<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-24004
HOLLINGER INTERNATIONAL INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-3518892
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611
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(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 10, 1997
------------------------ --------------------------------
<S> <C>
Class A Common Stock
par value $.01 per share 71,556,899 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
</TABLE>
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
8
PART II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K. 23
Signatures 24
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Advertising $364,829 $313,513 $1,120,866 $ 971,892
Circulation 131,982 139,794 395,457 423,367
Job printing 19,388 22,312 56,741 61,186
Other 7,459 19,547 26,858 56,276
-------- -------- ---------- ----------
Total operating revenues 523,658 495,166 1,599,922 1,512,721
-------- -------- ---------- ----------
OPERATING COSTS AND EXPENSES
Newsprint 75,020 82,198 223,934 269,239
Compensation costs 185,636 174,987 544,574 537,898
Other operating costs 179,841 180,819 535,846 528,180
Direct subscription campaign costs, net 7,405 - 22,191 -
Depreciation and amortization 30,064 26,161 86,097 72,064
-------- -------- ---------- ----------
Total operating costs and expenses 477,966 464,165 1,412,642 1,407,381
-------- -------- ---------- ----------
Operating income 45,692 31,001 187,280 105,340
-------- -------- ---------- ----------
Other income (expense)
Interest expense (28,270) (23,743) (83,863) (56,539)
Amortization of debt issue costs (816) (2,606) (5,966) (3,623)
Equity in earnings of affiliates 260 2,566 5,882 5,649
Interest and dividend income 1,698 3,144 7,879 8,495
Other income, net 1,685 609 69,753 2,327
-------- -------- ---------- ----------
Total other income (expense) (25,443) (20,030) (6,315) (43,691)
-------- -------- ---------- ----------
Earnings before income taxes, minority
interest and extraordinary item 20,249 10,971 180,965 61,649
Provision for income taxes 8,305 9,067 60,806 29,384
-------- -------- ---------- ----------
Earnings before minority interest and
extraordinary item 11,944 1,904 120,159 32,265
Minority interest 6,335 5,897 30,999 27,784
-------- -------- ---------- ----------
Earnings (loss) before extraordinary item 5,609 (3,993) 89,160 4,481
Extraordinary loss on debt extinguishments - - - (2,150)
-------- -------- ---------- ----------
Net earnings (loss) $ 5,609 $ (3,993) $ 89,160 $ 2,331
======== ======== ========== ==========
Earnings (loss) per common share and common share
equivalent
Earnings before extraordinary item $ 0.05 $ (0.04) $ 0.78 $ 0.04
Extraordinary loss on debt extinguishments - - - (0.03)
-------- -------- ---------- ----------
Net earnings (loss) per common share and
common share equivalent $ 0.05 $ (0.04) $ 0.78 $ 0.01
======== ======== ========== ==========
Weighted average shares outstanding 115,676 100,031 113,851 86,603
======== ======== ========== ==========
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 59,878 $ 148,550
Accounts receivable, net 280,099 321,586
Due from Hollinger Inc. 32,328 -
Inventories 34,488 30,056
Other current assets 30,030 23,494
------------ ----------
Total current assets 436,823 523,686
Investments in affiliates 51,406 198,496
Other investments, at cost 70,923 487,547
Property, plant and equipment, net of accumulated
depreciation 609,626 561,731
Intangible assets, net of accumulated amortization 1,704,974 1,641,485
Other assets 47,622 12,599
------------ ----------
$ 2,921,374 $3,425,544
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 35,384 $ 35,920
Bank loans - 503,364
Accounts payable 79,668 114,545
Accrued expenses 159,576 173,832
Deferred revenue 80,893 79,182
Income taxes payable 32,443 38,896
Due to Hollinger Inc. - 263,149
----------- ----------
Total current liabilities 387,964 1,208,888
Long-term debt 1,431,916 675,428
Other long-term liabilities 116,268 128,822
------------ ----------
Total liabilities 1,936,148 2,013,138
----------- ----------
Minority interest 192,336 109,943
----------- ----------
Redeemable preferred stock 78,518 605,579
----------- ----------
Stockholders' equity:
Convertible preferred stock 195,104 195,104
Class A common stock 726 726
Class B common stock 150 150
Additional paid-in capital 389,741 346,572
Cumulative foreign currency translation adjustment (35,126) 22,995
Retained earnings 178,850 131,337
----------- ----------
729,445 696,884
Class A common stock in treasury, at cost (15,073) -
----------- ----------
Total stockholders' equity 714,372 696,884
----------- ----------
$ 2,921,374 $3,425,544
=========== ==========
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings 89,160 $ 2,331
Items not involving cash:
Depreciation and amortization 86,097 72,064
Amortization of debt issue costs 5,966 7,207
Equity in net earnings of affiliates, net (3,429) 321
Minority interest 30,999 27,784
Gain on sale of investment (63,320) (10)
Other non-cash items 34,719 3,302
Changes in working capital net (45,532) 11,437
----------- ---------
Cash provided by operating activities 134,660 124,436
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (94,161) (88,032)
Proceeds from sales of assets 2,237 76,148
Acquisitions, net (43,769) (199,475)
Additions to investments (66,914) (661,935)
Proceeds on disposal of investments 237,596 -
Collections on long-term receivables 9,401 8,431
Other investing activities (4,051) 446
----------- ---------
Cash provided by (used in) investing activities 40,339 (864,417)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 877,342 355,062
Repayments of long-term debt (115,214) (450,748)
Proceeds from short-term debt - 642,450
Repayments of short-term debt (495,784) (78,299)
Payment of debt issue costs (37,221) -
Changes in amounts due to/from affiliated companies (299,600) (33,339)
Proceeds from common stock - 443,530
Repurchase of common stock (15,063) -
Issue of common shares of a subsidiary 10,105 1,230
Redemption of preference shares (116,863) -
Dividends to minority interests (9,281) (28,265)
Cash dividends paid (41,052) (31,672)
Acquisition paid for by Hollinger Inc. - 68,436
Other financing activities (17) (28,115)
----------- ---------
Cash provided by (used in) financing activities (242,648) 860,270
----------- ---------
Effect of exchange rate changes on cash (21,023) 1,960
----------- ---------
Net increase (decrease) in cash (88,672) 122,249
Cash at beginning of period 148,550 23,810
----------- ---------
Cash at end of period $ 59,878 $ 146,059
=========== =========
</TABLE>
3
<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. It is presumed that the reader has already
read the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the fiscal year. For
further information, refer to the consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
NOTE 2 - PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The Company is a subsidiary of Hollinger Inc., a Canadian corporation,
which owns approximately 59.8% of the combined equity ownership interest and
approximately 84.3% 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 Company's Preferred Redeemable Increased
Dividend Equity Securities ("PRIDES"), the exchange of the HCPH Special
Shares or upon conversion of the Company's Series D Convertible Redeemable
Preferred Stock ("Series D Preferred Stock").
