<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
Commission file Number 0-24004
HOLLINGER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3518892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 North Wabash Avenue, Suite 740, Chicago, IL 60611
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(312)321-2299
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT August 14, 1996
Class A Common Stock
par value $.01 per share 69,565,754 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis
of Results of Operations
and Financial Condition X
PART II. OTHER INFORMATION
Item 6. Exhibits and reports
on Form 8-K XX
Signatures XX
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1996 and June 30, 1995
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Six Months
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Operating Revenues:
Advertising $ 169,579 $ 159,857 $ 329,936 $ 311,478
Circulation 78,299 59,507 154,349 118,973
Job printing 13,479 12,035 26,100 23,598
Other 5,892 4,230 10,758 8,336
----------- ------------- ----------- -----------
Total Operating Revenues 267,249 235,629 521,143 462,385
----------- ------------- ----------- -----------
Operating Costs and Expenses:
Operating costs 203,546 185,476 406,349 361,568
General and administrative 23,136 23,348 47,572 44,339
Depreciation and amortization 12,002 12,720 24,843 25,323
Allocable expense from Hollinger Inc. 1,780 1,237 3,720 2,774
----------- ------------- ----------- -----------
Total Operating Costs and Expenses 240,464 222,781 482,484 434,004
----------- ------------- ----------- -----------
Operating Income 26,785 12,848 38,659 28,381
----------- ------------- ----------- -----------
Other Income and (Expense):
Interest expense, net (13,295) (6,875) (25,859) (17,636)
Equity in earnings of affiliates 2,714 11,331 6,121 17,059
Non-operating income 2,185 (1,656) 4,687 10,843
----------- ------------- ----------- -----------
Total Other Income and (Expense) (8,396) 2,800 (15,051) 10,266
----------- ------------- ----------- -----------
Earnings before Income Taxes, Minority
Interest, and Extraordinary Item 18,389 15,648 23,608 38,647
Provision for Income Taxes 7,220 4,859 8,920 12,173
----------- ------------- ----------- -----------
Earnings before Minority Interest
and Extraordinary Item 11,169 10,789 14,688 26,474
Minority Interest 4,539 6,488 9,960 14,432
----------- ------------- ----------- -----------
Earnings before Extraordinary Item 6,630 4,301 4,728 12,042
Extraordinary Loss on Debt Extinguishments - - (2,150) -
----------- ------------- ----------- -----------
Net Earnings $ 6,630 $ 4,301 $ 2,578 $ 12,042
=========== ============= =========== ===========
Earnings per Common Share:
Earnings before Extraordinary Item $ 0.09 $ 0.08 $ 0.06 $ 0.21
Extraordinary Loss on Debt Extinguishments - - (0.03) -
----------- ------------- ----------- -----------
Net Earnings Per Common Share $ 0.09 $ 0.08 $ 0.03 $ 0.21
=========== ============= =========== ===========
Weighted Average Shares Outstanding 73,056 56,956 69,633 56,956
=========== ============= =========== ===========
</TABLE>
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<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1996 and December 31, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 64,515 $ 23,810
Accounts receivable, net 157,191 134,511
Due from affiliated companies 220,721 0
Inventories 19,342 25,684
Other current assets 12,218 13,562
----------- -----------
Total Current Assets 473,987 197,567
Property, Plant, and Equipment, net 192,879 193,407
Intangible Assets, net 562,934 529,694
Investments in Affiliates 477,009 463,527
Other Assets 194,091 185,910
----------- -----------
Total Assets $ 1,900,900 $ 1,570,105
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 32,285 $ 38,646
Accrued expenses 77,819 50,874
Deferred revenue 25,443 22,902
Income taxes payable 5,950 12,390
Bank loans 247,535 147,866
Current installments of long-term debt 55,298 27,552
Due to Hollinger Inc. 3,954 21,512
----------- -----------
Total Current Liabilities 448,284 321,742
Long-Term Debt 512,295 446,234
Other Long-Term Liabilities 103,673 103,135
----------- -----------
Total Liabilities 1,064,252 871,111
Minority Interest 96,955 97,298
Redeemable Preferred Stock 306,242 306,452
Stockholders' Equity 433,451 295,244
----------- -----------
Total Liabilities and
Stockholders' Equity $ 1,900,900 $ 1,570,105
=========== ===========
</TABLE>
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<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and June 30, 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 2,578 $12,042
Items not involving cash:
Depreciation & Amortization 24,843 25,323
Equity in earnings affiliates, net 972 (6,298)
Minority interest 9,960 14,432
Gain on sale of investment 0 (11,968)
Other non-cash items 10,398 4,960
Changes in working capital, net (9,606) (42,858)
------- -------
Cash Provided By (Used) In
Operating Activities 39,145 (4,367)
------- -------
Cash Flows From Investing Activities:
Capital expenditures (10,368) (9,476)
Proceeds from sales of assets 15 132
Acquisitions, net (44,451) (2,410)
Proceeds from marketable securities 0 17,700
Collections on long-term receivable 5,601 5,796
Other investing activities 180 (1,461)
------- -------
Cash Provided By (Used) In
Investing Activities (49,023) 10,281
------- -------
Cash Flows From Financing Activities:
Changes in debt 169,787 (13,172)
Changes in due to affiliated companies (215,641) (68,897)
Proceeds from common stock 141,337 0
Dividends to minority interests (12,408) (11,067)
Cash dividends paid (15,428) (1,167)
Other financing activities (13,396) 2,678
------- -------
Cash Provided By (Used) In
Financing Activities 54,251 (91,625)
------- -------
Effect Of Exchange Rate Changes On Cash (3,668) 1,503
------- -------
Net Increase (Decrease) In Cash 40,705 (84,208)
Cash At Beginning Of Period 23,810 117,425
------- -------
Cash At End of Period $64,515 $33,217
======= =======
</TABLE>
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<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Unaudited Financial Statements
This report updates the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, in accordance with the instructions to Form 10-Q. It
is presumed that the reader has already read the Company's Annual Report on
Form 10-K.
