7.5% 9.0%
Long-term rate of return on plan assets.............. 9.0% 9.0%
Compensation increase................................ 3.0% 3.0%
</TABLE>
The assumptions used for The Telegraph's plan were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate........................................ 7.68% 8.25% 6.75%
Long-term rate of return on plan assets.............. 7.68% 8.25% 6.75%
</TABLE>
F-21
<PAGE> 143
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multi-employer Pension Plans
Certain U.S. employees are covered by union-sponsored multi-employer
pension plans, all of which are defined benefit plans. Contributions are
determined in accordance with the provisions of negotiated labor contracts and
are generally based on the number of man hours worked. Pension expense for these
plans was $1,343,000 for the nine months ended December 31, 1994 and $1,900,000
for the year ended December 31, 1995. The passage of the Multi-employer Pension
Plan Amendments Acts of 1980 (the Act) may, under certain circumstances, cause
the Company to become subject to liabilities in excess of the amounts provided
for in the collective bargaining agreements. Generally, liabilities are
contingent upon withdrawal or partial withdrawal from the plans. The Company has
not undertaken to withdraw or partially withdraw from any of the plans as of
December 31, 1995. Under the Act, withdrawal liabilities would be based upon the
Company's proportional share of each plan's unfunded vested benefits. As of the
date of the latest actuarial valuations, the Company's share of the unfunded
vested liabilities of the plans was approximately $1,620,000.
12. REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Preferred Stock of subsidiaries......................... $123,135 $226,982
Series A Preferred Stock of the Company................. 80,966 79,470
-------- --------
$204,101 $306,452
======== ========
</TABLE>
(a) During 1992 two wholly-owned United Kingdom subsidiaries of the Company
issued preference shares as follows:
(i) On May 19, 1992 FDTH issued 60 floating rate cumulative redeemable
retractable preference shares, Series A, with a nominal value of
Cdn.$500,000 per share and 60 floating rate cumulative redeemable
retractable preference shares, Series B, with a nominal value of
Cdn.$500,000 per share to certain Canadian financial institutions. Total
gross proceeds of the issue were $50,276,000 (Cdn.$60,000,000). In December
1995 FDTH Series A and Series B preference shares with an aggregate
redemption value of Cdn.$140,000,000 ($102,600,000) held by DTH were
transferred to Argsub (note 4). Cumulative preferential cash dividends are
payable quarterly in arrears at a rate per annum approximately equal to 2%
plus 60% of the Canadian bankers' acceptance rate, compounded monthly. The
Series A and Series B preference shares are redeemable and retractable on
each five-year anniversary of their date of issue and on the occurrence of
certain events. Hollinger Inc. has indemnified the holders of the
preference shares and agreed to purchase these preference shares if FDTH
fails to pay the full amount of the dividends, retraction price or
redemption price on such shares on the date fixed for repayment thereof.
Hollinger Inc. and FDTH have also agreed to indemnify the holders of the
preference shares on an after-tax basis for any reduction in income tax
credits or any additional income tax liabilities related to the dividend on
these preference shares. During 1993 a reduction in income tax credits in
the United Kingdom resulted in FDTH increasing the dividend under the
indemnity. The actual dividend paid in 1995 on the Series A and Series B
preference shares, including the dividend under the indemnity, was at a
combined rate of 6.6% per annum.
DTH issued 2,540,000 cumulative redeemable preference shares, Series 1
at a price of Cdn.$25 per share and 1,100,000 cumulative redeemable
preference shares, Series 2, at a price of $25 per share. The total gross
proceeds were $53,209,000 (Cdn.$63,500,000) for Series 1 and $27,500,000
for Series 2. Dividends are payable quarterly. The dividend rates for
Series 1 and Series 2 preference shares are 7.748% and 6.829% respectively
until June 9, 1997 when the dividend rates will be determined for
successive five-year periods by formula. The shares are redeemable at any
time by the holders of the shares at an amount determined by reference to a
formula and on June 27, 1997 and each successive five-
F-22
<PAGE> 144
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
year anniversary date at a price per share of Cdn.$24.92 for the Series 1
preference shares and $24.88 for the Series 2 preference shares. Hollinger
Inc. and DTH have agreed to indemnify the holders of the preference shares
on an after-tax basis for any reductions in income tax credits or
additional income tax liabilities related to the dividends on these
preference shares. Hollinger Inc. has also agreed to purchase the issued
preference shares of DTH if certain restrictive covenants are not met, one
of which is the Company's requirement to own at least 51% of the
outstanding voting shares of the Telegraph. During 1993 a reduction in
income tax credits in the United Kingdom resulted in DTH increasing the
dividend under the indemnity. The actual dividend paid in 1995, including
the dividend under the indemnity, was at a rate of 8.6% per annum in
respect of the Series 1 preference shares and 7.6% per annum in respect of
the Series 2 preference shares.
In connection with the Reorganization, Hollinger Inc. and the Company
entered into an agreement which provides that if Hollinger Inc. is required
to indemnify the holders of the preference shares or purchase the
preference shares in the event that either DTH or FDTH fails to pay the
full amount of the dividends or redemption price on such shares and in
certain other events, then the Company agrees to purchase any preference
shares so purchased by Hollinger Inc. at the same price Hollinger Inc. paid
(subject to certain exceptions) and to indemnify Hollinger Inc. for any tax
indemnification payments it was required to make.
(ii) In 1992, Hollinger Inc. entered into interest rate swap and
currency swap arrangements until June 30, 1997 to effectively convert
substantially all of the DTH Series 1 and Series 2 preference dividends to
U.S. dollar variable rate dividends and to convert Cdn.$60,000,000 of the
capital amount of the DTH Series 1 preference shares to $50,300,000. In
connection with the Reorganization, the Company entered into interest rate
and currency exchange arrangements with Hollinger Inc. that are intended to
permit the Company to receive benefits that correspond to those obtained by
Hollinger Inc. under these swap arrangements. As a result of these swap
arrangements and the indemnities referred to above, the effective dividend
cost using December 31, 1995 rates was 6.6% and 5.8% in 1994 and 1995,
respectively, for the Series 1 shares and was 7.0% and 6.3% for 1994 and
1995, respectively, for the Series 2 shares. The quarterly differential to
be paid or received under the interest rate swaps is treated as an
adjustment to the underlying dividends which are disclosed as minority
interest.
The carrying value of the redeemable preference shares of DTH and FDTH
reflect exchange rates in effect at the year end date.
(b) The Company is authorized to issue 20,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including voting, redemption and
conversion rights.
Pursuant to the Reorganization, on October 13, 1995, the Company issued
739,500 shares of Series A Preferred Stock to Hollinger Inc. as partial
consideration for all of the ordinary shares of DTH. As described in note 1, the
consolidated financial statements have been restated for all periods presented
to include the accounts of DTH on an "as-if" pooling-of-interests basis and to
reflect the issuance of the Series A Preferred Stock as partial consideration.
