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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____ to _____
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 (I.R.S. Employer Identification Number)
of incorporation or organization)
401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (312) 321-2299
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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Class A Common Stock par value $.01 per share New York Stock Exchange
9 1/4% Senior Subordinated Notes due 2006 New York Stock Exchange
9 3/4% Preferred Redeemable Increased Dividend New York Stock Exchange
Equity Securities
8 5/8% Senior Notes due 2005 New York Stock Exchange
9 1/4% Senior Subordinated Notes due 2007 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Class A Common Stock held by non-affiliates
as of March 16, 1998, was approximately $571,648,000. As of such date,
non-affiliates held no shares of Class B Common Stock. There is no active
market for the Class B Common Stock.
The number of outstanding shares of each class of the registrant's common
stock as of March 16, 1998, was as follows: 71,577,799 shares of Class A
Common Stock and 14,990,000 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT LOCATION
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Proxy Statement for 1998 Annual Meeting of Stockholders filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934...................Part III
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HOLLINGER INTERNATIONAL INC.
1997 FORM 10-K
______________
PART I PAGE
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Item 1. Business ................................................... 1
Item 2. Properties ................................................. 25
Item 3. Legal Proceedings .......................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ........ 26
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ........................................ 29
Item 6. Selected Financial Data .................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 33
Item 8. Financial Statements and Supplementary Data ................ 52
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 52
PART III
Item 10. Directors and Executive Officers of
the Registrant ............................................ 53
Item 11. Executive Compensation .................................... 53
Item 12. Security Ownership of Certain Beneficial
Owners and Management ..................................... 53
Item 13. Certain Relationships and Related Transactions ............ 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 54
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PART I
ITEM 1. BUSINESS
OVERVIEW
Hollinger International Inc. (the "Company"), through subsidiaries and
affiliated companies, is a leading publisher of English-language newspapers in
the United States, the United Kingdom, Canada and Israel. Included among the
167 paid daily newspapers, which the Company owns or has an interest in, are
the Chicago Sun-Times, The Daily Telegraph and the Ottawa Citizen. These 167
newspapers have a worldwide daily combined circulation of approximately
4,504,000. In addition, the Company owns or has an interest in 361 non-daily
newspapers as well as magazines and other publications. The Company's strategy
is to achieve growth through acquisitions and improvements in the cash flow and
profitability of its newspapers. Since the Company's formation in 1986, the
existing senior management team has acquired over 400 newspapers and related
publications (net of dispositions) in the United States, The Daily Telegraph in
the United Kingdom, The Jerusalem Post in Israel, and has made significant
investments in newspapers in Canada, including a controlling interest in
Southam Inc. ("Southam"), Canada's largest newspaper publisher and the
acquisition of the Canadian Newspapers in 1997 from Hollinger Inc. In December
1996 and the first quarter of 1997 the Company sold its 24.7% interest in John
Fairfax Holdings Limited ("Fairfax"), a publicly held Australian newspaper
publisher.
The operations of the Company consist of its United States Newspaper
Group, its U.K. Newspaper Group, and Canadian Newspaper Group which accounted
for 29%, 22% and 49%, respectively, of the Company's total operating revenues
of $2,211.5 million for the year ended December 31, 1997.
Unless the context requires otherwise, all references herein to the
"Company" mean Hollinger International Inc., its predecessors and combined
subsidiaries, "Publishing" refers to Hollinger International Publishing Inc.
and "Hollinger Inc." refers to Hollinger Inc.
UNITED STATES NEWSPAPER GROUP
The Company's United States operations consist of its Chicago Group, led
by the Chicago Sun-Times, the eighth largest circulation metropolitan daily
newspaper in the United States, and its Community Group, consisting of 324
newspapers and related publications. As of December 31, 1997, the Company
published a total of 402 newspapers and related publications in the United
States consisting of 107 daily newspapers with a total paid circulation of
approximately 1,272,000, 141 paid non-daily newspapers with a combined paid
circulation of approximately 1,191,000 and 154 free circulation publications
with a combined circulation of approximately 2,354,000, and a total combined
circulation of approximately 4,817,000. For accounting and management purposes,
the Community Group also includes the Company's wholly-owned subsidiary
("Jerusalem Post") which publishes The Jerusalem Post, Israel's most important
English-language daily newspaper, with a paid daily circulation of
approximately 14,700. The related weekend edition of The Jerusalem Post,
including the English and French-language international weekly editions, have a
combined paid circulation of approximately 120,000. The Chicago Group and the
Community Group accounted for 15.4% and 13.2%, respectively, of the Company's
total operating revenues for the year ended December 31, 1997.
U.K. NEWSPAPER GROUP
The Company's U.K. Newspaper Group consists of its wholly owned
subsidiary, The Telegraph Group Limited and its consolidated subsidiaries ("The
Telegraph"). The Telegraph publishes The Daily Telegraph, the leading quality
(or broadsheet) newspaper in the United Kingdom. The Telegraph also publishes
The Sunday Telegraph, The Weekly Telegraph, the Electronic Telegraph and The
Spectator magazine. The Daily Telegraph is the largest circulation quality
daily newspaper in the United Kingdom with an average daily circulation of
approximately 1,111,000, representing a 39% share of the quality daily
newspaper market. The Daily Telegraph's Saturday edition has the highest
average daily circulation (approximately 1,273,000) among quality daily
newspapers in the United Kingdom. The Sunday Telegraph is the second largest
circulation quality Sunday newspaper in the United Kingdom with an average
Sunday circulation of approximately 890,000. The Telegraph's operating
revenues were $492.3 million for the year ended December 31, 1997.
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On December 16, 1996, the Company announced that Daily Telegraph Holdings
BV ("DTH BV"), a Dutch subsidiary of The Telegraph, had agreed conditionally to
sell its 24.7% interest in Fairfax to three Australian subsidiaries of Brierley
Investments Limited ("BIL") of New Zealand. The first tranche of the sale
consisted of a 12.0% interest and was completed on December 20,1996 for gross
cash proceeds of A$254.8 million ($202.3 million). The second tranche consisted
of a 7.9% interest, including seven million non-voting convertible debentures
and was completed on January 10, 1997 for gross cash proceeds of A$192.2 million
($150.3 million). The Company sold its remaining 4.8% interest on March 27,
1997 for gross cash proceeds of A$112.5 million ($88.7 million).
CANADIAN NEWSPAPER GROUP
The Company's Canadian Newspaper Group consists of its 58.6% equity
interest in Southam and its consolidated subsidiaries and the Canadian
Newspapers.
During 1997, the Company increased its indirect interest in Southam from
50.7% to 58.6%. Southam is a publicly held Canadian corporation with
operations in newspaper publishing, and to a lesser extent, in business
communications. Southam is Canada's largest publisher of daily newspapers with
33 daily newspapers and 58 non-daily newspapers with a total daily circulation
of approximately 1,600,000. Southam's principal publications include The
Gazette (Montreal), The Ottawa Citizen, the Calgary Herald, The Vancouver Sun,
The Province (Vancouver) and The Edmonton Journal. In addition, the Southam
Magazine and Information Group publishes Canadian and United States business
magazines and tabloids for the automotive, trucking, construction, natural
resources, manufacturing and other industries. Southam's operating revenues
were $861.8 million for the year ended December 31, 1997.
The Canadian Newspapers consist of ten daily, five non-daily and 18 free
distribution newspapers located in Ontario, four daily, one non-daily and
six free distribution newspapers located in Saskatchewan, eight daily, five
non-daily and 10 free distribution newspapers located in British Columbia and
three daily, one non-daily and 11 free distribution newspapers in Quebec.
Total paid daily circulation for the Canadian Newspapers is approximately
475,000. Canadian Newspapers' operating revenues were $223.9 million for the
year ended December 31, 1997.
REORGANIZATION
On October 13, 1995 the Company acquired Hollinger Inc.'s indirect 58.2%
interest in The Telegraph, including The Telegraph's approximate 24.7% interest
in Fairfax and its approximate 19.4% voting interest in Southam, and its
rights and obligations under an option pursuant to which Hollinger Inc. had the
right to purchase 7,000,000 ordinary shares of The Telegraph (the "Telegraph
Option"), in exchange for 33,610,754 shares of the Company's Class A Common
Stock, par value $.01 per share ("Class A Common Stock"), 739,500 shares of its
Series A Preferred Stock, par value $.01 per share ("Series A Preferred Stock")
which are convertible to Class A Common Stock at an initial conversion price of
the Canadian dollar equivalent of $14 per share and paid Hollinger Inc.
$13,832,000 in cash as a working capital adjustment (the "Reorganization"). The
Series A Preferred Stock was subsequently exchanged for Series D Preferred
Stock. The Company also exercised the Telegraph Option which increased its
interest in The Telegraph to 63.5%. On December 15, 1995, the Company,
through an English subsidiary, acquired an additional 995,000 ordinary shares
of The Telegraph for approximately $6.9 million, thereby increasing its total
interest in The Telegraph to approximately 64% of the outstanding ordinary
shares. On August 8, 1996, the Company acquired of all of the outstanding
ordinary shares of The Telegraph (approximately 36%) not previously controlled
by it (the "Telegraph Minority Shares") for apprximately $455.7 million. As a
result, the Telegraph became an indirect wholly owned subsidiary of the
Company.
REORGANIZATION OF CANADIAN NEWSPAPER INTERESTS
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 wholly owned Canadian publishing interests directly or
indirectly to Hollinger Canadian Publishing Holdings Inc. ("HCPH"), including
newspaper assets located mainly in Ontario, Saskatchewan, British Columbia, and
UniMedia, Inc. (collectively the "Canadian Newspapers") for an aggregate
consideration of approximately $382.0 million (Cdn.$523.0 million), subject to
working capital
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adjustments and currency exchange adjustments (the "Hollinger Inc.
Transaction"). The purchase price was satisfied by payment of cash in the
amount of $250.0 million, and by the issuance of a new series 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 $90.0 million and
(ii) 3,207,245 shares of Class A Common Stock of the Company having a nominal
agreed value of $42.0 million, subject to adjustment as described above.
PUBLIC OFFERINGS
1996 OFFERINGS. On February 7, 1996, the Company completed an
underwritten public offering of 14,000,000 shares of its Class A Common Stock
at a public offering price of $9.25 per share and on February 20, 1996, the
Underwriters exercised their over-allotment option and purchased an additional
2,100,000 shares (the "Stock Offering"). Net proceeds to the Company from the
Stock Offering were approximately $142.1 million.
In addition, on February 7, 1996, Publishing, a Delaware corporation and a
wholly owned subsidiary of the Company, completed a public offering of $250
million principal amount of 9.25% Senior Subordinated Notes due February 1,
2006 (the "Notes") priced at par (the "Notes Offering"). Payment of the
principal, premium, if any, and interest on the Notes was guaranteed by the
Company on an unsecured senior subordinated basis. Net proceeds to Publishing
from the Notes Offering were approximately $242.5 million. In connection with
the consummation of the Notes Offering, the Company transferred to Publishing
all of the shares owned by it of its United States and foreign subsidiaries
together with associated debt and other liabilities.
The Company applied the net proceeds of the Stock Offering and the Notes
Offering to (i) repay in full outstanding bank debt of the Company and its
subsidiaries in the aggregate principal amount of $290 million, plus accrued
interest of $3.5 million; and (ii) repay $20.8 million due to Hollinger Inc.
The remaining net proceeds, after paying accrued interest and costs associated
with this offering, were added to the Company's cash and cash equivalents for
general corporate purposes.
In a series of transactions occurring in early August 1996, the Company
sold 11,500,000 shares of Class A Common Stock at a price of $9.75 per share
and 20,700,000 9.75% Preferred Redeemable Increased Dividend Equity Securities
("PRIDES") at a price of $9.75 per PRIDES. The $301.1 million combined net
proceeds of these sales, together with the related bank financing, were used in
the acquisition of the Telegraph Minority Shares, to paydown Telegraph
indebtedness and to pay transaction costs.
1997 OFFERINGS. On March 4, 1997, Publishing filed both a Prospectus and
a 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
the Senior Subordinated Notes are guaranteed by the Company.
The Senior Notes are unsecured senior obligations of Publishing,
rank pari-passu with all other unsecured 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 bank indebtedness, to repay the redeemable preference shares
of DT Holdings Limited ("DTH") and First DT Holdings Limited ("FDTH") and for
general working capital purposes.
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OWNERSHIP BY HOLLINGER INC.
Hollinger Inc. directly and indirectly owns 59.9% of the combined equity
interest and 84.3% of the combined voting power of the outstanding Class A
Common Stock and Class B Common Stock of the Company (without giving effect to
the future issuance of Class A Common Stock in connection with the Company's
PRIDES or upon conversion of the Company's Series C Preferred Stock or Series
D Preferred Stock or the Special Shares of HCPH as defined in Note 12 of the
Consolidated Financial Statements). As a result, Hollinger Inc. will
continue to be able to control the outcome of any election of directors and to
direct management policy, strategic direction and financial decisions of the
Company and its subsidiaries. Hollinger Inc. owns all of the outstanding
Series C Preferred Stock which shall convert automatically on June
1, 2001 pursuant to the conversion formula set forth in its Certificate of
Designations and Series D Preferred Stock of the Company, which is convertible
at any time into shares of Class A Common Stock at the initial conversion price
of the Canadian dollar equivalent of $14 per share. Based on the initial
conversion price, 5,654,582 shares of Class A Common Stock would have been
issuable as of March 16, 1998.
Hollinger Inc. is effectively controlled by The Hon. Conrad M. Black,
Chairman of the Board and Chief Executive Officer of Hollinger Inc. and the
Company, through his direct and indirect ownership and control of Hollinger
Inc.'s securities. Mr. Black has advised the Company that Hollinger Inc. does
not presently intend to reduce its voting power in the Company's outstanding
Common Stock to less than 50%. Furthermore, Mr. Black has advised the Company
that he does not presently intend to reduce his voting control over Hollinger
Inc. such that a third party would be able to exercise effective control over
it.
GENERAL
The Company was incorporated in the State of Delaware on December 28, 1990
and Publishing was incorporated in the State of Delaware on December 12, 1995.
Each of the Company and Publishing has its executive offices at 401 North
Wabash Avenue, Chicago, Illinois 60611, telephone number (312) 321-2299.
BUSINESS STRATEGY
The Company's strategy for achieving growth in its newspaper business is
based on achieving two principal objectives: improvements in the cash flow and
profitability of its newspapers principally through cost reductions and revenue
enhancement and growth through acquisitions. Generally, the approach of both
the Company and Hollinger Inc. to improving profitability typically includes
measures to reduce costs, improve efficiency and enhance product quality,
including the visual quality of printed pages.
The Company's newspaper operating strategy in the U.S. Community Group is
to operate newspapers in regional clusters where feasible. This enables the
Company to market advertising on a regional basis and allows for regionalized
management which results in cost savings from reduction in overhead,
centralized purchasing and, to the extent practicable, regionalized
printing. The Company intends to generate additional cost savings
opportunities through operating efficiencies and automation in the Community
Group. Further, improvements in profitability at properties acquired during
the past three years will be emphasized.
In Chicago, the focus on overall cost reduction will continue.
Significant emphasis on continuing to increase circulation at the Chicago
Sun-Times and the continued focus on deploying human resources to sales and
marketing, both locally through a combined network of all Chicago Group
newspapers, and nationally by bringing national salesmen in-house and opening
national sales offices in major business centers. In addition, efficiencies
through automation and an upgrade of printing facilities are expected.
The focus for The Daily Telegraph will continue to be increased
circulation and resulting advertising revenue increases. The successful
prepaid subscription program will continue, albeit at higher subscription
prices than the initial introductory offer. The Company will continue to focus
on maintaining and increasing the circulation increase for The Sunday
Telegraph. Operationally, continued efficiencies in producing the newspapers
through joint ventures in West Ferry Printers and Trafford Park Printers are
expected. Through its new joint venture with Express Newspapers, Newsprint
Management and Supply Services, Ltd. ("NMSS"), The Telegraph expects to realize
efficiencies in the control of waste with a resulting decrease in newspaper
costs.
After the acquisition of the Canadian Newspapers from Hollinger Inc., the
Company intends to continue current efforts to improve the profitability of the
acquired papers and to capitalize on profitability improvements already
introduced by Hollinger Inc. The Company also intends to achieve additional
cost savings through the
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centralization of newsprint purchasing and certain other functions, such as
accounting and personnel. The Company intends to coordinate, to the extent
practicable, its newsprint purchases for its United States newspapers with
those of the Canadian Newspapers as well as Southam. To achieve greater
product quality and cost reductions, the Company, where justified by economic
and operational criteria, may regionalize production operations at its
Canadian community newspapers and may explore the feasibility of such
regionalization with Southam's newspaper operations in Canada. The Company
also intends to enhance advertising and circulation revenues by focusing on the
natural circulation and readership advantages of the particular newspapers
acquired.
Southam intends to continue to improve profitability of its existing
and newly acquired newspapers, magazines and other publications through the
implementation of the previously announced labor cost reduction program, the
decentralization of certain administrative and corporate functions, and
enhancements to editorial and product quality. By the end of 1997 Southam had
made significant progress in its staff reduction plan announced in 1995
which included the elimination of 750 positions and the write-down of redundant
assets at its Pacific Press facility in Vancouver, including printing equipment
and other operating assets. Southam installed new printing equipment at the
Pacific Press facilities which became operational in 1997, which has improved
product print quality is expected to reduce labor and other operating costs as
the equipment becomes fully operational. In addition, Southam's business
strategy includes improvement of circulation and advertising revenues by
focusing on the natural circulation or readership advantages of each newspaper
and improvement in its newsprint purchase agreements by coordinating, to the
extent practicable, its newsprint purchases with that of the Company. The
Company also intends to explore with Southam possible regional printing
arrangements between Southam's various newspapers located in different
communities throughout Canada and the Canadian Newspapers.
The Company constantly seeks newspaper acquisition candidates that are
underperforming in terms of cash flow but have a long history of publishing
within a community and, from the Company's point of view, possess strong
readership and advertiser loyalty; have the potential for increased gross
operating profit through cost reductions, revenue enhancements and synergies
with the Company's existing operations; and are available at attractive prices.
The Company expects that its future acquisitions in the United States and
Canada will be principally of community newspapers; however, the Company may
consider the acquisition of selected larger circulation publications that meet
the Company's acquisition criteria.
The Company and Hollinger Inc. have historically agreed that the Company
will be Hollinger Inc.'s principal vehicle for engaging in and effecting
acquisitions in the newspaper business and in related media businesses in the
United States, Israel and, through The Telegraph, the United Kingdom, and the
rest of the European Community (the "Telegraph Territory"). Hollinger Inc.
reserved the ability to pursue all media (including newspaper) acquisition
opportunities outside the United States, Israel and The Telegraph Territory,
and all media acquisition opportunities unrelated to the newspaper business
throughout the world.
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Certain statements contained in this report under various sections,
including but not limited to "Business Strategy" and "Management's Discussion
and Analysis", are forward-looking statements that involve risks and
uncertainties. Such statements are subject to the following important factors,
among others, which in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for the first quarter of 1998, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, the Company:
o International Holding Company Structure -- The Company is an international
holding company and its assets consist solely of investments in its
subsidiaries and affiliated companies. As a result, the Company's ability
to meet its future financial obligations is dependent upon the
availability of cash flows from its United States and foreign subsidiaries
and affiliated companies (subject to applicable withholding taxes) through
dividends, intercompany advances, management fees and other payments.
Similarly, the Company's ability to pay dividends on its common stock, its
preferred stock or its PRIDES will be limited as a result of its
dependence upon the distribution of earnings of its subsidiaries and
affiliated companies. The Company's subsidiaries and affiliated companies
are under no obligation to pay dividends and, in the case of Publishing,
and its principal United States and foreign subsidiaries, are subject to
statutory restrictions and restrictions in debt agreements that may limit
their ability to pay dividends. Substantially all of the shares of the
subsidiaries of the Company have been pledged to lenders of the Company.
The Company's right to participate in the distribution of assets of any
subsidiary or affiliated company upon its liquidation or reorganization
will be subject to the prior claims of the creditors of such subsidiary or
affiliated company, including trade creditors, except to the extent that
the Company may itself be a creditor with recognized claims against such
subsidiary or affiliated company.
o Growth Strategy -- The Company's strategy is to achieve growth through
acquisitions and improvements in the cash flow and profitability of its
newspapers, principally through cost reductions. The Company's growth
strategy presents risks inherent in assessing the value, strengths and
weaknesses of acquisition opportunities, in evaluating the costs of new
growth opportunities at existing operations and in managing the numerous
publications it has acquired and improving their operating efficiency.
While the Company believes that there are significant numbers of potential
acquisition candidates, the Company is unable to predict the number or
timing of future acquisition opportunities or whether any such
opportunities will meet the Company's acquisition criteria or, if such
acquisitions occur, whether the Company will be able to achieve improved
operating efficiencies or enhanced profitability. In addition, the
Company's acquisition strategy is largely dependent on the Company's
ability to continue to obtain financing on acceptable terms.
o Restrictions in Debt Agreements and Other Restrictive Arrangements -- The
Company and its subsidiaries have substantial leverage and
substantial debt service obligations as well as obligations under the
preferred stock of the Company and the PRIDES. The instruments
governing the terms of the principal indebtedness and redeemable preferred
stock of the Company, Publishing and its principal United States and
foreign subsidiaries contain various covenants, events of default and
other provisions that could limit the financial flexibility of the
Company, including the payment of dividends with respect to outstanding
common stock and preferred stock and the implementation of its growth
strategy.
o Cyclicality of Revenues -- Advertising and, to a lesser extent,
circulation revenues of the Company, as well as those of the newspaper
industry in general, are cyclical and dependent upon general economic
conditions. Historically, increases in advertising revenues have
corresponded with economic recoveries while decreases, as well as changes
in the mix of advertising, have corresponded with general economic
downturns and regional and local economic recessions. The Company
believes, however, that the geographic diversity of its global operations
may mitigate, to some degree, the effects of an economic downturn in any
particular market served by the Company.
o Newsprint Costs -- Newsprint represents the single largest raw
material expense of the Company's newspapers throughout the world and,
together with employee costs, is one of the most significant operating
costs. Newsprint costs vary widely from time to time. For example,
newsprint cost increased approximately 40% per metric ton in 1995 on an
industry-wide basis, and the average cost per metric ton of newsprint was
substantially higher in the first half of 1996 than in the first half of
1995. However, newsprint costs decreased significantly in the second half
of 1996, continued to decline through the second quarter of 1997 and
increased slightly in the second half of 1997. Although the Company has
implemented measures in an attempt to offset a rise in newsprint prices,
such as reducing page width and managing its return policy, price
increases have had an adverse effect on
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Company's results of operations. The Company has no effective ability to
use long term fixed price newsprint supply contracts to hedge its exposure
to price fluctuations.
o Foreign Operations and Currency Exchange Rates -- Operations outside of
the United States accounted for approximately 72.3% of the Company's
operating revenues and approximately 71.8% of the Company's operating
income for the year ended December 31, 1997. In general, the Company does
not hedge against foreign currency exchange rate risks. As a result, the
Company may experience economic loss and a negative impact on earnings with
respect to its investments and on dividends from its foreign subsidiaries,
solely as a result of currency exchange rate fluctuations.
o Newspaper Industry Competition -- Revenues in the newspaper industry are
dependent primarily upon advertising revenues and paid circulation.
Competition for advertising and circulation revenue comes from local and
regional newspapers, radio, broadcast and cable television, direct mail,
and other communications and advertising media that operate in the
Company's markets. The extent and nature of such competition is, in large
part, determined by the location and demographics of the markets and the
number of media alternatives in those markets. Some of the Company's
competitors are larger and have greater financial resources than the
Company. For example, in the Chicago metropolitan area, the Chicago
Sun-Times competes with a large established metropolitan daily and Sunday
newspaper that is the fifth largest metropolitan daily and Sunday newspaper
in the United States. In the United Kingdom, The Daily Telegraph
competes with other national newspapers, principally The Times, which over
the past several years has from time to time substantially reduced its
cover price in an effort to increase its circulation. The Daily Telegraph
has met this competition and has from time to time engaged in its own
price reduction or promotional initiatives. These competitive activities
can and have from time to time had an adverse effect on revenues and
operating costs.
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UNITED STATES NEWSPAPER GROUP
CHICAGO GROUP
The Chicago Group consists of The Sun-Times Company which, with its
subsidiaries (the "Chicago Sun-Times"), publishes the Chicago Sun-Times,
presently the eighth largest metropolitan daily newspaper in the United States,
and one suburban daily and 74 suburban weekly and biweekly newspapers in the
Chicago area.
The Chicago Sun-Times, which has an average daily paid circulation of
approximately 500,000 and is published in a tabloid format, has the largest
daily circulation in Cook County, Illinois, which includes the City of Chicago.
The suburban papers include Pioneer Newspapers Inc. ("Pioneer Press") which
currently publishes 48 weekly newspapers in Chicago's north and northwest
suburbs, 20 biweekly newspapers published by Star Publications in Chicago's
south and southwest suburbs and one daily newspaper, one weekly newspaper, and
five free distribution papers published by Daily Southtown. On December 27,
1997 Star Publications Inc. merged into Daily Southtown Inc.; the surviving
entity charged its name to Midwest Suburban Publishing Inc.
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage such sources represent of total revenues for the Chicago
Group during the past three years.
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YEAR ENDED DECEMBER 31,
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1997 1996 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Advertising.................. $ 243,301 71% $ 228,676 69% $ 228,685 69%
Circulation ................. 79,574 23 80,693 24 78,518 24
Job Printing
and Other ................. 18,493 6 24,263 7 23,419 7
--------------------------------------------------------------------------------
Total ........................ $ 341,368 100% $ 333,632 100% $ 330,622 100%
================================================================================
</TABLE>
ADVERTISING Substantially all advertising revenues are derived from local
and national retailers and classified advertisers. Advertising rates and rate
structures vary among the publications and are based, among other things, on
circulation, penetration and type of advertising (whether classified or display
and national or retail). In 1997, retail advertising accounted for the largest
share of advertising revenues (51%), followed by classified (38%) and
national (11%).
The Chicago Sun-Times offers a variety of advertising alternatives,
including full-run advertisements, geographically zoned issues, special
interest pull-out sections and advertising supplements in addition to regular
sections of the newspaper targeted to different readers, such as arts, food,
real estate, TV listings, weekend, travel and special. The Chicago area
suburban newspapers also offer weekly both separate and special sections.
Management has also developed the Sun-Times Newspaper Network, an advertising
vehicle which can reach the combined readership base of the Chicago Sun-Times
and the Chicago area suburban newspapers, including the Daily Southtown.