The accompanying financial statements are unaudited, but have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The interim financial statements
contained herein do not include all of the footnotes and other information
required by generally accepted accounting principles for complete financial
statements, as provided at year end.
The reader is reminded that the results of operations for interim periods
are not necessarily indicative of the results for the complete fiscal year.
Note 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. Following the sale of additional Class A Common Stock
referred to in Note 7, Hollinger Inc. owns approximately 57.5% of the combined
equity ownership interest and approximately 83.6% of the combined voting power
of the outstanding Common Stock of the Company, without giving effect to the
future issuance of Class A Common Stock in connection with the PRIDES or upon
conversion of the Series A Preferred Stock.
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<PAGE> 7
These unaudited financial statements present the accounts of Hollinger
International Inc. and its subsidiaries (the "Company"). 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. 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").
All significant intercompany balances and transactions have been
eliminated. Prior period amounts include all reclassifications necessary to
conform to current presentations.
Note 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
16,100,000 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.
Note 4 - Extraordinary Item
The extingishment of three credit facilities, in February 1996, 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-
<PAGE> 8
Note 5 - Acquisitions and Disposals
On April 30, 1996, the Company concluded a strategic trade of several
newspapers with Garden States 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 $31.4 million in cash, subject to certain adjustments.
Note 6 - Advance to Affiliate
On May 24, 1996, the Company entered into a short-term loan facility
with a Canadian chartered bank in the amount of Canadian $300 million (the
"Southam Facility"). The Southam Facility consists of a secured,
non-amortizing credit facility guaranteed by Hollinger Inc. which is repayable
on or prior to November 25, 1996. The Company borrowed $218.8 million
(Canadian $298.8 million) under this facility and advanced the proceeds to a
subsidiary of Hollinger Inc. as a loan which was used to finance the purchase
of an additional 21.5% interest in the common shares of Southam from Power
Corporation of Canada. This purchase increased the Company's and Hollinger
Inc.'s combined holdings in Southam to approximately 41.5% of Southam's
outstanding common shares, including 19.5% which is currently held by the
Company. The Company will have the right to acquire a substantial equity
interest in the subsidiary company which purchased these additional Southam
shares.
Note 7 - Subsequent Events
On July 31, 1996, the Company completed its Scheme of Arrangement to
purchase all of the outstanding ordinary shares of Telegraph which it did not
already own. The purchase for the shares was 560p ($8.68) 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 total consideration paid by the
Company (including the special dividend paid to holders of Telegraph minority
shares and the net amount payable in respect of outstanding Telegraph options,
but not the contingent payment related to Fairfax) was approximately $455.1
million. The acquisition was effected by means of a "Scheme of Transaction"
under Section 425 of the Companies Act of 1985 of Great Britain. As a result,
Telegraph became an indirect wholly owned subsidiary of the Company. On the
same date, Telegraph changed its name to the Telegraph Group Limited and was
delisted on the London Stock Exchange.