On January 7, 1997, the Boards of Directors of the Company and Hollinger
Inc. announced that they had reached an agreement for the transfer by Hollinger
Inc. of certain of its owned Canadian publishing interests directly or
indirectly to Hollinger Canadian Publishing Holdings Inc. (the "Hollinger Inc.
Transaction"), including (i) certain newspaper assets located mainly in
Ontario; (ii) certain newspaper assets located mainly in Saskatchewan; (iii)
certain newspaper assets located mainly in British Columbia; and (iv) UniMedia,
Inc. (collectively the "Canadian Newspapers") for an aggregate consideration of
approximately $382.0 million (Cdn.$523.0 million), subject to working capital
adjustments and currency exchange adjustments. The purchase price, all of
which was payable to Hollinger Inc., was satisfied in cash in the amount of
$250.0 million, and by the issuance of preferred stock of the Company, which
was converted into (i) 829,409 shares of a new series of mandatorily
convertible preferred stock of the Company similar to the PRIDES issued by the
Company in August 1996 having a face value of approximately $90.0 million and
(ii) 3,207,045 shares of Class A Common Stock of the Company having a nominal
agreed value of approximately $42.0 million, subject to adjustments as
described above. The preferred stock and common stock was issued subsequent to
receiving the requisite approval of the stockholders of the Company which
occurred on July 31, 1997.
4
<PAGE> 7
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
The initial payment of the $250.0 million cash and the issuance of the
preferred stock in respect of the Hollinger Inc. Transaction was made on April
18, 1997. Interest on the cash portion of the purchase price has been accrued
for the period from January 1, 1997 to April 18, 1997. The transfer was
effective retroactive to January 1, 1997. The Hollinger Inc. Transaction
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 prior periods presented.
All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made in the 1996 financial
statements to conform to the 1997 presentation. The 1996 results have also
been restated to reflect an accounting change originally made in the fourth
quarter of 1996 that related to the third quarter.
NOTE 3 - SALE OF SUBORDINATED NOTES AND BANK CREDIT FACILITY
On March 4, 1997, Publishing filed both a Preliminary Prospectus and a
Preliminary Prospectus Supplement offering $200 million of Senior Notes due
2005 (the "Senior Notes") and $200 million of Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") pursuant to its universal shelf
registration statements. On March 12, 1997, Publishing increased the size of
the offerings to a total of $550.0 million, which closed on March 18, 1997.
Both the Senior Notes and the Senior Subordinated Notes are guaranteed by the
Company.
The Senior Notes are unsecured senior obligations of Publishing and rank
pari-passu with all other senior indebtedness of Publishing including
Publishing's bank credit facilities, mature on March 15, 2005 and bear interest
at 8.625% per annum. The Senior Subordinated Notes are unsecured senior
subordinated obligations of Publishing and rank pari-passu with all other
senior subordinated indebtedness of Publishing including its existing 9.25%
Senior Subordinated Notes due 2006. The Senior Subordinated Notes mature on
March 15, 2007 and bear interest payable semi-annually at a rate of 9.25% per
annum. The Indentures relating to the Senior Notes and the Senior Subordinated
Notes contain financial covenants and negative covenants that limit
Publishing's ability to, among other things, incur indebtedness, pay dividends
or make other distributions on its capital stock.
Publishing and its restricted subsidiaries utilized the proceeds of these
offerings to repay substantially all of its outstanding bank indebtedness, to
repay the redeemable preference shares of DTH and FDTH and for general working
capital purposes.
On April 7, 1997, Publishing, Hollinger Canadian Publishing Holdings Inc.
("HCPH"), The Telegraph and certain financial institutions entered into a new
long-term bank credit facility (the "Bank Credit Facility"). The purchase
price of the Canadian Newspapers was financed in part through a $175 million
borrowing by HCPH under the Bank Credit Facility. The Bank Credit Facility
originally provided for up to $900 million in total credit availability under
four tranches with available borrowings by The Telegraph limited to $150
million, available borrowings by HCPH limited to $750 million, and available
borrowings by Publishing limited to $900 million, less amounts outstanding
under other tranches, with maximum borrowings in each case limited by financial
statement covenants. In July 1997, the Company reduced its total available
commitment to $515 million and reduced the HCPH tranche to $365 million. The
5
<PAGE> 8
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Bank Credit Facility matures on March 15, 2004 with required reductions in
availability equal to 6.25% of the commitment per calendar quarter commencing
on June 30, 2000.
Loans under the Bank Credit Facility bear interest, at the option of the
respective borrower, at a rate per annum tied to specified floating rates or a
reserve adjusted Eurocurrency rate, in each case plus a specified margin
determined based on leverage ratios. The obligations of each borrower under
the Bank Credit Facility are guaranteed by the Company and by each U.S.
subsidiary (other than American Publishing (1991) Inc. ("AP-91"), which
provides a partial guaranty). The obligations of HCPH are guaranteed in whole
or part by each of its Canadian subsidiaries and by The Telegraph and its
subsidiaries. The obligations of The Telegraph are guaranteed in whole or in
part by each United Kingdom ("U.K.") subsidiary and by HCPH and each of its
Canadian subsidiaries.
The obligations of all borrowers under the Bank Credit Facility are
secured by a pledge by the Company of all stock of Publishing, the pledge by
Publishing and its restricted subsidiaries of the stock of their United States
subsidiaries (other than AP-91 and its subsidiaries), certain intercompany notes
and security agreements, and portions of the stock of certain Canadian and U.K.
subsidiaries. The obligations of HCPH and the Canadian and U.K. subsidiaries
which have guaranteed its debt are secured by all or part of the pledge of the
stock of the Canadian subsidiaries, including approximately 58% of the stock of
Southam, and all or part of the stock of The Telegraph and the U.K.
subsidiaries. The obligations of The Telegraph and the Canadian and U.K.
subsidiaries which have guaranteed its debt are secured by the pledge of all or
part of the stock of the U.K. subsidiaries, and all or part of the stock of The
Telegraph and the Canadian subsidiaries.
The parties to the Bank Credit Facility entered into a First Amendment
Agreement to the Bank Credit Facility (the "First Amendment") dated May 12,
1997. The First Amendment amends certain terms and conditions of the Bank
Credit Facility to permit HCPH to bid for the remaining shares of Southam not
currently owned by it. The First Amendment allows for the Southam offer as an
"Approved Acquisition" and modifies certain definitions, representations and
covenants to account for, among other things, the issuance of HCPH Special
Shares, the operation of the Exchange Indenture, approval by the lenders of the
bid circular and related documentation, and the provision and timing of
additional security under the Bank Credit Facility.
The parties to the Bank Credit Facility have entered into a Second
Amendment Agreement to the Bank Credit Facility (the "Second Amendment") dated
June 23, 1997. The Second Amendment amends certain terms and conditions of the
Bank Credit Facility primarily to allow HCPH to take up less than all of the
outstanding Southam shares and allow Publishing to pay up to $20 million in
dividends to the Company for Class A Common Stock repurchases.