CIRCULATION Circulation revenues are derived from single copy newspaper
sales made through retailers and vending racks and home delivery newspaper
sales to subscribers. Approximately 67% of the copies of the Chicago
Sun-Times sold in 1997 were single copy sales. Approximately 42% of 1997
circulation revenues of the Chicago area suburban newspapers were derived
from subscription sales.
The average paid daily and Sunday circulation of the Chicago Sun-Times is
approximately 500,000 and 427,000, respectively, the daily and Sunday paid
circulation of the Daily Southtown is approximately 53,500 and 61,100,
respectively, and the aggregate non-daily paid and free circulation of the
Chicago area suburban newspapers is approximately 263,600 and 586,200,
respectively.
-8-
<PAGE> 11
COMPETITION. Each of the Company's Chicago area newspapers competes in
varying degrees with radio, television, direct marketing and other
communications and advertising media as well as with other newspapers having
local, regional or national circulation. The Chicago metropolitan region is
comprised of Cook County and six surrounding counties and is served by six
daily newspapers.
The Chicago Sun-Times competes in the Chicago region with the Chicago
Tribune, a large established metropolitan daily and Sunday newspaper, which is
the fifth largest newspaper in the United States. In addition, the Chicago
Sun-Times and other Chicago Group newspapers face competition from other
newspapers published in adjacent or nearby locations and circulated in the
Chicago metropolitan area market.
EMPLOYEES AND LABOR RELATIONS. As of March 16, 1998, the Chicago Group
employed approximately 2,800 employees (including approximately 600 part-time
employees). Approximately 1,300 employees are represented by 15 collective
bargaining units. Employee costs (including salaries, wages, fringe benefits,
employment-related taxes and other direct employee costs) equaled approximately
38% of the Chicago Group's revenues in the year ended December 31, 1997. There
have been no strikes or general work stoppages at any of the Chicago Group's
newspapers in the past five years. The Chicago Group believes that its
relationships with its employees are generally good.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint costs equaled approximately 18% of the Chicago Group's revenues in
the year ended December 31, 1997. The newspaper industry has seen the cost of
newsprint increase significantly since March of 1994. Newsprint prices began
decreasing in the second quarter of 1996 and continued to decline through the
first quarter of 1997. Newsprint prices increased slightly though the
remainder of 1997. The Chicago Group is not dependent upon any single
newsprint supplier and currently obtains newsprint from four principal
suppliers. To ensure an adequate supply of newsprint, the Chicago Group has
newsprint supply contracts with certain minimum purchase requirements. The
Chicago Group, like other newspaper publishers, has not entered into any
long-term fixed price newsprint supply contracts in the current environment of
volatile newsprint costs. The Chicago Group believes that its sources of
supply for newsprint are adequate for its anticipated needs.
PRINTING AND PRODUCTION. The Chicago Group has eight operating and
production facilities. All editorial, pre-press, press, marketing, sales and
administrative activities for the Chicago Sun-Times are conducted at its main
facility in Chicago. The Chicago Sun-Times plans to commence construction of a
new press facility during 1998 at an expected total cost of approximately
$100.0 million, to be operational in 1999.
Pioneer Press uses its facility in north suburban Chicago for editorial,
pre-press, sales and administrative activities. Production activities occur in
a neighboring suburb. In February 1997 Star Publications and Daily Southtown
moved to a new combined facility for editorial, pre-press, marketing, sales and
administrative activities.
-9-
<PAGE> 12
COMMUNITY GROUP
The Community Group consists of smaller newspaper publications in the
United States and Israel. The Community Group's United States daily newspapers
have been published on average for almost 100 years and are typically the only
paid daily newspapers of general circulation in their respective communities.
Circulation for community newspapers range from 1,100 to 46,400 for paid
dailies and from 100 to 53,500 for paid non-dailies. Generally, the Company's
community newspapers combine news, sports and features with a special emphasis
on local information and provide one of the primary sources of such community
information for the towns in which they are distributed. In addition to
reaching the local population through paid daily and non-daily community
newspapers, the Company also publishes free circulation "total market coverage"
publications, including shoppers, with limited or no news or editorial content.
As a group, these publications provide the Company with a stable and
established circulation within the communities they serve, which it believes
provides an effective medium for advertisers to reach a significant portion of
the households in these communities.
On January 27, 1998, the Company completed a sale of approximately 80
community newspapers. The newspapers sold had paid daily circulation of
approximately 240,000.
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage that such sources represent of total revenues for the
Community Group, including Jerusalem Post, during the past three years.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Advertising... $190,215 65% $174,652 64% $143,912 63%
Circulation... 69,499 24 64,575 24 51,167 22
Job Printing..
and Other..... 32,551 11 34,513 12 33,512 15
------------------------------------------------------------
Total......... $292,265 100% $273,740 100% $228,591 100%
============================================================
ADVERTISING. Substantially all of the United States community newspaper
advertising revenues in 1997 were derived from local retailers and classified
advertisers, which management believes are less subject to fluctuation than
national advertising. Advertising rates and rate structures vary among the
publications and are based, among other things, on circulation penetration and
type of advertising (whether classified, display, or retail). In 1997, United
States local and regional advertising accounted for the largest share of
advertising revenues (56%), followed by classified (25%), preprinted inserts
(17%) and national (2%). Management believes that the Company's strategy of
acquiring and operating community newspapers in regional clusters parallels an
emerging trend of larger retailers to advertise on a regional basis and
positions the Company to benefit from this trend.
Management intends to continue to develop new advertising revenue sources
such as regional and national display advertising, co-op advertising, national
classified advertising and other targeted advertising. The Company believes
its existing sales, editorial and distribution resources provide it with
significant cost advantages in developing new shoppers, other "total market
coverage" and targeted publications in these markets.
CIRCULATION. Circulation revenues are derived from home delivery sales of
newspapers to subscribers and single copy sales made through retailers and
vending racks. Approximately 76% of the 1997 United States community newspaper
circulation revenue was derived from subscription sales. When possible
subscription and single copy sales rates are increased in an effort to
increase circulation revenues. Single copy cover prices currently range from
35 cents to 50 cents.
JOB PRINTING. Job printing revenues are derived from utilizing available
press capacity for printing customers' orders for newspapers, fliers, retail
store advertisements and real estate listings. The Company currently has a
substantial number of printing customers and believes that its growth potential
for job printing exists mainly in low volume (less than 100,000 copies) offset
printing.
COMPETITION. Each of the Company's community newspapers and total market
coverage publications competes in varying degrees with radio, television,
direct marketing and other communications and advertising media as well as with
other newspapers having local, regional or national circulation. The Company
also competes with other commercial printers for job printing orders.
-10-
<PAGE> 13
The Company's United States community publications are located in small
towns which, for the most part, are not suburbs of larger cities but are either
county seats or are located on significant transportation corridors. The
Company's community dailies are typically the only paid daily newspapers of
general circulation published in their respective communities. The Company
believes that distribution of its total market coverage publications with
nearly 100% penetration levels in conjunction with community daily or non-daily
newspapers strengthens its competitive position in the relevant market areas.
Some of the Company's dailies face competition from dailies published by others
in adjacent or nearby locations and circulated in the markets where the Company
publishes a newspaper.
The Company's total market coverage publications, including shoppers,
compete primarily with direct mail advertising, shared mail packages and other
private advertising delivery services. The Company believes that because of
its significant presence in the small towns served by its community
publications, which are predominantly in rural areas, not close to metropolitan
areas, and its established distribution network, it has been able to compete
effectively.
EMPLOYEES AND LABOR RELATIONS. As of March 16, 1998, the Community Group
employed approximately 3,000 employees (including approximately 1,100 part-time
employees) at its community publications in the United States. Approximately
3% of these employees are represented by unions. Total Community Group
employee costs (including salaries, wages, fringe benefits, employment-related
taxes and other direct employee costs) equaled approximately 33.7% of the
Community Group's revenues in fiscal year 1997. There have been no strikes or
general work stoppages at any of the Company's community newspapers in the past
five years. The Company believes that its relationships with its employees are
generally good.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint costs equaled approximately 9.9% of revenues for the Community Group
in 1997. The newspaper industry has seen the cost of newsprint increase
significantly since March of 1994. Newsprint prices began decreasing in
the second quarter of 1996 and continued to decline through first quarter of
1997. Newsprint prices increased slightly though the remainder of 1997. The
Community Group is not dependent upon any single newsprint supplier and does
not have long-term fixed price contracts with newsprint suppliers for its
community publications. It currently obtains newsprint from a number of
suppliers, foreign and domestic. The Community Group believes that its
newsprint sources of supply are adequate for its anticipated needs.
JERUSALEM POST. At the time of acquisition by Hollinger Inc. in 1989,
Jerusalem Post was suffering operating losses. Since then, a turnaround
strategy has been implemented by senior officers of the Company and Jerusalem
Post to reduce operating and labor costs and upgrade printing capability and
the physical plant. In the years ended December 31, 1997, 1996, and 1995,
Jerusalem Post had operating margins of 7.4 %, 10.8%, and 14.7%, respectively.
Over 40.4% of Jerusalem Post's revenues of $20.3 million in 1997 were
derived from circulation, with 30.6% from job printing and 24.7% from
advertising. Jerusalem Post derives a greater percentage of its revenues from
job printing than the Company's United States newspapers. Jerusalem Post has
entered into a long-term contract to print and bind copies of the "Golden
Pages", Israel's equivalent of the "Yellow Pages" telephone directory.
Newsprint costs relating to publication of The Jerusalem Post equaled
approximately 9.1% of Jerusalem Post's revenues in 1997. Newsprint used in
producing the "Golden Pages" is provided by the owners of that publication.
Newspapers in Israel are required by law to obtain a license from the
country's interior minister, who is authorized to restrain publication of
certain information if, among other things, it may endanger the public safety.
To date, Jerusalem Post has not experienced any difficulties in maintaining its
license to publish or been subject to any efforts to restrain publication. In
addition, all written media publications in Israel are reviewed by Israel's
military censor prior to publication in order to prevent the publication of
information that could threaten national security. Such censorship is
considered part of the ordinary course of business in the Israeli media and has
not adversely affected Jerusalem Post's business in any significant way.
-11-
<PAGE> 14
MANAGEMENT ORGANIZATION
The senior management of the United States Newspaper Group is responsible
for developing operating strategies, approving business plans and significant
capital expenditures, identifying acquisition opportunities, negotiating
acquisitions and overseeing the integration of acquired newspapers and other
newspapers into the Company. Financial management of the Company, including
the arrangement of financing to fund acquisitions and working capital
needs of the Company, accounting, payroll and other financial functions and
newsprint purchases, are centralized and undertaken by corporate staff at the
Company's principal executive offices in Chicago and its offices in Marion,
Illinois. Each of the principal newspaper operations of the United
States Newspaper Group has a separate management structure and team which is
responsible for operational and editorial matters affecting the publications
under their supervision.
UNITED STATES REGULATION
Paid circulation newspapers that are delivered by second class mail are
required to obtain permits from, and to file an annual statement of ownership
and circulation with, the United States Postal Service. Free circulation
publications such as shoppers are delivered to subscribers and non subscribers
both by mail and without the use of the mail. Second class mail costs in 1997
for the Company's community newspapers were $3.5 million, or 1.2% of the
Community Group's revenues, and third class mail costs were $4.5 million in
1997, or 1.5% of that group's revenues. Second class mail costs in 1997 for
the Chicago Group were $1.6 million or 0.5% of the Chicago Group's revenues,
and third class mail costs were $2.9 million or 0.8% of the Chicago Group's
revenues. There is no significant regulation with respect to acquisitions of
newspapers, other than filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 if certain threshold requirements under such act are
satisfied.
ENVIRONMENTAL
The Company, in common with other newspaper companies engaged in similar
operations, is subject to a wide range of federal, state and local
environmental laws and regulations pertaining to air and water quality, storage
tanks, and the management and disposal of wastes at its major printing
facilities. These requirements are becoming increasingly more stringent. The
Company believes that compliance with these laws and regulations will not have
a material adverse effect on the Company.
-12-
<PAGE> 15
U.K. NEWSPAPER GROUP
The Company's U.K. Newspaper Group consists of The Telegraph and its
investment in two joint venture printing companies.
THE TELEGRAPH
The Telegraph is the publisher of the leading quality (or broadsheet)
newspapers in the United Kingdom, The Daily Telegraph, The Sunday
Telegraph, The Weekly Telegraph, the Electronic Telegraph and The Spectator
magazine. Its most important property, The Daily Telegraph, was launched in
1855 and is the largest circulation quality daily newspaper in the United
Kingdom. As of December 31, 1997, The Daily Telegraph's average daily
circulation of approximately 1,111,000 represents a 39% share of the quality
daily national newspaper market, a substantially greater share than that of its
nearest direct competitor. The Daily Telegraph's Saturday edition has the
highest circulation (1,273,000 as of December 31, 1997) among quality daily
newspapers in the United Kingdom. The Sunday Telegraph is the second largest
circulation quality Sunday newspaper in the United Kingdom with a Sunday
circulation of approximately 890,000 as of December 31, 1997.
THE UNITED KINGDOM NATIONAL NEWSPAPER INDUSTRY. The newspaper market in
the United Kingdom is segmented and, within each segment, highly competitive.
The market segment in which The Daily Telegraph competes is generally known as
the quality (or broadsheet) daily newspaper segment. This segment consists of
all the broadsheets, and none of the tabloid daily newspapers. The Daily
Telegraph and its competitors in this market segment appeal to the middle and
upper end of the demographic scale.
Newspapers in the United Kingdom differ from their counterparts in North
America in several respects. First, they have substantially fewer pages. In
1997, The Daily Telegraph averaged 57 pages per issue, printed in one section
on Wednesdays and Fridays, two sections on Mondays, Tuesdays and Thursdays, and
six sections plus a magazine and television guide on Saturdays. The Sunday
Telegraph is published in five sections with two magazines, one which
was launched in September 1995 and the other magazine, Rx, launched in
April 1997. Second, pre-printed advertising inserts, which have been a major
source of revenue growth in North America, are less common in the United
Kingdom. Third, the advertising to news ratio in British newspapers is far
lower. Fourth, British national newspapers more closely resemble North
American magazines in that they have broad distribution and readership across
the country and derive a much larger portion of their advertising revenue from
national advertisers - unlike North American newspapers which, because of their
relatively small geographical distribution, derive a substantial portion of
their advertising from local advertisers. Finally, newspapers in the United
Kingdom generally have charged higher cover prices, which in turn leads to
higher circulation revenues than North American newspapers with similar
circulation bases. However, since September 1993, when The Times first
substantially reduced its cover price on its weekday newspaper, the national
newspaper market in the United Kingdom has experienced intense cover price
competition. Since July 1995, The Daily Telegraph and The Times have increased
their respective cover prices. See "Circulation" below.
-13-
<PAGE> 16
The following charts illustrate the circulation trends of The Daily
Telegraph and The Sunday Telegraph and its principal competitors in the United
Kingdom for the three years ended December 31, 1997.
CIRCULATION: MARKET SHARE AND AVERAGE DAILY SALES (1) (2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ---------------------
AVERAGE AVERAGE AVERAGE
MARKET DAILY MARKET DAILY MARKET DAILY
SHARE SALES SHARE SALES SHARE SALES
(AVERAGE SALES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
The Daily Telegraph... 39% 1,111 38% 1,065 39% 1,060
The Times............. 27 770 27 738 24 658
The Guardian.......... 14 406 14 386 15 397
Financial Times....... 11 321 11 299 11 295
The Independent....... 9 259 10 272 11 294
---------------------------------------------------------------------------
100% 2,867 100% 2,760 100% 2,704
===========================================================================
</TABLE>
- --------------------
(1) Circulation is defined as average sales of a newspaper per issue, net of
returns.
(2) Derived from the twelve-month average circulation and market share index
information published by the Audit Bureau of Circulations Limited.
CIRCULATION: MARKET SHARE AND AVERAGE DAILY SALES (1) (2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- ---------------------
AVERAGE AVERAGE AVERAGE
MARKET DAILY MARKET DAILY MARKET DAILY
SHARE SALES SHARE SALES SHARE SALES
(AVERAGE SALES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
The Sunday Times............ 44% 1,273 47% 1,313 46% 1,253
The Sunday Telegraph........ 31 890 26 724 25 683
Observer.................... 15 448 16 453 17 463
The Independent on Sunday... 10 282 11 296 12 327
---------------------------------------------------------------------------
100% 2,893 100% 2,786 100% 2,726
===========================================================================
</TABLE>
(1) Circulation is defined as average sales of a newspaper per issue, net of
returns.
(2) Derived from the twelve-month average circulation and market share index
information published by Audit Bureau of Circulations Limited.
-14-
<PAGE> 17
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and their percentage of total revenues for The Telegraph (including its
subsidiaries) during the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- --------------------------- -----------------------------
(IN THOUSANDS OF BRITISH POUNDS STERLING)
<S> <C> <C> <C> <C> <C> <C>
Advertising... (Pound)204,498 68% (Pound)177,997 62% (Pound)162,720 64%
Circulation... 82,917 28 100,258 35 83,666 33
Other......... 12,232 4 9,863 3 8,440 3
---------------------------------------------------------------------------------
Total......... 299,647 100% (Pound)288,118 100% (Pound)254,826 100%
=================================================================================
</TABLE>
(1) Does not include revenues from Fairfax, Southam or joint venture printing
companies.
(2) Financial data is in accordance with U.K. GAAP.
ADVERTISING. Advertising is the largest source of revenue at The
Telegraph, representing approximately 68% of newspaper revenue in 1997. In
1997 the combined share of display advertising volume of The Daily Telegraph
and The Sunday Telegraph in the quality newspaper sector was 24% with
classified advertising's share 19%. These percentages are fairly consistent
with prior years. Management believes that because The Daily Telegraph is able
to charge advertisers a premium rate over that of its competitors in the
quality daily sector by virtue of the size of its readership, The Telegraph is
able to achieve a higher market share in terms of revenue.
The rates charged by The Telegraph for display and classified
advertisements are determined in part by the total number of people in the
various demographic groupings who read each publication. Readership is
measured by a continuous independent survey conducted for National Readership
Surveys Limited ("NRS"). NRS estimates of readership are based upon the number
of people responding to the NRS survey who report having read or looked at one
or more issues of a given newspaper or magazine during a particular period.
According to NRS, The Daily Telegraph's readers are primarily in the top
three of the six socio-economic groups, collectively ABC1. The Daily Telegraph
has a readership of almost 2.1 million ABC1 adults, the highest of any quality
daily newspaper and 338,000 more than its nearest competitor for the six-month
period ended December 31, 1997. Management believes The Daily Telegraph
readership position is highly advantageous in attracting advertisers, thereby
permitting it to charge higher advertising rates per page than its direct
competitors. The Sunday Telegraph has seen ABC1 readership rise by 14% year on
year. This represents 241,000 additional ABC1 readers. In combined
socio-economic groups The Sunday Telegraph has grown by 10%, faster than any
other national Sunday newspaper.
The Telegraph's display advertising strengths are in the automobile and
travel sections. Display advertising revenue grew to pound.99.4 million in 1997
from pound.88.3 million in 1996. Financial advertising markets grew by 14% in
1997 and The Daily Telegraph is holding its market leadership position in
terms of volume. Advertising revenues in this segment grew to pound.21.4
million in 1997, compared with pound.18.8 million in 1996.
Advertising in The Daily Telegraph's Saturday Magazine grew to pound.23.6
million in 1997 from pound.20.7 million in 1996, an increase of 14%.
Advertising in The Sunday Telegraph Magazine, which was launched in September
1995, grew to pound.7.5 million in 1997 compared to pound.5.6 million in 1996.
The level of classified advertisements, especially recruitment
advertisements, fluctuates with the economy. The Telegraph's revenue from this
source increased to pound.67.3 million in 1997 compared with pound.58.0
million in 1996. The Telegraph's strategy with respect to classified
advertising is to improve volume and yield in four sectors: recruitment,
property, travel and automobiles. Recruitment advertising is the largest
classified advertising category, representing about two-thirds of all
classified advertising in terms of revenue.
In common with other national newspapers in the United Kingdom, The
Telegraph's newspapers compete for advertising revenue with other forms of
media, particularly television, magazine, direct mail, posters and radio. In
addition, total gross advertising expenditures, including financial, display
and recruitment classified advertising, are affected by economic conditions in
the United Kingdom.
-15-
<PAGE> 18
CIRCULATION. The target audience of The Telegraph's newspapers is
generally conservative, middle and upper income readers, with an increased
emphasis on gaining new younger readers. The editorial strengths of The
Telegraph's newspapers provide national and international news, financial news
and features and comprehensive sports coverage. Net circulation revenue for
The Daily Telegraph and The Sunday Telegraph for the three years ended December
31, 1997 is set forth below:
NET NEWSPAPER CIRCULATION REVENUE (1) (2)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------
(IN MILLIONS OF BRITISH POUNDS STERLING)
<S> <C> <C> <C> <C> <C> <C>
The Daily Telegraph (Pound)70.6 90% (Pound)84.2 87% (Pound)68.9 86%
The Sunday Telegraph... 7.8 10 12.1 13 10.8 14
---------------------------------------------------------------------
Total.................. (Pound)78.4 100% (Pound)96.3 100% (Pound)79.7 100%
=====================================================================
Proportion of The
Telegraph's newspaper
revenue................ 28% 35% 33%
</TABLE>
(1) Net newspaper circulation revenue is shown as a proportion of The
Telegraph's newspaper revenue, not total revenue.
(2) Financial data is in accordance with U. K. GAAP.
Between 1986 and 1993, The Telegraph's strategy was to enhance circulation
revenue by increasing cover prices annually, at least in line with inflation,
and generally before its competitors. Since Hollinger Inc. acquired control of
The Telegraph in 1986, the cover price of The Daily Telegraph was increased
from 25p to 48p for the weekday edition and to 70p for the Saturday edition.
At the same time, the cover price of The Sunday Telegraph was increased from
40p to 70p. Aggregate newspaper circulation revenue for all of The Telegraph's
publications increased during that period by 53% from L.74 million in 1988 to
L.113.5 million in 1993, an important factor contributing to the relative
stability of The Telegraph's operating revenue during that period.
In September 1993, The Times, the principal competitor of The Daily
Telegraph, reduced the cover price of its weekday edition from 45p to 30p and
its Saturday edition from 50p to 40p. The Telegraph did not respond initially,
but pursued a strategy of increasing its promotional activities, which proved
successful in maintaining The Telegraph's circulation levels. However, the
strategy failed to stem the growth in circulation of The Times. In order to
protect The Daily Telegraph's market leadership and to secure its premium
advertising position in the longer term, management of The Telegraph decided in
June 1994 to reduce the cover price of its weekday edition from 48p to 30p.
The Times responded with a further reduction in the cover price of its weekday
edition from 30p to 20p and its Saturday edition from 40p to 30p.
In addition, The Telegraph launched a joint promotion involving the
Saturday edition of The Daily Telegraph and The Sunday Telegraph, whereby
readers could use a voucher to purchase both weekend titles for L.1.00 (later
reduced to 80p) compared to a combined cover price of pound.1.40. The
strategy was to use its circulation dominance on Saturday to increase
circulation of The Sunday Telegraph and place pressure on its competitors'
weekend titles.
On July 3, 1995, The Times increased the cover price on its weekday
edition by 5p to 25p and The Telegraph immediately responded by increasing the
cover price on its weekday edition 5p to 35p. The value of the discount
voucher for The Sunday Telegraph was reduced from 60p to 40p. The Telegraph
ended its voucher promotion in September 1995.
On November 20, 1995, The Times increased the cover price on its weekday
and Saturday editions by 5p to 30p per copy. The Telegraph responded by
increasing the cover price of the weekday edition of The Daily Telegraph by 5p
to 40p per copy. The price of the Saturday issue of The Daily Telegraph
remained at 70p. Management believes that maintaining the weekday cover price
difference of 10p per copy above that of The Times has not led to any
significant erosion of its circulation levels.
-16-
<PAGE> 19
On June 3, 1996 The Times reduced the cover price of their Monday edition
from 35p to 10p. In response, The Telegraph introduced vouchers to purchase
the Monday edition of The Daily Telegraph for 10p on Monday June 10, 1996.
These vouchers were printed in the Saturday and Sunday Telegraph and as a
consequence of this activity The Telegraph's Monday circulation immediately
increased by 3-4%.
On October 8, 1996 the cover price of the Tuesday to Friday editions of The
Daily Telegraph was increased by 5p to 45p. The Saturday edition cover price
was increased by 5p to 75p. On the same date The Times increased the cover
price of its Tuesday to Friday editions by 5p to 35p and the Saturday edition by
5p and 50p.
In May 1996 The Telegraph introduced the first United Kingdom national
advance purchase subscription program. In the past, newspaper subscribers in
the U.K. dealt directly with independent news agents for the purchase of
newspapers. A significant portion of the newspaper readers did not take the
paper every day and this was especially true for Sunday This program has proven
successful in driving circulation increases although there has been some
inevitable cannibalization of circulation revenues. By the end of 1996, the
plan had added about 100,000 new weekday and 200,000 new Sunday average sales
and the average prepaid subscription was for a period of about 40 weeks. In
order to gain broad acceptance of this revolutionary plan, the subscriptions
were offered at a significant discount. The amount of that discount was reduced
throughout 1997. By obtaining long term subscribers, The Telegraph expects to
reduce its traditional promotional spending. The Sunday Telegraph's cover price
increased form 70p to 80p in May 1997. In September 1997, the cover price of
the Monday edition of The Daily Telegraph increased to 45p, in-line with the
Tuesday to Friday editions.
OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Telegraph is involved in
several other publications and business enterprises, including The Spectator,
The Weekly Telegraph, and the Electronic Telegraph. The Telegraph utilizes its
brand in developing third party revenue opportunities including Reader Offers
and Books Direct.
EMPLOYEES AND LABOR RELATIONS. At March 16, 1998, The Telegraph and its
subsidiaries employed approximately 1,100 persons and the two joint venture
printing companies employed an additional 987 persons. Collective
agreements between The Telegraph and the trade unions representing certain
portions of The Telegraph's workforce expired on June 30, 1990 and have not
been renewed or replaced. The absence of such collective agreements has had no
adverse effect on The Telegraph's operations and, in management's view, is
unlikely to do so in the foreseeable future.
The Telegraph's joint venture printing companies, West Ferry Printers and
Trafford Park Printers, each have "in-house" collective agreements with the
unions representing their employees and certain provisions of these collective
agreements are incorporated into the employees' individual employment
contracts. In contrast to the union agreements that prevailed on Fleet Street
when Hollinger Inc. acquired control of The Telegraph, these collective
agreements provide that there shall be flexibility in the duties carried out by
union members and that staffing levels and the deployment of staff are the sole
responsibility of management. Binding arbitration and joint labor-management
standing committees are key features of each of the collective agreements.