-6-
<PAGE> 9
In a series of transactions occurring in early August 1996, the Company
sold 11,500,000 shares of Class A Common Stock at $9.75 per share and
20,700,000 9-3/4% PRIDES (Preferred Redeemable Increased Dividend Equity
Securities) at $9.75 per PRIDES. The PRIDES are depository shares representing
one-half share of Series B Convertible Preferred Stock of the Company that will
mandatorily convert on the Mandatory Conversion Date of August 1, 2000 into one
share of Class A Common Stock and the right to receive an amount in cash equal
to all accrued and unpaid dividends therefrom, unless either previously
redeemed or converted at the option of their holder.. The PRIDES will pay
cumulative quarterly dividends at a rates of 9 3/4% per annum (equivalent to
$0.9506 per PRIDES) and will have an aggregate liquidation preference equal to
their issue price plus any accrued and unpaid dividends thereon. The combined
net proceeds of these sales were $301.1 million The proceeds were used, first,
to finance a portion of the Company's acquisition of the minority interest in
Telegraph and pay outstanding indebtedness of Telegraph and related transaction
costs (approximately $193 million), to pay a portion of the Southam Facility
indebtedness (approximately $55 million), and the balance will be used for
general corporate purposes, including working capital.
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. On August 7, 1996, the Company borrowed approximately $130.0 million
under the Amended Publishing Bank Credit Facility and approximately $305.0
million under the FDTH Credit Facility, which funds, together with the net
proceeds of the concurrent offerings of Class A Common Stock and PRIDES, were
used to finance the Scheme (approximately $455.1 million), pay outstanding debt
of the Telegraph (approximately $139.5 million) and pay related transaction
costs (approximately $8.1 million).
-7-
<PAGE> 10
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company's business is concentrated in the publishing, printing, and
distribution of newspapers and is divided between the United States Newspaper
Group and the International Newspaper Group. The United States Newspaper Group
consists of the Chicago Group, comprised of the CHICAGO SUN-TIMES and suburban
newspapers in the Chicago metropolitan area and American Publishing Company,
comprised of the Company's community newspapers, operating in 29 states, and
(for reporting and administrative purposes) Jerusalem Post. The International
Newspaper Group includes the operating results of the Telegraph and the
Company's equity share in the earnings of Fairfax and Southam.
Results of Operations
The Company reported second quarter net earnings of $6.6 million, or 9
cents per share compared with $4.3 million, or 8 cents per share, in 1995. For
the first six months of 1996, net earnings was $2.6 million, or 3 cents per
share, compared with $12.0 million, or 21 cents per share, in the same period
of 1995. Net earnings before extraordinary items was $4.7 million, or 6 cents
per share, in the first six months of 1996, compared with $12.0 million, or 21
cents per share, in the same period of 1995.
The comparison of year over year net earnings was affected negatively
by a number of unusual and nonrecurring items, including a gain on the sale of
an investment by Telegraph in the first quarter of 1995, net costs of a new
magazine for THE SUNDAY TELEGRAPH, costs associated with the termination of
senior executives and redundancy costs related to the opening of a new printing
plant at Fairfax, and redundancy and other unusual costs at Telegraph's joint
venture printing plants in 1995. These unusual items account for $0.4 million,
or 1 cent per share of the difference, between the second quarters of the two
years and $5.4 million, or 9 cents per share, between the first six months of
1996 and 1995.
-8-
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Amount Percent Amount Percent
-------- ------- -------- -------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
United States Newspaper Group $153,739 57.5 % $139,625 59.3 %
International Newspaper Group 113,510 42.5 96,004 40.7
-------- ----- -------- -----
Total Operating Revenues $267,249 100.0 % $235,629 100.0 %
======== ===== ======== =====
Operating Income:
United States Newspaper Group $18,696 69.8 % $12,925 100.6 %
International Newspaper Group 8,089 30.2 (77) -0.6
-------- ----- -------- -----
Total Operating Income $26,785 100.0 % $12,848 100.0 %
======== ===== ======== =====
United States Newspaper Group
Operating Revenues:
Advertising $100,624 65.5 % $94,699 67.8 %
Circulation 37,703 24.5 31,054 22.2
Job Printing and Other 15,412 10.0 13,872 10.0
-------- ----- -------- -----
Total Operating Revenues 153,739 100.0 % 139,625 100.0 %
-------- ----- -------- -----
Compensation Costs 54,497 35.4 49,427 35.4
Newsprint 30,360 19.7 25,755 18.4