NOTE 4 - STOCK REPURCHASE
During 1997 the Company purchased 1,295,500 shares of Class A Common Stock
under its previously announced stock buy back program. The repurchased shares
are recorded at cost as treasury stock.
6
<PAGE> 9
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 5 - ACQUISITION OF ARGSUB LIMITED
In June 1997 DTH purchased 100% of the common shares of Argsub from Argus
Corporation Limited. Argsub is the holder of $401.2 million preference shares
of FDTH, a subsidiary of the Company. As a result of this acquisition, the
consolidated financial statements include the accounts of Argsub and therefore
this results in the elimination of the investment in Argsub preference shares
which was previously disclosed as other investments and of the FDTH share
capital which was previously disclosed as redeemable preferred stock.
NOTE 6 - ISSUE OF NON-VOTING SPECIAL SHARES OF HCPH
HCPH, a Canadian company in the Hollinger International consolidated
group of companies issued 6,552,425 Cdn. $10 Non-Voting Special shares
("Special Shares") in July 1997 for a total issue price of Cdn. $65,524,250.
This issue of the special shares was part of the consideration for the purchase
of Southam shares described in note 7 below.
In September 1997 an additional 4,146,107 special shares were issued
for a total issue price of Cdn. $41,461,070 in exchange for 4,146,107 special
shares in 3396754 Canada Limited (3396754), a subsidiary of Hollinger Inc.
On July 18, 1997 HCPH, the Company and Montreal Trust Company of Canada
as trustee, entered into an Exchange Indenture providing for the exchange of
the HCPH special shares at the option of the holder (Optional Exchange) at any
time after December 23, 1997 but prior to June 26, 2000,into newly issued Class
A Subordinate Voting Shares of Hollinger International based on an exchange
ratio set out in the Exchange Indenture (initially .510 Class A Subordinate
Voting Shares per HCPH special share and increasing to .602 after June 8,
2000.) Each HCPH special share will be automatically exchanged (Mandatory
Exchange) on June 26, 2000 into a number of Hollinger International Class A
Subordinate Voting Shares equal to a) US$8.88 divided by b) 95% of the current
market price of the Class A Subordinate Voting Shares. Upon either an Optional
Exchange or a Mandatory Exchange, Hollinger International will have the option
in lieu of delivering all or any of the Class A Subordinate Voting Shares
issuable on exchange, to make a cash payment.
On September 3, 1997, 3396754, HCPH and the Company entered into an
Exchange Agreement, in respect of the special shares issued by 3396754 and held
by HCPH. The terms of the Exchange Agreement are virtually identical to the
Exchange Indenture described above, such that the issue of any Class A
Subordinate Voting Shares or cash payment by Hollinger International resulting
from the Optional Exchange or Mandatory Exchange in respect of the 4,146,107
HCPH special shares previously described, will be provided by 3396754. Such
shares or cash amounts will be provided to 3396754 by Hollinger Inc.
The number of Class A Subordinate Voting Shares which would be issued
on the Mandatory Exchange date, based on the September 30, 1997 market price of
Hollinger International Class A common stock, in respect of the 6,552,425
special shares issued in July 1997, have been considered as common share
equivalents in the computation of the weighted average share outstanding.
NOTE 7 - ACQUISITION OF ADDITIONAL SOUTHAM INTEREST
In May 1997 HCPH made an offer to shareholders of Southam Inc. to acquire all
of the common shares of Southam not presently controlled by the Hollinger group
for a consideration valued by the offeror at Cdn. $23.50 per share payable as
to Cdn. $13.50 in cash and as to Cdn. $10 by the issue of a HCPH Non-Voting
Special Share previously described in note 6. The offer expired on July 7,
1997. HCPH purchased 6,552,425 common shares of Southam which had been
tendered under this offer. This purchase of shares brings the Company's
ownership interest in Southam to 45,692,468 common shares, or approximately
58.6%.
The cash portion of the purchase price was funded through borrowings by
HCPH under the Bank Credit Facility described in Note 3.
7
<PAGE> 10
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 includes the United States Newspaper Group, the
U.K. Newspaper Group and the Canadian Newspaper Group. The United States
Newspaper Group consists of the Chicago Group, which includes the Chicago
Sun-Times and suburban newspapers in the Chicago metropolitan area, and the
Community Group, which includes the Company's community newspapers, operating
in 28 states, and for reporting and administrative purposes, Jerusalem Post.
The U.K. Newspaper Group includes the operating results of the Telegraph and
the Canadian Newspaper Group includes results of Southam Inc. ("Southam") and
the Canadian Newspapers acquired from Hollinger Inc.
In December 1996, the Company acquired control of Southam by increasing its
ownership interest to 50.7%. The results of Southam are reported on a
consolidated basis and were consolidated retroactive to January 1, 1996 for the
year ended December 31, 1996. The non-owned percentage of Southam is reflected
as minority interest.
On April 18, 1997, certain Canadian newspaper interests owned and controlled by
Hollinger Inc. were purchased by Hollinger Canadian Publishing Holdings Inc.
("HCPH") from Hollinger Inc. (the "Canadian Newspaper Transaction"), effective
as of January 1, 1997, for an aggregate consideration of approximately
Cdn.$523.0 million (U.S. $373.5 million (using exchange rates in effect on
April 18, 1997)) pursuant to (i) the UniMedia Class A Stock Purchase Agreement
dated as of April 18, 1997 among Hollinger Inc., UniMedia Holding Company, a
subsidiary of Hollinger Inc. ("UniMedia Holding") and the Company (the
"UniMedia Class A Stock Purchase Agreement"), (ii) the UniMedia Class B Common
Stock Purchase Agreement dated as of April 18, 1997 among Hollinger Inc.,
UniMedia Holding and the Company (the "UniMedia Class B Common Stock Purchase
Agreement"), and (iii) the Sterling Purchase Agreement dated as of April 18,
1997 between Hollinger Inc. and HCPH (the "Sterling Purchase Agreement"). (The
UniMedia Class A Stock Purchase Agreement, the UniMedia Class B Stock Purchase
Agreement and the Sterling Purchase Agreement are collectively referred to as
the "Purchase Agreements.") The Canadian newspaper interests transferred to
HCPH consist of the Sterling Newspaper Group and UniMedia Inc. (collectively,
the "Canadian Newspapers"). Pursuant to the UniMedia Class A Stock Purchase
Agreement, the Company paid UniMedia Holding consideration consisting of
Cdn.$19.373 million in cash and 149,658 shares of newly issued Series 2
Non-voting Preferred Stock, par value $.01 per share, of the Company ("Series 2
Preferred Stock") with a stated issue price of Cdn.$149.658 million. Pursuant
to the UniMedia Class B Stock Purchase Agreement, the Company paid UniMedia
Holding consideration consisting of Cdn.$100,000 in cash and 23,267 shares of
newly issued Series 1 Non-voting Preferred Stock, par value $.01 per share, of
the Company ("Series 1 Preferred Stock") with a stated issue price of
Cdn.$23.267 million. Pursuant to the Sterling Purchase Agreement, HCPH paid
Hollinger Inc. consideration consisting of Cdn. $330.602 million in cash.