These collective agreements may be terminated by either party by six months'
prior written notice.
There have been no strikes or general work stoppages involving employees
of The Telegraph or the joint venture printing companies in the past five
years. Management of The Telegraph believes that its relationships with its
employees and the relationships of the joint venture printing companies with
their employees are good.
RAW MATERIALS. Newsprint represents the single largest raw material
expense of The Telegraph's newspapers and, together with employee costs, is one
of the most significant operating costs. Up to 163,000 metric tons are
consumed annually and in 1997 the total cost was approximately pound.62.6
million, or 22% of its newspaper revenues.
In the last quarter of 1997, The Telegraph formed a new joint venture
with Express Newspapers to manage the newsprint resource. This was a further
extension of the successful joint printing activity at West Ferry Printers that
Telegraph and Express have benefited from for the last eight years. The new
joint venture company - Newsprint Management & Supply Services Ltd (NMSS) - has
as its main purpose the control of specifications, sourcing and the monitoring
of usage through the printing plants operated by the joint venture partners,
and other locations where the partners' publications are printed on a contract
basis. NMSS commenced operations on January 1, 1998. Through close liaison with
printing management, the benefits of common newsprint specifications and better
control over inventory levels, reductions in operating waste are becoming
evident.
West Ferry Printers is the largest printing unit, in respect of which NMSS
supplies and monitors approximately 250,000 tonnes of newsprint per annum
consumed on the products of the joint venture partners. In total, including
other printing plants operated by the partners or with which they are
associated, mainly in the North of England (including Trafford Park Printers),
NMSS is responsible for about 400,000 tons per annum of newsprint
consumption.
During 1998 the activities of NMSS will be extended to cover up to 70,000
tonnes of magazine paper used by Telegraph and Express, at a cost of some pound
30 million per annum.
The newsprint supply agreements entered into by NMSS for 1998 provide
for tonnages from individual suppliers of between 30,000 and 65,000 metric
tons. In the main, prices are fixed throughout 1998 at levels some 5% below the
average price paid during last year. Inventory held at each printing location
is sufficient for three to four days production and in addition, suppliers'
stock held in the United Kingdom on behalf of NMSS represents a further four to
five weeks consumption by the joint venture partners.
-17-
<PAGE> 20
PRINTING. All copies of The Daily Telegraph and The Sunday Telegraph are
printed by The Telegraph's two 50% owned joint venture printing companies, West
Ferry Printers and Trafford Park Printers. The Telegraph has a very close
involvement in the management of the joint venture companies and regards them
as being important to The Telegraph's day-to-day operations. The magazine
sections of the Saturday edition of The Daily Telegraph and of The Sunday
Telegraph are printed under contract by external magazine printers.
The managements of both joint venture printing companies continually seek
to improve production performance. Major capital expenditures require the
approval of the boards of directors of the joint venture partners. The presses
used to print The Telegraph's newspapers were upgraded in 1992 by the addition
of two color satellites for each press, enabling color to be printed on up to 12
pages of a 48 page newspaper on each print run. A further capital expenditure
of around L.1 million was incurred with the addition of "balloon formers" to the
presses. These permit The Telegraph's weekend newspapers to be printed in
multiple sections.
There is high utilization of the plants at West Ferry and Trafford Park
Printers, with little spare capacity. At Trafford Park Printers, revenue
earned from contract printing for third parties has a marginal effect on The
Telegraph's printing costs. West Ferry Printers also undertakes some contract
printing for third parties, which results in increased profitability. In April
1995 West Ferry Printers entered into a 13-year printing contract with Pearson
plc, the media group that owns the Financial Times, to print the Financial
Times' southern editions (160,000 copies) Monday to Saturday. Pearson plc
closed its London printing plant that prints the Financial Times and one of
this plant's two Rockwell Goss Headliner web-offset presses was sold along with
ancillary equipment to West Ferry Printers for pound 6 million in cash and
pound 3 million in redeemable preference shares of West Ferry Printers which
are supported by guarantees of the joint venture partners. The press commenced
printing The Financial Times in April 1996.
In addition, following damage to its own printing plant as a result of a
terrorist bomb in February 1996, The Guardian was printed as an emergency
measure at West Ferry Printers. This developed into a long term arrangement
whereby The Guardian closed its own press center and entered into a 12-year
printing agreement with West Ferry Printers. As a result, new presses and
ancillary equipment were being installed at a capital cost of over (Pound) 30
million, paid for by West Ferry and charged back to the Guardian.
West Ferry Printers will has eighteen presses, six of which are
configured for The Telegraph's newspapers, eight are used for the
newspapers published by The Telegraph's joint venture partner, United News &
Media plc, and the remaining four for contract printing customers, of which The
Guardian and the Financial Times are the largest. Trafford Park Printers has
four presses, two of which are used primarily for The Telegraph's newspapers.
DISTRIBUTION. Since 1988, The Telegraph's newspapers have been
distributed to wholesalers by truck under a contract with a subsidiary of TNT
Express (UK) Limited. During 1996, The Daily Express, Daily Star, Financial
Times and The Guardian, which are all printed at West Ferry Printers in London,
along with The Daily Telegraph and The Sunday Telegraph joined The Telegraph
and were distributed to wholesalers on the same trucks. At Trafford Park
Printers in Manchester, where The Daily Telegraph, The Sunday Telegraph and
The Guardian are printed, a joint distribution service was arranged. The
Telegraph's arrangements with wholesalers contain performance provisions to
ensure minimum standards of copy availability while controlling the number of
unsold copies.
-18-
<PAGE> 21
Wholesalers distribute newspapers to retail news outlets. The number of
retail news outlets throughout the United Kingdom has increased as a result of
a 1994 ruling by the British Department of Trade and Industry that prohibits
wholesalers from limiting the number of outlets in a particular area. More
outlets do not necessarily mean more sales and The Telegraph's circulation
department has continued to develop its control of wastage while taking steps
to ensure that copies remain in those outlets with high casual (single copy)
sales. In addition to casual sales, many retail news outlets offer home
delivery services. In 1997 home deliveries accounted for 46% of sales of The
Daily Telegraph and 41% of sales of The Sunday Telegraph.
Historically, wholesalers and retailers have been paid commissions based
on a percentage of the cover price. Prior to June 1994 when competitive
pressures caused The Telegraph to reduce its cover price, wholesaler and
retailer commissions amounted to approximately 34% of the then cover price.
Notwithstanding the reduction of the cover price, the commissions paid were not
reduced. In line with other national newspapers, The Telegraph has recently
moved away from a commission paid on a percentage of cover price to a fixed
price in pence per copy and has reduced the amount paid to wholesalers and
retailers in terms of pence per copy.
MANAGEMENT. The Telegraph's management consists of five executive
directors: Conrad M. Black, Executive Chairman; Daniel W. Colson, Deputy
Chairman and Chief Executive Officer; Jeremy W. Deedes, Managing Director;
Leonard M. Sanderson, Advertisement Director; and Niamh O'Donnell-Keenan,
Finance Director, together with fifteen non-executive directors, including F.
David Radler. Mr. Black is Chairman of the Board of Directors, Chief Executive
Officer and Director of the Company and Chairman of the Board and Chief
Executive Officer of Hollinger Inc., and Chairman and a Director of Southam.
Mr. Colson is a Director of the Company and Hollinger Inc., and a Director of
Southam. Mr. Radler is President and Chief Operating Officer and a Director of
the Company and Hollinger Inc. and a Director of Southam.
ARTICLES OF ASSOCIATION. As a result of the minority buyout on July 31,
1996, The Telegraph was delisted from the London Stock Exchange and The
Telegraph's articles of association were amended by special resolutions passed
on July 26, July 31, August 5, and November 26, 1996. One of the principal
changes was to dispense with the former requirements that a majority of the
Board, or any committee thereof, be independent of Hollinger Inc.
REGULATORY AND ENVIRONMENTAL MATTERS. United Kingdom companies are
subject to various competition laws, including the Restrictive Trade Practices
Act 1956-1976 (the "RTPA"), which requires the registration of certain
restrictive or information-sharing agreements with the Office of Fair Trading
and, under certain circumstances, prohibits such agreements. In common with
other major newspaper publishers, The Telegraph has given undertakings in
proceedings under the RTPA to the Restrictive Practices Court in respect of,
among other things, both daily and Sunday papers. These undertakings include a
general undertaking not to enter into any kind of agreement registrable under
the RTPA of which particulars are not furnished to the Office of Fair Trading
within the prescribed period. The Telegraph has also given a number of
specific undertakings (concerning pricing, wholesaler discounts and other
conditions upon which newspapers may be supplied) which prohibit the entering
of agreements containing the restrictions specified in the undertakings or any
agreements to the like effect. A breach of any of the undertakings may result
in The Telegraph (and potentially any individuals involved) being held in
contempt of court. The Telegraph has instituted procedures designed to ensure
that all personnel in relevant managerial positions are required to acknowledge
quarterly that they have been reminded of the requirements of the RTPA, the
meaning and scope of the undertakings given, the necessity of obtaining legal
advice in case of doubt and the consequences and seriousness of any breach. A
code of conduct, which contains this information, has been circulated among
relevant personnel.
Special provisions of the Fair Trading Act 1973 apply to certain newspaper
mergers (in addition to the general merger control system). In particular,
where a proprietor of newspapers circulating in the United Kingdom acquires a
controlling interest in a newspaper or newspaper assets such that total sales
of all the newspapers concerned are 500,000 or more copies per day of
publication, such transfer is unlawful and void unless made with the written
consent of the Secretary of State for Trade and Industry. That consent can,
with limited exceptions, be given only after a Monopolies and Mergers
Commission investigation.
-19-
<PAGE> 22
The Telegraph and its joint venture printing companies, West Ferry
Printers and Trafford Park Printers, in common with other newspaper publishers
and printers, are subject to a wide range of environmental laws and regulations
promulgated by United Kingdom and European authorities. These laws are
becoming increasingly more stringent. Management of The Telegraph believes
that compliance with these laws and regulations will not have a material
adverse effect on The Telegraph.
-20-
<PAGE> 23
CANADIAN NEWSPAPER OPERATIONS
The Company's Canadian Newspaper Group consists of its majority equity
interest in Southam and the Canadian Newspapers.
Southam
The Company indirectly has an approximate 58.6% interest in Southam. The
results of Southam have been consolidated for 1997 and 1996.
BUSINESS OF SOUTHAM. Southam is a diversified publicly held enterprise
with operations in two principal business segments: newspaper publishing (94%
of Southam's consolidated revenue of Cdn.$1.2 billion in 1997) and business
communications (6% of Southam's 1997 consolidated revenue).
Southam is Canada's largest publisher of daily newspapers. In two
separate transactions during 1997, Southam acquired one paid daily newspaper,
one paid non-daily newspaper and 13 free distribution newspapers. The 33 daily
newspapers published by Southam have a total paid daily circulation of
approximately 1,600,000. In addition Southam published 18 paid non-daily
community newspapers and 48 free distribution publications with a combined
circulation of approximately 2,800,000.
Southam also provides communications and information services to business,
government and the professions mainly in Canada and also in the United States
including business magazines and tabloids in the automotive, trucking,
construction, natural resources, manufacturing and other markets.
The following table sets forth the revenue mix for Southam for the three
years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------------- -------------------------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Newspapers Cdn.$ 1,118,934 94% Cdn.$ 928,845 85% Cdn.$ 846,262 83%
Business
Communications 75,852 6 166,805 15 176,083 17
--------------------------------------------------------------------------------------------------
Total Cdn.$ 1,194,786 100% Cdn.$ 1,095,650 100% Cdn.$ 1,022,345 100%
==================================================================================================
</TABLE>
ADVERTISING. Advertising revenues represented 76% of Southam's daily
newspaper revenues in 1997 (daily newspapers represented 93% of total Southam
newspaper group revenues in the year, with 7% derived from non-daily newspapers
and other revenues). Advertisements are carried either within the body of the
newspapers, and referred to as run-of-press (ROP) advertising, or as inserts.
ROP, which represented 87% of total advertising revenues in 1997 is categorized
as either retail, classified or national. The three categories represented
41%, 31% and 28%, respectively, of ROP advertising revenues in 1997. ROP
advertising volume at Southam's daily newspapers in 1997 was 445.9 million
lines, an increase of 8.9% over 1996.
CIRCULATION. Average circulation of Southam's daily newspapers in 1997
was 1.6 million copies. On a same-paper basis, circulation revenues increased
by 6% in 1997. Home delivery represents approximately 77% of daily newspapers
sold and single copy sales account for 23%.
BUSINESS COMMUNICATIONS. During 1996 Southam disposed of its construction
data and consumer and trade show groups. For ongoing operations, revenues grew
by 5.7%, led by U.S. magazines.
-21-
<PAGE> 24
COMPETITION. The majority of Southam's revenues are from advertising.
Advertising linage in the company's newspapers is affected by a variety of
factors including competition from print and other media as well as general
economic performance and the level of consumer confidence. Specific
advertising segments such as real estate, automotive and help wanted will be
significantly affected by local factors. Each one percent change in annual ROP
linage in Southam's newspaper operations has a pre-tax earnings impact of
approximately Cdn.$5 million.
Southam's business communications operations are concentrated in a number
of cyclical industries - construction, trucking, automotive, mining and forest
products. Performance of these sectors will have a significant effect on
profitability, particularly on advertising-based products in the trade magazine
group.
EMPLOYEES AND LABOR RELATIONS. As of March 16, 1998, Southam had
approximately 6,400 full-time employees. Southam has approximately 100 union
contracts in its newspaper operations. The percentage of unionized employees
varies widely from paper to paper. For Southam's nine largest newspapers,
which represent 71% of the total number of employees in the daily newspaper
operations, approximately 63% of the workforce is unionized. As of December
31, 1997 23 union contracts have expired and are being renegotiated. With the
large number of contracts being renegotiated every year, labor disruptions are
always possible.
RAW MATERIALS. The basic raw materials for newspapers is newsprint.
Newsprint consumption in 1997 was 204,400 tons and newsprint costs represented
approximately 13% of total revenues. Newsprint consumption at the daily
newspapers was up 15.5%, primarily due to an increase in advertising; however,
the cost per ton was down by 16.8%. Southam has access to adequate supplies to
meet anticipated production needs.
SOUTHAM RESTRUCTURING PLANS. In the last quarter of 1995, Southam took a
pretax charge against its 1995 earnings of Cdn.$120.0 million ($88.1 million).
Approximately Cdn.$40.0 million of the charge related to the writedown of
redundant assets at its Pacific Press facility and other non-recurring costs,
with the remaining Cdn.$80 million relating to employee termination costs
in respect of the elimination of 750 positions. By the end of 1997 Southam had
made significant progress in its staff reduction plan announced in 1995.
REGULATORY MATTERS. The publication, distribution and sale of newspapers
and magazines in Canada is regarded as a "cultural business" under the
Investment Canada Act and consequently, any acquisition of control of Southam
by a non-Canadian investor would be subject to the prior review and approval by
the Minister of Industry of Canada.
CONSTRAINED SHARE PROVISIONS. Southam is a constrained share corporation
under the Canada Business Corporations Act. The general effects of its
constrained share status are to restrict the holding or ownership of its shares
by non-Canadians, either individually or in the aggregate, within limits set
from time to time by the Board of Directors; to prevent the issue or transfer
of its shares in circumstances where these limits would be exceeded; and to
limit the voting rights attached to its shares in circumstances where these
limits are exceeded. These provisions were enacted in order to ensure the
ability of advertisers in Southam's newspapers and other periodicals to deduct,
for Canadian income tax purposes, the cost of advertising in these
publications.
The Board of Directors of Southam determined that the "constrained class"
includes: (1) individuals other than Canadian citizens and (ii) corporations
that are controlled directly or indirectly by citizens or subjects of a country
other than Canada. The Board of Directors also has determined that the maximum
aggregate holdings of members of the constrained class will be 25% and that the
maximum individual holdings of members of the constrained class will be 25%.
Because the Company's indirect interest in Southam is held by a Canadian
corporation which is controlled directly or indirectly by Mr. Conrad M. Black,
a Canadian citizen, Southam's constrained share provisions should not restrict
the Company's investment in Southam. Accordingly, so long as the Company's
investment maintains its current structure, the Company would be free to make
additional indirect investments in Southam.
-22-
<PAGE> 25
PRICE RANGE OF COMMON SHARES AND DIVIDENDS. The ordinary shares of
Southam are listed on the Toronto and Montreal stock exchanges. The twelve
month high and low closing sales prices for the ordinary shares of Southam on
the Toronto Stock Exchange as of March 16, 1998 were Cdn.$29.90 ($21.16) and
Cdn.$18.95 ($13.41), respectively. The closing price for the ordinary shares
of Southam on March 16, 1998 was Cdn.$29.90 ($21.16). The payment and the
level of future dividends will be determined by the Board of Directors of
Southam based on considerations such as earnings from operations, capital
requirements and the financial condition of Southam.
RELATIONSHIP WITH THE COMPANY. The Company and Hollinger Inc. now
directly own a combined 58.6% interest in Southam through Hollinger Canadian
Publishing Holdings Inc. ("HCPH"), a New Brunswick holding company. Effective
March 18, 1997, the Company completed an internal reorganization of its
interest in Southam which previously had been held as follows: (i) 18.5%
through Hollinger Telegraph Holdings Inc. ("HTH"), a Canadian corporation which
is jointly owned by two wholly owned subsidiaries of the Company, and 0.6%
through such subsidiaries; (ii) 21.2% held through HCPH; and (iii) 10.4%
through a wholly owned subsidiary of FDTH as a result of the Southam share
acquisition in December 1996. The Company's majority interest in Southam, is
held by HCPH in which Publishing and Hollinger Inc. own, directly or
indirectly, the following interests; (i) Publishing and its subsidiaries own
100% of the non-voting equity shares and non-voting preference shares and (ii)
each of Publishing and Hollinger Inc. (through its wholly-owned subsidiary)
own 50% of the voting preference shares which have only nominal equity value.
It is anticipated that Hollinger Inc. will pledge its interest in HCPH
collateral for bank financing arrangements of the Company and its subsidiaries.
In connection with this internal reorganization, the Company substituted a
direct pledge of Southam common shares owned by the Company for the previous
pledge of 50% of the HTH Shares under the Southam-Linked Debentures. At the
time, HTH owned an 18.5% interest in Southam. At December 31, 1997 this pledge
represented approximately 8% of Southam's outstanding common shares. The
Southam-Linked Debentures bear a redemption price of Cdn.$9.0 million ($6.3
million).
In 1997, the Series A Preferred Stock was exchanged for Series D Preferred
Stock. As the holder of the Company's Series D Preferred Stock, Hollinger
Inc.'s and its subsidiaries' redemption rights are linked to the number of
shares of HTH or Southam that at the time of exercise are free and clear of
encumbrances. The Share Exchange Agreement entered into in connection with the
1995 Reorganization contained a covenant by Hollinger Inc. limiting the
exercise of its redemption rights as the holder of the Series D Preferred
Stock. The Share Exchange Agreement has been modified to reflect the
substitution of the Southam common shares for the HTH Shares as collateral for
the Southam-Linked Debentures. Hollinger Inc. is now contractually entitled to
exercise its redemption rights under the Series D Preferred Stock proportionate
to the number of such Southam common shares that became free of the pledge
under the Southam-Linked Debentures. The Series D Preferred Stock has an
aggregate redemption price of $75.9 million at December 31, 1997, of which up
to approximately $45.0 million may be subject to redemption by Hollinger Inc.
MANAGEMENT. Mr. Conrad M. Black, Chairman of the Board of Directors,
Chief Executive Officer and Director of the Company and Chairman of the Board
and Chief Executive Officer of Hollinger Inc., Chairman and a Director of The
Telegraph, is Chairman and a Director of Southam. Mr. F. David Radler,
President and Chief Operating Officer and a Director of Hollinger Inc. and the
Company and a Director of The Telegraph, is a Director of Southam. Mr. Stephen
A. Jarislowsky, a Director of The Telegraph, is a Director of Southam. Mr. J.
A. Boultbee, Executive Vice President and Chief Financial Officer of the
Company and Vice President, Finance and Treasury of Hollinger Inc., is a
Director of Southam. Mrs. Barbara Amiel Black, Vice President Editorial and
Director of the Company and Hollinger Inc., is a Director of Southam. Mr.
Peter Y. Atkinson, Vice President of the Company and Vice President and General
Counsel of Hollinger Inc., is a Director of Southam. Mr. Daniel W. Colson, a
Director of the Company and Deputy Chairman and Chief Executive Officer of The
Telegraph is a Director of Southam. Mr. Peter G. White, Chairman of UniMedia
Inc., is a Director of Southam.
-23-
<PAGE> 26
Canadian Newspapers
The Company acquired its interest in the Canadian Newspapers from
Hollinger Inc. in 1997. The Canadian Newspapers have been accounted for using
the "as-if" pooling of interests method.
BUSINESS OF THE CANADIAN NEWSPAPERS. The Canadian Newspapers consist
of ten daily, five non-daily and 18 free distribution newspapers located in
Ontario, four daily, one non-daily and six free distribution newspapers located
in Saskatchewan, eight daily, five non-daily and 10 free distribution
newspapers located in British Columbia and three daily, one non-daily and 11
free distribution newspapers in Quebec. These newspapers are operated by
Sterling Newspaper Company and UniMedia Inc., wholly owned subsidiaries of the
Company. Total paid daily circulation for the Canadian Newspapers is
approximately 475,000.
The following table sets forth the revenue mix for the Canadian Newspapers
for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
(IN THOUSANDS OF CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising Cdn.$ 179,560 58% Cdn.$ 164,275 57% Cdn.$ 87,673 56%
Circulation 101,668 33 98,081 34 53,606 34
Job printing and
Other 27,521 9 25,783 9 15,558 10
------------------------------------------------------------------------------------------------
Total Cdn.$ 308,749 100% Cdn.$ 288,139 100% Cdn.$ 156,837 100%
================================================================================================
</TABLE>
ADVERTISING. Advertising revenue represents mainly advertisements that
are carried within the body of the newspapers and includes retail, national or
classified. Advertising revenues in 1997 increased from 1996 due to strong
national advertising growth. Classified advertising also showed increases. In
1997, advertising revenue represented 58% of the total revenues.
CIRCULATION. Circulation revenue accounted for approximately 33% of
total revenue in 1997 and increased by 4% from 1996. In Quebec, home delivery
represented approximately 82% of daily newspapers sold while single copy sales
accounted for 18%.
COMPETITION. The majority of the Canadian Newspaper revenues are from
advertising. The amount of advertising in the newspapers is affected
by a variety of factors including competition from print and other media as
well as general and local economic conditions and the level of consumer
confidence.
EMPLOYEES AND LABOR RELATIONS. As of March 16, 1998, the Canadian
Newspapers had approximately 3,200 full-time employees. Approximately half of
the work force is unionized, but the percentage of unionized employees varies
widely from paper to paper. The Company does not expect any undue
difficulties in renewing any collective agreements that have expired or will
expire in the future.
RAW MATERIALS. The basic raw material for newspapers is newsprint.
Newsprint consumption in 1997 was 46,400 tons and newsprint costs represented
approximately 11% of total revenues. The Canadian Newspapers have access
to adequate supplies of newsprint in order to meet production needs.
REGULATORY MATTERS. The publication, distribution and sale of newspapers
and magazines in Canada is regarded as a "cultural business" under the
Investment Canada Act and consequently, any acquisition of control of the
Canadian Newspapers by a non-Canadian investor would be subject to the prior
review and approval by the Minister of Industry of Canada.
In August 1998, Hollinger Inc. and UniMedia Group Inc. entered into an
agreement with Sodec (Societe de developpment des enterprieses culturelles), an
agency of the Quebec government, pursuant to which Sodec was granted an
assignable right of first refusal in the event of the proposed acquisition by a
person not resident in Quebec of the assets of LeSoleil and Le Quotidien or of
the proposed direct or indirect acquisition by a person not resident in Quebec
of control on UniMedia Group Inc., a wholly-owned subsidiary of UniMedia Inc.
MANAGEMENT. Mr. Conrad M. Black, Chairman of the Board of Directors,
Chief Executive Officer and Director of the Company and Chairman of the Board
and Chief Executive Officer of Hollinger Inc., Chairman and a Director of The
Telegraph, is Vice Chairman and a Director of UniMedia Inc. and Chairman of
Sterling Newspaper Company. Mr. F. David Radler, President and Chief Operating
Officer and a Director of the Company and Hollinger Inc. and a Director of The
Telegraph, is Vice Chairman and Director of UniMedia Inc. and President and
Chief Executive Officer of Sterling Newspaper Company. Mr. Stephen A.
Jarislowsky, a Director of The Telegraph, is a Director of UniMedia Inc. Mr.
Daniel W. Colson, a Director of the Company and Deputy Chairman and Chief
Executive Officer of The Telegraph is Chairman of the Board and a Director of
UniMedia Inc.
-24-
<PAGE> 27
ITEM 2. PROPERTIES
The Company's management believes that its properties and equipment are in
generally good condition, well-maintained, and adequate for current operations.
UNITED STATES NEWSPAPER GROUP
CHICAGO GROUP. The Chicago Group has eight operating and production
facilities. All editorial, pre-press, press, marketing, sales, and
administrative activities for the Chicago Sun-Times are conducted in a 535,000
square foot, seven-story building owned by the Chicago Sun-Times. The
circulation fleet is garaged and maintained in a three-story building.
Mechanized insertion and pre-print storage occurs in a complex of seven single
story buildings. The Company intends to replace these facilities with a new
press facility, at an expected cost of approximately $100.0 million, to be
operational in 1999.
Pioneer Press utilizes and owns a building in north suburban Chicago for
editorial, pre-press, sales and administrative activities. Production
activities occur in a 65,000 square foot leased building in a neighboring
suburb. In February 1997 Star Publications and Daily Southtown moved to a new
combined facility for editorial, pre-press, marketing sales and administrative
activities. Production activities occur at a separate facility. Both
facilities are located in Chicago's south suburbs.
COMMUNITY GROUP. The Community Group has 169 operating and production
facilities for its community publications in the United States, of which nine
have been newly constructed by the Company since 1986. The group uses modern
data processing equipment in its business management operations and in its
typesetting. The group believes that all of its properties are in generally
good condition, well maintained and adequate for their current operations. The
group's operating and production facilities for its community publications are
owned or leased by its subsidiaries, with approximately 157 being owned and the
remaining 12 being leased for terms ranging from two to five years.