Other Operating Costs 39,250 25.6 40,340 28.9
Depreciation and Amortization 9,600 6.2 10,302 7.4
Expenses from Hollinger Inc. 1,336 0.9 876 0.6
-------- ----- -------- -----
Total Oper. Cost & Exp. 135,043 87.8 126,700 90.7
-------- ----- -------- -----
Operating Income $ 18,696 12.2 % $ 12,925 9.3 %
======== ===== ======== =====
International Newspaper Group
Operating Revenues:
Advertising $ 68,955 60.7 % $ 65,158 67.9 %
Circulation 40,596 35.8 28,454 29.6
Job Printing and Other 3,959 3.5 2,392 2.5
-------- ----- -------- -----
Total Operating Revenues 113,510 100.0 % 96,004 100.0 %
-------- ----- -------- -----
Compensation Costs 17,842 15.7 18,202 19.0
Newsprint 27,838 24.5 20,022 20.8
Other Operating Costs 56,896 50.2 55,078 57.4
Depreciation and Amortization 2,402 2.1 2,418 2.5
Expenses from Hollinger Inc. 443 0.4 361 0.4
Total Oper. Cost & Exp. 105,421 92.9 96,081 100.1
-------- ----- -------- -----
Operating Income $ 8,089 7.1 % $ (77) (0.1)%
======== ===== ======== =====
EBITDA:
United States Newspaper Group $28,296 73.0 % $ 23,227 90.8 %
International Newspaper Group 10,491 27.0 2,341 9.2
-------- ----- -------- -----
Total EBITDA $ 38,787 100.0 % $ 25,568 100.0 %
======== ===== ======== =====
EBITDA Margin:
United States Newspaper Group 18.4 % 16.6 %
International Newspaper Group 9.2 % 2.4 %
Total EBITDA 14.5 % 10.9 %
</TABLE>
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<PAGE> 12
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
Amount Percent Amount Percent
-------- ------- -------- -------
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Operating Revenues:
United States Newspaper Group $296,087 56.8 % $269,395 58.3 %
International Newspaper Group 225,056 43.2 192,990 41.7
-------- ----- -------- -----
Total Operating Revenues $521,143 100.0 % $462,385 100.0 %
======== ===== ======== =====
Operating Income:
United States Newspaper Group $ 21,939 56.8 % $ 20,064 70.7 %
International Newspaper Group 16,720 43.2 8,317 29.3
-------- ----- -------- -----
Total Operating Income $ 38,659 100.0 % $ 28,381 100.0 %
======== ===== ======== =====
United States Newspaper Group
Operating Revenues:
Advertising $193,485 65.3 % $179,251 66.5 %
Circulation 72,475 24.5 62,669 23.3
Job Printing and Other 30,127 10.2 27,475 10.2
-------- ----- -------- -----
Total Operating Revenues 296,087 100.0 % 269,395 100.0 %
-------- ----- -------- -----
Compensation Costs 108,886 36.8 99,791 37.0
Newsprint 60,224 20.3 46,751 17.4
Other Operating Costs 82,194 27.7 80,708 30.0
Depreciation and Amortization 19,999 6.8 20,024 7.4
Expenses from Hollinger Inc. 2,845 1.0 2,057 0.8
-------- ----- -------- -----
Total Oper. Cost & Exp. 274,148 92.6 249,331 92.6
-------- ----- -------- -----
Operating Income $ 21,939 7.4 % $ 20,064 7.4 %
======== ===== ======== =====
International Newspaper Group
Operating Revenues:
Advertising $136,451 60.6 % $132,227 68.5 %
Circulation 81,874 36.4 56,304 29.2
Job Printing and Other 6,731 3.0 4,459 2.3
-------- ----- -------- -----
Total Operating Revenues 225,056 100.0 % 192,990 100.0 %
-------- ----- -------- -----
Compensation Costs 36,020 16.0 36,290 18.8
Newsprint 54,265 24.1 39,599 20.5
Other Operating Costs 112,332 49.9 102,768 53.3
Depreciation and Amortization 4,844 2.2 5,299 2.7
Expenses from Hollinger Inc. 875 0.4 717 0.4
-------- ----- -------- -----
Total Oper. Cost & Exp. 208,336 92.6 184,673 95.7
-------- ----- -------- -----
Operating Income $ 16,720 7.4 % $ 8,317 4.3 %
======== ===== ======== =====
EBITDA:
United States Newspaper Group $ 41,938 66.0 % $ 40,088 74.6 %
International Newspaper Group 21,564 34.0 13,616 25.4
-------- ----- -------- -----
Total EBITDA $ 63,502 100.0 % $ 53,704 100.0 %
======== ===== ======== =====
EBITDA Margin:
United States Newspaper Group 14.2 % 14.9 %
International Newspaper Group 9.6 % 7.1 %
Total EBITDA 12.2 % 11.6 %
</TABLE>
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<PAGE> 13
Earnings were also negatively impacted by newsprint and other paper costs
that, in general, increased substantially in 1995, reached and maintained peak
levels in the fourth quarter of 1995 and the first quarter of 1996, and
started a declining trend in the second quarter of 1996. For example, the
CHICAGO SUN-TIMES was purchasing newsprint at an average price of approximately
$500 per metric ton at the beginning of 1995 and this escalated to a peak price
of approximately $740 per metric ton in the fourth quarter of 1995 and the
first quarter of 1996. However, newsprint prices have been easing and, in June
1996, prices paid by the CHICAGO SUN-TIMES averaged approximately $655 per
metric ton, compared with an average price of approximately $675 per metric ton
paid a year earlier. As most of the newsprint consumed in the second quarter
was from higher priced inventory, the benefit of the decline in prices will be
more pronounced in the second half of the year.