8
<PAGE> 11
As a consideration to the closing of the Purchase Agreements, the Company,
Hollinger Inc. and UniMedia Holding entered into an Exchange Agreement dated as
of April 18, 1997 (the "Exchange Agreement") pursuant to which the Company
agreed to exchange all of the shares of Series 1 Preferred Stock with Series 2
Preferred Stock issued to UniMedia Holding as consideration under the Purchase
Agreements for shares of Class A Common Stock and shares of Series C
Convertible Preferred Stock, par value $.01 per share of the Company ("Series C
Preferred Stock"), subsequent to receiving the requisite approval of the
stockholders of the Company (the "First Exchange") which was received on July
31, 1997. In addition, the Company, Hollinger Inc., and UniMedia Holding
entered into a Second Exchange Agreement (the "Second Exchange Agreement")
pursuant to which the Company agreed to issue 721,165 shares, subject to
certain reductions, of Series C Preferred Stock (including up to 7,114,004
shares of Class A Common Stock into which the shares of Series C Preferred
Stock are convertible) in exchange for 739,500 shares of Series A Convertible
Redeemable Preferred Stock, par values $.01 per share ("Series A Preferred
Stock") held by Hollinger Inc. and/or its designated subsidiary; and issue
739,500 shares of newly-authorized Series D Convertible Redeemable Preferred
Stock, par value $.01 per share ("Series D Preferred Stock") (including the
shares of Class A Common Stock into which such shares are convertible) in
exchange for 721,165 shares, subject to certain reductions, of the Series C
Preferred Stock issued in the First Exchange and held by UniMedia Holding
and/or designated subsidiary (the "Second Exchange"). The exchange
contemplated by the Second Exchange Agreement occurred immediately following
the First Exchange, subsequent to receiving the requisite approval of the
stockholders of the Company which occurred on July 31, 1997.
Following the consummation of the Purchase Agreements, Hollinger Inc. continues
to own a majority of the equity interest and voting control of the Company, the
Company continues to own all of the outstanding capital stock of Publishing,
and Hollinger Inc. and Publishing each hold interests in HCPH such that (i)
Publishing and its subsidiaries own 100% of the non-voting equity shares and
non-voting preference shares, (ii) each of Publishing and Hollinger Inc.
(through each of their wholly-owned subsidiaries) own 50% of the voting
preference shares which have only nominal equity value and (iii) the
non-voting special shares of HCPH are held by shareholders outside the
Hollinger Inc. group.
CONSOLIDATED RESULTS OF OPERATIONS
Third quarter 1997 net earnings were $5.6 million, or 5 cents per share
compared to a loss of $4.0 million, or a loss of 4 cents per share, in 1996.
Net earnings for the nine months ended September 30, 1997 were $89.2 million,
or 78 cents per share compared with $2.3 million or 1 cent per share for the
same period in 1996. Earnings before extraordinary items for the nine months
ended September 30, 1997 were $89.2 million, or 78 cents per share compared
with $4.5 million, or 4 cents per share in 1996.
Non-recurring items in the third quarters of both 1997 and 1996 were
insignificant. Net earnings for the nine months ended September 30, 1997 have
been increased by non recurring items totaling $53.6 million which also
includes the net gain on the sale of Fairfax of $48.9 million. Excluding these
non recurring items in 1997, the effects of the extraordinary item and an
unusual item at Fairfax in 1996, net earnings contributed by operations for the
nine months ended September 30, 1997 were $35.6 million or 31 cents per share
compared with $6.3 million or 6 cents per share in 1996.
EBITDA for the third quarter increased $18.6 million or 32.5% to $75.8 million
from $57.2 million in 1996. For the nine months ended September 30, 1997,
EBITDA increased $96.0
9
<PAGE> 12
million or 54.1% to $273.4 million from $177.4 million in 1996. Operating
income for the three months ended September 30, 1997 increased $14.7 million,
or 47.4% to $45.7 million from $31.0 million in 1996. Operating income for the
nine month period in 1997 increased $82.0 million, or 77.9% to $187.3 million
from $105.3 million in 1996.
Operations in the Community Group and at Southam were affected by acquisitions
and disposals. On a "same store" basis the Community Group revenues and EBITDA
were $60.3 million and $18.5 million, respectively, for the third quarter of
1997 compared to $57.9 million and $16.9 million, respectively, in 1996. For
the nine months ended September 30, 1997, Community Group "same store" revenues
and EBITDA were $160.0 million and $48.7 million, respectively, compared to
$156.4 million and $44.5 million, respectively, in 1996. For Southam, on a
"same store" basis, revenue and EBITDA were $186.2 million and $30.0 million,
respectively, for the third quarter of 1997 compared to $169.6 million and
$16.2 million, respectively, in 1996. For the nine months ended September 30,
1997, Southam "same store" revenues and EBITDA were $550.2 million and $103.2
million, respectively, for the third quarter of 1997 compared to $517.7 million
and $54.1 million, respectively, in 1996.
The U.K. Newspaper Group's operating results were once again affected by the
direct prepaid subscription campaign that was commenced in the second half of
1996. Excluding the net direct costs of this campaign, EBITDA of the U.K.
Newspaper Group was $12.1 million in the third quarter 1997 compared to $2.5
million in 1996 and $52.8 million for the first nine months of 1997 compared to
$27.3 million in 1996. The U.K. Newspaper Group reported a significant
increase in advertising revenues, which is due, in part, to the circulation
increases generated by the campaign.
Consolidated operating revenues for the third quarter of 1997 increased 5.8% to
$523.7 million from $495.2 million in 1996 and revenues for the nine month
period in 1997 grew 5.8% to $1,599.9 million from $1,512.7 million in 1996.
The increase in revenues was largely a result of increased advertising revenues
in all divisions and acquisitions in 1996.
Total newsprint expense (which includes newsprint costs of $4.7 million for the
third quarter 1997 and $12.4 million for the nine months ended September 30,
1997 associated with the direct subscription campaign) decreased 3.0% and
12.2%, respectively, for the third quarter 1997 and the nine months ended
September 30, 1997 compared to the respective periods in the prior year. After
seeing significant increases in newsprint prices in 1995 and peak price levels
in the beginning of 1996, newsprint prices began a declining trend in the
second quarter of 1996 in the United States and in the fourth quarter of 1996
in the United Kingdom. Newsprint costs have increased slightly during the first
nine months of 1997. There are no significant increases expected for the
remainder of the year.
Compensation costs for the third quarter 1997 increased $10.6 million or 6.1%
to $185.6 million from $175.0 million in the same period in the prior year due
to both annual compensation increases and to acquisitions. Compensation costs
as a percentage of sales were 35.4% and 35.3%, for the third quarter of 1997
and 1996, respectively. For the nine months ended September 30, 1997
compensation costs increased $6.7 million or 1.2% to
10
<PAGE> 13
$544.6 million from $537.9 million in 1996. As a percentage of sales
compensation costs decreased to 34.0% for the first nine months of 1997 from
35.6% for the first nine months of 1996.