The value ascribed to the Series A Preferred Stock at December 31, 1994 and
December 31, 1995 is the redemption value of the shares expressed in U.S.
dollars based on actual rates of exchange on October 13, 1995 and December 29,
1995.
The Series A Preferred Stock is non-voting and is entitled to receive
cumulative cash dividends, payable quarterly. The amount of each dividend per
share will be equal to the aggregate amount of ordinary course cash dividends
paid during the preceding calendar quarter on one-half of the Southam shares
held indirectly by the Company, divided by 739,500.
F-23
<PAGE> 145
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series A Preferred Stock is redeemable in whole or in part, at any time
by the Company or a holder of such shares, subject to restrictions in the
Company's credit facilities. In addition, the Company is not obligated to redeem
the Series A Preferred Stock held by Hollinger Inc. in the event that clear
legal title to the shares of HTH previously transferred by Hollinger Inc. to
FDTH is not delivered to FDTH on or prior to April 1, 1999. The redemption price
per share will be Cdn.$146.63 ($107.47 based on December 29, 1995 exchange
rates) plus accrued dividends.
A holder of shares of this Series may convert such shares at any time into
shares of Class A Common Stock of the Company. The conversion price will
initially be $14.00 per share of Class A Common Stock, subject to adjustment
upon the occurrence of certain events.
13. STOCKHOLDERS' EQUITY
On October 13, 1995, pursuant to the Reorganization, the Company's
authorized capital stock was increased from 50,000,000 shares of Class A Common
Stock to 250,000,000 and the Company issued to Hollinger Inc. 33,610,754 shares
of Class A Common Stock with a par value of $0.01 per share, 739,500 shares of
Series A Preferred Stock with an aggregate redemption value of Cdn.$108,429,000
($79,470,000 as at December 29, 1995), and was obligated to pay Hollinger Inc.
$13,832,000 in cash as consideration for all of the ordinary shares of DTH. An
adjustment of $95,134,000 was made to paid-in capital which represents the
excess of the values assigned to the Class A Common Stock and Series A Preferred
Stock issued net of the $13,832,000 due Hollinger Inc. over Hollinger Inc.'s
historical carrying value of its investment in DTH, being nil. As described in
note 1, the consolidated financial statements have been restated for all periods
presented to include the accounts of DTH on an "as-if" pooling-of-interests
basis and to reflect the issuance of the Class A Common Stock as partial
consideration. Accordingly, stockholders' equity reflects 41,965,754 shares
outstanding at December 31, 1994 and 1995.
During May 1994, the Company issued 8,355,000 shares of Class A Common
Stock through a public offering, resulting in proceeds, after deducting
applicable expenses, of $98,622,000 (the Offering). The proceeds were used to
repay outstanding short-term bank indebtedness of $50,000,000 and to repay
$48,622,000 of intercompany indebtedness owed to Hollinger Inc. incurred in
connection with the acquisition of the Chicago Sun-Times.
Concurrent with the Offering, the Company effected a recapitalization and
issued 14,990,000 of the 50,000,000 authorized shares of Class B Common Stock to
Hollinger Inc. in consideration for (i) the conversion of $44,500,000 in
intercompany indebtedness owed by the Company to Hollinger Inc., (ii) the
conversion of the Company's common stock already held by Hollinger Inc. and
(iii) the transfer of Hollinger Inc.'s 99.3% interest in Jerusalem Post to the
Company.
Class A Common Stock and Class B Common Stock have identical rights with
respect to cash dividends and in any sale or liquidation, but different voting
rights. The Class A Common Stock is entitled to one vote per share, while the
Class B Common Stock is entitled to ten votes per share, on all matters,
including the election of directors, where the two classes vote together as a
single class.
Class B Common Stock is convertible at any time at the option of Hollinger
Inc. into Class A Common Stock on a share-for-share basis and is transferable by
Hollinger Inc. under certain conditions.
A significant portion of the Company's operating income and net earnings is
derived from foreign subsidiaries and affiliated companies. As an international
holding company, the Company's ability to meet its financial obligations is
dependent upon the availability of cash flows from foreign subsidiaries and
affiliated companies (subject to applicable withholding taxes) through
dividends, intercompany advances, management fees and other payments. The
Company's subsidiaries and affiliated companies are under no obligation to pay
dividends. The deemed dividend to Hollinger Inc. represents net distributions to
Hollinger Inc. by DTH and its subsidiaries.
F-24
<PAGE> 146
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OTHER INCOME
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of The Telegraph shares (note 2).... $ 7,328 $80,592 $ --
Gain on dilution of Fairfax interest (note 3).... 3,609 -- --
Gain on sale of marketable securities............ 17,601 -- 11,968
Other............................................ 575 228 2,730
------- ------- -------
$29,113 $80,820 $14,698
======= ======= =======
</TABLE>
15. MINORITY INTEREST
Minority interest in the consolidated statements of operations is comprised
of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Minority interest in The Telegraph earnings...... $20,047 $15,354 $13,359
Dividends on FDTH and DTH redeemable preferred
stock, net of related interest rate swap
adjustments.................................... 5,428 6,055 9,278
------- ------- -------
$25,475 $21,409 $22,637
======= ======= =======
</TABLE>
16. STOCK OPTION PLAN
During May 1994, the Company adopted the Hollinger International Inc. 1994
Stock Option Plan (the Plan). The Plan provides for the issuance of up to
1,337,400 shares of Class A Common Stock in connection with stock options
granted under such plan. The Plan authorizes the grant of incentive stock
options and nonqualified stock options.
The exercise price for incentive stock options must be at least equal to
100% of the fair market value of the Class A Common Stock on the date of grant
of such option (110% in the case of an incentive stock option granted to a plan
participant who owns 10% or more of the voting power of all classes of stock of
the Company or its parent or subsidiary corporations). The exercise price for
nonqualified stock options must be at least equal to the average fair market
value of Class A Common Stock during the ten trading days ending on the third
trading day prior to the date of grant.
F-25
<PAGE> 147
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan is administered by a committee of the Board of Directors. The
Committee has the authority to determine the employees to whom awards will be
made, the amount and type of awards, and the other terms and conditions of the
awards.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
----------
<S> <C>
Balance at December 31, 1993...................................... --
Options granted................................................... 505,500
-------
Options outstanding at December 31, 1994.......................... 505,500
Options granted................................................... 355,000
Options canceled.................................................. (29,000)
-------
Options outstanding at December 31, 1995.......................... 831,500
=======
Shares available for grant at December 31,
1994............................................................ 831,900
1995............................................................ 505,900
=======
Options exercisable at December 31, 1995........................ 119,125
=======
</TABLE>
The shares have been granted at exercise prices between $12.40 and $13.00.