The Jerusalem Post is produced and distributed in Israel from a
three-story building in Jerusalem owned by Jerusalem Post. The Jerusalem Post
also leases a sales office in Tel Aviv and a sales and distribution office in
New York. The Jerusalem Post also owns certain properties held for investment
in Jerusalem.
U.K. NEWSPAPER GROUP
THE TELEGRAPH. The Telegraph occupies five floors of a tower on Canary
Wharf in London's Docklands under a 25 year lease. Printing of The Telegraph's
newspaper titles is carried out at fifty percent owned joint venture printing
plants in London's Docklands and in Trafford Park, Manchester.
CANADIAN NEWSPAPER GROUP
SOUTHAM. Southam's newspapers and magazines are published at numerous
facilities throughout Canada. Southam publishes predominantly all of its
newspapers and performs all pre-press work on its magazines in facilities owned
by Southam. Southam's magazines are printed at facilities owned by third
parties. Southam has constructed a new production facility in
Vancouver and has recently commissioned a new printing plant in Windsor,
Ontario. Subject to the completion of the conversion of a few remaining letter
press operations to web-offset, such facilities meet Southam's current needs
and have ample capacity to meet anticipated future demands.
-25-
<PAGE> 28
ITEM 3. LEGAL PROCEEDINGS
The Company becomes involved from time to time in various claims and
lawsuits incidental to the ordinary course of its business, including such
matters as libel, defamation and invasion of privacy actions. In addition, the
Company is involved from time to time in various governmental and
administrative proceedings with respect to employee terminations and other
labor matters, environmental compliance, tax and other matters.
Management believes that the outcome of any pending claims or proceedings
will not have a material adverse effect on the Company taken as a whole. See
Note 19 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-26-
<PAGE> 29
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages (as of March 16,
1998) of each of the Company's current executive officers, followed by a
description of their principal occupations during the past five years and
current directorships of public reporting companies and investment companies in
the United States, Canada and the United Kingdom. Unless otherwise indicated,
each of the executive officers has held his or her position with the Company,
or a similar position with the Company, for at least the past five years.
<TABLE>
<CAPTION>
Name Age Position with the Company
----- --- -------------------------
<S> <C> <C>
The Hon. Conrad M. Black,
P.C., O.C. 53 Chairman of the Board, Chief Executive Officer and Director
F. David Radler 55 President, Chief Operating Officer and Director
J. A. Boultbee 54 Executive Vice President and Chief Financial Officer
Fredrick A. Creasey 47 Group Corporate Controller
J. David Dodd 54 Vice President of Publishing and Chief Financial Officer of
Southam
Barbara Amiel Black 57 Vice President, Editorial and Director
Paul B. Healy 34 Vice President, Corporate Development and Investor Relations
Daniel W. Colson 50 Deputy Chairman and Chief Executive Officer of The
Telegraph and Director
Jerry J. Strader 61 President, American Publishing Company
</TABLE>
THE HON CONRAD M. BLACK, P.C., O.C., Chairman of the Board of Directors,
Chief Executive Officer and Director. Mr. Black has served as Chairman of the
Board of Directors and Chief Executive Officer of the Company since October 25,
1995, and has served as a Director of the Company since 1990. Mr. Black served
as Deputy Chairman of the Board of Directors of the Company from 1991 to
October 25, 1995. Mr. Black has served for the past five years as the Chairman
of the Board and Chief Executive Officer of Hollinger Inc. He currently serves
as the Chairman and as a Director of The Telegraph, as the Chairman and as a
Director of Southam and the Jerusalem Post, and as Chairman of the Board, Chief
Executive Officer and as a Director of Argus, as a Director of EdperBrascan
Limited and the Canadian Imperial Bank of Commerce, both of which are public
reporting companies in Canada, as a Director of Livent Inc. and Sotheby's
Holding Inc. and as a Member of the Advisory Board of Gulfstream Aerospace
Corporation. Mr. Black served as a Director of John Fairfax Holdings Inc. from
1992 to 1997.
F. DAVID RADLER, President, Chief Operating Officer and Director. Mr.
Radler has served as President and Chief Operating Officer of the Company since
October 25, 1995 and a Director of the Company since 1990. Mr. Radler was
Chairman of the Board of Directors of the Company from 1990 to October 25,
1995. Mr. Radler has served for the past five years as President and Chief
Operating Officer and a Director of Hollinger Inc. He currently serves as a
director of The Telegraph, and as a Director of Southam, Argus, Dominion
Malting Limited, and West Fraser Timber Co. Ltd., all of which are Canadian
public reporting companies. Mr. Radler is also a Director or the Jerusalem
Post.
J. A. BOULTBEE, Executive Vice President and Chief Financial Officer. Mr.
Boultbee has served as Executive Vice President and Chief Financial Officer of
the Company since June 14, 1996. Mr. Boultbee has served as a Vice President
of the Company from 1990 to 1995. Mr. Boultbee served as a Director of the
Company from 1990 to October 25, 1995. Mr. Boultbee has served for the past
five years as a Director and as the Vice-President, Finance and Treasury of
Hollinger Inc. Mr. Boultbee also serves as a Director of Argus, Southam,
-27-
<PAGE> 30
Iamgold International African Mining Gold Corporation and Consolidated Enfield
Corporation, all of which are Canadian public reporting companies.
FREDERICK A. CREASEY, Group Corporate Controller. Mr. Creasey has served
as Group Corporate Controller of the Company since June 14, 1996. Mr. Creasey
also has served for the past five years as the Controller of Hollinger Inc.
J. DAVID DODD, Vice President of Publishing and Vice President and Chief
Financial Officer of Southam. Mr. Dodd has served as Vice President of
Publishing since October 25, 1995 and as Vice President and Chief Financial
Officer of Southam since January 1997. He previously served as Executive Vice
President and a Director of the Company from 1991 to October 25, 1995 and as
Chief Financial Officer of the Company from 1994 to October 25, 1995. Mr. Dodd
served as a Vice President of the Company from 1990 to 1991.
BARBARA AMIEL BLACK, Vice President, Editorial and Director. Mrs. Black
has served as Vice President, Editorial of the Company since September 1995 and
as a director of the Company since February 1996. Mrs. Black is the wife of
Mr. Black. Mrs. Black is currently a columnist for The Daily Telegraph. After
an extensive career in both on and off air television production, Mrs. Black
was the editor of The Toronto Sun from 1982 to 1984, a columnist of The Times
and The Sunday Times of London from 1986 to 1994 and a columnist of MacLean's
magazine since 1976. Mrs. Black also serves as Vice President, Editorial and
as a Director of Hollinger Inc. and as a Director of Southam and the Jerusalem
Post.
PAUL B. HEALY, Vice President, Corporate Development and Investor
Relations. Mr. Healy has served as Vice President, Corporate Development and
Investor Relations of the Company since October 25, 1995. Mr. Healy was a Vice
President of The Chase Manhattan Bank, N.A. for more than five years prior to
October 1995, serving as a corporate finance specialist in the media and
communications sector.
DANIEL W. COLSON, Deputy Chairman and Chief Executive Officer of The
Telegraph and Director. Mr. Colson has served as a Director of the Company
since February 1995. Mr. Colson served as Vice Chairman of The Telegraph from
1992 to 1995 and as Deputy Chairman of The Telegraph since 1995 and Chief
Executive Officer of The Telegraph since 1994. Mr. Colson currently serves as
a Director of Hollinger Inc., Southam, and Argus, The Molson Companies Limited,
and as Vice Chairman of HCPH which are Canadian public reporting companies, as
a Director of The Telegraph, and as a Director of John Fairfax Holdings
Limited from 1991 to 1997.
JERRY J. STRADER, President, American Publishing Company. Mr. Strader was
appointed President of the Company's Community Group (American Publishing
Company) in February of 1996. He served as Senior Vice President of American
Publishing Company from 1994 to 1996 and as a Regional Manager of American
Publishing Company and as publisher of The Meridian Star, one of the Company's
daily newspapers, since 1990.
-28-
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Common Stock is listed on the New York Stock Exchange under
the trading symbol "HLR." At March 16, 1998 there were 71,577,799 shares of
Class A Common Stock outstanding and held by approximately 245 holders of
record and approximately 4,000 beneficial owners. The Class A Common Stock
traded on the NASDAQ Stock Market from the Company's initial public offering on
May 4, 1994 through January 15, 1996. On January 16, 1996, the Class A Common
Stock was listed on the New York Stock Exchange. The Class B Common Stock of
the Company is not publicly traded. As of March 16, 1998, 14,990,000 shares of
Class B Common Stock were outstanding and owned by Hollinger Inc. In addition,
the Company issued 739,500 shares of its Series A Preferred Stock owned by
Hollinger Inc. until August of 1997 when the Series A Preferred Stock was
exchanged for Series D Preferred Stock. The Series D Preferred Stock is
convertible into 5,654,582 shares of Class A Common Stock (as of March 16,
1998). The Company has issued 20,700,000 Preferred Redeemable Increased
Dividend Equity Securities ("PRIDES"), each of which represents one-half share
of the Company's Series B Preferred Stock, par value $.01 per share. The
PRIDES are listed on the New York Stock Exchange and are held by one holder of
record and approximately 2,700 beneficial owners. The Company has issued
829,409 shares of Series C Convertible Preferred Stock, par value $0.1 per
share ("Series C Preferred Stock") to Hollinger Inc. The Series C Preferred
Stock was issued at $108.50 each and pays a dividend of 9.5% per annum. The
Series C Preferred Stock is convertible into 7,052,465 shares of Class A Common
Stock (as of March 16, 1998).
The following table sets forth for the periods indicated the high and
low sales prices for the Class A Common Stock, as reported by the New York
Stock Exchange Composite Transactions Tape for the period since January 16,
1996, and the cash dividends declared per share on the Class A Common Stock.
<TABLE>
<CAPTION>
CASH DIVIDENDS
PRICE RANGE DECLARED
----------------
CALENDAR PERIOD HIGH LOW PER SHARE
- --------------- ------- ------- ---------
<S> <C> <C> <C>
1996
First Quarter $12.375 $ 9.250 $0.10
Second Quarter 13.125 10.625 0.10
Third Quarter 12.500 9.375 0.10
Fourth Quarter 12.875 10.000 0.10
1997
First Quarter $12.000 $ 9.125 $0.10
Second Quarter 12.000 9.000 0.10
Third Quarter 13.438 11.125 0.10
Fourth Quarter 14.125 12.375 0.10
1998
First Quarter (through March 16, 1998) $16.750 13.000 0.10
</TABLE>
On March 16, 1998 the closing price of the Class A Common Stock was $16.50
per share. Each share of Class A Common Stock and Class B Common Stock is
entitled to receive dividends if, as and when declared by the Board of
Directors of the Company. Dividends must be paid equally, share for share, on
both the Class A Common Stock and the Class B Common Stock at any time that
dividends are paid. Up until the first quarter of 1996, the Company paid a
quarterly dividend of $0.025 per share of common stock. As a result of the
1995 Reorganization, the Company had greater financial capacity to support
substantially higher level of dividends with respect to its common stock.
Since the first quarter 1996 the Company has paid a quarterly dividend of $0.10
per share of common stock.
-29-
<PAGE> 32
As an international holding company, the Company's ability to declare
and pay dividends in the future with respect to its Common Stock will be
dependent, among other factors, upon its results of operations, financial
condition and cash requirements, the ability of its United States and foreign
subsidiaries to pay dividends and make payments to the Company under applicable
law and subject to restrictions contained in existing and future loan
agreements, the prior payments of dividends to holders of PRIDES and Series D
Preferred Stock, the preference share and other financing obligations to third
parties relating to such United States or foreign subsidiaries of the Company,
as well as foreign and United States tax liabilities with respect to dividends
and payments from those entities.
-30-
<PAGE> 33
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1) (2)
Operating Revenues:
Advertising $1,556,041 $1,364,527 $ 699,434 $ 577,092 $ 316,640
Circulation 535,447 562,122 301,724 278,280 217,608
Job Printing 80,024 80,132 58,750 36,207 25,044
Other 40,018 67,241 18,606 14,329 107,223
---------------------------------------------------------------------
Total Operating Revenues 2,211,530 2,074,022 1,078,514 905,908 666,515
Operating Costs and Expenses 1,783,995 1,782,053 951,187 781,750 536,669
Direct Subscription Campaign Costs,
Net and Infrequent Items 25,243 41,567 8,000 -- --
Depreciation and Amortization 114,570 102,435 57,463 48,984 38,655
---------------------------------------------------------------------
Operating Income 287,722 147,967 61,864 75,174 91,191
Interest Expense (113,558) (84,356) (44,727) (33,192) (27,292)
Amortization of Debt Issue Costs (13,466) (16,640) (168) -- --
Equity in Earnings of Affiliates 5,807 12,050 14,356 35,896 12,468
Other Income, net (3) 77,644 70,917 18,199 92,181 27,356
---------------------------------------------------------------------
Earnings before income taxes,
minority interest, cumulative
effect of change in accounting for
income taxes and extraordinary item 244,149 129,938 49,524 170,059 103,723
Income Taxes 93,655 51,865 20,564 45,050 35,540
---------------------------------------------------------------------
Earnings before minority interest,
cumulative effect of change in
accounting for income taxes and
extraordinary item 150,494 78,073 28,960 125,009 68,183
Minority Interest 45,973 33,138 22,637 21,409 25,475
---------------------------------------------------------------------
Earnings before cumulative effect of
change in accounting for income
taxes and extraordinary item 104,521 44,935 6,323 103,600 42,708
Cumulative effect of change in
accounting for income taxes -- -- -- -- (24,256)
Extraordinary loss on debt
extinguishments -- (2,150) -- -- --
---------------------------------------------------------------------
Net Earnings $ 104,521 $ 42,785 $ 6,323 $ 103,600 $ 18,452
=====================================================================
Basic earnings per share $ 0.93 $ 0.41 $ 0.09 $ 1.81 $ 0.36
=====================================================================
Cash dividends declared per common
share $ 0.40 $ 0.40 $ 0.10 $ 0.05 $ 0.05
=====================================================================
BALANCE SHEET DATA: (4)
Working Capital (deficit) $ 56,365 $ (695,760) $(390,673) $(275,265) $(319,237)
Total Assets (5) 3,023,921 3,425,544 1,737,980 1,551,172 1,104,394
Minority Interest 203,034 109,943 97,298 109,518 79,290
Total Long-Term Debt 1,428,415 711,348 475,048 475,429 374,772
Redeemable Preferred Stock 75,891 605,579 306,452 204,101 206,846
Total Stockholders' Equity (6) 687,602 686,326 159,973 91,143 (105,598)
</TABLE>
-31-
<PAGE> 34
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEGMENT DATA:
Operating Revenues:
United States Newspaper Group $ 633,633 $ 607,372 $ 559,213 $422,067 $185,043
U.K. Newspaper Group 492,270 451,902 405,038 386,243 384,558
Canadian Newspaper Group 1,085,627 1,014,748 114,263 97,598 96,914
---------------------------------------------------------------
Total Operating Revenues $2,211,530 $2,074,022 $1,078,514 $905,908 $666,515
===============================================================
Operating Income:
United States Newspaper Group $ 89,461 $ 63,881 $ 32,125 $39,039 $ 18,069
U.K. Newspaper Group 26,657 1,601 27,000 33,953 71,416
Canadian Newspaper Group 171,604 82,485 2,739 2,182 1,706
---------------------------------------------------------------
Total Operating Income $ 287,722 $ 147,967 $ 61,864 $75,174 $ 91,191
===============================================================
EBITDA (7)
United States Newspaper Group $ 131,119 $ 106,707 $ 74,139 $74,885 $ 43,582
U.K. Newspaper Group 44,733 15,918 37,374 43,307 80,448
Canadian Newspaper Group 226,440 127,777 7,814 5,966 5,816
---------------------------------------------------------------
Total EBITDA $ 402,292 $ 250,402 $ 119,327 $124,158 $129,846
===============================================================
</TABLE>
(1) The financial data presented above is derived from the Consolidated
Financial Statements of the Company. Such financial statements include
the accounts of The Telegraph and the Canadian Newspapers on an "as-if"
pooling-of-interests basis.
(2) The statement of operations data include data for Jerusalem Post for all
periods presented, data for Chicago Sun-Times from the date of its
acquisition by the Company on March 31, 1994, and data is included for
Daily Southtown from January 1, 1995, and data for Southam is included as
equity earnings for 1995 and 1994 and consolidated for 1997 and 1996.
(3) Other income, net includes gain on the sale of Fairfax, the gain on the
sale of The Telegraph shares, gain on dilution of Fairfax interest, gain
on the sale of marketable securities, foreign currency gains (losses), and
interest and dividend income.
(4) The balance sheet data include The Telegraph, Canadian Newspapers and
Jerusalem Post for all periods presented, the Chicago Sun-Times and Daily
Southtown as at December 31, 1994 and thereafter. Long-term debt does not
include intercompany indebtedness owed to Hollinger Inc.
(5) Includes intangible assets, net of accumulated amortization, which
amounted to $1,671,210,000 at December 31, 1997 and $1,641,485,000 at
December 31, 1996. Such intangible assets consist of the value of
acquired subscriber and advertiser lists, noncompetition agreements,
archives and goodwill. The amortization periods for intangible assets do
not exceed 40 years.
(6) See Consolidated Statements of Stockholders' Equity.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and certain other income items. EBITDA is not intended to
represent an alternative to operating income (as determined in accordance
with generally accepted accounting principles) as an indicator of the
Company's operating performance, or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity. The Company believes that EBITDA
largely determines its ability to fund current operations and to service
debt, due to the significant number of acquisitions made by the Company
which have resulted in non-cash charges for depreciation and amortization.
These non-cash charges have adversely affected net earnings, but have not
affected EBITDA.
-32-
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
The Company's business is concentrated in the publication of newspapers
in the United States, Canada, United Kingdom, and Israel. Its revenues are
derived principally from advertising, paid circulation and, to a lesser extent,
job printing. Approximately 29% of the Company's total operating revenues in
1997 were attributable to the United States Newspaper Group, approximately 22%
were attributable to its U.K. Newspaper Group, and 49% from its Canadian
Newspaper Group. The Company's United States Newspaper Group consists of the
Chicago Group (comprised of the Chicago Sun-Times and suburban newspapers in the
Chicago metropolitan area) and the Community Group, which includes Jerusalem
Post. The Company's U.K. Newspaper Group consists of the operations of The
Telegraph, its subsidiaries and two joint venture printing companies. The
Canadian Newspaper Group consists of the Company's majority investment in
Southam and the operation of the Canadian Newspapers.
The Company's revenues have grown substantially since the beginning of
1986, principally through acquisitions. Over that period, the Company acquired
The Telegraph, a majority interest in which was acquired by Hollinger Inc. in
1986; Jerusalem Post, which was acquired by Hollinger Inc. in 1989; Chicago
Sun-Times, 61 related newspapers and Daily Southtown, which were acquired by the
Company in 1994; the Canadian Newspapers, which were acquired in a number of
transactions by Hollinger Inc. from 1986 through 1996, 19 daily newspapers,
which were acquired by the Company from Thomson Newspapers Corporation
("Thomson") in 1995 and 1996; and 86 other paid daily community newspapers,
together with related publications, net of dispositions, acquired in numerous
transactions over the past eleven years, and majority control of Southam which
was acquired by Hollinger Inc. and the Company during the period 1993 to the
present time.
The Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. At December 31, 1997, 1996, and
1995, the Company's interest in The Telegraph was 100.0%, 100.0%, and 64.0% and
in Southam was 58.6%, 50.7%, and 19.4%, respectively. Investments in less than
majority-owned affiliated companies are accounted for using the equity method of
accounting. All intercompany balances and transactions have been eliminated on
consolidation.
SIGNIFICANT TRANSACTIONS
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 wholly owned Canadian publishing interests directly or
indirectly to Hollinger Canadian Publishing Holdings Inc. ("HCPH"), a
subsidiary of the Company, including newspaper assets located mainly in
Ontario, Saskatchewan, British Columbia, and 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 "Hollinger Inc. Transaction"). The purchase
price was satisfied by payment of cash in the amount of $250.0 million and by
the issuance of a new series 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 $90.0 million, and (ii) 3,207,245 shares of
Class A Common Stock of the Company to Hollinger Inc. having a nominal agreed
value of $42.0 million, subject to adjustments as described above. The
mandatorily convertible preferred stock was issued for a price of $108.5 each
and pays dividends of 9.5% per annum. The preferred stock and common stock was
issued subsequent to receiving the requisite approval of the stockholders of
the Company.
The initial payment of $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 purchase price was accrued for the period from January
1, 1997 to April 18, 1997.
1997 OFFERINGS On March 4, 1997, Publishing filed both a Prospectus and
a 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, closing on March 18, 1997. Both the Senior Notes and the Senior
Subordinated Notes are guaranteed by the Company.
-33-
<PAGE> 36
The Senior Notes are unsecured and senior obligations of Publishing and
rank pari-passu with all other unsecured 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 bank indebtedness, to repay the redeemable preference
shares of DTH and FDTH and for general working capital.
In February 1996, the Company sold 16,100,000 shares of Class A Common
Stock, at $9.25 per share and $250,000,000 principal amount of 9.25%
Subordinated Notes due 2006. Combined net proceeds of $384.6 million were used
to repay short-term and long-term bank loans, and short-term debt due to
Hollinger Inc. of $20.8 million.
In a series of transactions in August 1996, the Company sold 11,500,000
shares of Class A Common Stock at a price of $9.75 per share and 20,700,000
9-3/4% Preferred Redeemable Increased Dividend Equity Securities ("PRIDES") at a
price of $9.75 per PRIDES. The combined net proceeds of these sales of $301.1
million were used in the acquisition of the Telegraph shares, to paydown
Telegraph indebtedness and to pay transaction costs.
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 thereon, unless either previously redeemed by the Company or converted
at the option of the holder. The PRIDES will pay cumulative quarterly dividends
at a rate of 9.75% per annum (equivalent to $0.9506 per PRIDES) and will have an
aggregate liquidation preference equal to their price plus any accrued and
unpaid dividends thereon.
On July 31, 1996 the Company acquired all of the outstanding ordinary
shares of The Telegraph which it did not already own. The purchase price for the
shares was (pound)5.60 ($8.68) per share. The total consideration paid,
including a special dividend paid to holders of Telegraph minority shares and
the net amount payable in respect of outstanding Telegraph options, was
approximately $455.7 million. On the same date, The Telegraph changed its name
to the Telegraph Group Limited and canceled its listing on the London Stock
Exchange.
On May 24, 1996 the Company acquired from Power Corporation of Canada
("Power"), 16,349,743 common shares of Southam representing approximately 21.5%
of Southam's then outstanding common shares, for an aggregate consideration of
Cdn.$294.3 million ($214.1 million). The acquisition was financed through a
short-term facility with a Canadian chartered bank. On December 11, 1996, the
Company purchased an additional 8,000,300 shares of Southam representing
approximately 10.4% of Southam's then outstanding common shares for an aggregate
consideration of Cdn.$160.0 million ($117.4 million). The acquisition was
financed through short-term bank facilities and working capital. The 1996
acquisitions increased the Company's indirect equity interest in Southam to
50.7%. During 1997, a subsidiary of the Company acquired 6,552,425 additional
shares of Southam, increasing the ownership interest to 58.6%. The accounts of
Southam were consolidated in the financial statements for all of 1996 and 1997.
Southam has been accounted for using the equity method in the 1995 consolidated
financial statements.
On December 16, 1996, a subsidiary of the Company announced that it had
agreed conditionally to sell its 24.7% interest in Fairfax in three tranches.
The first tranche of the sale consisted of a 12.0% interest and was completed on
December 20, 1996 for gross cash proceeds of A$254.8 million ($202.3 million).
This sale resulted in a gain before income taxes of $53.5 million. The second
tranche consisted of a 7.9% interest including seven million non-voting
convertible debentures and was completed on January 10, 1997 for gross cash
proceeds of A$192.2 million ($150.3 million). The Company sold its remaining
4.8% interest in Fairfax on March 27, 1997 for gross cash proceeds of A$112.5
million ($88.7 million). The sales pursuant to the second and third tranches
gave rise to a $66.1 million pre-tax gain that is recorded in the 1997 accounts.
-34-
<PAGE> 37
On September 20, 1995, October 3, 1995 and October 16, 1995, the
Company consummated three separate agreements resulting in the acquisition of a
total of 16 United States daily newspapers and related publications from Thomson
Newspapers for approximately $95.0 million. These acquisitions were financed
through the Company's then existing credit facility and new interim bank
arrangements entered into on September 28, 1995. On April 30, 1996, the Company
completed a trade with Garden States Newspapers, Inc. The Company acquired the
Tribune-Democrat in Johnstown, Pennsylvania in exchange for six small daily
newspapers, several weekly newspapers and $31.4 million in cash. On December 16,
1996, the Company completed an exchange of newspaper assets with Thomson and Cox
Newspapers Inc. through which the Company acquired the Mount Vernon Register
News in Mount Vernon, Illinois, the Enid News in Enid, Oklahoma, and the
Herald-Palladium in St. Joseph/Benton Harbor, Michigan and related publications
in exchange for four daily newspapers in Indiana, a daily newspaper in Texas,
related publications and approximately $32.4 million in cash.
SUBSEQUENT EVENTS
On January 27, 1998, the Company completed a sale of approximately 80
community newspapers for aggregate cash consideration of approximately $310.0
million. The proceeds from the sale were used to pay off the AP-91 Notes and pay
down $175.0 million of outstanding debt on the Bank Credit Facility. A pre-tax
gain resulting from this transaction of approximately $206.0 million will be
included in the first quarter 1998 accounts.