Depreciation and amortization increased $3.9 million for the third quarter 1997
from the comparable period in the prior year and $14.0 million for the nine
months ended September 30, 1997 compared to the same period in the prior
year. Increased depreciation and amortization resulted from the acquisitions
by Southam and the Community Group and increased ownership of Southam acquired
in December 1996 and July 1997 and the August 1996 buyout of the Telegraph
minority.
Interest expense increased $4.6 to $28.3 million for the third quarter of 1997
from $23.7 million in 1996. For the nine months ended September 30, 1997
interest expense increased $27.4 million to $83.9 million from $56.5 million in
1996. The Company increased its borrowings in 1996 to fund the purchase of the
additional interests in Southam, the buyout of The Telegraph minority and
acquisitions of community newspapers offset, in part, by proceeds received on
the sale of the Fairfax investment; borrowings were also increased in 1997 to
fund the acquisition of the additional interest in Southam in July 1997.
Amortization of debt issue costs represents debt issue costs on the Senior
Subordinated Notes issued in February 1996 and the Senior Notes and Senior
Subordinated Notes issued in February 1997 and the Publishing Credit Facility.
Equity in net earnings of affiliates decreased from $2.6 million in the third
quarter of 1996 to $0.3 million in 1997 due to the sale of the interest in
Fairfax and the sale of a division of the chicago joint venture. For the nine
months ended September 30, 1997 equity in net earnings of affiliates was $5.9
million compared to $5.6 million in 1996. The increase for the first nine
months of 1997 is due to a gain of $5.2 million on the sale of a division at
the Chicago joint venture offset by the decrease in equity earnings as a result
of the sale of the interest in Fairfax. In December 1996, the Company announced
the sale in three tranches of its interest in Fairfax. The first tranche was
sold in December 1996. Proceeds of $239.0 million from the sale of the second
and third tranches were received in the first quarter of 1997. A pre-tax gain
of $65.2 million was recognized on the sale of the second and third tranches
and is included in other income for the nine months ended September 30, 1997.
11
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Amount Amount Amount Amount
------ ------ ------ ------
Operating revenues: (dollar amounts in thousands) (dollar amounts in thousands)
<S> <C> <C> <C> <C>
United States Newspaper Group $ 156,625 $149,478 $ 462,966 $ 445,565
U.K. Newspaper Group 109,099 104,161 359,435 329,217
Canadian Newspaper Group 257,934 241,527 777,521 737,939
---------- -------- ----------- -----------
Total operating revenue $ 523,658 $495,166 $ 1,599,922 $ 1,512,721
========== ======== =========== ===========
Operating income (loss):
United States Newspaper Group $ 19,034 $ 20,764 $ 64,066 $ 42,703
U.K. Newspaper Group 246 (2,154) 17,158 17,799
Canadian Newspaper Group 26,412 12,391 106,056 44,838
---------- -------- ----------- -----------
Total operating income $ 45,692 $ 31,001 $ 187,280 $ 105,340
========== ======== =========== ===========
EBITDA:
United States Newspaper Group $ 30,464 $ 30,601 $ 95,456 $ 72,539
U.K. Newspaper Group 4,702 2,486 30,620 27,283
Canadian Newspaper Group 40,590 24,075 147,301 77,582
---------- -------- ----------- -----------
Total EBITDA $ 75,756 $ 57,162 $ 273,377 $ 177,404
========== ======== =========== ===========
Operating revenues:
United States Newspaper Group 29.9% 30.2% 28.9% 29.4%
U.K. Newspaper Group 20.8% 21.0% 22.5% 21.8%
Canadian Newspaper Group 49.3% 48.8% 48.6% 48.8%
---------- ------- ----------- -----------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
========== ======== =========== ===========
Operating income (loss):
United States Newspaper Group 41.7% 67.0% 34.2% 40.5%
U.K. Newspaper Group 0.5% (7.0)% 9.2% 16.9%
Canadian Newspaper Group 57.8% 40.0% 56.6% 42.6%
---------- ------- ----------- -----------
Total operating income 100.0% 100.0% 100.0% 100.0%
========== ======== =========== ===========
EBITDA:
United States Newspaper Group 40.2% 53.5% 34.9% 40.9%
U.K. Newspaper Group 6.2% 4.4% 11.2% 15.4%
Canadian Newspaper Group 53.6% 42.1% 53.9% 43.7%
---------- ------- ----------- -----------
Total EBITDA 100.0% 100.0% 100.0% 100.0%
========== ======== =========== ===========
EBITDA Margin:
United States Newspaper Group 19.5% 20.5% 20.6% 16.3%
U.K. Newspaper Group 4.3% 2.4% 8.5% 8.3%
Canadian Newspaper Group 15.7% 10.0% 18.9% 10.5%
Total EBITDA Margin 14.5% 11.5% 17.1% 11.7%
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Amount Amount Amount Amount
------ ------ ------ ------
United States Newspaper Group (dollar amounts in thousands) (dollar amounts in thousands)
<S> <C> <C> <C> <C>
Operating revenue
Advertising $ 106,879 $ 97,422 $ 313,165 $ 290,907
Circulation 36,526 35,920 111,449 108,395
Job printing and other 13,220 16,136 38,352 46,263
--------- ---------- ---------- ----------
Total operating revenue 156,625 149,478 462,966 445,565
--------- ---------- ---------- ----------
Operating costs
Newsprint 21,704 25,690 64,632 85,914
Compensation costs 58,193 52,826 171,591 161,712
Other operating costs 46,264 40,361 131,287 125,400
Depreciation and amortization 11,430 9,837 31,390 29,836
--------- ---------- ---------- ----------
Total operating costs 137,591 128,714 398,900 402,862
--------- ---------- ---------- ----------
Operating income $ 19,034 $ 20,764 $ 64,066 $ 42,703
========= ========== ========== ==========
U.K. Newspaper Group
Operating revenue
Advertising $ 74,575 $ 62,773 $ 248,104 $ 199,224
Circulation 31,296 38,021 98,738 119,895
Job printing and other 3,228 3,367 12,593 10,098
--------- ---------- ---------- ----------
Total operating revenue 109,099 104,161 359,435 329,217
--------- ---------- ---------- ----------
Operating costs
Newsprint 20,094 25,689 64,902 79,953
Compensation costs 21,294 19,641 64,777 55,661
Other operating costs 55,604 56,345 176,945 166,320
Direct subscription campaign costs 7,405 - 22,191 -
Depreciation and amortization 4,456 4,640 13,462 9,484
--------- ---------- ---------- ----------
Total operating costs 108,853 106,315 342,277 311,418
--------- ---------- ---------- ----------
Operating income (loss) $ 246 $ (2,154) $ 17,158 $ 17,799
========= ========== ========== ==========
Canadian Newspaper Group
Operating revenue
Advertising $ 183,375 $ 153,318 559,597 481,761
Circulation 64,160 65,853 185,270 195,077
Job printing and other 10,399 22,356 32,654 61,101
--------- ---------- ---------- ----------
Total operating revenue 257,934 241,527 777,521 737,939
--------- ---------- ---------- ----------
Operating costs
Newsprint 33,222 30,819 94,400 103,372
Compensation costs 106,149 102,520 308,206 320,525
Other operating costs 77,973 84,113 227,614 236,460