The Telegraph has several option plans under which options have been
granted to executives and certain employees. At December 31, 1995 options for
5,465,000 ordinary shares had been granted with 1,088,749 options exercisable at
December 31, 1995. Total ordinary shares outstanding at December 31, 1995 were
136,250,000.
17. COMMITMENTS AND CONTINGENCIES
(a) The Telegraph has guaranteed the joint venture partners' share of
leasing obligations to third parties of the printing joint ventures which
amounted to $44,236,000 (L28,484,000) at December 31, 1995. These obligations
are also guaranteed jointly and severally by each joint venture partner.
(b) In connection with the Company's insurance program, letters of credit
are required to support certain projected workers' compensation obligations. At
December 31, 1995, letters of credit in the amount of $2,488,000 were
outstanding.
(c) See note 12 for the Company's indemnity to the holders of preference
shares of FDTH and DTH.
F-26
<PAGE> 148
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SEGMENT INFORMATION
The Company operates principally in the business of publishing, printing
and distribution of newspapers and magazines and holds investments principally
in companies which operate in the same business as the Company. The following is
a summary of the geographic segments of the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------------------------------
(IN THOUSANDS)
UNITED UNITED OTHER
TOTAL STATES KINGDOM COUNTRIES
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Operating revenues to unaffiliated
customers............................... $ 569,601 $166,480 $384,558 $18,563
========== ======== ======== ========
Operating costs........................... $ 477,738 $147,898 $313,247 $16,593
General corporate expenses................ 4,069 2,093 1,586 390
---------- -------- -------- --------
Total operating costs and expenses........ $ 481,807 $149,991 $314,833 $16,983
========== ======== ======== ========
Operating income.......................... $ 87,794 $ 16,489 $ 69,725 $ 1,580
========== ======== ======== ========
Equity in earnings of affiliates.......... $ 13,476 -- -- $13,476
========== ======== ======== ========
Identifiable assets....................... $ 626,273 $311,435 $276,722 $38,116
Investments in affiliates................. 407,882 -- 407,882 --
---------- -------- -------- --------
Total assets.............................. $1,034,155 $311,435 $684,604 $38,116
========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------
(IN THOUSANDS)
UNITED UNITED OTHER
TOTAL STATES KINGDOM COUNTRIES
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Operating revenues to unaffiliated
customers............................... $ 808,837 $403,357 $386,243 $19,237
========== ======== ======== ========
Operating costs........................... $ 733,397 $362,390 $353,924 $17,083
General corporate expenses................ 4,911 3,155 1,356 400
---------- -------- -------- --------
Total operating costs and expenses........ $ 738,308 $365,545 $355,280 $17,483
========== ======== ======== ========
Operating income.......................... $ 70,529 $ 37,812 $ 30,963 $ 1,754
========== ======== ======== ========
Equity in earnings of affiliates.......... $ 35,659 -- -- $35,659
========== ======== ======== ========
Identifiable assets....................... $1,002,263 $596,270 $366,143 $39,850
Investments in affiliates................. 461,492 -- 461,492 --
---------- -------- -------- --------
Total assets.............................. $1,463,755 $596,270 $827,635 $39,850
========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
(IN THOUSANDS)
UNITED UNITED OTHER
TOTAL STATES KINGDOM COUNTRIES
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Operating revenues to unaffiliated
customers.............................. $ 964,967 $538,018 $405,037 $21,912
========== ======== ======== ========
Operating costs.......................... $ 903,874 $503,530 $380,214 $20,130
General corporate expenses............... 5,605 3,714 1,491 400
---------- -------- -------- --------
Total operating costs and expenses....... $ 909,479 $507,244 $381,705 $20,530
========== ======== ======== ========
Operating income......................... $ 55,488 $ 30,774 $ 23,332 $ 1,382
========== ======== ======== ========
Equity in earnings of affiliates......... $ 16,449 -- -- $16,449
========== ======== ======== ========
Identifiable assets...................... $1,106,578 $722,978 $361,527 $22,073
Investments in affiliates................ 463,527 -- 463,527 --
---------- -------- -------- --------
Total assets............................. $1,570,105 $722,978 $825,054 $22,073
========== ======== ======== ========
</TABLE>
The "Other Countries" geographic segment includes operations in Australia,
Canada and Israel.
F-27
<PAGE> 149
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. RELATED PARTY TRANSACTIONS
On July 27, 1995, under the terms of the Reorganization, FDTH paid to
Hollinger Inc. cash of L46,000,000 ($73,437,000) as partial consideration for
its direct and indirect interest in Southam. As described in note 1, the
consolidated financial statements for all periods are presented to include this
acquisition by FDTH on an "as-if" pooling-of-interests basis. Accordingly, the
cash consideration paid of $73,437,000 on July 27, 1995 is reflected as an
amount due to Hollinger Inc. as of December 31, 1994. The excess of Hollinger
Inc.'s historical equity carrying value of its investment in Southam (net of
accumulated earnings in respect of the investment) over the cash consideration
paid is reflected as an increase in paid-in capital.
In addition, the Company is obligated to pay Hollinger Inc. $13,832,000 as
a combined DTH/FDTH working capital adjustment under the terms of the
Reorganization. As described in note 1, the consolidated financial statements
for all periods are presented to include the acquisition of DTH on an "as-if"
pooling-of-interests basis. Accordingly, this additional purchase consideration
has been reflected as an amount due to Hollinger Inc. as of December 31, 1994.
Approximately $6,000,000 of this amount was paid to Hollinger Inc. in December
1995. The remaining amount payable is reflected as an amount due to Hollinger
Inc. as of December 31, 1995.
As of December 31, 1995, the Company is obligated to pay $3,500,000 to
Hollinger Inc. for expenses incurred by Hollinger Inc. in connection with the
Reorganization.
Other than the amounts due to Hollinger Inc. with respect to the
Reorganization, all other amounts due to Hollinger Inc. represent cash advances
and management and administrative expenses billed by Hollinger Inc. and a
corporate affiliate of Hollinger Inc. Hollinger Inc. and its affiliate billed
the Company for allocable expenses amounting to $4,069,000, $4,911,000 and
$5,605,000 for 1993, 1994 and 1995, respectively.
20. SUBSEQUENT EVENTS
On February 7, 1996, the Company completed the public sale of 14,000,000
shares of Class A Common Stock, at $9.25 per share, and $250,000,000 principal
amount of 9.25% Senior Subordinated Notes due February 1, 2006, at par. Net
proceeds of $365,770,000 were used to repay short-term bank loans of
$130,000,000 due September 6, 1996 (see note 6) and long-term bank loans, due
1996-2001, of $160,000,000 (see note 7). The Company also repaid short-term debt
due to Hollinger Inc. of $20,843,000. The Company expensed the related
unamortized deferred financing fees of approximately $3,600,000 upon repayment
of the short-term and long-term debt.