The effects of the increase in newsprint and other paper costs for
publications that were included in both years amounted to approximately $8.3
million, or 11 cents per share, for the second quarter and $18.4 million, or 26
cents per share, for the first six months.
Without the effects of unusual and non-recurring items and increased
newsprint and other paper costs, net earnings before extraordinary items would
have been $16.6 million in the second quarter of 1996, compared with $6.3
million in 1995, and $25.9 million in the first six months of 1996, compared
with $9.3 million in 1995.
Total revenues for the Company's second quarter increased 13.4% to
$267.2 million from $235.6 million last year largely due to cover price
increases in the United Kingdom and to revenue contributed by community
newspapers that were acquired in the last quarter of 1995 and the second
quarter of 1996. Revenues for the six months ended June 30, 1996 were $521.1
million, a 12.7% increase from $462.4 million in 1995. Depreciation and
amortization in the second quarter of 1996 was $0.7 million less than the
second quarter of 1995 and for the six months ended June 30, 1996 was $0.5
million less than 1995. These reductions reflected a decrease of approximately
$0.8 million in the second quarter and approximately $0.6 million in the six
months, a revaluation of the remaining useful life of certain intangible assets
offset in part by the 1995 and the second quarter of 1996 purchases of
community newspapers.
Second Quarter 1996 Compared With Second Quarter 1995
Operating Revenues.
The following table shows the percentage increase in revenues between
the second quarter ended June 30, 1996 and the second quarter ended June 30,
1995, by principal business group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times 0.0 %
American Publishing Company 25.8
Total 10.1
International Newspaper Group 18.2
Total Operating Revenues 13.4
-11-
<PAGE> 14
United States Newspaper Group. Operating revenues in the United States
Newspaper Group were $153.7 million in the second quarter of 1996, an increase
of $14.1 million, or 10.1% over the same period in 1995. The Chicago
Sun-Times' group operating revenues of $84.9 million were level with the prior
year. While circulation revenues gained 7.2%, this was offset by a 2.4%
decline in advertising revenues, as national and retail advertising continued
to show weakness. American Publishing reported operating revenues of $68.8
million, an increase of $14.1 million, or 25.8%, over the 1995 period. While
acquisitions (net of disposals) added $15.6 million to revenues, same
publication revenues declined $1.5 million due to lower advertising revenues.
International Newspaper Group. Operating revenues for the International
Newspaper Group were $113.5 million in the second quarter of 1996, an increase
of $17.5 million, or 18.2%, over 1995. The increase in local revenue in pounds
sterling was 23.8%, but a decline in the U. S. dollar's value versus the
British pound reduced the reported U. S. dollar increase. Circulation revenues
improved by $12.1 million, reflecting higher cover prices for the weekday
edition of THE DAILY TELEGRAPH. Advertising revenues advanced $3.8 million.
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 (decrease) in operating costs and expenses
between the second quarter 1996 and the second quarter 1995, by principal
business group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times (1.1)%
American Publishing Company 19.7
Total 6.6
International Newspaper Group 9.7
Total Operating Costs and Expenses 7.9
United States Newspaper Group. Operating costs and expenses were $135.0
million, an increase of $8.3 million, or 6.6%, over the 1995 period.
Acquisitions (net of disposals) added $11.8 million to costs, while same
publication newsprint costs were up $2.8 million. Operating costs and expenses
were 87.8% of revenues in 1996 and 90.7% in 1995. Excluding the effect of
higher same publication newsprint costs the comparison would have been 86.0% of
revenues in 1996 and 90.7% of revenues in 1995.
-12-
<PAGE> 15
International Newspaper Group. Operating costs and expenses were
$105.4 million for the period, an increase of $9.3 million, or 9.7%, from same
period in 1995. In local currency, the increase was 13.8%, but the reduced
value of the U.S. dollar versus the British pound in 1996 absorbed some of this
unfavorable increase. Most of the cost increase came from higher newsprint
costs of $7.8 million and product enhancement costs of $3.5 million. Operating
costs and expenses were 92.9% of revenues in 1996 and 100.1 % in 1995.
Excluding the effect of higher newsprint costs the comparison would have been
86.0% of revenues in 1996 and 100.1% of revenues in 1995.
Operating Income.
The above changes in operating revenues and operating costs and
expenses resulted in the follow increases in operating income between the
second quarter of 1996 and the second quarter of 1995, by principal business
group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times 17.2 %
American Publishing Company 62.2
Total 44.7
International Newspaper Group N.A. (1)
Total Operating Income 108.5
(1) Can not be quantified due to a negative figure in the base period.