Depreciation and amortization 14,178 11,684 41,245 32,744
--------- ---------- ---------- ----------
Total operating costs 231,522 229,136 671,465 693,101
--------- ---------- ---------- ----------
Operating income $ 26,412 $ 12,391 $ 106,056 $ 44,838
========= ========== ========== ==========
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Percentage Percentage Percentage Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States Newspaper Group
Operating revenue
Advertising 68.2% 65.2% 67.6% 65.3%
Circulation 23.3% 24.0% 24.1% 24.3%
Job printing and other 8.5% 10.8% 8.3% 10.4%
------ ------ ------ ------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating costs
Newsprint 13.9% 17.2% 14.0% 19.3%
Compensation costs 37.2% 35.3% 37.1% 36.3%
Other operating costs 29.5% 27.0% 28.4% 28.1%
Depreciation and amortization 7.3% 6.6% 6.8% 6.7%
------ ------ ------ ------
Total operating costs 87.9% 86.1% 86.3% 90.4%
------ ------ ------ ------
Operating income 12.1% 13.9% 13.7% 9.6%
====== ====== ====== ======
U.K. Newspaper Group
Operating revenue
Advertising 68.3% 60.3% 69.0% 60.5%
Circulation 28.7% 36.5% 27.5% 36.4%
Job printing and other 3.0% 3.2% 3.5% 3.1%
------ ------ ------ ------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating costs
Newsprint 18.4% 24.7% 18.1% 24.3%
Compensation costs 19.5% 18.9% 18.0% 16.9%
Other operating costs 51.0% 54.1% 49.1% 50.5%
Direct subscription campaign costs 6.8% - 6.2% -
Depreciation and amortization 4.1% 4.4% 3.7% 2.8%
------ ------ ------ ------
Total operating costs 99.8% 102.1% 95.1% 94.5%
------ ------ ------ ------
Operating income (loss) 0.2% (2.1)% 4.9% 5.5%
====== ====== ====== ======
Canadian Newspaper Group
Operating revenue
Advertising 71.1% 63.4% 72.0% 65.3%
Circulation 24.9% 27.3% 23.8% 26.4%
Job printing and other 4.0% 9.3% 4.2% 8.3%
------ ------ ------ ------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating costs
Newsprint 12.9% 12.8% 12.1% 14.0%
Compensation costs 41.2% 42.4% 39.6% 43.4%
Other operating costs 30.2% 34.8% 29.3% 32.0%
Depreciation and amortization 5.5% 4.8% 5.3% 4.5%
------ ------ ------ ------
Total operating costs 89.8% 94.8% 86.3% 93.9%
------ ------ ------ ------
Operating income 10.2% 5.2% 13.7% 6.1%
====== ====== ====== ======
</TABLE>
14
<PAGE> 17
GROUP OPERATING RESULTS
UNITED STATES NEWSPAPER GROUP
United States Newspaper Group operating revenues increased 4.8% for the third
quarter 1997 and 3.9% for the nine months ended September 30, 1997 over the
prior year. Advertising revenues grew 9.7% and 7.7% in the third quarter and
nine months ended September 30, 1997, respectively, primarily due to the
strengthening of the advertising market. The increase in advertising revenues
was offset, in part, by declines in job printing revenue resulting from the
loss of certain printing contracts in the Chicago area. Chicago Group
operating revenues increased approximately 1.0% for both the third quarter and
the nine months ended September 30, 1997 compared to the same periods in the
prior year. The Community Group operating revenues increased 9.6% and 7.6% in
the third quarter and the nine months ended September 30, 1997 compared to the
respective periods in 1996. Acquisitions during 1996 and 1997 at the Community
Group added $8.8 million and $37.4 million to revenues for the third quarter
1997 and the nine months ended September 30, 1997, respectively.
Operations in the Community Group were affected by acquisitions and disposals.
On a "same store" basis the Community Group revenues and EBITDA were $60.3
million and $18.5 million, respectively, for the third quarter of 1997 compared
to $57.9 million and $16.9 million, respectively, in 1996. For the nine months
ended September 30, 1997, Community Group "same store" revenues and EBITDA were
$160.0 million and $48.7 million, respectively, compared to $156.4 million and
$44.5 million, respectively, in 1996.
EBITDA in total for the United States Newspaper Group for the third quarter
1997 decreased slightly to $30.5 million from $30.6 million in 1996. However,
for the nine months ended September 30, 1997 EBITDA increased $23.0 million
or 31.7% to $95.5 million from $72.5 million in 1996. Acquisitions at the
Community Group added $2.8 million and $12.1 million to EBITDA for the third
quarter and nine months ended September 30, 1997, respectively. Third quarter
operating income of the United States Newspaper Group decreased 8.7% to $19.0
million in 1997 from $20.8 million in the prior year. For the nine months
ended September 30, 1997, operating income increased 50.1% to $64.1 million
from $42.7 million in the prior year. Newsprint expense declined by 15.5% and
24.8% for the third quarter and the nine months ended September 30, 1997,
compared to the respective periods in the prior year.
Compensation costs as a percentage of sales increased for the third quarter
1997 to 37.2% from 35.3% in 1996. For the nine months ended September 30, 1997
compensation costs as percentage of sales were 37.1% compared to 36.3% of sales
for the comparative period in the prior year. The increases are primarily due
to standard salary increases and addition of staff in the advertising areas due
to the strength of the advertising market. Other operating costs, as a
percentage of sales, increased to 29.5% for the third quarter 1997 compared to
27.0% in 1996. This increase in percentage of sales is caused in part by lower
than normal other costs in 1996 as the result of reserve adjustments made
during the third quarter of 1996 and third quarter 1997 includes an increase in
corporate overhead allocations. Other operating costs remained consistent at
approximately 28% of sales for the first nine months of 1997 and 1996.
Depreciation and amortization increased $1.6 million for both the third quarter
1997 and the nine months ended September 30, 1997 in comparison to the
respective periods in the prior year. The increases are primarily due to
acquisitions at the Community Group.
15
<PAGE> 18
U.K. NEWSPAPER GROUP
Third quarter operating revenues for the U.K. Newspaper Group increased 4.7% to
$109.1 million in 1997 from $104.2 million in 1996 and for the nine months
ended September 30, 1997 increased 9.2% to $359.4 million from $329.2 million
in 1996. The majority of the increase was from growth in advertising revenues
offset, in part, by decreased circulation revenues.
The U.K. Newspaper Group's operating income for the third quarter of 1997
increased $2.4 million to $0.2 million in 1997 from a loss of $2.2 million in
1996 and for the nine months ended September 30, 1997 decreased $0.6 million
from the same period in 1996. Costs, net of subscription revenue, related to
the direct subscription campaign had a significant impact on operating income
for both the third quarter and the nine months ended September 30, 1997, but
the impact was offset, in part, by the increase in advertising revenues.