The remaining proceeds of approximately $49,000,000 (after paying accrued
interest and costs associated with the offering) and a new bank loan facility of
$100,000,000 are available to meet Company's future operating requirements.
On February 19, 1996, the underwriters exercised in full, their option, to
purchase 2,100,000 additional Class A Common Shares at the initial per share
price to the public. The proceeds of $18,858,000, net of underwriting discount,
are available to meet the Company's future operating requirements.
F-28
<PAGE> 150
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUMMARIZED FINANCIAL INFORMATION
Summarized balance sheet and income statement data for Hollinger
International Publishing Inc. is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Current assets............................................ $ 125,785 253,568 197,567
Total assets.............................................. 1,034,155 1,463,755 1,569,292
Current liabilities....................................... 97,309 250,357 263,929
Total liabilities......................................... 549,086 832,835 813,299
Minority interest......................................... 79,290 109,518 97,297
Redeemable preferred stock................................ 125,880 123,135 226,982
Stockholders' equity...................................... 279,899 398,267 431,714
Income Statement Data:
Operating revenues........................................ 569,901 808,837 964,967
Operating income.......................................... 87,794 70,529 55,488
Net earnings.............................................. 25,789 102,772 10,014
-------- --------- ---------
</TABLE>
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1994 and 1995 are
as follows:
<TABLE>
<CAPTION>
1994
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues............................. $151,501 $289,908 $137,556 $229,872
Operating income............................... 30,873 17,945 3,698 18,013
Gain on sale of The Telegraph shares........... -- 80,592 -- --
Net earnings................................... 12,371 73,033 2,846 14,522
Net earnings per common share.................. 0.25 1.37 0.05 0.25
Weighted average common shares outstanding..... 48,601 53,283 56,956 56,956
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues............................. $214,438 $205,666 $229,623 $315,240
Operating income............................... 15,454 15,488 7,462 17,084
Gain on sale of The Telegraph shares........... 11,968 -- -- --
Net earnings (loss)............................ 7,741 4,301 1,493 (7,333)
Net earnings (loss) per common share........... 0.14 0.07 0.03 (0.13)
Weighted average common shares outstanding..... 56,956 56,956 56,956 56,956
</TABLE>
F-29
<PAGE> 151
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 92,684
Accounts receivable, net................................................... 140,633
Inventories................................................................ 23,164
Other current assets....................................................... 13,618
----------
Total current assets.................................................. 270,099
Property, plant, and equipment, net............................................. 189,461
Intangible assets, net.......................................................... 526,972
Investments in affiliates....................................................... 478,566
Other assets.................................................................... 187,504
----------
$1,652,602
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans................................................................. $ 9,157
Current installments of long-term debt..................................... 55,154
Accounts payable........................................................... 36,576
Accrued expenses........................................................... 64,758
Deferred revenue........................................................... 24,489
Income taxes payable....................................................... 7,128
Due to Hollinger Inc....................................................... 4,074
----------
Total current liabilities............................................. 201,336
Long-term debt, less current installments....................................... 509,857
Deferred income taxes........................................................... 73,430
Other liabilities............................................................... 29,153
----------
Total liabilities..................................................... 813,776
Minority interest............................................................... 97,738
Redeemable preferred stock...................................................... 306,608
Stockholders' Equity............................................................ 434,480
----------
$1,652,602
==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-30
<PAGE> 152
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1995 1996
-------- --------
<S> <C> <C>
Operating revenues:
Advertising..................................................... $151,621 $160,357
Circulation..................................................... 59,466 76,049
Job printing.................................................... 11,563 12,621
Other........................................................... 4,106 4,866
-------- --------
Total operating revenues................................... 226,756 253,893
-------- --------
Operating costs and expenses:
Operating costs................................................. 176,092 202,803
General and administrative...................................... 20,991 24,436
Depreciation and amortization................................... 12,603 12,841
Allocable expenses from Hollinger Inc........................... 1,537 1,940
-------- --------
Total operating costs and expenses......................... 211,223 242,020
-------- --------
Operating income..................................................... 15,533 11,873
-------- --------
Other income (expense):
Interest expense, net........................................... (10,761) (12,564)
Equity in earnings of affiliates................................ 5,728 3,407
Non-operating income............................................ 12,499 2,501
-------- --------
Total other income (expense)............................... 7,466 (6,656)
-------- --------
Earnings before income taxes, minority interest,
and extraordinary item............................................. 22,999 5,217
Income taxes......................................................... 7,314 1,700
-------- --------
Earnings before minority interest and extraordinary item............. 15,685 3,517
Minority interest.................................................... 7,944 5,421
-------- --------
Earnings (loss) before extraordinary item............................ 7,741 (1,904)
Extraordinary loss on debt extinguishments........................... -- (2,150)
-------- --------
Net earnings (loss).................................................. $ 7,741 $ (4,054)
======== ========
Earnings (loss) per common share:
Earnings (loss) before extraordinary item....................... $ 0.14 $ (0.03)
Extraordinary loss on debt extinguishments...................... -- (0.03)
-------- --------
Net earnings (loss) per common share................................. $ 0.14 $ (0.06)
======== ========
Weighted average common shares outstanding........................... 56,956 66,056
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-31
<PAGE> 153
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................. $ 7,741 $ (4,054)
Items not involving cash:
Depreciation and amortization.............................. 12,682 12,841
Equity in earnings of affiliates........................... (5,427) (2,896)
Minority interest.......................................... 7,944 5,421
Gain on sale of investment................................. (11,968) --
Other non-cash items....................................... 4,495 2,316
Changes in working capital, net................................. (28,906) 2,086
-------- --------
Cash provided by (used in) operating activities............ (13,439) 15,714
-------- --------
Cash flows from investing activities:
Capital expenditures............................................ (5,764) (4,051)
Proceeds from sales of assets................................... 163 2,484
Acquisitions, net............................................... -- (5,071)
Collections on long-term receivable............................. 2,566 2,568
Other........................................................... 1,400 1,196
-------- --------
Cash used in investing activities.......................... (1,635) (2,874)
-------- --------
Cash flows from financing activities:
Changes in debt................................................. (10,325) (70,806)
Changes in borrowings from Hollinger Inc........................ (72,811) 4,395
Net proceeds from issuance of Class A common stock.............. -- 141,511
Dividends to minority interests................................. (2,116) (3,207)
Cash dividends paid............................................. (584) (7,852)
Other........................................................... 406 (7,942)
-------- --------
Cash provided by (used in) financing activities............ (85,430) 56,099
-------- --------
Effect of exchange rate changes on cash.............................. 2,948 (65)
-------- --------
Net increase (decrease) in cash...................................... (97,556) 68,874
Cash and cash equivalents at beginning of period..................... 117,425 23,810
-------- --------
Cash and cash equivalents at end of period........................... $ 19,869 $ 92,684
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-32
<PAGE> 154
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited Condensed Consolidated Financial Statements of Hollinger
International Inc. (the "Company") have been prepared pursuant to the Securities
and Exchange Commission ("SEC") rules and regulations and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto for the
three years ended December 31, 1995, included elsewhere in this Prospectus. The
accompanying Condensed Consolidated Financial Statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the interim
financial statements. In the opinion of management, all such adjustments are of
a normal and recurring nature. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for the fiscal
year.
2. PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The Company is a subsidiary of Hollinger Inc., a Canadian Corporation,
which owns approximately 66.5% of the combined equity ownership interest and
approximately 88.2% of the combined voting power of the outstanding Common Stock
of the Company.
These unaudited condensed consolidated financial statements present the
accounts of Hollinger International Inc. and its subsidiaries (the "Company").
The Company's principal operating subsidiaries are the Chicago Sun-Times, Inc.
and subsidiaries ("CST"); American Publishing Company and subsidiaries ("APC");
and The Telegraph plc and subsidiaries ("Telegraph"). The Company's principal
operating affiliates (accounted for on the equity method) are John Fairfax
Holdings Limited and subsidiaries ("Fairfax") and Southam Inc. and subsidiaries
("Southam"). The Company's other significant subsidiaries are Hollinger
International Publishing Inc. ("Publishing"); the Sun-Times Company ("STC"); DT
Holdings Limited ("DTH"); and First DT Holdings Limited ("FDTH"). "Jerusalem
Post" refers to the subsidiaries of the Company which publish THE JERUSALEM
POST.
All significant intercompany balances and transactions have been
eliminated. Prior period amounts include all reclassifications necessary to
conform to current presentations.
3. SALE OF SUBORDINATED NOTES AND COMMON STOCK
During the first quarter of 1996, the Company sold $250.0 million principal
amount of 9.25% Senior Subordinated Notes, through Publishing, and 16.1 million
shares of Class A Common Stock at $9.25 per share. The combined net proceeds of
these sales were $384.6 million. This was used to repay $130.0 million of
short-term bank debt, $160.0 million of long-term bank debt, and $20.8 million
of short-term debt due to Hollinger Inc., plus accrued interest in each case.
The remaining proceeds were added to the Company's cash and cash equivalents for
use in general corporate purposes.
4. EXTRAORDINARY ITEM
The extinguishment of three credit facilities prior to their expiration
dates required the recognition of a loss on extinguishment of debt of $3.5
million before tax benefits of $1.3 million. The loss represents the write-off
of unamortized deferred financing fees.
5. SUBSEQUENT EVENTS
On April 24, 1996, the Company announced a proposal to acquire all of the
outstanding ordinary shares of Telegraph not presently controlled by the Company
for 560p ($8.46) per share, plus a special cash dividend of 10p ($0.15) per
share and a contingent cash payment if Telegraph's 24.7% interest in Fairfax is
sold in the next two years at a price (net of any tax incurred in the disposal
or distribution of disposal proceeds) in excess of $3.00(Australian) per share.
The per share amount of any such additional cash payment will be paid pro rata
to minority shareholders of the Telegraph. The acquisition would take place via
a "scheme of
F-33
<PAGE> 155
arrangement" under Section 425 of the English Companies Act of 1985 ("Plan") and
will require the approval of a majority in number, representing three-fourths in
value, of the relevant minority holders of Telegraph shares present and voting
at meetings of Telegraph's shareholders, as well as approval of an English
court.
The total consideration payable by the Company (including the special dividend
to be paid to the holders of Telegraph minority shares and the net amount
payable in respect of outstanding Telegraph options but not the contingent
payment related to Fairfax) is estimated at approximately $453 million, based on
recent exchange rates.
The Company has received commitments for bank credit facilities and bridge
financing from certain financial institutions for short-term bank credit
facilities and bridge financing in the aggregate amount of approximately $600
million to provide the necessary financing for the transaction. In addition, the
Company is considering raising up to $150 million in equity financing, subject
to market conditions, which may be used to reduce or repay indebtedness to be
incurred in connection with the Plan. Consummation of the Plan is not
conditioned upon any such equity financing.
On April 30, 1996, the Company concluded a strategic trade of several
newspapers with Garden State Newspapers, Inc. The Company acquired the
Tribune-Democrat in Johnstown, Pennsylvania, with a daily circulation of 46,000,
in exchange for six smaller daily newspapers, several weekly newspapers and
approximately $31.0 million in cash, subject to certain adjustments.
F-34
<PAGE> 156
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma condensed consolidated financial statements give
effect to (i) the acquisition by FDTH of the Telegraph Minority Shares and
related borrowings, (ii) the acquisition of the Power Shares and related bank
borrowings by the Company, and (iii) adjustments to reflect (a) the Offering and
the concurrent Common Stock Offering and the application of total net proceeds
therefrom (estimated to be $239.5 million, assuming that the underwriters for
the Common Stock Offering do not exercise their over-allotment options) as
described under "Use of Proceeds" and (b) the repayment of Telegraph bank
indebtedness. The pro forma condensed consolidated balance sheet at March 31,
1996 assumes such transactions occurred on March 31, 1996. The pro forma
condensed consolidated statements of operations for the three months ended March
31, 1996 and the year ended December 31, 1995 assume such transactions occurred
on January 1, 1995. The pro forma condensed consolidated financial statements
are not necessarily indicative of the results that actually would have occurred
if the transactions had been completed on the assumed dates nor are the
statements indicative of future financial position or results of operations.
These pro forma condensed consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements of the Company and the
information under "Selected Consolidated Historical Financial Information and
Other Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Description of Capital Stock," "Description of Certain
Indebtedness and Other Obligations" and "Description of Securities" included
elsewhere in this Prospectus.
F-35
<PAGE> 157
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HOLLINGER ADJUSTMENTS
INTERNATIONAL ---------------------
INC. DEBIT CREDIT PRO FORMA
------------- -------- -------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 92,684 55,581(f) 9,000(d) $ 139,265
Accounts receivable, net......................... 140,633 140,633
Inventories...................................... 23,164 23,164
Other current assets............................. 13,618 13,618
------------ ----------
Total current assets........................... 270,099 316,680
Investments in affiliates, at equity............. 478,566 214,747(a) 755,003
61,690(b)
Property, plant and equipment, net............... 189,461 189,461
Intangible assets, net........................... 526,972 293,979(b) 820,951
Other assets..................................... 187,504 3,300(c) 199,804
9,000(d)
------------ ----------
$ 1,652,602 $2,281,899
============ ==========
Current liabilities:
Bank indebtedness................................ $ 9,157 9,157(e) 214,747(a) $ 635,047
3,300(c)
183,919(f)
453,407(b)
147,512(e)
Current installments of long-term debt........... 55,154 35,271(e) 19,883
Accounts payable................................. 36,576 36,576
Accrued expenses................................. 64,758 64,758
Income taxes payable............................. 7,128 7,128
Deferred revenue................................. 24,489 24,489
Due to Hollinger Inc............................. 4,074 4,074
------------ ----------
Total current liabilities...................... 201,336 791,955
Long-term debt, less current installments.......... 509,857 103,084(e) 406,773
Deferred income taxes.............................. 73,430 73,430
Other liabilities.................................. 29,153 29,153
------------ ----------
Total liabilities.................................. 813,776 1,301,311
------------ ----------
Minority interest.................................. 97,738 97,738(b) --
------------ ----------
Redeemable preference shares of DTH and FDTH....... 227,083 227,083
------------ ----------
Series A Redeemable Stock.......................... 79,525 79,525
------------ ----------
Stockholders' equity:
Convertible preferred stock...................... 145,000(g) 145,000
Common stock..................................... 730 100(g) 830
Additional paid-in capital....................... 303,960 94,400(g) 398,360
Other equity..................................... 5,373 5,373
Retained earnings................................ 124,417 124,417
------------ ----------
Total stockholders' equity..................... 434,480 673,980
------------ ----------
$ 1,652,602 $2,281,899
============ ==========
</TABLE>
The accompanying notes are an integral part of these
pro forma condensed consolidated financial statements.