-35-
<PAGE> 38
The following table sets forth, for the periods indicated, certain
items included in the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Operating revenues
United States Newspaper Group $ 633,633 $ 607,372 $ 559,214
U.K. Newspaper Group 492,270 451,902 405,037
Canadian Newspaper Group 1,085,627 1,014,748 114,263
---------------- ---------------- ----------------
Total operating revenue $ 2,211,530 $ 2,074,022 $ 1,078,514
================ ================ ================
Operating income (4)
United States Newspaper Group $ 89,461 $ 63,881 $ 32,125
U.K. Newspaper Group 26,657 1,601 27,000
Canadian Newspaper Group 171,604 82,485 2,739
---------------- ---------------- ----------------
Total operating income $ 287,722 $ 147,967 $ 61,864
================ ================ ================
EBITDA (2)
United States Newspaper Group $ 131,119 $ 106,707 $ 74,139
U.K. Newspaper Group 44,733 15,918 37,374
Canadian Newspaper Group 226,440 127,777 7,814
---------------- ---------------- ----------------
Total EBITDA $ 402,292 $ 250,402 $ 119,327
================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE RELATIONSHIPS
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating revenues
United States Newspaper Group 28.65% 29.28% 51.85%
U.K. Newspaper Group 22.26% 21.79% 37.56%
Canadian Newspaper Group 49.09% 48.93% 10.59%
---------------- ---------------- ----------------
Total operating revenue 100.00% 100.00% 100.00%
================ ================ ================
Operating income
United States Newspaper Group 31.10% 43.17% 51.93%
U.K. Newspaper Group 9.26% 1.08% 43.64%
Canadian Newspaper Group 59.64% 55.75% 4.43%
---------------- ---------------- ----------------
Total operating income 100.00% 100.00% 100.00%
================ ================ ================
EBITDA Margin (3)
United States Newspaper Group 20.69% 17.57% 13.26%
U.K. Newspaper Group 9.09% 3.52% 9.23%
Canadian Newspaper Group 20.86% 12.59% 6.84%
Total EBITDA 18.19% 12.07% 11.06%
EBITDA
United States Newspaper Group 32.59% 42.61% 62.13%
U.K. Newspaper Group 11.12% 6.36% 31.32%
Canadian Newspaper Group 56.29% 51.03% 6.55%
---------------- ---------------- ----------------
Total EBITDA 100.00% 100.00% 100.00%
================ ================ ================
</TABLE>
(Footnotes following tables)
-36-
<PAGE> 39
The following table sets forth, for the periods indicated, certain
items included in the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(dollar amounts in thousands)
<S> <C> <C> <C>
United States Newspaper Group
Operating revenues
Advertising $ 433,516 $ 403,328 $ 372,597
Circulation 149,073 145,268 129,685
Job printing and other 51,044 58,776 56,932
---------------- ---------------- ----------------
Total operating revenues 633,633 607,372 559,214
---------------- ---------------- ----------------
Operating costs
Newsprint 89,302 109,045 101,748
Compensation costs 229,994 218,832 197,319
Other Operating costs 181,364 172,788 178,008
Direct subscription campaign costs, net and
infrequent items 1,854 -- 8,000
Depreciation and amortization 41,658 42,826 42,014
---------------- ---------------- ----------------
Total operating costs 544,172 543,491 527,089
---------------- ---------------- ----------------
Operating income $ 89,461 $ 63,881 $ 32,125
================ ================ ================
U.K. Newspaper Group
Operating revenues
Advertising $ 335,115 $ 278,156 $ 262,963
Circulation 137,073 158,220 132,985
Job printing and other 20,082 15,526 9,089
---------------- ---------------- ----------------
Total operating revenues 492,270 451,902 405,037
---------------- ---------------- ----------------
Operating costs
Newsprint 89,851 101,259 87,648
Compensation costs 86,887 76,892 74,216
Other operating costs 248,232 225,506 205,799
Direct subscription campaign costs, net and
infrequent items 22,567 32,327 --
Depreciation and amortization 18,076 14,317 10,374
---------------- ---------------- ----------------
Total operating costs 465,613 450,301 378,037
---------------- ---------------- ----------------
Operating income $ 26,657 $ 1,601 $ 27,000
================ ================ ================
Canadian Newspaper Group
Operating revenues
Advertising $ 787,410 $ 683,043 $ 63,874
Circulation 249,301 258,634 39,054
Job printing and other 48,916 73,071 11,335
---------------- ---------------- ----------------
Total operating revenues 1,085,627 1,014,748 114,263
---------------- ---------------- ----------------
Operating costs
Newsprint 132,857 136,142 14,678
Compensation costs 419,272 435,949 47,539
Other operating costs 306,236 305,640 44,232
Direct subscription campaign costs, net and
infrequent items 822 9,240 --
Depreciation and amortization 54,836 45,292 5,075
---------------- ---------------- ----------------
Total operating costs 914,023 932,263 111,524
---------------- ---------------- ----------------
Operating income $ 171,604 $ 82,485 $ 2,739
================ ================ ================
</TABLE>
(Footnotes following tables)
-37-
<PAGE> 40
The following table sets forth, for the periods indicated, the
percentage relationships for certain items included in the Company's
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
PERCENTAGE RELATIONSHIPS
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States Newspaper Group
Operating revenues
Advertising 68.41% 66.40% 66.63%
Circulation 23.53 23.92 23.19
Job printing and other 8.06 9.68 10.18
---------------- ---------------- ----------------
Total operating revenues 100.00% 100.00% 100.00%
---------------- ---------------- ----------------
Operating costs (1)
Newsprint 14.09% 17.95% 18.20%
Compensation costs 36.30 36.03 35.29
Other operating costs 28.62 28.45 31.83
Direct subscription campaign costs, net and
infrequent items 0.30 -- 1.43
Depreciation and amortization 6.57 7.05 7.51
---------------- ---------------- ----------------
Total operating costs 85.88 89.48 94.26
---------------- ---------------- ----------------
Operating income (1) 14.12% 10.52% 5.74%
================ ================ ================
U.K. Newspaper Group
Operating revenues
Advertising 68.07% 61.55% 64.93%
Circulation 27.85 35.01 32.83
Job printing and other 4.08 3.44 2.24
---------------- ---------------- ----------------
Total operating revenues 100.00% 100.00% 100.00%
---------------- ---------------- ----------------
Operating costs (1)
Newsprint 18.25% 22.41% 21.64%
Compensation costs 17.65 17.02 18.32
Other operating costs 50.43 49.90 50.81
Direct subscription campaign costs, net and
infrequent items 4.58 7.15 --
Depreciation and amortization 3.67 3.17 2.56
---------------- ---------------- ----------------
Total operating costs 94.58 99.65 93.33
---------------- ---------------- ----------------
Operating income (1) 5.42% 0.35% 6.67%
================ ================ ================
Canadian Newspaper Group
Operating revenues
Advertising 72.53% 67.31% 55.90%
Circulation 22.96 25.49 34.18
Job printing and other 4.51 7.20 9.92
---------------- ---------------- ----------------
Total operating revenues 100.00% 100.00% 100.00%
---------------- ---------------- ----------------
Operating costs (1)
Newsprint 12.24% 13.41% 12.85%
Compensation costs 38.62 42.96 41.60
Other operating costs 28.21 30.13 38.71
Direct subscription campaign costs, net and
infrequent items 0.07 0.91 --
Depreciation and amortization 5.05 4.46 4.44
---------------- ---------------- ----------------
Total operating costs 84.19 91.87 97.60
---------------- ---------------- ----------------
Operating income (1) 15.81% 8.13% 2.40%
================ ================ ================
</TABLE>
(1) Expressed as a percentage of related revenues.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and certain other income items. EBITDA is not intended to
represent an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or cash flows from
operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company
believes that EBITDA largely determines its ability to fund current
operations and to service debt due to the significant number of
acquisitions made by the Company which have resulted in non-cash
charges for depreciation and amortization. These non-cash charges have
adversely affected net income, but have not affected EBITDA.
(3) EBITDA Margin represents EBITDA divided by related operating revenues.
(4) Includes allocation of corporate expenses.
-38-
<PAGE> 41
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
NET EARNINGS The Company had net earnings of $104.5 million, or 93
cents per share in 1997, compared with net earnings of $42.8 million, or 41
cents per share in 1996. Earnings in 1997 and 1996 include a number of
non-recurring items. For the year ended December 31, 1997, earnings from
continuing operations excluding non-recurring items were $72.6 million or 56
cents per share, compared to $12.0 million or 2 cents per share in 1996. The
method for computing per share numbers has been changed in 1997. On the basis
that was used prior to 1997 earnings from continuing operations, excluding
non-recurring items, were 63 cents per share in 1997 compared to 12 cents per
share in 1996.
OPERATING INCOME Operating income increased $139.7 million to $287.7
million in 1997 from $148.0 million in 1996. Operating income at the Canadian
Newspaper Group more than doubled primarily due to strong results at Southam.
The operating income of The Telegraph increased by $25.1 million to $26.7
million in 1997, from $1.6 million in 1996, principally as a result of increased
advertising revenues due in part by the increased circulation from the direct
subscription campaign. The United States Newspaper Group's operating income
increased $25.6 million to $89.5 million from $63.9 million, due to increased
advertising revenues, decreased newsprint expense, and income contributed by
newspapers acquired at the Community Group.
OPERATING REVENUES Operating revenues increased $137.5 million from
$2,074.0 million in 1996 to $2,211.5 million in 1997. Due to a strong
advertising market for all groups, advertising revenues increased 14.0% to
$1,556.0 million. Total circulation revenues decreased $26.7 million from $562.1
million in 1996 to $535.4 million primarily due to $21.1 million lower
circulation revenue at the Telegraph resulting from the direct prepaid
subscription campaign and a $11.1 million decrease in total circulation revenue
at Southam. 1996 circulation revenue at Southam included $46.0 million related
to its information technology group which was disposed of in 1996.
OPERATING EXPENSES Total operating costs and expenses decreased $2.3
million to $1,923.8 million in 1997 from $1,926.1 million in 1996. The decrease
is primarily due to a decrease in newsprint expense offset in part by increased
compensation costs, other costs and depreciation and amortization and the
separate reporting of costs associated with the direct prepaid subscription
campaign. Newsprint expense for the United States Newspaper Group decreased by
18.1%, the U.K. Newspaper Group decreased by 11.3%, and the Canadian Newspaper
Group decreased by 2.4% from the prior year. Newsprint prices began declining in
1996, continued to decline in the early part of 1997 and started to increase
through the latter part of 1997. Compensation costs increased $4.5 million from
$731.7 million in 1996 to $736.2 million in 1997. Increases in compensation at
the United States Newspaper Group and the U.K. Newspaper Group were offset, in
part, by a decrease at Southam. Other operating expenses, excluding special
charges, increased by $31.9 million from $703.9 million in 1996 to $735.8
million in 1997. Depreciation and amortization increased $12.2 million from
$102.4 million in 1996 to $114.6 million in 1997. 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.
EQUITY IN EARNINGS OF AFFILIATES Equity in earnings of affiliates
decreased to $5.8 million in 1997 from $12.1 million in 1996. The decrease is
due to the sales of the interests in Fairfax at the end of 1996 and early 1997
and of a portion of the Chicago joint venture in the second quarter of 1997.
OTHER INCOME Other income of $67.3 million in 1997 consisted mostly of
the gain on sale of Fairfax interest of $66.1 million and the gain on sale of
several U.S. community newspapers of $2.3 million. Other income of $58.3 million
in 1996 consisted mostly of the gain on sale of Fairfax interest of $53.5
million, the gain on sale of some U.S. community newspapers of $17.9 million and
the write-off of fixed assets and other investments at Southam of $13.2 million.
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<PAGE> 42
INTEREST EXPENSE Interest expense increased by $29.2 million. The
increase in interest expense resulted from increased borrowings that related to
the purchase of the additional Southam interest in December 1996 and July 1997,
the August 1996 buyout of the Telegraph minority and the acquisition of the
Canadian Newspapers in 1997. These increases in borrowings were offset, in part,
by the proceeds of the sale of Fairfax.
AMORTIZATION OF DEBT ISSUE COSTS 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. Amortization of debt issue costs includes
regular amortization of these costs and a one-time write-off of balances in the
amount of $4.6 million in 1997 and $12.7 million in 1996.
INCOME TAXES Income tax expense for 1997 was $93.7 million, compared
with $51.9 million in 1996. Income tax expense for 1997 and 1996 included tax on
the gain on sale of Fairfax of $22.5 million and $13.5 million, respectively.
MINORITY INTEREST Minority interest reflects the interest of the
minority holders of ordinary shares of The Telegraph in the earnings of The
Telegraph its affiliated companies until the minority buyout in August 1996, the
minority interest in earnings of Southam and dividends paid on redeemable
preferred stock of two subsidiary companies until they were redeemed in 1997.
The amount attributable to minority interests increased to $46.0 million in
1997, compared with $33.1 million in 1996, primarily as a result of the increase
in earnings of Southam.
UNITED STATES NEWSPAPER GROUP
Operating revenues in the United States Newspaper Group were $633.6
million in 1997 (or 28.7% of total operating revenues), an increase of $26.3
million over the same period in 1996. Chicago Group operating revenues increased
2.3% primarily due to strong advertising revenues. The Community Group's
revenues increased 6.8%. For newspapers in the Community Group operated
throughout both years, revenues increased $2.7 million or 1.3%.
Advertising revenues in the United States Newspaper Group were $433.5
million in 1997, an increase of $30.2 million over 1996. Advertising revenues at
the Chicago Group increased 6.4% and the Community Group increased 8.9%. For
newspapers in the Community Group operated throughout both years, advertising
revenues increased 2.6%. Circulation revenues in the United States Newspaper
Group were $149.1 million in 1997, an increase of 2.6% over 1996. Circulation
revenues for the Chicago Group decreased 1.4% from 1996, while circulation
revenues at the Community Group increased $4.9 million, primarily due to
acquisitions. For newspapers in the Community Group operated throughout both
years, circulation revenues for 1997 remained consistent with 1996. Job printing
revenues decreased $7.7 million, partially due to a decrease in newsprint
prices, but also affected by a loss of printing contracts at the Chicago Group.
Total operating costs and expenses, excluding the special charge for
the cost of terminated employees, were $542.3 million, a decrease of $1.2
million from 1996. A decrease in newsprint expense was offset in part by
increased compensation costs and other expenses. However, as a percentage of
total United States Newspaper Group revenues, operating costs and expenses,
excluding the special charge, decreased to 85.6% from 89.5%. Newsprint expense
decreased $19.7 million, or 18.1% to $89.3 million in 1997. Newsprint as a
percentage of operating revenues also decreased to 14.1% in 1997 from 18.0% in
1996. The decrease in newsprint expense is the result of lower newsprint prices
throughout 1997. Even though newsprint prices increased during the second half
of 1997, the prices still remained lower that the prices that were in effect
during most of 1996. Compensation costs increased $11.2 million from $218.8
million in 1996 to $230.0 million in 1997; however, as a percentage of revenues
compensation costs remained relatively flat at 36.3% in 1997 and 36.0% in 1996.
Increases in compensation costs were due to standard wage increases and
increases in the minimum wage. Other operating costs, excluding the special
charge, increased $8.6 million to $181.4 million in 1997 from $172.8 million in
1996; however, as a percentage of sales they remained fairly consistent at 28.6%
in 1997 and 28.5% in 1996. Depreciation and amortization costs at $41.7 million
in 1997 compared with $42.8 million in 1996 were relatively flat.
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<PAGE> 43
Operating income in the United States Newspaper Group was $89.5 million
in 1997, an increase of $25.6 million from 1996. The increases in operating
income were primarily due to the growth in advertising revenues and the
reduction of newsprint expense. As a percentage of total United States Newspaper
Group revenues, operating income increased to 14.1% in 1997 from 10.5% in 1996.
-41-
<PAGE> 44
U.K. NEWSPAPER GROUP
Operating revenues in the U.K. Newspaper Group were $492.3 million in
1997 (or 22.3% of total operating revenues), an increase of $40.4 million, or
8.9%, from 1996. When expressed in British pounds sterling, revenues increased
by 3.8%. Advertising revenues for 1997 increased $57.0 million to $335.1
million, or 20.5% over 1996. When expressed in British pounds sterling,
advertising revenues increased 14.9%. Circulation revenues for 1997 were $137.1
million, a decrease of $21.1 million, or 13.4% from 1996. When expressed in
British pounds sterling, circulation revenues decreased by 17.6%.
Total operating costs and expenses, excluding the special charge, at
The Telegraph were $443.0 million in 1997, an increase of $25.0 million, or
6.0%, over 1996. Total operating costs and expenses, excluding the special
charge, as a percentage of Telegraph revenues, were 90.0% in 1997, compared with
92.5% in 1996. As a percentage of Telegraph revenues, newsprint costs, excluding
the special charge, were 18.3% in 1997 and 22.4% in 1996. Newsprint prices in
the U.K. started to decline in the fourth quarter of 1996.
Operating income, including the $22.6 million special charge, was $26.7
million in 1997. Operating income, including the $32.3 million special charge,
was $1.6 million in 1996. As a percentage of revenues, operating income
increased to 5.5% from 0.4%. Without the special charges for the direct
subscription campaign and the cost of terminated employees, operating income
would have been $49.2 million in 1997 compared to $33.9 million in 1996. The
increase in operating income was primarily due to increases in advertising
revenues resulting partially due to the growth in circulation from the direct
subscription campaign and decreases in newsprint expense.
During 1996 the Telegraph began a program to solicit direct prepaid
subscriptions. In the past, newspaper subscribers in the U.K. dealt directly
with independent news agents for the purchase of newspapers. A significant
portion of our newspaper readers did not take the paper every day and this was
especially true for Sunday. In the summer of 1996 the Telegraph began a direct
mail campaign to solicit prepaid seven-day-a-week subscriptions. By the end of
1996, the plan had added about 100,000 new weekday and 200,000 new Sunday
average sales and the average prepaid subscription was for a period of about 40
weeks. In order to gain broad acceptance of this revolutionary plan, the
subscriptions were offered at a significant discount. The amount of that
discount was reduced throughout 1997. The Company grouped all the net costs
associated with the program including an estimate in 1996 of costs that would be
incurred in 1997 for subscribers that were signed up at December 31, 1996. This
amounted to $32.3 million and was deducted as a separately identifiable
operating expense in arriving at earnings for the year ended December 31, 1996.
During the first three quarters of 1997 these net costs associated with the
campaign amounted to $22.2 million net and were also grouped together and
deducted separately in arriving at operating income. In the fourth quarter the
net costs associated with the campaign had declined and advertising revenue had
increased, sufficient that no separate charge was necessary.
CANADIAN NEWSPAPER GROUP
Operating revenues in the Canadian Newspaper Group were $1,085.6
million in 1997 (or 49.1% of total operating revenues), an increase of $70.9
million, or 7.0%, from 1996. Advertising revenues for 1997 increased $104.4
million to $787.4 million, or 15.3% over 1996. The majority of the increase was
at Southam. Circulation revenues for 1997 were $249.3 million, a decrease of
$9.3 million, or 3.6% from the 1996. The decrease was primarily due to the
disposition by Southam of its information technology group which in 1996 had
circulation revenue of $46.0 million.
Total operating costs and expenses, excluding the special charge for
the cost of terminated employees, were $913.2 million in 1997, a decrease of
$9.8 million, or 1.1%, from 1996. Newsprint expense decreased 2.4% and
compensation costs decreased 3.8%. The decrease in compensation costs is
primarily due to staff reductions at Southam. Total operating costs and
expenses, excluding the special charge, as a percentage of revenues were 84.1%
in 1997 compared with 91.0% in 1996. Depreciation and amortization increased
$9.5 million to $54.8 million. The increase is primarily due to additional
amortization resulting from the purchase of additional interests in Southam in
December 1996 and July 1997.
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<PAGE> 45
Operating income in 1997 increased by $89.1 million or 108.0% to $171.6
million. Operating income in 1996 included a charge of $9.2 million for the cost
of terminated employees. As a percentage of revenues, operating income increased
to 15.8% from 8.1%. The increase in operating income was primarily due to an
increase in advertising revenues and decreases in compensation and newsprint
expenses.
1996 COMPARED WITH 1995
NET EARNINGS The Company had net earnings of $42.8 million in 1996,
compared with net earnings of $6.3 million in 1995. Net earnings per share were
$0.41 per share in 1996, compared with $0.09 per share in 1995. Earnings in 1996
and 1995 include several significant infrequently occurring items. The after
tax, after minority interest impact of such items in 1996 was as follows: a
charge of $4.8 million in respect of severance payments at Southam, the
Telegraph and Fairfax; a charge of $10.0 million in respect of finance costs
including $2.2 million disclosed as an extraordinary charge; a charge of $2.8
million representing the write-off of the carrying value of fixed assets and
certain investments at Southam; a $1.2 million loss on dilution of the
investment in Southam; a gain on sale of the Fairfax interest of $40.0 million
and a $9.6 million gain on sale of assets. The after tax after minority interest
impact of such items in 1995 was as follows: restructuring costs and a loss on
discontinued operations at Southam totaling $10.7 million; a charge in respect
of reorganization expenses of $4.8 million; a charge in respect of severance
payments at the Telegraph and Fairfax of $1.6 million and a $4.7 million gain on
sale of marketable securities. Excluding these items, the Company would have
reported net earnings of $0.02 per share in 1996, compared with $0.27 per share
in 1995.
OPERATING INCOME Operating income increased $86.1 million to $148.0
million in 1996 from $61.9 million in 1995. Of the increase, $62.4 million
relates to operating income of Southam. The operating income of The Telegraph
declined by $25.4 million to $1.6 million in 1996, from $27.0 million in 1995,
caused principally by the $32.3 million of costs for the direct subscription
campaign. The United States Newspaper Group's operating income increased $31.8
million to $63.9 million from $32.1 million, due to decreasing newsprint prices
at the Chicago Group, improved results at Community Group operations owned
throughout both years and income contributed by newspapers acquired at the
Community Group. The Chicago Group experienced an increase of $8.4 million to
$16.7 million, from approximately $8.3 million, caused largely by a decrease in
newsprint costs and overall cost controls. Operating income at the Canadian
Newspapers increased $17.4 million due to acquisitions during 1996 and the
latter part of 1995.
OPERATING REVENUES Operating revenues increased $995.5 million from
$1,078.5 million in 1995 to $2,074.0 million in 1996. Of the increase $803.4
million is attributable to revenues from Southam. Advertising revenues increased
$665.1 million from $699.4 million to $1,364.5 million, of which $562.6 million
is attributable to advertising revenues of Southam. Circulation revenues
increased $244.3 million of which $186.7 million related to circulation revenues
of Southam.
OPERATING EXPENSES Total operating costs and expenses increased $909.4
million from $1,016.7 million in 1995 to $1,926.1 million in 1996. The increase
in operating expenses without the inclusion of $741.1 million operating expense
from Southam was $168.3 million. Newsprint expense for the United States
Newspaper Group and the U.K. Newspaper Group increased by 11.0% from the prior
year. Acquisitions at the Community Group added $8.0 million to newsprint
expense. Even though newsprint prices began declining in 1996 the effects were
not realized until the second quarter in the United States and the fourth
quarter of 1996 in the United Kingdom. Compensation costs increased $412.6
million from $319.1 million in 1995 to $731.7 million in 1996. Compensation
costs at Southam were $352.7 million for 1996. Other operating expenses,
excluding special charges, increased by $275.9 million from $428.0 million in
1995 to $703.9 million in 1996. The increase in other operating expenses was
$39.5 million excluding $236.4 million of other operating expenses at Southam.
Depreciation and amortization increased $44.9 million from $57.5 million in 1995
to $102.4 million in 1996. The increase in depreciation and amortization was
$4.5 million excluding depreciation and amortization at Southam.
EQUITY IN EARNINGS OF AFFILIATES Equity in earnings of affiliates
decreased $2.3 million from $14.4 million in 1995 to $12.1 million in 1996. In
December 1996, the Company announced the sale in three tranches of its interest
in Fairfax. The first tranche was sold in December 1996 resulting in proceeds of
$202.3 million and a
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<PAGE> 46
gain recognized of $53.5 million in 1996. The second and third tranches were
accounted for in 1997. The 1996 equity earnings were $12.0 million and include
Fairfax up to the date of sale and the Chicago joint venture. The results of
Southam were consolidated for the year ended December 31, 1996. The 1995 results
include the Company's shares of equity in earnings for Fairfax, Southam and the
joint venture. Excluding Southam from the 1995 results, equity in earnings would
have been $25.4 million. Equity in earnings of Fairfax decreased $13.5 million
primarily due to higher deprecation and interest costs related to the new
production plant in Sydney and weakness in the Australian economy.
OTHER INCOME Other income of $58.3 million in 1996 consisted mostly of
the gain on sale of Fairfax interest of $53.5 million, the gain on sale of some
U.S. community newspapers of $17.9 million and the write-off of fixed assets and
other investments at Southam of $13.2 million. Comparable other income in 1995
consisted mostly of the gain on sale of subsidiary shares and marketable
securities of $12.0 million.
INTEREST EXPENSE Interest expense increased by $39.7 million to $84.4
million in 1996, compared with $44.7 million in 1995. The increase in interest
expense resulted from increased borrowings that related to the purchase of the
additional Southam interest, the buyout of the Telegraph minority interest and
acquisitions at the Community Group.
AMORTIZATION OF DEBT ISSUE COSTS Amortization of debt issue costs
represents debt issue costs on Senior Subordinated Notes issued in February 1996
and include regular amortization of these costs in 1996 and a one time write-off
of balances in 1996 in the amount of $12.7 million.
INCOME TAXES Income tax expense for 1996 was $51.9 million, compared
with $20.6 million in 1995. Income tax expense for 1996 consisted of $17.1
million in United States taxes and $34.8 million in foreign taxes, compared with
$2.5 million United States taxes and $18.1 million in foreign taxes for 1995.
Taxes related to Southam were $13.3 million in 1996. In 1995 taxes at Southam
were included in equity earnings.
MINORITY INTERESTS Minority interest reflects the interest of the
minority holders of ordinary shares of The Telegraph in the earnings of The
Telegraph its affiliated companies until the minority buyout in August 1996, the
minority interest in earnings of Southam for 1996 and dividends paid on
redeemable preferred stock of two subsidiary companies. The amount attributable
to minority interests increased to $33.1 million in 1996, as compared with $22.6
million in 1995 and $17.7 million of this was represented by minority interests
in Southam.
UNITED STATES NEWSPAPER GROUP
Operating revenues in the United States Newspaper Group were $607.4
million in 1996 (or 29.3% of total operating revenues), an increase of $48.2
million, or 8.6%, over the same period in 1995. The Community Group's revenues
increased $45.1 million, or 19.8%. For newspapers in the Community Group
operated throughout both years, revenues increased $4.6 million, or 2.7%.
Advertising revenues in the United States Newspaper Group were $403.3
million in 1996, an increase of $30.7 million, or 8.2%, over 1995. The Community
Group increased $30.7 million, or 21.4%. For newspapers in the Community Group
operated throughout both years, advertising revenues increased $3.2 million, or
2.8%.
Circulation revenues in the United States Newspaper Group were $145.3
million in 1996, an increase of $15.6 million, or 12.0% over 1995. Circulation
revenues for the Chicago Group increased $2.2 million, while circulation
revenues at the Community Group increased $13.4 million, or 26.2%. For
newspapers in the Community Group operated throughout both years, circulation
revenues increased $2.5 million, or 7.3%.
Job printing revenues, derived from utilizing available press capacity
for printing unaffiliated newspapers, fliers, retail store advertisements and
real estate listings for third parties, increased $1.9 million, or 3.2%, to
$58.8 million in 1996 from $56.9 million in the same period in 1995.