Newsprint costs for the third quarter of 1997 were $24.8 million (including
$4.7 million of newsprint costs associated with the direct subscription
campaign) compared with $25.7 million in 1996. For the first nine months of
1997 newsprint costs were $77.3 million (including $12.4 million of newsprint
costs associated with the direct subscription campaign) compared with $80.0
million in the comparable period of 1996. The effect of lower newsprint prices
was almost entirely offset by increased consumption related to higher
circulation and a greater number of pages in the newspaper largely as a result
of increased advertising. Compensation costs increased for both the third
quarter and the nine months ended September 30, 1997 primarily as a result of
advertising bonuses given related to the increase in advertising revenues,
general salary increases, and an addition of staff resulting from the launch of
a new Sunday magazine. Costs of the new magazine and increased editorial were
the primary factors in the increase in other operating costs for the nine
months ended September 30, 1997.
CANADIAN NEWSPAPER GROUP
Third quarter operating revenues for the Canadian Newspaper Group increased
6.8% or $16.4 million from $241.5 million in 1996 to $257.9 million in 1997.
Operating revenues for the nine months ended September 30, 1997 grew 5.4% to
$777.5 million from $737.9 million in 1996. Advertising revenues increased
$30.1 million in the third quarter of 1997 and $77.8 million for the nine
months ended September 30, 1997 compared to the prior year. The increase in
advertising revenue was offset in part, by decreases in circulation revenue due
primarily to the disposal by Southam in the second quarter of 1996, of its
information technology group. Acquisitions at Southam added $20.2 million in
revenues and $4.9 million to EBITDA for the third quarter of 1997 and $65.6
million in revenues and $17.3 million to EBITDA for the nine months ended
September 30, 1997.
Operating income for the Canadian Newspaper Group increased by $14.0 million
from $12.4 million in the third quarter of 1996 to $26.4 million in 1997. The
increase in operating income for nine months ended September 30,1 997 was $61.3
million to $106.1 million from $44.8 million in 1996. Operations at Southam
were affected by acquisitions and disposals. On a "same store" basis, revenue
and EBITDA were $186.2 million and $30 million, respectively for the third
quarter of 1997 compared to $169.6 million and %16.2 million, respectively, in
1996. For the nine months ended September 30, 1997, Southam "same store"
revenues and EBDITDA were $550.2 million and $103.2 million, respectively, for
the third quarter of 1997 compared to $517.7 million and $54.1 million,
respectively, in 1996.
These significantly improved "same store" operating results for both the third
quarter of 1997 and nine months ended September 30, 1997 compared with
1996 are the result of increased advertising and circulation revenues, lower
newsprint prices, offset in part by increased consumption, and lower
compensation costs.
Operating revenue for the Canadian Newspaper operations increased by $4.5
million from $47.0 million in the third quarter of 1996 to $51.5 million in
1997 and for the nine months ended September 30 increased $9.1 million from
$152.9 million in 1996 to $162.0 million in 1997.
Operating income increased by $2.1 million from $3.4 million in the third
quarter of 1996 to $5.5 million in 1997 and for the nine months ended September
30 increased by $11.2 million from $11.4 million in 1996 to $22.6 million in
1997. This increase results primarily from increased advertising revenue and
lower newsprint costs. Depreciation and amortization for both the third quarter
1997 and nine months ended September 30, 1997 increased compared with
16
<PAGE> 19
1996 primarily as a result of increased intangible assets arising from the
greater percentage ownership of Southam.
17
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital consists of current assets less current liabilities. Working
capital was $48.9 million at September 30, 1997 compared to a working capital
deficiency of $685.2 million at December 31, 1996. The improvement is the
result of the repayments of short term debt and the second quarter payment to
Hollinger Inc., related to the transfer of the Canadian Newspapers using the
proceeds from the Fairfax sale and partial proceeds from the Notes Offering.
Current assets were $436.8 million at September 30, 1997 compared with $523.7
million at December 31, 1996. The decrease was due to a reduction in cash
which was used primarily for acquisitions and capital expenditures and a
reduction in accounts receivable. The decrease in cash and accounts receivable
was offset by a receivable due from Hollinger Inc. and an increase in
inventories and other current assets. Current liabilities, excluding debt
obligations were $352.6 million at September 30, 1997, compared with $669.6
million at December 31, 1996. The decrease primarily is due to the payment to
Hollinger Inc. in the second quarter related to the transfer of Canadian
Newspapers.
DEBT
Current debt obligations, excluding the current portion of long term debt,
included in current liabilities were $503.4 million at December 31, 1996. The
proceeds from the issuance of the Senior Notes and Senior Subordinated Notes in
the first quarter of 1997 were used to pay down the bank loans that were
outstanding at December 31, 1996. There was no short term bank debt
outstanding as of September 30, 1997. Long-term debt, including the current
portion, was $1,467.3 million at September 30, 1997 compared with $711.3
million at December 31, 1996. The increase is primarily due to the issuance in
March 1997 of $550.0 million of the Senior Notes and Senior Subordinated Notes
and the drawdown of the Bank Credit Facility for the purchase of the Canadian
Newspapers and of the additional Southam interest in July 1997.
1997 OFFERINGS
On March 4, 1997, Publishing filed both a Preliminary Prospectus and a
Preliminary Prospectus Supplement offering $200 million of Senior Notes due
2005 (the "Senior Notes") and $200 million of Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") pursuant to its universal shelf
registration statements. On March 12, 1997, Publishing increased the size of
the offerings to $550.0 million, which closed on March 18, 1997. Both the
Senior Notes and Senior Subordinated Notes are guaranteed by the Company.
The Senior Notes are unsecured senior obligations of Publishing and rank
pari-passu with all other senior indebtedness of Publishing including
Publishing's bank credit facilities. The Senior Notes mature on March 15, 2005
and bear interest at 8.625% per annum. The Senior Subordinated Notes are
unsecured senior subordinated obligations of Publishing and rank pari-passu
with all other senior subordinated indebtedness of Publishing including its
existing 9 1/4% Senior Subordinated Notes due 2006. The Senior Subordinated
Notes mature on March 15, 2007 and bear interest payable semi-annually at a
rate of 9.25% per annum. The Indentures relating to the Senior Notes and the
Senior Subordinated Notes contain financial covenants and negative covenants
that limit Publishing's ability to, among other things, incur indebtedness, pay
dividends or make other distributions on its capital stock.
18
<PAGE> 21
Publishing and its restricted subsidiaries utilized the proceeds of these
offerings to repay indebtedness, to repay redeemable preference shares of DTH
and FDTH and for general working capital.