F-36
<PAGE> 158
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HOLLINGER ADJUSTMENTS
INTERNATIONAL ------------------
INC. DEBIT CREDIT PRO FORMA
------------- ------ ------ ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $ 253,893 $ 253,893
Operating costs and expenses...................... 229,179 229,179
Depreciation and amortization..................... 12,841 1,837(h) 14,678
--------- ---------
Operating income.................................. 11,873 10,036
Other income (expense):
Interest expense, net........................... (12,564) 8,966(i) (25,346)
3,816(j)
Equity in earnings of affiliates................ 3,407 386(h) 2,517(m)
504(k)
Other income, net............................... 2,501 2,501
--------- ---------
Earnings (loss) before income taxes, minority
interest and extraordinary item................. 5,217 (10,292)
Income taxes (benefit)............................ 1,700 4,764(l) (3,064)
--------- ---------
Earnings (loss) before minority interest and
extraordinary item.............................. 3,517 (7,228)
Minority interest................................. 5,421 2,214(m) 3,207
--------- ---------
Loss before extraordinary item.................... (1,904) (10,435)
Extraordinary loss on debt extinguishments........ (2,150) (2,150)
--------- ---------
Net loss.......................................... $ (4,054) $ (12,585)
========= =========
Loss per common share:
Loss before extraordinary item.................. $ (0.03) $ (0.14)
Extraordinary loss on debt extinguishments...... $ (0.03) $ (0.03)
--------- ---------
Net loss per common share......................... $ (0.06) $ (0.17)
========= =========
Weighted average common shares outstanding........ 66,056 76,056
========= =========
</TABLE>
The accompanying notes are an integral part of these
pro forma condensed consolidated financial statements.
F-37
<PAGE> 159
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HOLLINGER ADJUSTMENTS
INTERNATIONAL ------------------
INC. DEBIT CREDIT PRO FORMA
------------- ------ ------ ---------
<S> <C> <C> <C> <C>
Operating revenues................................ $ 964,967 $ 964,967
Operating costs and expenses...................... 857,091 857,091
Depreciation and amortization..................... 52,388 7,349(i) 59,737
--------- ---------
Operating income.................................. 55,488 48,139
Other income (expense):
Interest expense................................ (43,189) 38,812(h) 10,621(k) (69,612)
15,032(j) 16,800(l)
Equity in earnings of affiliates................ 16,449 1,542(i) 2,901(o)
12,006(f)
Interest and dividend income.................... 4,590 4,590
Foreign currency losses, net.................... (1,089) (1,089)
Other income, net............................... 14,698 14,698
--------- ---------
Earnings (loss) before income taxes and minority
interest........................................ 46,947 (373)
Income taxes...................................... 18,108 9,542(p) 8,566
--------- ---------
Earnings (loss) before minority interest.......... 28,839 (8,939)
Minority interest................................. 22,637 13,256(j) 9,381
--------- ---------
Net earnings (loss)............................... $ 6,202 ($ 18,320)
========= =========
Net earnings (loss) per common share.............. $ 0.11 ($ 0.26)
========= =========
Weighted average common shares outstanding........ 56,956 69,956
========= =========
</TABLE>
The accompanying notes are an integral part of these
pro forma condensed consolidated financial statements.
F-38
<PAGE> 160
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma adjustments reflect the following:
(a) On May 24, 1996, Hollinger Inc. acquired, through a wholly-owned
subsidiary, 16,349,743 common shares of Southam previously held by Power,
representing a 21.5% interest in Southam, at a price of $18.00 Cdn ($13.13 as at
May 31, 1996) per share. The total purchase price of $214.747 million was
financed through a bank credit facility. The Company has the right to acquire a
substantial equity interest of the company holding these Southam shares. These
pro forma financial statements have been prepared on the basis that the Company
has acquired the 21.5% interest in Southam and made the related bank borrowings.
The preliminary allocation of the acquisition cost indicates an amount in
excess of the Company's share of Southam's net tangible assets of $196.9
million, which has been allocated to intangible assets of Southam and amortized
on a straight line basis over 40 years.
The preliminary allocation of the acquisition cost has been made based upon
the estimated fair values of the net tangible assets of Southam and is subject
to further adjustments. However, the Company does not expect the estimated
values to change materially upon finalization of the allocation of the
acquisition cost.
The pro forma consolidated statements of operations have been prepared
assuming the acquisition of the additional 21.5% interest in Southam was
consummated as of January 1, 1995. The pro forma consolidated balance sheet has
been prepared assuming the acquisition of the additional Southam shares was
consummated March 31, 1996.
(b) On April 24, 1996, the Company announced a proposal to acquire all of
the outstanding ordinary shares of The Telegraph not presently controlled by the
Company, representing approximately a 36% interest in The Telegraph. The
purchase price under the proposal is L5.60 ($8.68 as at May 31, 1996) per share,
plus a special cash dividend of 10p ($0.15) per share and a contingent payment
described below. The total consideration payable by the Company, including the
special dividend, is L292.615 million ($453.407 million), to be financed by bank
credit facilities.
This acquisition will be accounted for using the purchase method of
accounting and will result in the elimination of all of the minority interest in
The Telegraph. The preliminary allocation of the excess purchase price results
in $61.690 million ascribed to the investment in Fairfax and $293.979 million
ascribed to intangible assets of The Telegraph, both of which are amortized on a
straight line basis over 40 years.
These preliminary allocations of the purchase price are subject to further
adjustment, however, the Company does not expect the estimated values to change
materially upon finalization of the allocation of the purchase price.