United States Newspaper Group. The United States Newspaper Group's
operating income increased by $5.8 million. Recent acquisitions added $3.8
million to earnings, while higher same publication newsprint costs reduced
earnings by $2.8 million. Revenue enhancements and cost containment efforts
improved earnings by $4.8 million.
International Newspaper Group. The International Newspaper Group's
operating income increased by $8.2 million. The benefits from higher
circulation revenues of $12.1 million and higher advertising and other revenues
of $5.4 million were partially offset by $7.8 million in higher newsprint
costs and $3.5 million in product enhancement costs. Other costs decreased
$2.0 million during the second quarter.
-13-
<PAGE> 16
Other Income and Expense.
Other income and expense in 1996 was a net expense of $8.4 million,
compared with a net income of $2.8 million in 1995. Higher debt levels have
contributed to the $6.4 million increase in net interest expense, while equity
in the earnings of affiliates declined $8.6 million. This latter decline came
essentially at Fairfax where continued economic slowness, increased newsprint
prices, and further redundancy and executive termination provisions adversely
affect results in the second quarter. Non-operating income in 1996 included
income from the Argsub investment which was made in December 1995.
Income Taxes.
Income taxes of $7.2 million were recorded in the second quarter of
1996, compared with income taxes of $4.9 million in 1995. The change in tax
provisions was essentially due to the change in earnings and their origin for
the respective periods
Minority Interests.
Minority interest of $4.5 million in 1996 was down from $6.5 million in
1995 due to lower earnings at Fairfax and Telegraph and the reduction in the
minority interest in Telegraph following the Company's purchase of additional
Telegraph shares in December 1995. Minority interest also includes dividends
on preference stock issued by a subsidiary in 1996.
Six Months 1996 Compared With Six Months 1995
Operating Revenues.
The following table shows the percentage increase (decrease) in revenues
between the six months ended June 30, 1996 and the six months ended June 30,
1995, by principal business group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times (0.7) %
American Publishing Company 26.5
Total 9.9
International Newspaper Group 16.6
Total Operating Revenues 12.7
United States Newspaper Group. Operating revenues in the United States
Newspaper Group were $296.1 million in the first half of 1996, an increase of
$26.7 million, or 9.9% over the same period in 1995. The Chicago Sun-Times'
group operating revenues of $163.4 million decreased $1.1 million, or 0.7%.
Circulation revenues gained 6.0%, but this was more than offset by a 3.2%
decline in advertising revenues. National and retail advertising have been
regionally weak, while classified advertising has improved. American
Publishing reported operating revenues of $132.7 million, an increase of $27.8
million, or 26.5%, over the 1995 period. Acquisitions (net of disposals) added
$28.5 million to revenues, while same publication revenues declined $0.7
million, or 0.7%, from the prior year.
-14-
<PAGE> 17
International Newspaper Group. Operating revenues for the International
Newspaper Group were $225.1 million in the first half of 1996, an increase of
$32.1 million, or 16.6%, over 1995. The increase in operating revenue in
pounds sterling was 21.3%, but a
decline in the U. S. dollar's value versus the British pound reduced the
reported U. S. dollar increase. Circulation revenues improved by $25.6
million, reflecting higher cover prices for the weekday edition of THE DAILY
TELEGRAPH. Advertising revenues advanced $4.2 million.
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 the first
half 1996 and the first half 1995, by principal business group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times 2.4 %
American Publishing Company 23.0
Total 10.0
International Newspaper Group 12.8
Total Operating Costs and Expenses 11.2
United States Newspaper Group. Operating costs and expenses were $274.1
million, an increase of $24.8 million, or 10.0%, over the 1995 period.
Acquisitions (net of disposals) added $22.1 million to costs, while same
publication newsprint costs were up $9.9 million. Operating costs and expenses
were 92.6% of revenues in 1996 and 92.6% in 1995. Excluding the effect of
higher same publication newsprint costs the comparison would have been 89.2% of
revenues in 1996 and 92.6% of revenues in 1995.
International Newspaper Group. Operating costs and expenses were
$208.3 million for the period, an increase of $23.7 million, or 12.8%, from
same period in 1995. In local currency, the increase was 16.8%, but the
reduced value of the U. S. dollar versus the British pound in 1996 absorbed
some of this unfavorable increase. Most of the cost increase came from higher
newsprint costs of $14.7 million and product enhancement costs of $6.8 million.
Operating costs and expenses were 92.6% of revenues in 1996 and 95.7 % in 1995.
Excluding to effect of higher newsprint costs the comparison would have been
86.1% of revenues in 1996 and 95.7% of revenues in 1995.
-15-
<PAGE> 18
Operating Income.
The above changes in operating revenues and operating
costs and expenses resulted in the follow increases (decreases) in operating
income between the first half of 1996 and the first half of 1995, by principal
business group.