BANK CREDIT FACILITY
On April 7, 1997, Publishing, HCPH, The Telegraph and certain financial
instituted entered into a new long-term bank credit facility (the "Bank Credit
Facility"). The purchase price of the Canadian Newspapers was financed in part
through a $175 million borrowing by HCPH under the Bank Credit Facility. The
Bank Credit Facility originally provided for up to $900 million in total credit
availability under four tranches with available borrowings by The Telegraph
limited to $150 million, available borrowings by HCPH limited to $750 million,
and available borrowings by Publishing limited to $900 million, less amounts
outstanding under other tranches, with maximum borrowings in each case limited
by financial statement covenants. In July 1997, the Company reduced its total
available commitments to $515 million and reduced the HCPH tranche to $365
million. The Bank Credit Facility matures on March 15, 2004 with required
reductions in availability equal to 6.25% of the commitment per calendar quarter
commencing on June 30, 2000.
Loans under the Bank Credit Facility bear interest, at the option of the
respective borrower, at a rate per annum tied to specified floating rates or a
reserve adjusted Eurocurrency rate, in each case plus a specified margin
determined based on leverage ratios. The obligations of each borrower under
the Bank Credit Facility are guaranteed by the Company and by each U.S.
subsidiary (other than American Publishing (1991) Inc. ("AP-91"), which
provides a partial guaranty). The obligations of HCPH are guaranteed in whole
or in part by each of its wholly owned Canadian subsidiaries and by The
Telegraph and its subsidiaries. The obligations of The Telegraph are
guaranteed in whole or in part by each United Kingdom ("U.K.") subsidiary and
by HCPH and each of its Canadian subsidiaries.
The obligations of all borrowers under the Bank Credit Facility are secured by
a pledge by the Company of all stock of Publishing, the pledge by Publishing
and its restricted subsidiaries of the stock of their United States
subsidiaries (other than AP-91 and its subsidiaries), certain intercompany
notes and security agreements, and portions of the stock of certain Canadian
and U.K. subsidiaries. The obligations of HCPH and the Canadian and U.K.
subsidiaries which have guaranteed its debt are secured by all or part of the
pledge of the stock of the Canadian subsidiaries, including approximately 58%
of the stock of Southam, and all or part of the stock of The Telegraph and the
U.K. subsidiaries. The obligations of The Telegraph and the Canadian and U.K.
subsidiaries which have guaranteed its debt are secured by the pledge of all or
part of the stock of the U.K. subsidiaries, and all or part of the stock of The
Telegraph and the Canadian subsidiaries.
The parties to the Bank Credit Facility entered into a First Amendment
Agreement to the Bank Credit Facility (the "First Amendment") dated May 12,
1997. The First Amendment amends certain terms and conditions of the Bank
Credit Facility to permit HCPH to bid for the remaining shares of Southam not
currently owned by it. The First Amendment allows for the Southam offer as an
"Approved Acquisition" and modifies certain definitions, representations and
covenants to account for, among other things, the issuance of the HCPH Special
Shares, the operation of the Exchange Indenture, approval by the lenders of the
bid circular and related
19
<PAGE> 22
documentation, and the provision and timing of additional security under the
Bank Credit Facility. The parties to the Bank Credit Facility have entered
into a Second Amendment Agreement to the Bank Credit Facility (the "Second
Amendment") dated June 23, 1997. The Second Amendment amends certain terms and
conditions of the Bank Credit Facility primarily to allow HCPH to take up less
than all of the outstanding Southam shares and allow Publishing to pay up to
$20 million in dividends to the Company for Class A Common Stock repurchases.
REDEEMABLE PREFERRED STOCK
In May and June 1997, The Company's subsidiaries, DTH and FDTH, paid
approximately $116.9 million in respect of the redemption of their redeemable
preferred stock. In June 1997 DTH purchased 100% of the common shares of
Argsub from Argus Corporation Limited. Argsub is the holder of $401.2 million
preference shares of FDTH. As a result of this acquisition, the consolidated
financial statements include the accounts of Argsub and therefore this results
in the elimination of the investment in Argsub preference shares which was
previously disclosed as other investments and of the FDTH share capital which
was previously disclosed as redeemable preferred stock.
EBITDA
EBITDA, which represents the Company's earnings before interest expense,
amortization of debt issue costs, income taxes, depreciation and amortization,
minority interest, equity in earnings of affiliates and other income was $75.8
million for the third quarter of 1997 compared with $57.2 million for the same
period in 1996 and $273.4 million for the nine months ended September 30, 1997
compared to $177.4 million in 1996. The Company believes that EBITDA is
important to its ability to fund current operations and to service debt. The
significant number of acquisitions made by the Company which have resulted in
non-cash charges for depreciation and amortization have reduced net earnings,
but have not affected EBITDA.
CASH FLOWS
Cash flows from operating activities were $134.7 million in 1997, compared with
$124.4 million in 1996. Excluding changes in working capital (other than
cash), cash provided by operating activities was $180.2 million in 1997 and
$113.0 million in 1996.
Cash flows related to investing activities were an inflow of $40.3 million in
1997, largely related to the sale of the interest in Fairfax, and an outflow of
$864.4 million in 1996, due largely to the buyout of the minority of the
Telegraph and acquisitions at the Canadian Newspaper Group made by Hollinger
Inc.
Cash flows related to financing activities were a net outflow of $242.6 million
in 1997. Net cash inflows of $860.3 million in 1996 were primarily the result
of the equity and debt offering in February 1996 and the two equity offerings
in August 1996.
20
<PAGE> 23
CAPITAL EXPENDITURES AND ACQUISITION FINANCING
The United States Newspaper Group, the U.K. Newspaper Group and the Canadian
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,
proceeds from the Company's initial public offering in May 1994, concurrent
debt and equity offerings in February 1996, concurrent equity offerings in
August 1996 and a debt offering in March 1997.
The Chicago Sun-Times announced a commitment to purchase six new printing
presses in connection with the construction of its $100 million state of the
art printing facility. The facility is expected to be operational in 1999.
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 D Redeemable Preferred Stock.
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 Publishing and other
subsidiaries of the Company contain such restrictive provisions. As of
September 30, 1997, the total amount of funds that would be unrestricted as to
payment of dividends by Publishing under its debt instruments would, under the
most restrictive provisions, have been approximately $26.3 million. The
foregoing calculation is based on the sum of the following for the period
January 1, 1997 to September 30, 1997: (i) 50% of the sum of (x) consolidated
net income of Publishing and its Restricted Subsidiaries or if it is a loss,
reduced by 100% of such loss, and (y) amortization expense of Publishing and
its subsidiaries; (ii) 50% of the cash dividends received by Publishing and its
restricted subsidiaries from any unrestricted subsidiaries; 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. The Company's subsidiary, American
Publishing (1991) Inc. also is party to an agreement that limits its respective
ability 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.
21
<PAGE> 24
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 the Form 10-K for
a discussion of factors that may affect such statements.
22
<PAGE> 25
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 report on Form 8-K under Item 5 on
July 14, 1997.
23
<PAGE> 26
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: November 14, 1997 By: /S/ J. A. Boultbee
-----------------------
J. A. Boultbee
Vice President, and
Chief Financial Officer
24
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