Under the proposal the Company has agreed to pay a contingent cash payment
in the event that The Telegraph's interest in Fairfax is sold prior to the
second anniversary of the effective date of the Scheme at a price in excess of
A$3.00 per share. The pro forma financial statements do not reflect any
adjustment in respect of this contingent cash payment.
In addition, the pro forma financial statements have been prepared on the
basis that all shareholders elect to receive an immediate cash payment for the
special dividend and do not reflect any contingently issuable preference shares
of The Telegraph under purchase options granted to Telegraph minority
shareholders.
The pro forma consolidated statements of operations have been prepared
assuming the purchase of the Telegraph minority shares was consummated as of
January 1, 1995. The pro forma balance sheet has been prepared assuming the
purchase of the Telegraph minority shares was consummated as of March 31, 1996.
F-39
<PAGE> 161
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(c) Represents payment of approximately $3.3 million of financing fees in
respect of the bank credit facility used to finance the additional shares of
Southam and the amortization of the fees over the term of the facility.
(d) Represents financing fees of approximately $9.0 million in respect of
the bank credit facilities used to finance the acquisition of the Telegraph
Minority Shares and to repay the Telegraph bank loans, to be paid out of working
capital and the amortization of the fees over the terms of the facilities.
(e) Represents the repayment of Telegraph bank loans, including $9.157
million of short term loans, financed by bank credit facilities.
(f) Represents the use of $183.9 million of the net proceeds from the
issuance of Class A Common Stock and Convertible Preferred Stock to finance the
acquisition of the Telegraph Minority Shares. Of the remaining $55.6 million of
proceeds, $30.1 million will be held for working capital needs of the Company
and to finance the costs and expenses associated with the credit facilities and
the acquisition expenses of the Telegraph Minority Shares and additional
interest in Southam. A further $25.5 million will be used to repay Telegraph
bank indebtedness, which is expected to be $173 million at the consummation of
the Scheme (or $25.5 million higher than at March 31, 1996).
(g) Represents the net proceeds from the issuance of 10,000,000 shares of
Class A Common Stock and the net proceeds from the issuance of Convertible
Preferred Stock. These pro forma condensed consolidated financial statements do
not reflect the issuance of Class A Common Stock which will occur on the
conversion or redemption of the Convertible Preferred Stock.
(h) Represents the amortization of the intangible assets arising on the
acquisition of all of the minority interest shares of The Telegraph.
(i) Represents interest expense at approximately 8.6% on the funds borrowed
to fund the acquisition of Telegraph Minority Shares and repayment of Telegraph
bank loans, after giving effect to the use of proceeds on the issuance of Class
A Common Stock and Convertible Preferred Stock.
(j) Represents interest expense at approximately 7.0% on the funds borrowed
to fund the acquisition of the additional Southam interest.
(k) Represents the additional equity earnings (loss) of Southam, net of the
amortization of the underlying intangible assets, as a result of the acquisition
of an additional 21.5% interest in Southam.
(l) Represents the tax effect of the pro forma adjustments.
(m) Represents the elimination of the minority stockholders' interest in
The Telegraph's net earnings resulting from the acquisition of the Telegraph
Minority Shares.
(n) Equity earnings in affiliates is comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ ------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Fairfax............................... $1,896 $ 23,120
Southam............................... (938) (22,974)
Printing joint ventures............... 1,559 2,755
------ --------
$2,517 $ 2,901
====== ========
</TABLE>
F-40
<PAGE> 162
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Equity earnings in Southam for the year ended December 31, 1995 reflects
the Company's approximate 41% interest in a special charge, net of a related tax
benefit, in the amount of $24,026,000.
The pro forma adjustments do not reflect the following:
(aa) Costs and expenses of approximately $ associated with the
acquisition of the Telegraph minority shares and the additional interest in
Southam.
(bb) The April 30, 1996 exchange of newspapers with Garden State
Newspapers, Inc. and the related cash consideration paid by the Company of
approximately $31.0 million.
F-41
<PAGE> 163
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OF OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 4
Risk Factors........................... 20
The Company............................ 31
Use of Proceeds........................ 36
Market Prices and Dividend Policy...... 37
Capitalization......................... 38
Selected Consolidated Historical
Financial Information and Other
Data................................. 40
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 43
Business............................... 58
Management............................. 78
Certain Relationships.................. 81
Description of Capital Stock........... 86
Description of Certain Indebtedness and
Other Obligations.................... 90
Description of the Securities.......... 100
Certain Federal Income Tax
Consequences......................... 112
Underwriting........................... 116
Legal Matters.......................... 117
Exchange Rates......................... 118
Experts................................ 119
Available Information.................. 119
Incorporation of Certain Documents
by Reference......................... 120
Index to Financial Statements.......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
15,000,000 SECURITIES
LOGO
% PRIDESSM
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
AUGUST , 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be paid by the Company in connection with the
distribution of the securities being registered are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee.................. $ 96,449
NYSE listing fee............................................... *
Accounting fees and expenses................................... *
Legal fees and expenses........................................ *
Printing and engraving expenses................................ *
Transfer agent's fees.......................................... *
Bluesky fees and expenses (including counsel fees)............. *
Miscellaneous expenses......................................... *
--------
Total........................................................ $ *
</TABLE>
- ------------------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Certificate of Incorporation provides
that no director of the Company will be personally liable to the Company or any
of its stockholders for monetary damages arising from the director's breach of
the duty of care as a director, with certain limited exceptions.
Pursuant to the provisions of Section 145 of the Delaware General
Corporation Law, every Delaware corporation has the power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the corporation) by reason of the fact that he is
or was a director, officer, employee or agent of any corporation, partnership,
joint venture, trust or other enterprise, against any and all expenses,
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with such action, suit or proceeding. The power to indemnify applies
only if such person acted in good faith and in a manner he reasonably believed
to be in the best interest, or not opposed to the best interest, of the
corporation and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication or liability unless the court, in its
discretion, believes that in light of all the circumstances indemnification
should apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of the actions referred to
therein, such person is entitled, pursuant to Section 145, to indemnification as
described above.
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws provide for indemnification to officers and directors of the
Company to the fullest extent permitted by the Delaware General Corporation Law.
The Company maintains a policy of liability insurance which insures its
officers and directors against losses resulting from certain wrongful acts
committed by them in their capacity as officers and directors of the Company.
The form of Purchase Agreement included as Exhibit 1.01 provides for
indemnifying the Company and certain controlling persons under certain
circumstances, including indemnification for liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been
II-1
<PAGE> 165
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT PRIOR FILING OR
NUMBER DESCRIPTION SEQUENTIAL PAGE NUMBER
- ------- ------------------------------------------------------- -------------------------
<C> <S> <C>
1.01 Form of Underwriting Agreement with respect to the
PRIDES.*
5.01 Opinion of Kirkpatrick & Lockhart LLP
8.01 Tax Opinion of Kirkpatrick & Lockhart LLP
23.01 Consent of Kirkpatrick & Lockhart LLP (included in
Exhibits 5.01 and 8.01)
23.02 Consent of KPMG Peat Marwick LLP
24.01 Powers of Attorney (previously filed)
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, State of Illinois, on July , 1996.