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<PAGE> 47
Total operating costs and expenses, excluding the reorganization
expense in 1995, were $543.5 million, an increase of $24.4 million, or 4.7%,
over 1995. As a percentage of total United States Newspaper Group revenues,
operating costs and expenses decreased to 89.5% from 94.3%.
Newsprint expense increased $7.3 million, or 7.2% to $109.0 million in
1996. Newsprint as a percentage of operating revenues remained relatively flat
at 18.0% in 1996 and 18.2% in 1995. Acquisitions at the Community Group added
$8.0 million in newsprint costs to 1996. Compensation costs increased $21.5
million from $197.3 million in 1995 to $218.8 million in 1996 and as a
percentage of revenues compensation costs remained relatively flat at 36.0% in
1996 and 35.3% in 1995. Other operating costs, excluding the reorganization
expense in 1995, decreased $5.2 million to $172.8 million in 1995 from $178.0
million in 1995. Depreciation and amortization costs at $42.8 million in 1996
compared with $42.0 million in 1995 were relatively flat. Increased depreciation
and amortization on Community Group acquisitions was offset by reduced
amortization resulting from the revaluation of the remaining useful lives of
certain intangible assets.
Expenses associated with the Reorganization were $8.0 million in 1995
and there were no comparable expenses in 1996.
Operating income in the United States Newspaper Group was $63.9 million
in 1996, an increase of $31.8 million from 1995. The Community Group's
performance, notwithstanding newsprint cost increases, improved by 48.4% as a
result of both operating improvements at operations owned in both years and
acquisitions, and the Chicago Group showed an improvement of 100.5% generated
largely by cost controls. As a percentage of total United States Newspaper Group
revenues, operating income increased to 10.5% from 5.7%.
U.K. NEWSPAPER GROUP
Operating revenues in the U.K. Newspaper Group were $451.9 million in
1996 (or 21.8% of total operating revenues), an increase of $46.9 million, or
11.6%, from 1995. When expressed in British pounds sterling, revenues increased
by 13.5%. Advertising revenues for 1996 increased $15.2 million to $278.2
million, or 5.8% over 1995. When expressed in British pounds sterling,
advertising revenues increased 7.6%. Circulation revenues for 1996 were $158.2
million, an increase of $25.2 million, or 19.0%, from the 1995 period. When
expressed in British pounds sterling, circulation revenues increased by 21.3%.
Total operating costs and expenses, excluding the special charge, at
The Telegraph were $418.0 million in 1996, an increase of $40.0 million, or
10.6%, over 1995. When expressed in British pounds sterling, total operating
costs and expenses increased 10.0% over 1995. Total operating costs and
expenses, excluding the special charge, as a percentage of Telegraph revenues,
were 92.5% in 1996, compared with 93.3% in 1995. As a percentage of Telegraph
revenues, newsprint costs, excluding the special charge, were approximately 22%
in both 1996 and 1995. Newsprint prices in the U.K. started to decline in the
fourth quarter of 1996.
Operating income, including the $32.3 million special charge, at The
Telegraph was $1.6 million in 1996, a decrease of $25.4 million, or 94.1%, from
1995. As a percentage of Telegraph revenues, operating income declined to 0.4%
from 6.7%. When expressed in British pounds sterling, the operating income
decrease was 64.7%. Without the special charge for the prepaid subscription
campaign, operating income would have been $33.9 million in 1996 compared to
$27.0 million in 1995. The decline in operating income due to this fourth
quarter special charge was partially offset by improved advertising revenues. In
addition, amortization of intangibles increased as a result of the August 1996
buyout of the minority.
For the first time in the United Kingdom, the Telegraph solicited
direct prepaid subscriptions from potential readers. In the past, newspaper
subscribers have dealt directly with independent news agents for the purchase of
newspapers. These agents deal in numerous publications. A significant portion of
the newspaper readers did not take the paper every day and this has been
especially true for Sunday. Starting in the late summer the Telegraph began a
direct mail campaign to solicit prepaid seven-day-a-week subscriptions. These
were offered for 12, 24, 36 and 52 week periods. By year end, the plan had added
about 100,000 new weekday and 200,000 new
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<PAGE> 48
Sunday average sales. The average prepaid subscription was for a period of about
40 weeks. In order to gain broad acceptance of this revolutionary plan, the
subscriptions were offered at a significant discount. As a result the Company
has grouped all the net costs associated with the program including an estimate
of costs that would be incurred in 1997 for subscribers that were signed up at
December 31, 1996. This amounted to $32.3 million and we have deducted this as a
separately identifiable operating expense in arriving at earnings.
CANADIAN NEWSPAPER GROUP
For 1996, the Canadian Newspaper Group consists of the Company's
majority interest in Southam and the Canadian Newspapers. For 1995, only the
Canadian Newspapers are included as the ownership interest in Southam was
recorded as equity earnings.
Operating revenues for the Canadian Newspaper Group increased $900.5
million to $1,104.7 million in 1996, of which Southam represented $803.4 million
of the increase. Advertising revenues for the Canadian Newspapers increased
$56.6 million to $120.5 million in 1996 and circulation revenues increased $32.9
million to $71.9 million in 1996. An acquisition of a group of newspapers in
1996 added $53.9 million to revenues. A full year of operating results from the
acquisition of another group of newspapers at the end of 1995 also contributed
to the increase in revenues. For 1996 Southam's advertising revenues were $562.6
million and circulation revenues were $186.7 million.
Total operating costs and expenses increased $79.7 million due
primarily to the acquisitions described above. Operating costs and expenses,
excluding costs in respect of terminated employees for Southam were $731.8
million.
Operating income for the Canadian Newspaper Group increased $79.7 million to
$82.5 million in 1996. Operating income of Southam represented $62.4 million of
the increase.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL Working capital consists of current assets less current
liabilities. Current assets were $505.3 million and $523.7 million at December
31, 1997 and 1996, respectively. Current liabilities, excluding debt
obligations, were $413.3 million and $680.2 million, respectively, at December
31, 1997 and 1996, of which $160.0 million related to current liabilities
(excluding debt obligations) of Southam in 1996. Short-term debt was $503.4
million in 1996. There was no short-term debt outstanding at December 31, 1997.
Amounts due from affiliates were $18.4 million in 1997 compared with
intercompany indebtedness and other amounts due to affiliates of $273.7 in 1996.
The amount at December 31, 1996 includes $260.6 million payable to Hollinger
Inc. for the Canadian Newspapers plus a working capital adjustment. The
Company's consolidated working capital at December 31, 1997 was $56.4 million
compared to a deficit of $695.8 million in 1996.
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 $402.3 million in
1997, $250.4 million in 1996 and $119.3 million in 1995, respectively. The
Company believes that EBITDA largely determines its ability to fund current
operations and to service debt
CASH FLOW Cash flows on a consolidated basis from operating activities
(calculated in accordance with United States generally accepted accounting
principles) were $242.8 million, $198.4 million, and $21.2 million in 1997,
1996, and 1995, respectively. Excluding changes in working capital (other than
cash), cash from operating activities was $265.1 million, $146.0 million, and
$71.3 million for 1997 1996, and 1995, respectively Working capital changes
required cash of $22.3 million and $50.1 million in 1997 and 1995, respectively
and provided cash of $52.4 million in 1996. Changes reflect normal variations
from year to year in inventory, accounts receivable, short-term liabilities and
other working capital items.
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<PAGE> 49
Cash flows provided by investing activities were $8.5 million in 1997
principally reflecting proceeds from the disposal of Fairfax offset by capital
expenditures and acquisitions at the Community Group and Southam and the
purchase of the additional interest in Southam. Cash flows used in investing
activities were $895.3 million in 1996 and $217.4 million in 1995, principally
reflecting the acquisitions of the Telegraph minority, the additional interest
in Southam and acquisitions at the Community Group in 1996, the acquisition of
16 paid daily community newspapers and the purchase of additional Telegraph
shares in 1995, offset by the proceeds from the sale of the Fairfax in 1996 and
the sale of other marketable securities in 1995. Cash flows used in financing
activities were $276.9 million reflecting changes in borrowings offset by the
redemption of preference shares at DTH and FDTH, payment of dividends and
payments made to Hollinger for the Canadian Newspapers. Cash flows provided by
financing activities were $814.7 million in 1996 and $103.7 million in 1995,
reflecting changes in borrowings and proceeds from the sale of Class A Common
Stock and PRIDES offset by dividend payments.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING In the past three years
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,
advances from Hollinger Inc. and proceeds from one debt offering, two equity
offerings and one PRIDES offering in 1996 and two debt offerings in 1997.
UNITED STATES NEWSPAPER GROUP
Capital expenditures at the United States Newspaper Group amounted to
$28.4 million, $17.2 million, and $16.3 million in 1997 1996, and 1995,
respectively, primarily for purchases of computerized pre-press and other
production equipment and improvements to its properties in the United States and
Israel. The Company plans to commence construction of a new printing facility in
Chicago during 1998 at an estimated cost of approximately $100.0 million, to be
operational in 1999.
The Company acquired newspapers and other publications in the United
States in 1997, 1996, and 1995, for aggregate cash consideration of $180.9
million funded primarily through bank borrowings. Such amount does not include
notes payable to former owners and amounts due under noncompetition agreements
with former owners. In 1997, the Community Group purchased four paid daily
newspapers, four paid non-daily newspapers and six free distribution newspapers
for $22.1 million. In addition, the Community Group acquired two paid daily
newspapers and one paid non-daily newspaper in exchange for one daily newspaper,
three non-daily newspapers and one free distribution newspaper. In 1996, the
Community Group acquired seven paid daily, 12 paid non-daily and sixteen free
non-daily newspapers. In 1996, the Community Group disposed of 15 paid daily
newspapers and 18 free non-daily newspapers for $63.8 million. In 1995, the
Community Group acquired 16 paid daily newspapers, three paid non-dailies and 20
free non-daily publications in nine states at an aggregate cash cost of
approximately $95.0 million.
The Company's acquisition of Hollinger Inc.'s indirect interest in The
Telegraph, Fairfax, and Southam occurred in October 1995 and involved the
issuance to Hollinger Inc. of 33,610,754 shares of Class A Common Stock and
739,500 shares of Series A Preferred Stock (changed to Series D Preferred Stock
in 1997). The acquisition of an additional 5.1% interest in The Telegraph at a
cash cost of $49.6 million was accomplished through the exercise of the
Telegraph Option in October 1995. The acquisition of the Telegraph minority
occurred in August 1996 and acquisitions of additional interests in Southam
occurred in May and December of 1996 and July of 1997. The Company acquired
Canadian Newspapers from Hollinger Inc, in April 1997.
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<PAGE> 50
U.K. NEWSPAPER GROUP
Capital expenditures at The Telegraph were $5.6 million, $4.6 million,
and $5.4 million, in 1997, 1996, , and 1995, respectively. Not included in the
capital expenditures of The Telegraph are capital expenditures of the two joint
venture printing companies, which aggregated $61.1 million in the three years
ended December 31, 1997. The capital expenditures and depreciation charges of
the joint venture printing companies are not consolidated in the accounts of The
Telegraph, but are reflected through the normal equity accounting procedures
applied to affiliated companies.
CANADIAN NEWSPAPER GROUP
Capital expenditures at the Canadian Newspaper Group were $84.3
million, $102.8 million and $5.7 million in 1997, 1996 and 1995, respectively.
The capital expenditure amount includes $79.3 million and $98.0 million in 1997
and 1996, respectively for Southam, which primarily relate to the construction
of a new press facility in Vancouver, which was put into service in 1997.
DEBT OBLIGATIONS The Company, Publishing and its principal subsidiaries
are parties to various debt agreements that have been entered into to fund
acquisitions, working capital requirements and other corporate purposes. At
December 31, 1997, the indebtedness of the Company was $1,428.4 million.
1997 OFFERINGS On March 4, 1997, Publishing filed both a Prospectus and
a 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, closing on March 18, 1997. Both the Senior Notes and the Senior
Subordinated Notes are guaranteed by the Company.
The Senior Notes are unsecured and senior obligations of Publishing and
rank pari-passu with all other senior unsecured 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. The Company is in compliance with its
covenants.
Publishing and its restricted subsidiaries utilized the proceeds of
these offerings to repay the Amended Publishing Credit Facility, the FDTH Credit
Facility and the Southam Credit Facility, to repay the redeemable preference
shares of DTH and FDTH and for general working capital.
SENIOR SECURED NOTES American Publishing (1991) Inc. ("AP-91"), a
wholly owned subsidiary of Publishing, issued $150 million in senior secured
notes (collectively, the "AP-91 Senior Notes") which are held by 19 insurance
companies of which $105 million were outstanding at December 31, 1997. The AP-91
Senior Notes were issued in five series due on September 1, 1998, September 1,
1999, and September 1, 2000, in the principal amounts of $30 million, $20
million and $55 million, respectively, and bearing interest at rates ranging
from 10.44% to 10.53%. The Notes were repaid together with a makewhole premium
of $8.4 million in January 1998 in conjunction with the 1998 sale of the
Community Group newspapers as previously discussed.
SENIOR SUBORDINATED NOTES Publishing sold $250 million aggregate
principal amount of Notes on February 7, 1996. The Notes mature on February 1,
2006, and are unsecured senior subordinated obligations of Publishing. Each Note
bears interest at the rate of 9.25% per annum payable semiannually on February 1
and August 1 of each year, commencing on August 1, 1996. The Notes may be
redeemed at any time on or after February 1, 2001, at the option of Publishing,
in whole or in part, at a price of 104.625% of the principal amount thereof,
declining ratably to par on or after February 1, 2004, together with accrued and
unpaid interest to the
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<PAGE> 51
redemption date. Payment of the principal, premium,, and interest on the Notes
is guaranteed by the Company on a senior subordinated basis (the "Guarantee").
The Notes and the Guarantee are expressly subordinated to all senior
indebtedness of Publishing and the Company, including all indebtedness and other
obligations under the Publishing Credit Facility and the Company's guarantee
thereof.
The indenture relating to the Notes (the "Indenture") contains
covenants that, among other things, limit the ability of Publishing and the
Restricted Subsidiaries (defined to include the United States subsidiaries of
Publishing, the Telegraph, the Canadian Newspapers and Jerusalem Post) to, incur
indebtedness, pay dividends or make other distributions on its capital stock,
subject in each case to certain exceptions. The Company and the Restricted
subsidiaries are in compliance with the covenants.
CONSENT SOLICITATION On February 19, 1997, Publishing completed a
solicitation of consents from the holders of the 9.25% Notes with respect to
certain amendments (the "Amendments") to the Indenture governing the 9.25% Notes
dated as of February 1, 1996 between Publishing and Fleet National Bank, as
trustee (the "Trustee"). The primary purpose of the Amendments was to facilitate
the inclusion of certain international subsidiaries of the Company as Restricted
Subsidiaries of Publishing and to enhance its corporate and financing
flexibility.
PUBLISHING CREDIT FACILITY In May 1996, Publishing entered into an
amended and restated credit agreement (the "Amended Publishing Credit Facility")
with a lender, which consisted of a secured non-amortizing revolving credit
facility. The facility was for a maximum amount of $160 million and matured on
April 7, 1997. At December 31, 1996 $157.0 million was outstanding under this
facility. The facility was used to finance the acquisition of the Telegraph
minority shares and was repaid with the proceeds of the 1997 issue of Senior
Notes and Senior Subordinated Notes.
On April 7, 1997, Publishing, HCPH, The Telegraph and a group of
financial institutions entered into a new long-term bank credit facility (the
"Bank Credit Facility"). This facility replaced the Amended Publishing 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 up to $900 million in total credit
availability under four tranches. In July 1997, the Company reduced its total
available commitments to $515 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.
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,
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<PAGE> 52
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 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.
The Bank Credit Facility contains both affirmative and negative
covenants, and various financial covenants. The Company was in compliance with
all covenants at December 31, 1997.
FDTH CREDIT FACILITY In May 1996, FDTH entered into a credit agreement
(the "FDTH Credit Facility") with certain lenders, which consisted of a secured
non-amortizing revolving credit facility. The Facility was for a maximum of
(pound)250 million ($428.1 million) and matured on April 7, 1997. At December
31, 1996 $191.3 million was outstanding under this facility. The facility was
used to finance the acquisition of the Telegraph minority shares and pay
outstanding indebtedness of the Telegraph. The FDTH Credit Facility was repaid
as to approximately (pound)30 million ($51.4 million) with the proceeds of the
first two tranches of the sale of its stake in Fairfax and remaining balance
repaid with the proceeds of the Senior Notes and Senior Subordinated Notes.
SOUTHAM FACILITY In May 1996, the Company, through a subsidiary,
entered into a short-term facility with a Canadian chartered bank in the amount
of Cdn$300 million (the "Southam Facility"). The maturity date on the loan was
March 31, 1997 or earlier upon the occurrence of certain events. The Company
borrowed $218.8 million (Cdn$298.8 million) under the facility and the proceeds
of the facility were used in 1996 to acquire the additional 21.5% interest in
Southam. The Company repaid the Southam Facility with the proceeds of the Senior
Notes and the Senior Subordinated Notes.
REDEEMABLE PREFERRED STOCK The Company's interest in The Telegraph is
held through intermediate English holding companies, DTH and FDTH, whose only
significant long-term assets are their direct or indirect interests in The
Telegraph.
On December 29, 1995, DTH transferred all outstanding FDTH Preference
shares which it then held (with an aggregate redemption amount of Cdn$140
million ($102.6 million )) to Argsub Limited (Argsub), in exchange for newly
issued preference shares (with an aggregate redemption amount of Cdn$140 million
($102.6 million )) of Argsub. Argsub was a wholly owned English subsidiary of
Argus Corporation Limited. Argus Corporation Limited is a Canadian corporation,
all the voting stock of which is indirectly owned or controlled by the principal
shareholder of Hollinger Inc. On September 30, 1996, FDTH issued 600 Fourth
Preference Shares Series 1996 (with an aggregate redemption amount of $300
million) to Argsub in exchange for 600 newly issued Second Preference Shares,
Series 1996 of Argsub (with an aggregate redemption amount of $300 million).
Both series of Argsub shares have terms substantially identical to those of the
FDTH shares for which they were exchanged. At December 31, 1996 DTH and FDTH had
outstanding preference shares held by persons other than the Company and its
affiliates with an aggregate redemption amount of $526.4 million. In June 1997
DTH purchased 100% of the common shares of Argsub Limited ("Argsub") from Argus
Corporation Limited. Argsub is the holder of $401.2 million preference shares of
FDTH. In addition, in May and June 1997 DTH paid approximately $123.3 million in
respect of the redemption of their redeemable preferred stock.
In addition, the Company issued to Hollinger Inc. in connection with
the 1995 Reorganization in which the Company acquired Hollinger Inc.'s interest
in The Telegraph and Southam, 739,500 shares of Series A Preferred Stock. The
Series A Preferred Stock was subsequently exchanged for Series D Preferred Stock
as part of the Hollinger Inc. transaction. The shares of Series D Preferred
Stock are redeemable in whole or in part, at any time and from time to time,
subject to restrictions in the Company's credit facilities, by the Company or by
a holder of such shares. The redemption price of the Series D Preferred Stock
was $75.9. million at December 31, 1997.
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<PAGE> 53
HCPH SPECIAL SHARES HCPH issued 6,552,425 Cdn.$10 Non-Voting Special
Shares in July 1997 for a total issue price of Cdn.$65.5 million.
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 Class A Common
Stock of the Company based on an exchange ratio set out in the Exchange
Indenture. Each HCPH special share will be automatically exchanged ("Mandatory
Exchange") on June 26, 2000 into a number of Class A Common Shares of the
Company equal to a) US$8.88 divided by b) 95% of the current market price of the
Class A Common Stock. Upon either an Optional Exchange or a Mandatory Exchange,
the Company will have the option in lieu of delivering all or any of the Class A
Common Stock issuable on exchange, to make a cash payment.
INFLATION During the past three years, inflation has not had a material
effect on the Company's newspaper business in the United States, United Kingdom,
Australia and Canada. However, operations of Jerusalem Post, in local currency
terms, have been affected by inflation amounting to 7.0%,10.0%, and 8.1%,
annually in 1997, 1996, and 1995, respectively, which to a certain extent have
been offset by the devaluation of the NIS in relation to the United States
dollar in each of these years by 8.8%, 3.7%, and 3.9 %, respectively.
NEWSPRINT Newsprint prices continued to fluctuate throughout 1997 and
on a consolidated basis amounted to $312.0 million ($345.3 million in 1996 and
$204.1 million in 1995). Management believes that while newsprint prices could
continue to show wide price variations in the future, they will be more stable
than they were through 1996. Operating divisions take steps to ensure that they
have sufficient supply of newsprint and have mitigated the cost increases by
adjusting pagination and page sizes and printing and distributing practices. For
the Company and subsidiaries at the end of 1997, total newsprint usage was about
580,000 tons per annum. At those levels of usage and based on properties and
ownership levels at December 31, 1997, a change in the price of newsprint of $50
per ton would increase or decrease net income by about $15.6 million.
YEAR 2000 The Company is currently analyzing its internally developed
and purchased software that utilize embedded date codes. Such embedded date
codes may experience operational problems with respect to dates on or after
January 1, 2000, the so-called Year 2000 problem. A corporate wide task force is
in place, with all major business segments involved. The Company has already
made some modifications and during 1998 and 1999 plans to make further necessary
modifications to the identified software and to test systems. The Company is
also communicating with suppliers and others with which we do business to
coordinate Year 2000 conversion. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational difficulties for the Company. It
is not anticipated that modifying or replacing software will have a material
effect in any one year on the Company's financial statements or results of
operations taken as a whole.
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<PAGE> 54
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears beginning at page F-1
of this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE> 55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
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<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES.
The consolidated financial statements filed as part of this report
appear beginning at page F-1.
(2) EXHIBITS.
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ----------- ---------------------- -------------------------
2.1 UniMedia Class A Stock Purchase Incorporated by
Agreement dated as of April 18, 1997 reference to Exhibit
among Hollinger Inc., UniMedia Holding 2.01 to Current Report
Company and Hollinger International on Form 8-K dated April
Inc. 18, 1997.
2.2 UniMedia Class B Stock Purchase Incorporated by
Agreement dated as of April 18, 1997 reference to Exhibit
among Hollinger Inc., UniMedia Holding 2.02 to Current Report
Company and Hollinger International on Form 8-K dated April
Inc. 18, 1997.
2.3 Sterling Purchase Agreement dated as of Incorporated by
April 18, 1997 among Hollinger Inc. and reference to Exhibit
Hollinger Canadian Publishing Holdings 2.03 to Current Report
Inc. on Form 8-K dated April
18, 1997.
2.4 Purchase Agreement relating to the Incorporated by
Senior Notes, dated March 12, 1997 reference to Exhibit
1.01 to Current Report
on Form 8-K dated March
18, 1997.
2.5 Purchase Agreement relating to the Incorporated by
Senior Subordinated Notes, dated March reference to Exhibit
12, 1997 1.02 to Current Report
on Form 8-K dated March
18, 1997.
3.1 Restated Certificate of Incorporation Incorporated by
reference to Exhibit 3.1
to Current Report on
Form 8-K dated October
13, 1995
3.2 Bylaws, as amended and restated. Incorporated by
reference to Exhibit 3.2
to Registration
Statement on Form S-1
(No. 33-74980)
3.3 Certificate of Designations for Series Incorporated by
B Convertible Preferred Stock reference to Exhibit
3.01 to Current Report
on Form 8-K dated August
7, 1996.
3.4 Certificate of Designations for Series Incorporated by
C Convertible Preferred Stock reference to Exhibit
1.1.3.2 to Current Report
on Form 8-K dated May 5,
1997.
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<PAGE> 57
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ----------- ---------------------- ----------------------
<S> <C> <C>
4.1 Second Amended Bank Credit Facility dated Pursuant to S-K
April 7, 1997 among Hollinger International 601(b)(4)(iii), the
Publishing Inc., Telegraph Group Limited, Registrant has not
Hollinger Canadian Publishing Holdings filed a copy of this
Inc., various financial institutions, The exhibit but will
Toronto Dominion Bank, as Issuing Bank, the furnish a copy upon
Bank of Nova Scotia, as Syndication Agent, the Commission's
Canadian Imperial Bank of Commerce, as request.
Documentation Agent, and Toronto Dominion
(Texas), Inc., as Administrative Agent.
4.2 Senior Indenture, dated as of March 18, 1997 Incorporated by
reference to Exhibit
4.01 to Current
Report on Form 8-K
dated March 18, 1997
4.3 Senior Subordinated Indenture, dated as of Incorporated by
March 18, 1997 reference to Exhibit
4.03 to Current
Report on Form 8-K
dated March 18, 1997
4.4 Exchange Indenture, dated July 17, 1997 Incorporated by
among Hollinger Canadian Publishing reference to Exhibit
Holdings Inc., Hollinger International 4.01 to Registration
Inc. and Montreal Trust Company of Canada Statement on Form S-3
(333-35619)
10.1 Composite conformed copy of twenty-one Incorporated by
separate Note Purchase Agreements, each reference to Exhibit
dated as of September 12, 1990, among 10.4 to Registration
American Publishing Company and the Statement on Form S-1
Purchasers identified on Schedule 1 (No. 33-74980)
thereof.
10.2 Credit Agreement, dated February 7, 1996, Incorporated by
by and among Hollinger International Inc., reference to Exhibit
Various Financial Institutions, The Toronto 10.3 to Current
Dominion Bank, as Issuing Bank, Report on Form 8-K
Toronto-Dominion (Texas), Inc., as Dated February 7,
Administrative Agent and The First National 1996
Bank of Chicago as Documentation Agent.