1996 Versus 1995
United States Newspaper Group
Chicago Sun-Times (67.2) %
American Publishing Company 51.3
Total 9.3
International Newspaper Group 101.0
Total Operating Income 36.2
United States Newspaper Group. The United States Newspaper Group's
operating income increased by $1.9 million. Acquisitions (net of disposals)
added $6.4 million to earnings, while higher same publication newsprint costs
increased $9.9 million. Revenue enhancements (mainly at American Publishing)
and cost containment efforts (largely at Chicago Sun-Times) resulted in
increased operating income of $5.4 million.
International Newspaper Group. The International Newspaper Group's
operating income increased by $8.4 million. The benefits of higher circulation
revenues of $25.6 million and higher advertising and other revenue of $6.5
million were partially offset by $14.7 million in higher newsprint costs and
product enhancement cost of $6.8 million.
Other Income and Expense.
Other income and expense in the first six months of 1996 was a net
expense of $15.1 million, compared with a net income of $10.3 million in 1995.
Higher debt levels have contributed to the $8.2 million year-to-year increase
in net interest expense, while equity in the earnings of affiliates declined
$10.9 million, due to lower earnings at Fairfax where increased newsprint
prices, executive severances, redundancy provisions, and economic slowness have
limited earnings results. In addition, Telegraph had a gain on the sale of
marketable securities of $11.9 million in 1995 while nothing comparable occurred
in 1996. Non-operating income in 1996 included income from the Argsub investment
which was made in December 1995.
Income taxes.
Income taxes of $8.9 million were recorded in the first six months of 1996,
compared with income taxes of $12.2 million in 1995. The change in tax
provisions was essentially due to the change in earnings and their origin for
the respective periods.
Minority Interests.
Minority interest of $10.0 million in 1996 was down from $14.4 million in
1995 due to lower earnings at Fairfax and Telegraph and the reduction in the
minority interest in Telegraph following the Company's purchase of additional
Telegraph shares in December 1995. Minority interest also includes dividends
on preference stock issued by a subsidiary in 1996.
-16-
<PAGE> 19
Liquidity and Capital Resources
Working Capital.
Working capital consists of current assets less current liabilities.
Current assets, excluding the advance to affiliated companies, were $253.3
million at June 30, 1996, compared with $197.6 million at December 31,
1995. Most of the increase was due to a $40.7 million increase in cash
equivalents which came about mainly as a result of financing actions taken in
the first quarter of 1996. Accounts receivable increased by $22.7 million due
largely as a result of acquisitions, while inventories were reduced by $6.3
million as the easing of newsprint prices reduced the need for inventory hedge
buying. Current liabilities, excluding debt obligations, were $141.5 million at
June 30, 1996, compared with $124.8 million at December 31, 1995, with the
increase as a result of acquisitions.
Debt.
Long-term debt and debt obligations included in current liabilities were $819.1
million at June 30, 1996, compared with $643.2 million at December 31, 1995.
This increase was principally due to borrowings of $218.8 million under the
Southam Facility during the second quarter of 1996. These borrowings were
advanced to a subsidiary of Hollinger Inc. as an intercompany loan. The Southam
Facility matures on November 25, 1996. Both debts are short-term and the Company
expects this to be a temporary situation which awaits clarifying decisions from
Canadian authorities. Excluding this debt, the Company's long-term debt and debt
items included in current liabilities was $600.3 million at June 30, 1996,
compared with $643.2 million at December 31, 1995. This decline was the result
of the Company's first quarter sale of Class A Common Stock and subordinated
debt, with proceeds used to reduce outstanding indebtedness and
increase cash equivalents.
Subsequent to June 30, 1996, the Company completed its Scheme of Arrangement to
purchase all of the outstanding ordinary shares of Telegraph which it did not
already own. The purchase cost of approximately $455.1 million and was financed
through a combination of new debt facilities and a portion of the proceeds from
the sale of 11,500,000 shares of Class A Common Stock and 20,700,000 9-3/4%
PRIDES (Preferred Redeemable Increased Dividend Equity Shares) (the "Equity
Offering"). The remaining proceeds of the Equity Offerings were used to pay
outstanding indebtedness of Telegraph and related transaction costs, to pay a
portion of the Southam Facility indebtedness (approximately $55 million), and
for general corporate purposes, including working capital.
-17-
<PAGE> 20
In the near term, the Company plans to fund its working capital needs
through available cash, working capital availability under the Amended
Publishing Credit Facility, a portion of the proceeds from the Equity Offerings
and internally generated funds. The Company is considering the issuance of
additional debt and equity securities after the completion of the Equity
Offerings 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 $63.5 million in
the first six months of 1996 compared with $53.7 million in the first six
months of 1995. The Company believes that EBITDA largely determines its
ability to fund current operations and to service debt resulting from the
significant number of acquisitions made by the Company. These acquisitions
have resulted in non-cash charges for depreciation and amortization which
have adversely affected net earnings, but have not affected EBITDA.