HOLLINGER INTERNATIONAL INC.
By: /S/ CONRAD M.
BLACK
CONRAD M. BLACK,
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------------- --------------
<C> <S> <C>
/S/ CONRAD M. BLACK Chairman of the Board, Chief Executive July , 1996
- ----------------------------------- Officer and Director (Principal Executive
Conrad M. Black Officer)
* President, Chief Operating Officer and July , 1996
- ----------------------------------- Director
F. David Radler
/S/ J. A. BOULTBEE Vice President and Chief Financial July , 1996
- ----------------------------------- Officer (Principal Financial Officer)
J. A. Boultbee
/S/ FREDERICK A. CREASEY Group Corporate Controller July , 1996
- ----------------------------------- (Principal Accounting Officer)
Frederick A. Creasey
* Director July , 1996
- -----------------------------------
Barbara Amiel Black
* Director July , 1996
- -----------------------------------
Dwayne O. Andreas
Director July , 1996
- -----------------------------------
Richard Burt
Director July , 1996
- -----------------------------------
Raymond G. Chambers
* Director July , 1996
- -----------------------------------
Daniel W. Colson
* Director July , 1996
- -----------------------------------
Henry A. Kissinger
* Director July , 1996
- -----------------------------------
Marie-Josee Kravis
</TABLE>
II-3
<PAGE> 167
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ----------------------------------------- --------------
<C> <S> <C>
Director July , 1996
- -----------------------------------
Shmuel Meitar
* Director July , 1996
- -----------------------------------
Richard N. Perle
* Director July , 1996
- -----------------------------------
Robert S. Strauss
* Director July , 1996
- -----------------------------------
Alfred Taubman
* Director July , 1996
- -----------------------------------
James R. Thompson
* Director July , 1996
- -----------------------------------
Lord Weidenfeld
* Director July , 1996
- -----------------------------------
Leslie H. Wexner
* By: /s/ Kenneth L. Serota July , 1996
---------------------------------
Kenneth L. Serota,
Attorney-in-fact, pursuant to power
of attorney previously filed as
part of this Registration
Statement.
</TABLE>
II-4
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PRIOR FILING OR
NO. DESCRIPTION SEQUENTIAL PAGE NUMBER
- ------- ------------------------------------------------------- -------------------------
<C> <S> <C>
1.01 Form of Underwriting Agreement with respect to the
PRIDES.*
5.01 Opinion of Kirkpatrick & Lockhart LLP
8.01 Tax Opinion of Kirkpatrick & Lockhart LLP
23.01 Consent of Kirkpatrick & Lockhart LLP (included in
Exhibits 5.01 and 8.01)
23.02 Consent of KPMG Peat Marwick LLP
24.01 Powers of Attorney (previously filed)
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 5.01
July 18, 1996
Hollinger International Inc.
401 North Wabash Avenue
Chicago, Illinois 60611
Ladies and Gentlemen:
We are acting as counsel to Hollinger International Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (No. 333-06619), originally filed by the Company with the Securities
and Exchange Commission on June 21, 1996, as amended (the "Registration
Statement"), in connection with the registration pursuant to the Securities Act
of 1933, as amended, of up to (i) 17,250,000 __% PRIDES(SM) Depositary Shares
("PRIDES"), (ii) 8,625,000 shares of Convertible Preferred Stock, and (iii)
17,250,000 shares of Class A Common Stock issuable in connection with the
PRIDES.
We have examined the Registration Statement and we have examined the
Company's Restated Certificate of Incorporation and By-laws, each as amended to
date. We have also examined such other public and corporate documents,
certificates, instruments and corporate records, and such questions of law, as
we have deemed necessary for purposes of this opinion.
Based on the foregoing, we are of the opinion that the issuance of the
PRIDES, the shares of Convertible Preferred Stock and the shares of Class A
Common Stock into which the PRIDES are convertible has been duly authorized by
the Company, and if and when sold by the Company as contemplated by the
Prospectus contained in the Registration Statement and, in the case of the
shares of Class A Common Stock, upon conversion in accordance with the terms of
the PRIDES, each will be validly issued, fully paid and non-assessable.
We consent to the use of this opinion as Exhibit 5.01 to the Registration
Statement and to the reference to the undersigned in the Prospectus that forms
part of the Registration Statement.
Yours truly,
/s/ KIRKPATRICK LOCKHART LLP
------------------------------
<PAGE> 1
Exhibit 8.01
Form of Opinion of
Kirkpatrick & Lockhart LLP
, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
We have acted as counsel to Hollinger International Inc. (the "Company") in
connection with the offering (the "Offering") of depositary shares each
representing a one-half share of Series B Convertible Preferred Stock, par
value $.01 per share, of the Company (the "Securities") described in
the Registration Statement on Form S-3 filed with the Securities and Exchange
Commission on the date hereof (Registration No. 333-06619), of which a
prospectus (the "Prospectus") forms a part. In this capacity, we have been
requested to provide our opinion with respect to certain of the federal income
tax consequences to persons who purchase the Securities. Except as otherwise
indicated herein, all capitalized terms used in this letter have the meaning
assigned to them in the Prospectus.
Our opinion is based on our understanding of the relevant facts concerning
the Offering described in the Prospectus. In this regard, we have examined and
are familiar with (1) the Registration Statement, and (2) such other documents
as we have considered necessary for rendering our opinion. We also have relied
upon certain representations made to us by the Company.
Our opinion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), regulations promulgated thereunder by the United States Treasury
Department (the "Regulations"), Internal Revenue Service rulings and court
cases interpreting the Code and Regulations, all as in effect as of the date of
this letter. Any of the statutes, Regulations, rulings, or judicial decisions
relied upon could be changed, perhaps retroactively, to affect adversely the
federal income tax consequences described in the Prospectus. Although the
opinion expressed in this letter is based on our best interpretation of
existing sources of law, no assurance can be given that such interpretation
would be followed if it became the subject of judicial or administrative
proceedings.
We have reviewed the section of the Prospectus entitled "Certain Federal
Income Tax Consequences." Subject to the limitations and exceptions set forth
in such section, the discussion under that section sets forth our opinion as to
the material federal income tax consequences relating to the ownership and
disposition of Securities. We are expressing our opinion only with respect to
the foregoing matters and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Hollinger International Inc.
We consent to the use of our report dated February 27, 1996, relating to the
consolidated balance sheets of Hollinger International Inc. and subsidiaries as
of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995, included in this Prospectus and
incorporated herein by reference from the Company's Annual Report on 1995 Form
10-K for the year ended December 31, 1995, and to the reference to our firm
under the heading "Selected Consolidated Historical Financial Information and
Other Data" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
July 15, 1996