10.3 Indenture dated as of February 7, 1996 Incorporated by
among Hollinger International Publishing reference to Exhibit
Inc., Hollinger International Inc. and 10.4 to Current
Fleet National Bank of Connecticut as Report on Form 8-K
Trustee. Dated February 7,
1996
10.4 Services Agreement between the Company and Incorporated by
Hollinger Inc., as Amended and Restated as reference to Exhibit
of February 7, 1996. 10.4 to Report on
Form 10-K for the
year ended December
31, 1995
10.5 Business Opportunities Agreement between Incorporated by
the Company and Hollinger Inc., as Amended reference to Exhibit
and Restated as of February 7, 1996. 10.5 to Report on
Form 10-K for the
year ended December
31, 1995
10.6 Employment and Noncompetition Letter Incorporated by
Agreements with executive officers. reference to Exhibit
10.9 to Registration
Statement on Form S-1
(No. 33-74980)
</TABLE>
-55-
<PAGE> 58
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ----------- ---------------------- ----------------------
<S> <C> <C>
10.7 American Publishing Company 1994 Stock Option Plan. Incorporated by
reference to Exhibit
10.10 to Registration
Statement on Form S-1
(No. 33-74980)
10.8 American Publishing Management Services, Inc. Incorporated by
Executive Benefit Plan. reference to Exhibit
10.11 to Registration
Statement on Form S-1
(No. 33-74980)
10.9 Share Exchange Agreement dated as of July 19, 1995 Incorporated by
between Hollinger Inc. and American Publishing reference to Exhibit
Company. 2.1 to Current Report
on Form 8-K Dated
July 18, 1995
10.10 DTH/FDTH Preference Share Agreement dated as of Incorporated by
October 13, 1995 between Hollinger Inc. and reference to Exhibit
Hollinger International Inc. 2.1 to Current Report
on Form 8-K Dated
July 18, 1995
10.11 HTH/FDTH Share Exchange Agreement dated as of July Incorporated by
19, 1995 between Hollinger Inc. and First DT reference to Exhibit
Holdings Limited. 2.1 to Current Report
on Form 8-K Dated
July 18, 1995
10.12 Deposit Agreement dated August 1, 1996 Incorporated by
reference to Exhibit
10.01 to Current
Report on Form 8-K
dated August 7, 1996
10.13 Exchange Agreement dated as of April 18, 1997 Incorporated by
among Hollinger International Inc., Hollinger Inc. reference to Exhibit
and UniMedia Holding Company. 10.1 to Current
Report on Form 8-K
dated April 18, 1997.
10.14 Amendment, dated as of March 18, 1997, to the Incorporated by
Share Exchange Agreement reference to Exhibit
10.1 to Current
Report on Form 8-K
dated March 18, 1997.
10.15 Amendment, dated as of March 18, 1997, to the Incorporated by
HTH/FDTH Share Exchange Agreement reference to Exhibit
10.2 to Current
Report on Form 8-K
dated March 18, 1997.
10.16 1997 Stock Incentive Plan Incorporated by
reference to Proxy
Statement of Schedule
14A dated March 28, 1997
</TABLE>
-56-
<PAGE> 59
<TABLE>
<CAPTION>
PRIOR FILING OR
EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
- ----------- ---------------------- ----------------------
<S> <C> <C>
21.1 Significant Subsidiaries of Hollinger International Inc. Incorporated by
reference to Exhibit
21.1 to Report on
Form 10-K for the
year ended December
31, 1995
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
27.2 Financial Data Schedule for years ended
December 31, 1996 and 1995
</TABLE>
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K under Items 5 to report
an event dated November 26, 1997.
-57-
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1998
HOLLINGER INTERNATIONAL INC.
(Registrant)
By: /s/ Conrad M. Black
---------------------
Conrad M. Black, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Conrad M. Black Chairman, Chief Executive Officer and
- -------------------
Conrad M. Black Director (Principal Executive Officer) March 26, 1998
Executive Vice President and Chief
/s/ J. A. Boultbee Financial Officer
- -------------------
J. A. Boultbee (Principal Financial Officer) March 26, 1998
/s/ Fredrick A. Creasey Group Corporate Controller
- -------------------
Frederick A. Creasey (Principal Accounting Officer) March 26, 1998
/s/ F. David Radler President, Chief Operating Officer and
- -------------------
F. David Radler Director March 26, 1998
/s/ Barbara Amiel Black
- -------------------
Barbara Amiel Black Vice President - Editorial and Director March 26, 1998
/s/ Dwayne O. Andreas
- -------------------
Dwayne O. Andreas Director March 26, 1998
-58-
<PAGE> 61
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Richard R. Burt
- -----------------------
Richard R. Burt Director March 26, 1998
/s/ Raymond G. Chambers
- -----------------------
Raymond G. Chambers Director March 26, 1998
/s/ Daniel W. Colson
- -----------------------
Daniel W. Colson Director March 26, 1998
/s/ Henry A. Kissinger
- -----------------------
Henry A. Kissinger Director March 26, 1998
/s/ Marie-Josee Kravis
- -----------------------
Marie-Josee Kravis Director March 26, 1998
- -----------------------
Shmuel Meitar Director March , 1998
/s/ Richard N. Perle
- -----------------------
Richard N. Perle Director March 26, 1998
- -----------------------
Robert S. Strauss Director March , 1998
/s/ A. Alfred Taubman
- -----------------------
A. Alfred Taubman Director March 26, 1998
- -----------------------
James R. Thompson Director March , 1998
- -----------------------
Lord Weidenfeld Director March , 1998
/s/ Leslie H. Wexner
- -----------------------
Leslie H. Wexner Director March 26, 1998
-59-
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
To Board of Directors
Hollinger International Inc.:
We have audited the accompanying consolidated balance sheets of Hollinger
International Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hollinger
International Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
February 23, 1998
Chicago, Illinois
F-1
<PAGE> 63
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 107,384 $ 148,550
Accounts receivable, net of allowance for doubtful accounts
of $24,966 in 1997 and $17,667 in 1996 315,894 321,586
Due from affiliates 18,411 --
Inventories 32,454 30,056
Prepaid expenses and other current assets 31,110 23,494
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 505,253 523,686
Investments in affiliates, at equity (note 3) 50,011 198,496
Other investments, at cost (note 4) 75,720 487,547
Property, plant and equipment, net of accumulated depreciation (note 5) 615,579 561,731
Intangible assets, net of accumulated amortization of $257,702 in 1997
and $210,102 in 1996 1,671,210 1,641,485
Deferred financing costs and other assets 106,148 12,599
- --------------------------------------------------------------------------------------------------------------------------------
$ 3,023,921 $ 3,425,544
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-2
<PAGE> 64
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (note 7) $ 35,560 $ 35,920
Bank loans (note 6) -- 503,364
Accounts payable 101,925 114,545
Accrued expenses 195,109 173,832
Income taxes payable 30,407 38,896
Deferred revenue 85,887 79,182
Due to affiliates -- 273,707
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 448,888 1,219,446
Long-term debt, less current installments (note 7) 1,392,855 675,428
Deferred income taxes (note 9) 132,137 70,121
Accrued employee benefits (note 11) 57,269 4,290
Other liabilities 26,245 54,411
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,057,394 2,023,696
- --------------------------------------------------------------------------------------------------------------------------------
Minority interest (note 12) 203,034 109,943
- --------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock (note 13) 75,891 605,579
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (note 14):
Convertible preferred stock 195,104 195,104
Class A common stock, $0.01 par value. Authorized 250,000,000
shares; issued and outstanding 72,852,799 and 72,772,799 shares in
1997 and 1996, respectively 726 726
Class B common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 14,990,000 shares in 1997 and 1996 150 150
Additional paid-in capital 358,871 336,609
Cumulative foreign currency translation adjustment (27,978) 22,995
Retained earnings 175,802 130,742
- --------------------------------------------------------------------------------------------------------------------------------
702,675 686,326
Class A common stock in treasury, at cost - 1,295,900 shares in 1997 (15,073) --
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 687,602 686,326
Commitments and contingencies (note 19)
$ 3,023,921 $ 3,425,544
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 65
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Operating revenues:
Advertising $ 1,556,041 $ 1,364,527 $ 699,434
Circulation 535,447 562,122 301,724
Job printing 80,024 80,132 58,750
Other 40,018 67,241 18,606
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating revenues 2,211,530 2,074,022 1,078,514
- -----------------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Newsprint 312,010 346,446 204,074
Compensation costs 736,153 731,673 319,074
Other operating costs 735,832 703,934 428,039
Direct subscription campaign costs, net and infrequent items
(note 16) 25,243 41,567 8,000
Depreciation and amortization 114,570 102,435 57,463
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,923,808 1,926,055 1,016,650
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 287,722 147,967 61,864
- -----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (113,558) (84,356) (44,727)
Amortization of debt issue costs (13,466) (16,640) (168)
Equity in earnings of affiliates (note 3) 5,807 12,050 14,356
Interest and dividend income 9,924 12,460 4,590
Foreign currency gains (losses), net 459 198 (1,089)
Other income, net (note 17) 67,261 58,259 14,698
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (43,573) (18,029) (12,340)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, minority interest and
extraordinary item 244,149 129,938 49,524
Income taxes (note 9) 93,655 51,865 20,564
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before minority interest and extraordinary item 150,494 78,073 28,960
Minority interest (note 12) 45,973 33,138 22,637
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 104,521 44,935 6,323
Extraordinary loss on debt extinguishments (note 14) -- (2,150) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 104,521 $ 42,785 $ 6,323
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share before extraordinary item $ 0.93 $ 0.43 $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share before extraordinary items $ 0.87 $ 0.42 $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.93 $ 0.41 $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.87 $ 0.39 $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 66
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Convertible Common Additional Cumulative gain on
Preferred stock paid-in translation marketable Retained Treasury
Stock Class A & B capital adjustment securities earnings stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ -- $ 600 $ (42,116) $ (2,568) $ 7,825 $ 127,402 $ -- $ 91,143
Jerusalem Post adjustment -- -- (288) -- -- -- -- (288)
Translation adjustments -- -- -- (2,782) -- -- -- (2,782)
Unrealized holding gain -- -- -- -- (7,825) -- -- (7,825)
Cash dividends - Class A and
Class B, $0.10 per share -- -- -- -- -- (3,175) -- (3,175)
Dividends on redeemable
preferred stock -- -- -- -- -- (271) -- (271)
Contribution by Hollinger Inc. -- -- 76,941 -- -- (93) -- 76,848
Net earnings -- -- -- -- -- 6,323 -- 6,323
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- 600 34,537 (5,350) -- 130,186 -- 159,973
Issuance of 20,700,000
Convertible Preferred Shares 195,104 -- -- -- -- -- -- 195,104
Issuance of 27,600,000
Class A Common Shares -- 276 245,537 -- -- -- -- 245,813
Cash dividends - Class A and
Class B, $0.40 per share -- -- -- -- -- (31,522) -- (31,522)
Dividends on redeemable
preferred stock -- -- -- -- -- (1,087) -- (1,087)
Dividends on convertible
preferred stock -- -- -- -- -- (9,620) -- (9,620)
Contribution by Hollinger Inc. -- -- 56,535 -- -- -- -- 56,535
Translation adjustments -- -- -- 28,345 -- -- -- 28,345
Net earnings -- -- -- -- -- 42,785 -- 42,785
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 195,104 876 336,609 22,995 -- 130,742 -- 686,326
Shares issued for acquisition -- -- 1,000 -- -- -- -- 1,000
Cash dividends - Class A and
Class B, $0.40 per share -- -- -- -- -- (34,150) -- (34,150)
Dividends on redeemable
preferred stock -- -- -- -- -- (1,060) -- (1,060)
Dividends on convertible
preferred stock -- -- -- -- (22,408) -- (22,408)
Contribution by Hollinger Inc. -- -- 17,986 -- -- (1,843) -- 16,143
Translation adjustments -- -- 3,276 (50,973) -- -- -- (47,697)
Net earnings -- -- -- -- -- 104,521 -- 104,521
Common shares repurchased -- -- -- -- -- -- (15,073) (15,073)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 195,104 $ 876 $ 358,871 $ (27,978) $ -- $ 175,802 $ (15,073) $ 687,602
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 67
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 104,521 $ 42,785 $ 6,323
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 114,570 102,435 57,463
Deferred income taxes 62,016 31,226 (3,678)
Amortization of debt issue costs 13,466 20,097 168
Minority interest 45,973 33,138 22,637
Equity in earnings of affiliates, net of dividends received (5,851) (1,104) 1,418
Gain on sale of investments (66,128) (53,518) (11,968)
(Gain) loss on sale of assets (3,286) (14,264) 1,569
Amortization of deferred gain (1,616) (1,616) (1,616)
Unrealized foreign exchange gain on redeemable preferred stock (464) (481) (257)
Other 1,872 (12,704) (732)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,556) (20,022) (6,513)
Inventories (3,064) 20,158 (13,801)
Prepaid expenses and other current assets (10,405) (1,300) (10,130)
Accounts payable (14,614) (3,598) 12,113
Accrued expenses 12,741 70,481 (7,786)
Accrued pension 3,960 (14,307) (4,024)
Income taxes payable (7,209) 27,131 (14,582)
Deferred revenue and other 854 (26,115) (5,411)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 242,780 198,422 21,193
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (118,291) (124,625) (27,422)
Proceeds from sale of property, plant and equipment 5,613 197,698 2,243
Proceeds on disposal of marketable securities 50 -- 17,700
Purchase of subsidiaries' stock and other investments, net of cash acquired (67,344) (780,167) (57,283)
Acquisitions, net of cash acquired (58,839) (400,125) (164,834)
Repayment of long-term receivables 11,267 11,855 10,393
Proceeds on disposal of other investments 247,418 191,878 --
Other (11,421) 8,171 1,832
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities $ 8,453 $ (895,315) $ (217,371)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
F-6
<PAGE> 68
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of debt $ (141,623) $ (330,757) $ (16,602)
Proceeds from issuance of bank debt 877,942 413,039 20,000
Repayment of bank loans (495,835) (395,752) --
Proceeds from bank loans -- 734,335 131,589
Payment of debt issue costs (38,988) (27,016) --
Change in borrowings from affiliates (302,587) (34,582) (79,394)
Net proceeds from issuance of equity -- 440,917 --
Issuance of common shares by a subsidiary 8,119 21,816 4,131
Repurchase of common shares (15,073) -- --
Redemption of preference shares (116,863) -- --
Dividends paid (57,618) (42,502) (3,175)
Contributions by Hollinger Inc. 16,143 -- (93)
Acquisitions paid for by Hollinger Inc. -- 68,600 67,902
Dividends paid by subsidiaries to minority stockholders, net of
related swap income (10,443) (33,399) (20,890)
Other (98) -- 257
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities (276,924) 814,699 103,725
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (15,475) 6,934 (1,162)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (41,166) 124,740 (93,615)
Cash and cash equivalents at beginning of year 148,550 23,810 117,425
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 107,384 $ 148,550 $ 23,810
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 69
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF PRESENTATION AND CONSOLIDATION
Hollinger International Inc. (the "Company") is a subsidiary of
Hollinger Inc., a Canadian corporation. Hollinger Inc. owns 59.9% of
the combined equity and 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") ("Convertible preferred stock") or upon conversion of the
Company's Series D Convertible Redeemable Preferred Stock ("Series D
Preferred Stock").
On January 7, 1997, the Board 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.
("HCPH"), a subsidiary of the Company, including newspaper assets
located mainly in Ontario, Saskatchewan, British Columbia, and UniMedia
Inc. (collectively the "Canadian Newspapers") for an aggregate
consideration of approximately $382,000,000 (Cdn.$ 523,000,000),
subject to working capital adjustments and currency exchange
adjustments (the "Hollinger Inc. Transaction"). The purchase price was
satisfied in cash in the amount of $250,00,000, 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 an face value of $90,000,000, and (ii) 3,207,045 shares of Class
A Common Stock of the Company having a nominal agreed value of
$42,000,000, 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.
The initial payment of $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 purchase price has been accrued for
the period from January 1, 1997 to April 18, 1997.
On October 13, 1995, the Company and Hollinger Inc. consummated a
reorganization of their international newspaper operations (the
"Reorganization"). In summary, the Reorganization consisted principally
of the Company's acquisition of the outstanding shares of DT Holdings
Limited ("DTH"), a subsidiary of Hollinger Inc., through which
Hollinger Inc. owned a 58.2% interest in The Telegraph plc ("The
Telegraph") and a 19.4% interest in Southam Inc. ("Southam"). In
exchange for all of the ordinary shares of DTH, the Company issued to
Hollinger Inc. 33,610,754 shares of Class A Common Stock and 739,500
shares of Series A Redeemable Convertible Preferred Stock ("Series A
Preferred Stock"), and paid Hollinger Inc. $13,832,000 in cash as a
working capital adjustment. The Series A Preferred Stock was
subsequently exchanged for Series D Preferred Stock.
F-8
<PAGE> 70
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Reorganization and the Hollinger Inc. Transaction represent a
combination of entities under common control and have been accounted
for on an "as-if" pooling-of-interests basis, with the accompanying
financial statements restated for all periods presented.
In May and December 1996, subsidiaries of the Company acquired an
additional 24,350,043 shares of Southam increasing the Company's
indirect ownership interest in Southam to 50.7% at December 31, 1996.
In July 1997 an additional 6,552,425 shares of Southam were acquired to
increase the ownership to 58.6%. The accounts of Southam have been
consolidated in the 1997 and 1996 financial statements. Southam has
been accounted for using the equity method in the 1995 consolidated
financial statements.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. The Company's interest in
the Telegraph was 100.0%, 100.0%, and 64.0% and in Southam was 58.6%,
50.7% and 19.4% at December 31, 1997, 1996, and 1995, respectively.
Investments in less than majority-owned affiliated companies are
accounted for using the equity method. All significant intercompany
balances and transactions have been eliminated on consolidation.
(b) DESCRIPTION OF BUSINESS
The Company is engaged in the publishing, printing and distribution of
newspapers and magazines in the United States, the United Kingdom and
Canada through subsidiaries and affiliates. The Company's raw
materials, mainly newsprint and ink, are available and not dependent on
a single or limited number of suppliers. Customers range from
individual subscribers to local and national advertisers.
F-9
<PAGE> 71
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of certain highly liquid investments with
original maturities of three months or less.
(e) INVENTORIES
Inventories consist principally of newsprint which is valued at the
lower of cost or net realizable value. Cost is determined using the
first-in, first-out (FIFO) method, except for newsprint inventories of
certain subsidiaries which are accounted for using the last-in,
first-out method (LIFO). At December 31, 1997 and December 31, 1996,
approximately 11% and 12%, respectively, of the Company's newsprint
inventories were valued using LIFO. If the FIFO method had been used,
such newsprint inventories would have been $1,198,000 and $713,000,
respectively, higher.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of its long-lived assets, such
as property, plant and equipment and intangible assets whenever events
or changes in business circumstances indicate the carrying amount of
the assets, or related group of assets, may not be fully recoverable.
The assessment of recoverability is based on management's estimate of
undiscounted future operating cash flows of its long-lived assets. If
the assessment indicates that the undiscounted operating cash flows do
not exceed the net book value of the long-lived assets, then a
permanent impairment has occurred. The Company would record the
difference between the net book value of the long-lived asset and the
fair value of such asset as a charge against income in the statement of
operations if such a difference arose. The Company determined that no
material permanent impairments had occurred at December 31, 1997.
F-10
<PAGE> 72
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(g) DERIVATIVES
The Company is a limited user of derivative financial instruments to
manage risks generally associated with interest rate and foreign
exchange rate market volatility. The Company does not hold or issue
derivative financial instruments for trading purposes. Amounts
receivable under the interest rate cap agreement are accrued as a
reduction of interest expense and amounts payable are accrued as
interest expense. The interest rate differential on the swap
arrangements related to preferred stock of subsidiaries is treated as
an adjustment to the underlying dividends which are disclosed as
minority interest. Interest rate differentials on all other swap
arrangements are accrued as interest rates change over the contract
period.
(h) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Routine maintenance
and repairs are expensed as incurred. Depreciation is calculated under
the straight-line method over the estimated useful lives of the assets,
principally 25 to 40 years for buildings and improvements and 3 to 10
years for machinery and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the estimated useful
life of the asset and the lease term. Construction in progress for
production facilities is not depreciated until facilities are in use.
(i) INTANGIBLE ASSETS
Intangible assets consist principally of circulation related assets,
non-competition agreements with former owners of acquired newspapers,
and the excess of acquisition costs over estimated fair value of net
assets acquired (goodwill). The fair market value of intangible assets
purchased is determined primarily through the use of independent
appraisals. Amortization is calculated using the straight-line method
over the respective estimated useful lives which do not exceed 40
years.
(j) DEFERRED FINANCING COSTS
Deferred financing costs consist of certain costs incurred in
connection with debt financings. Such costs are amortized on a
straight-line basis over the remaining term of the related debt, up to
ten years.
(k) DEFERRED REVENUE
Deferred revenue represents subscription payments which have not been
earned and are recognized on a straight-line basis over the term of the
related subscription.
F-11
<PAGE> 73
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(l) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(m) FOREIGN CURRENCY TRANSLATION
Foreign operations of the Company have been translated into U.S.
dollars in accordance with the principles prescribed in Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation",
(FAS 52). All assets, liabilities and minority interest are translated
at year-end exchange rates, stockholders' equity is translated at
historical rates, and revenues and expenses are translated at the
average rates of exchange prevailing throughout the year. These
exchange gains or losses are not included in earnings unless they are
actually realized through a reduction of the Company's net investment
in the foreign subsidiary. Gains and losses arising from the Company's
foreign currency transactions are reflected in net earnings.
(n) EARNINGS PER SHARE
For the years ended December 31, 1997, 1996, and 1995, earnings per
share was computed in accordance with Statement of Financial Accounting
Standards No. 128, which the Company adopted during the fourth quarter
of 1997. See note 15 for a reconciliation of numerator and denominator
for the calculation of the basic and diluted earnings per share.
(o) STOCK-BASED COMPENSATION
The Company utilizes the intrinsic value based method of accounting for
its stock-based compensation arrangements.
(p) RECLASSIFICATIONS
Certain 1996 and 1995 amounts in the consolidated financial statements
have been reclassified to conform to the 1997 presentation.
F-12
<PAGE> 74
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(2) ACQUISITIONS AND DISPOSITIONS
All of the following acquisitions are accounted for using the purchase
method of accounting. Based on estimated fair values of the acquired
assets and liabilities, the purchase price including direct costs is
allocated to working capital, property, plant and equipment, and
intangible assets.
(a) On April 30, 1996, the Company completed a trade with Garden
States Newspapers, Inc. The Company acquired the
Tribune-Democrat in Johnstown, Pennsylvania in exchange for
six small daily newspapers, several weekly newspapers and
$31,400,000 in cash. On December 16, 1996, the Company
completed an exchange of newspaper assets with Thomson
Newspapers Inc. and Cox Newspapers Inc. through which the
Company acquired the Mount Vernon Register News in Mount
Vernon, Illinois, the Enid News in Enid, Oklahoma, and the
Herald-Palladium in St. Joseph/Benton Harbor, Michigan and
related publication in exchange for four daily newspapers in
Indiana, a daily newspaper in Texas, related publications and
approximately $32,400,000 in cash.
The excess purchase price of $ 111,272,000 over the estimated
fair value of tangible assets acquired in 1996 was recorded as
identifiable intangibles and goodwill. The results of the
newspapers acquired have been included in the consolidated
results of operations since the date of acquisition. The pro
forma effect of the 1996 acquisitions is immaterial.
In three separate transactions throughout 1997, the Company
acquired four paid daily newspapers, four paid non-daily
newspapers and six free distribution newspapers. In addition,
the Company acquired two paid daily newspapers and one paid
non-daily newspaper in exchange for one daily newspaper, three
non-daily newspapers and one free distribution newspaper.
Total cash consideration paid for these transactions was
$22,138,000. The excess purchase price of $ 19,645,000 over
the estimated fair value of tangible assets acquired in 1997
was recorded as identifiable intangibles and goodwill. The
results of the newspapers acquired have been included in the
consolidated results of operations since the date of
acquisition. The pro forma effect of the current year
acquisitions is immaterial.
(b) On July 31, 1996, the Company acquired all of the outstanding
ordinary shares of The Telegraph which it did not already own.
The purchase price for the shares was approximately
$455,700,000. As a result, The Telegraph became an indirect
wholly owned subsidiary of the Company. On the same date, The
Telegraph changed its name to the Telegraph Group Limited and
canceled its listing on the London Stock Exchange. The
purchase price was allocated to assets acquired based on their
estimated fair values. This treatment resulted in the excess
purchase price over the estimated fair value of tangible
assets acquired being recorded as identifiable intangibles and
goodwill of $343,995,000.
F-13
<PAGE> 75
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(c) During 1997, a subsidiary of the Company acquired 6,552,425
additional shares of Southam increasing the ownership interest
to 58.6%. During 1996, the Company, through subsidiary
companies, acquired an additional 24,350,043 shares of
Southam, representing a 30.9% interest. The acquisitions are
described in note 3(b).
(d) The unaudited pro forma consolidated results of operations
giving effect to the acquisitions of the additional Southam
interest and the buyout of the Telegraph minority as if they
had occurred as of the beginning of the period were as
follows:
<TABLE>
<CAPTION>
1996
- --------------------------------------------------------------------------------
(in thousands,
except per share data)
<S> <C>
Net revenue $2,074,022
Net earnings 25,795
Basic earnings per share 0.15
Diluted earnings per share 0.15
- --------------------------------------------------------------------------------
</TABLE>
(e) On December 16, 1996, the Company announced The Telegraph had
agreed conditionally to sell its 24.7% interest in Fairfax.
The disposal is described in note 3(a).
(f) In 1996, in three separate acquisitions Southam acquired a
total of 15 Canadian daily newspapers and related
publications. The total cost of these acquisitions of $182.5
million was financed through use of existing cash and drawdown
of existing credit facilities. The purchase price was
allocated to assets acquired based on their estimated fair
values. This treatment resulted in the excess of the purchase
price over the estimated fair value of tangible assets
acquired being recorded as identifiable intangibles and
goodwill of $161.9 million. The results of the newspapers
acquired have been included in the consolidated results of
operations since the date of the acquisitions. The pro forma
effect of these acquisitions is immaterial.
In 1996, Southam sold certain operating divisions to an
outside third party for proceeds of $116.1 million. The gain
recognized by Southam was $59.3 million. The Company had
recorded identifiable goodwill on acquisition of Southam in
respect of these operating divisions. This goodwill was
written off reducing the Company's share of the gain to zero.
F-14
<PAGE> 76
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
In two separate transactions during 1997, Southam acquired one
paid daily newspaper, one paid non-daily newspaper and 13 free
distribution newspapers. Total cash consideration for these
transactions was $16.8 million. The excess purchase price of $
14.4 million over the estimated fair value of tangible assets
acquired was recorded as identifiable intangibles and
goodwill. The results of the newspapers acquired have been
included in the consolidated results of operations since the
date of acquisition. The pro forma effect of these
acquisitions is immaterial.
(g) In 1996, the Canadian Newspapers acquired 2 paid daily and 12
non-daily newspapers. The total cost of this acquisition was
$68.6 million. The purchase price was allocated to assets
acquired based on their estimated fair values. This treatment
resulted in the excess of the purchase price over the
estimated fair value of tangible assets acquired being
recorded as identifiable intangibles and goodwill of $61.4
million. The results of the newspapers acquired have been
included in the consolidated results of operations since the
date of the acquisitions. The pro forma effect of these
acquisitions is immaterial.