Cash Flows.
Cash flows from operating activities were $39.1 million in
the first six months of 1996, compared with a cash outflow of $4.4 million in
the first six months of 1995. Excluding changes in working capital (other than
cash), cash from operating activities was $48.8 million in 1996 and $38.5
million in 1995.
Cash flows related to investing activities were an outflow of $49.0
million in 1996, largely related to the acquisition of the Johnstown property,
and inflow of $10.3 million in 1995, due largely to Telegraph's proceeds from
marketable securities of $17.7 million.
Cash flows related to financing activities were a net inflow of $54.3
million. This results from proceeds from common stock issuances and increases
in debt, being partly used to repay due to Hollinger Inc. Net cash outflows
of $91.6 million in 1995 largely reflect reductions in debt which was possible
due to large cash equivalent balances.
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, concurrent debt and equity offerings in February 1996 and concurrent
Equity Offerings in August 1996.
In May 1996, Hollinger Inc. acquired the additional common shares of
Southam from a third party. Such acquisition was financed by approximately
Cdn. $300 million borrowings by the Company under the Southam Facility which
are guaranteed by Hollinger Inc. and mature on November 26, 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 acquired
Southam shares and 7,539,028 shares of Class A Common Stock and 14,909,000
shares of Class B Common Stock held by Hollinger, Inc.
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. On August 7, 1996 the Company borrowed approximately $130.0 million
under the Amended Publishing Bank Credit Facility and approximately $305.0
million under the FDTH Credit Facility, which funds, together with the net
proceeds of the concurrent offerings of Class A Common Stock and PRIDES, were
used to finance the Scheme (approximately $455.1 million), pay outstanding debt
of the Telegraph (approximately $139.5 million) and pay related transaction
costs (approximately $8.1 million).
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. At June 30, 1996,
the indebtedness of the Company was $815.1 million consisting of long-term debt
($567.6 million) and current bank loans ($247.5 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
June 30, 1996, after giving effect to the Equity Offerings and the borrowings
incurred in connection with the Scheme and the acquisition of the additional
shares, the Company's consolidated adjusted total debt, redeemable preferred
stock and stockholders' equity would have been $306.2 million, $734.6 million
and $1,055.3 million, respectively, and total debt and redeemable preferred
stock would represent approximately 65% of its total capitalization. Of the
Company's consolidated adjusted total debt, $647.4 million is due on or prior
to March 31, 1997.
Dividends and Other Commitments.
The Company's sales of Class A Common Stock and PRIDES has
significantly increased its dividend obligations and the Company also has
significant debt service obligations, capital expenditures, management fees due
to Hollinger Inc. and dividends on its Series A Redeemable Preferred Stock.
Furthermore, the Company's wholly owned subsidiaries, DTH and FDTH, have
obligations in respect of their redeemable preferred stock (the "DTH and FDTH
Preference Shares"). The Company has 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
set forth in the designation of such shares 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. Hollinger Inc. has agreed that, so long as the FDTH Credit
Facility is outstanding, it will refrain from demanding any such payment from
the Company. The Company has been informed by
18
<PAGE> 21
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 2 to 1 debt to equity ratio covenant in
the DTH Preference Shares which as of September 30, 1996 would create a
retraction right. The aggregate retraction price for all DTH and FDTH Preference
Shares held outside of Hollinger Inc. is approximately $125.6 million.
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
payments of dividends. However, certain agreements binding Publishing and
other subsidiaries of the Company contain such restrictive provisions. As of
June 30, 1996, after giving effect to use of the net proceeds from the Equity
Offerings, 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 $19 million. The foregoing calculation is based on the sum of
the following for the period January 1, 1996 to June 30, 1996: (1) 50% of the
sum of (x) consolidated net income of the 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. 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.
The amount available for the payment of dividends and other obligations by
the Company at any time is limited by a number of binding agreements, but the
Company expects its internal cash flow and financing resources to be adequate
to meet its foreseeable requirements.
Future Financing Plans. 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; however, no decision has been made as to whether or not
the Company will proceed, when to proceed, or the specific type of instrument
that it would use.
Other
Certain of the statements in this Form 10-Q may be deemed to be "forward
looking" statements. Refer to the Company's Annual Report on Form 10-K for a
discussion of factors that may affect such statements.
19
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K
on April 24, 1996, reporting an event under Item 5
on Form 8-K.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOLLINGER INTERNATIONAL INC.
Registrant
Date: August 14, 1996 By: /S/ J. A. Boultbee
J. A. Boultbee
Vice President, Finance
and Treasury
21
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