In 1997, the Canadian Newspapers sold two weekly newspapers
and one free distribution publication for total proceeds of
$1.5 million.
F-15
<PAGE> 77
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(3) INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
John Fairfax Holdings Limited (Fairfax) $ -- 181,001
3396754 Canada Limited 29,018 --
Joint ventures 20,993 17,495
- --------------------------------------------------------------------------------
$ 50,011 198,496
- --------------------------------------------------------------------------------
</TABLE>
(a) JOHN FAIRFAX HOLDINGS LIMITED
On December 16, 1996, the Company announced that Daily Telegraph Holdings
BV ("DTH BV"), a Dutch subsidiary of The Telegraph, had agreed
conditionally to sell its 24.7% interest in Fairfax to three Australian
subsidiaries of Brierley Investments Limited ("BIL") of New Zealand. The
first tranche of the sale consisted of a 12.0% interest and was completed
on December 20,1996 for gross cash proceeds of A$254.8 million ($202.3
million). The second tranche consisted of a 7.9% interest, including seven
million non-voting convertible debentures and was completed on January 10,
1997 for gross cash proceeds of A$192.2 million ($150.3 million). The
Company sold its remaining 4.8% interest in Fairfax on March 27, 1997 for
gross cash proceeds of A$112.5 million ($88.7 million). Total gross
proceeds from the entire sale were approximately A$559.5 million ($441.3
million). The sale of the second and third tranches have been recorded in
1997.
F-16
<PAGE> 78
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
While Fairfax has a June 30 year end for its financial reporting purposes,
the Company's equity in the earnings of Fairfax is for the 12 months ended
December 31. Selected financial information in Australian dollars and in
accordance with Australian generally accepted accounting principles
reported by Fairfax in its annual report for the years ended June 30, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Statements of Operations Data:
Operating revenues A$ 1,006,148 A$ 948,433
Operating income 151,611 216,491
Net earnings 87,429 147,078
Balance Sheet Data:
Current assets 195,018
Total assets 2,223,117
Current liabilities 337,335
Total liabilities 1,137,070
Stockholders' equity 1,086,047
- ------------------------------------------------------------------------------------------
</TABLE>
(B) SOUTHAM INC.
In May 1997 HCPH made an offer to shareholders of Southam to acquire all of
the common shares of Southam not presently controlled by the Company 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, described in note 12. The offer expired on July 7, 1997.
HCPH purchased 6,552,425 common shares of Southam which had been tendered
under this offer for an aggregate consideration of Cdn.$156.1 million
($113.4 million). This purchase of shares brings the Company's ownership
interest in Southam to approximately 58.6%. The cash portion of the
purchase price was funded through borrowings by HCPH under the Bank Credit
Facility described in note 7.
On May 24, 1996, the Company acquired 16,349,743 common shares of Southam
representing approximately 21.5% of Southam's then outstanding common
shares, for an aggregate consideration of Cdn.$294.3 million ($214.1
million). The acquisition was financed through a short-term facility with a
Canadian chartered bank. On December 11, 1996, the Company purchased an
additional 8,000,300 shares of Southam representing approximately 10.4% of
Southam's then outstanding common shares for an aggregate consideration of
Cdn.$160.0 million ($117.4 million). The acquisition was financed through
short term bank facilities and working capital. The 1996 acquisitions
increased the Company's indirect equity interest in Southam to 50.7%. The
accounts of Southam have been consolidated in the 1997 and 1996 financial
F-17
<PAGE> 79
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
statements. Southam has been accounted for using the equity method in the
1995 consolidated financial statements.
The total purchase price of the Company's 58.6% indirect interest was
allocated to assets acquired based on their estimated fair values. This
treatment resulted in the excess of the purchase price over the estimated
fair value of the tangible assets acquired being recorded as identifiable
intangibles and goodwill of $486.2 million.
368,572 Southam common shares indirectly owned by the Company are pledged
as collateral securing certain Hollinger Inc. debentures in the principal
amount of Cdn.$6.5 million due November 1, 1998 (Southam-Linked
Debentures). In the event that Hollinger Inc. does not deliver clear legal
title to such shares on or prior to April 1, 1999, or upon demand,
approximately 8% of the Company's indirect equity interest in Southam would
be subject to the rights of the Holders of the Southam-Linked Debentures.
(c) JOINT VENTURES
The Telegraph has a 50% interest in two printing joint ventures, West Ferry
Printers and Trafford Park Printers. These joint ventures operate printing
plants in which The Telegraph and the other joint venturers' newspapers are
printed on a break even basis.
The Chicago Sun Times owns a 50% interest in a joint venture which operates
a news gathering service focusing primarily on Chicago area stories. In
1997 the joint venture sold its newswire service that it had previously
operated.
(d) 3396754 CANADA LIMITED
In September 1997, HCPH, a subsidiary of the Company, acquired 4,146,107
Non-Voting Special Shares ("Special Shares") of 3396754 Canada Limited
("3396754"), a subsidiary of Hollinger Inc. in exchange for 4,146,107
special shares in HCPH (see note 12). The total cost of the investment was
Cdn.$41.5 million ($29.0 million).
F-18
<PAGE> 80
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(e) EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates is comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Fairfax $ -- 11,126 24,662
Southam -- -- (10,968)
Joint ventures and other 5,807 924 662
- -------------------------------------------------------------------------------
$ 5,807 12,050 14,356
- -------------------------------------------------------------------------------
</TABLE>
Equity in earnings of Fairfax is computed as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Share of net earnings as reported by Fairfax $ 12,777 22,779
Consolidation and U.S. GAAP adjustments (1,651) 1,883
- --------------------------------------------------------------------------------
$ 11,126 24,662
- --------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 81
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Equity in earnings of Southam for the year ended December 31, 1995 is computed
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1995
- -------------------------------------------------------------------------------
(in thousands)
<S> <C>
Share of operating results as reported by Southam:
Income before special charge $ 8,426
Special charge (17,324)
Tax benefit 3,189
Loss from discontinued operations, net of tax (2,084)
Consolidation and U.S. GAAP adjustments (3,175)
- -------------------------------------------------------------------------------
$(10,968)
- -------------------------------------------------------------------------------
</TABLE>
(4) OTHER INVESTMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Investment in Argsub Limited $ -- 402,214
Note receivable from West Ferry 16,296 29,020
Advances under printing contracts with joint ventures 45,012 40,677
Other 14,412 15,636
- ----------------------------------------------------------------------------------------
$ 75,720 487,547
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Argsub Limited ("Argsub") is a wholly owned English subsidiary of
Argus Corporation Limited. Argus Corporation Limited is a Canadian
corporation, all the voting stock of which is indirectly owned or
controlled by the principal shareholder of Hollinger Inc. On
December 29, 1995, DTH transferred all outstanding First DT
Holdings Limited ("FDTH") Preference shares which it then held
(with an aggregate redemption amount of Cdn.$140 million ($102.6
million)) to Argsub, in exchange for newly issued preference shares
(with an aggregate redemption amount of Cdn.$140 million ($102.6
million)) of Argsub.
On September 30, 1996, FDTH issued 600 Fourth Preference Shares
Series 1996 (with an aggregate redemption amount of $300 million)
to Argsub in exchange for 600 newly issued
F-20
<PAGE> 82
Second Preference Shares, Series 1996 of Argsub (with an aggregate
redemption amount of $300 million). Both series of Argsub shares
have terms substantially identical to those of the FDTH shares for
which they were exchanged.
In June 1997 DTH purchased 100% of the common shares of Argsub from
Argus Corporation Limited. 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 13).
(b) The note receivable from West Ferry represents amounts due to The
Telegraph following the granting of rights to West Ferry equivalent
to ownership of certain of The Telegraph's fixed assets. These
fixed assets have been treated as if they had been sold outright
with the long-term element of the note receivable included in
investments. The current portion of the note receivable was
$11,544,000 and $11,727,000 for 1997 and 1996, respectively, and is
included in accounts receivable. The income related to this note is
computed based on the effective interest rate method.
(c) Advances under printing contracts represent loans to the joint
venture by way of amounts prepaid under The Telegraph's printing
contracts.
F-21
<PAGE> 83
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land $ 58,636 63,659
Building and leasehold interests 286,933 216,535
Machinery and equipment 712,890 637,358
Construction in progress 24,737 69,200
- -------------------------------------------------------------------------------------------------------------
1,083,196 986,752
Less accumulated depreciation and amortization 467,617 425,021
- -------------------------------------------------------------------------------------------------------------
$ 615,579 561,731
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of property, plant and equipment totaled
$61,635,000, $60,640,000 and $28,264,000 in 1997, 1996 and 1995,
respectively.
(6) BANK LOANS
In May 1996, the Company, through a subsidiary, entered into a
short-term facility with a Canadian chartered bank in the amount of
Cdn.$300 million. At December 31, 1996, there was $155.0 million (Cdn.$
212.3 million) outstanding under this facility which was repaid on
February 7, 1997 with the proceeds of the Senior Notes and Senior
Subordinated Notes (note 7).
In May 1996, Hollinger International Publishing Inc. ("Publishing")
entered into an amended and restated credit agreement (the "Amended
Publishing Credit Facility") which consisted of a secured non-amortizing
revolving credit facility. At December 31, 1996, there was $157.0
million outstanding under this facility. The facility was used to
finance the acquisition of the Telegraph minority shares. The loan was
repaid on February 7, 1997 with the proceeds of the Senior Notes and
Senior Subordinated Notes (note 7).
Also, in May 1996, FDTH entered into a credit agreement (the "FDTH
Credit Facility") which consisted of a secured non-amortizing revolving
credit facility. The facility was for a maximum of (pound)250 million
($428.1 million ). At December 31, 1996, there was $191.3 million was
outstanding under this facility. The loan was repaid on February 7, 1997
with the proceeds of the Senior Notes and Senior Subordinated Notes
(note 7).
F-22
<PAGE> 84
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(7) LONG-TERM DEBT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Hollinger International Publishing:
Senior Subordinated Notes due 2006 $ 250,000 250,000
Senior Notes due 2005 260,000 -
Senior Subordinated Notes due 2007 290,000 -
Credit facility due 2004 85,000 -
US Newspaper Group:
Senior secured notes due 1998-2000 105,000 135,000
Amounts due under non-interest bearing
non-competition agreements due 1998-2004 5,889 7,445
Other due 1998-2006
(at varying interest rates up to 9%) 4,516 3,344
The Telegraph:
Obligations under capital leases (note 8) 12,699 15,947
Other 5,967 8,830
Hollinger Canadian Publishing Holdings:
Credit facility due 2004 233,840 -
Southam:
Promissory notes due 1999-2002
(at varying interest rates up to 6.0%) 72,090 188,000
Notes due 1999-2005
(at varying interest rates up to 8.5%) 102,851 101,982
Other:
Other debt 481 586
Other capital leases 82 214
- -------------------------------------------------------------------------------------------------------------
1,428,415 711,348
Less current portion included in current liabilities 35,560 35,920
- -------------------------------------------------------------------------------------------------------------
$ 1,392,855 675,428
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) (i) In February 1996, the Company through its subsidiary,
Publishing, sold $250,000,000 million of 9.25% Senior
Subordinated Notes ("Subordinated Notes"). Interest on the
Subordinated Notes is payable semi-annually on February 1 and
August 1 of each year. The Subordinated Notes mature on
February 1, 2006 and are redeemable at the option of
Publishing, in whole or in part, at any time on or after
February 1, 2001, at set
F-23
<PAGE> 85
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
redemption prices based on a percentage of the principal plus
any accrued and unpaid interest, if any, to the date of
redemption. The Subordinated Notes are guaranteed by the
Company.
(ii) On March 4, 1997, Publishing filed both a Prospectus and a
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 Senior Subordinated Notes are
guaranteed by the Company.
The Senior Notes are unsecured senior obligations of
Publishing and rank pari-passu with all other unsecured 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 9.25% 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 bank indebtedness, to
repay redeemable preference shares of DTH and FDTH and for
general working capital.
(iii)On April 7, 1997, Publishing, HCPH, The Telegraph and a group
of 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. In July 1997, the Company reduced its total
available commitments to $515 million and reduced the HCPH
tranche to $315 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.
F-24
<PAGE> 86
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 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.
F-25
<PAGE> 87
At December 31, 1997 Publishing had borrowings under this
facility of $85.0 million and HCPH had borrowings of $233.8
million.
(b) US Newspaper Group Senior Secured Notes ("Notes") are secured by
(1) a pledge of the capital stock and certain promissory notes of
the subsidiaries of American Publishing (1991) Inc., (2) the
general intangibles of such subsidiaries and (3) a guarantee by
Hollinger Inc. The Notes are repayable in annual installments from
September 1, 1998 through September 1, 2000 and bear interest at
rates ranging from 10.44% to 10.53%. These notes were paid off in
January 1998 (see note 22).
(c) (i) Southam has Cdn.$310.0 million credit facilities with its
banks. For Cdn.$145.0 million of the facilities, an initial
revolving period extends to December 31, 1998 and is
extendible for successive 364-day periods to December 31,
2001. For Cdn.$165.0 million of the facilities, an initial
term extends to December 31, 1998 after which it converts to a
reducing term loan with equal annual reductions in
availability until expiration on December 31, 2002. The credit
facilities are used to support short-term promissory note
issuances, capital expenditures, acquisitions and for general
corporate purposes. The amount borrowed at December 31, 1997
and December 31, 1996 was $72.1 million and $188.0 million,
respectively.
(ii) Southam has converted a portion of its variable rate interest
exposure to fixed rate by entering into a ten year Cdn.$25.0
million fixed rate interest swap at 8.7%, maturing May 2004.
Southam pays interest at the fixed rate and it receives
interest based on the three month bankers acceptance rate,
which is reset quarterly, on the nominal principal.
(d) The Company's agreements with banks and other debtors contain
various restrictive provisions relating to maintenance of certain
financial ratios, restrictions on additional indebtedness,
occurrence of certain corporate transactions and limitations on the
amount of capital expenditures and restricted payments (which
generally include dividends and management fees). At December 31,
1997, the Company was in compliance with the aforementioned
restrictive provisions.
(e) Principal amounts payable on long-term debt, excluding obligations
under capital leases, are: 1998 - $32,546,000, 1999 - $43,661,000,
2000 - $100,858,000, 2001 - $51,838,000, and
2002 - $10,412,000.
(f) Interest paid for 1997, 1996 and 1995 was $89,661,000, $72,616,000
and $40,716,000, respectively.
F-26
<PAGE> 88
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(8) LEASES
The following summarizes assets held under capital leases which are
included in property, plant and equipment:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Machinery and equipment $ 7,919 8,865
Less accumulated amortization 7,421 7,602
- --------------------------------------------------------------------------------
$ 498 1,263
- --------------------------------------------------------------------------------
</TABLE>
The Company also leases various facilities and equipment under
noncancelable operating lease arrangements. Rental expense under all
operating leases was approximately $15,422,000, $17,809,000 and
$11,434,000 in 1997, 1996 and 1995, respectively.
Minimum lease commitments together with the present value of obligations
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Capital Operating
leases leases
- -----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
1998 $ 4,225 $ 16,664
1999 4,141 14,431
2000 4,141 12,895
2001 3,106 11,830
2002 -- 11,374
Later years -- 113,794
- -----------------------------------------------------------------------------------------------
15,613 $ 180,988
------------
Less imputed interest and executory costs 2,832
- --------------------------------------------------------------------------------
Present value of net minimum payments 12,781
Less current portion included in current liabilities 3,014
- --------------------------------------------------------------------------------
Long-term obligations $ 9,767
- --------------------------------------------------------------------------------
</TABLE>
Minimum lease payments have been reduced for rental income from
noncancelable subleases by approximately $88,000 in 1998 and lesser
amounts thereafter (total reductions $228,000).
F-27
<PAGE> 89
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(9) INCOME TAXES
U.S. and foreign components of earnings before income taxes, minority
interest, and extraordinary item are presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
U.S $ 12,148 35,708 3,462
Foreign 232,001 94,230 46,062
- ----------------------------------------------------------------
$244,149 129,938 49,524
- ----------------------------------------------------------------
</TABLE>
Income tax expense for the periods shown below consists of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Current Deferred Total
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. Federal $ 3,019 6,713 9,732
Foreign 27,856 54,344 82,200
State and local 764 959 1,723
- --------------------------------------------------------------------------------
$ 31,639 62,016 93,655
- --------------------------------------------------------------------------------
Year ended December 31, 1996:
U.S. Federal $ 810 13,192 14,002
Foreign 19,829 14,928 34,757
State and local -- 3,106 3,106
- --------------------------------------------------------------------------------
$ 20,639 31,226 51,865
- --------------------------------------------------------------------------------
Year ended December 31, 1995:
U.S. Federal $ 2,619 (749) 1,870
Foreign 20,889 (2,822) 18,067
State and local 734 (107) 627
- --------------------------------------------------------------------------------
$ 24,242 (3,678) 20,564
- --------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE> 90
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% for 1997, 1996 and 1995 as a result
of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax expense $ 85,452 45,478 17,333
Increase (reduction) in income taxes resulting from:
Nondeductible expenses for income tax purposes 11,083 7,412 3,621
Resolution of foreign tax issues -- -- (3,492)
Results of foreign subsidiaries for which income tax
benefit has not been recognized -- 4,284 3,327
Additional U.S. taxes on foreign earnings -- 1,750 1,050
U.S. state and local income taxes, net of federal benefit 1,409 1,889 411
Impact of taxation at different foreign rates, repatriation
and other (2,639) 908 (880)
Utilization of net operating loss carryforwards and
investment tax credits for which no previous
benefit has been recognized -- -- (1,520)
Advance corporation tax recovery -- (1,880) --
Difference arising on sale of Fairfax interest -- (7,963) --
Other (1,650) (13) 714
- -------------------------------------------------------------------------------------------------------------
$ 93,655 51,865 20,564
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE> 91
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 2,040 6,014
Accrued compensation including vacation, bonus,
severance and deferred compensation 12,633 32,648
Excess of tax over book basis 4,593 6,278
Net operating loss carryforwards 25,660 14,453
Accrued medical and workers' compensation claims 1,629 4,011
Basis in subsidiaries, tax in excess of book -- 5,257
Prepaid expenses -- 3,237
Advance corporation tax receivable 2,472 8,680
- --------------------------------------------------------------------------------------------------------
Gross deferred tax assets 49,027 80,578
Less valuation allowance (11,423) (10,897)
- --------------------------------------------------------------------------------------------------------
Net deferred tax assets 37,604 69,681
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation 37,609 36,337
Intangible assets, principally due to differences in
basis and amortization 38,828 54,931
Foreign exchange basis differences 16,126 12,448
Long term advances under printing contract 13,953 13,424
Deferred gain on swap of assets 9,634 --
Unremitted earnings of a foreign equity investment 19,942 11,433
Other 33,649 11,229
- --------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities 169,741 139,802
- --------------------------------------------------------------------------------------------------------
Net deferred taxes $ 132,137 70,121
- --------------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE> 92
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred assets will not be realized. In
1995, the Company established a valuation allowance primarily for net
operating loss carryforwards and other deferred tax assets. From 1996 to
1997, the valuation allowance increased by a net $526,000. A full
valuation allowance against the net operating loss carryforwards has
been assessed.
Jerusalem Post has net operating loss and other credit carryforwards of
approximately $3,869,000 for Israeli tax purposes which do not have
expiration dates and may be used to reduce future Israeli income taxes.
Total income taxes paid in 1997, 1996 and 1995 amounted to $31,181,000,
$22,775,000 and $34,368,000 respectively.
(10) FINANCIAL INSTRUMENTS
The Company has entered into various types of financial instruments in
the normal course of business. Fair value estimates are made at a
specific point in time, based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of perceived risk and the country of origin.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, may not represent actual
values of the financial instruments that could be realized in the
future.
At December 31, 1997 and 1996, the comparison of the carrying value and
the estimated fair value of the Company's financial instruments was as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------ -----------------------
Carrying Fair Carrying Fair
value value value value
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Long-term debt $1,415,634 $ 928,348 $ 695,187 $ 565,458
Interest rate swaps, currency swaps and
forward exchange contracts -- 2,890 -- 8,722
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-31
<PAGE> 93
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The fair value of the interest rate swaps, currency swaps and forward
exchange contracts is the estimated amount that the Company would pay to
terminate the agreements (note 7). It is not practical to determine the
fair value of redeemable preferred stock held by related parties. The
carrying value of all other financial instruments at December 31, 1997
and 1996 approximate their estimated fair values.
(11) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company sponsors six domestic defined contribution plans, two of
which have provisions for Company matching contributions. Under the
Company's matching program for the two plans, $471,000, $246,000 and
$225,000 was contributed for the years ended December 31, 1997, 1996 and
1995, respectively.
The Telegraph sponsors a defined contribution plan, The Telegraph Staff
Pension Plan, for the majority of its employees, as well as a defined
contribution plan to provide pension benefits for senior executives.
Contributions to each of the plans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
The Telegraph Staff Pension Plan $ 5,780 5,176 6,970
The Telegraph Executive Pension Scheme 724 1,005 805
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Telegraph plans' assets consist principally of U.K. and overseas
equities, unit trusts and bonds.
F-32
<PAGE> 94
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
The Company and subsidiaries have nine domestic and seven foreign
single-employer defined benefit plans and contributes to various
union-sponsored, collectively bargained domestic multi-employer pension
plans. The Company's contributions to these plans for the years ended
December 31, 1997, 1996, and 1995 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Single-employer plans $ 5,146 5,440 3,820
Multi-employer plans 2,185 2,052 1,886
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Telegraph has a defined benefit plan, which was closed on July 1,
1991 and provides only benefits accrued up to that date. The liabilities
of the plan have been actuarially valued as at December 31, 1997. At
that date the market value of the plan assets was $20,020,000,
representing 100% of the estimated cost of purchasing the plan's
benefits from an insurance company. The actuary assumed a discount rate
of 6.29%. Increases to pension payments are discretionary and are
awarded by the trustees, with The Telegraph's consent, from surpluses
arising in the fund from time to time. Contributions to the trust were
$1,896,000 and $2,480,000 for 1997 and 1995, respectively, and there
were no contributions made in 1996.
Pursuant to the West Ferry joint venture agreement, The Telegraph has a
commitment to fund 50% of the obligation under West Ferry's defined
benefit plan.
F-33
<PAGE> 95
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
SINGLE-EMPLOYER PENSION PLANS
The benefits under the subsidiary companies' single-employer pension
plans are based primarily on years of service and compensation levels.
The Company funds the annual provision deductible for income tax
purposes. The plan's assets consist principally of marketable equity
securities and corporate and government debt securities.
Pension expense for the plans include the following components:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 8,444 2,339 1,710
Interest on projected benefit obligation 34,554 8,962 8,806
Expected return on assets (50,356) (10,949) (7,987)
Net amortization and deferral 5,506 1,862 (404)
- -------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ (1,852) 2,214 2,125
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The funded status of the plans and the amounts recognized in the
Company's consolidated financial statements are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Funded Unfunded
- ----------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 (in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations - vested benefit
obligation $(333,831) (69,373)
- ----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $(333,961) (71,558)
- ----------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 406,144 77,829
Plan assets at fair value 474,146 52,900
- ----------------------------------------------------------------------------------------------------------------
Plan assets in excess (deficit) of projected benefit obligation 68,002 (24,929)
Unrecognized net loss 10,813 1,054
- ----------------------------------------------------------------------------------------------------------------
Prepaid pension asset / (Accrued pension liability) $ 78,815 (23,875)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The prepaid pension asset in 1997 is included with other assets on the
balance sheet.
F-34
<PAGE> 96
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Funded Unfunded
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 (in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations - vested benefit
Obligation $ (121,470) (50,804)
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (121,520) (53,245)
- -------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 121,766 57,730
Plan assets at fair value 131,533 48,611
- -------------------------------------------------------------------------------------------------------------
Plan assets in excess (deficit) of projected benefit obligation 9,767 (9,119)
Unrecognized net loss (5,874) 935
- -------------------------------------------------------------------------------------------------------------
Prepaid pension asset / (Accrued pension liability) $ 3,893 (8,184)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The projected benefit obligation related to the Company's domestic plans
was determined using the following assumptions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0 - 7.5% 7.0% 7.5%
Long-term rate of return on plan assets 7.0 - 9.0% 9.0% 9.0%
Compensation increase 3.0 - 4.0% 3.0% 3.0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The assumptions used for the Company's foreign plans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.25 - 7.50% 7.62% 7.68%
Long-term rate of return on plan assets 3.50 - 6.29% 7.62% 7.68%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE> 97
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
MULTI-EMPLOYER PENSION PLANS
Certain U.S. employees are covered by union-sponsored multi-employer
pension plans, all of which are defined benefit plans. Contributions are
determined in accordance with the provisions of negotiated labor
contracts and are generally based on the number of man hours worked.
Pension expense for these plans was $2,185,000, $2,052,000 and
$1,886,000 for the years ended December 31, 1997, 1996, 1995,
respectively. The passage of the Multi-employer Pension Plan Amendments
Acts of 1980 (the Act) may, under certain circumstances, cause the
Company to become subject to liabilities in excess of the amounts
provided for in the collective bargaining agreements. Generally,
liabilities are contingent upon withdrawal or partial withdrawal from
the plans. The Company has not undertaken to withdraw or partially
withdraw from any of the plans as of December 31, 1997. Under the Act,
withdrawal liabilities would be based upon the Company's proportional
share of each plan's unfunded vested benefits. As of the date of the
latest actuarial valuations, the Company's share of the unfunded vested
liabilities of the plans was zero.
POST RETIREMENT BENEFITS
Southam sponsors a defined post retirement plan, which provides post
retirement benefits to certain employees.
The components of net period post retirement expense for the year ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C>
Service cost - benefits earned during the period $ 1,103
Interest cost on accumulated post retirement benefit obligation 2,692
Expected return on assets --
Net amortization and deferral --
- ----------------------------------------------------------------------------------------------------
Net periodic post retirement benefit cost $ 3,795
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE> 98
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The table below sets forth the plans' funded status reconciled to the
amounts recognized in the Company's financial statements:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------
(in thousands)
<S> <C>
Accumulated post retirement benefit obligation
Retirees $ 19,576
Fully eligible pan participants 5,923
Other active plan participants 17,862
- ----------------------------------------------------------------------------------------
Total accumulated post retirement benefit obligation $ 43,361
- ----------------------------------------------------------------------------------------
Unrecognized prior period loss (2,852)
- ----------------------------------------------------------------------------------------
Accrued post retirement benefit cost $ 40,509
- ----------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
post retirement benefit obligation is 6.5%. All benefits under the plan
are paid for by Southam's contribution to the Plan. For measuring the
expected post retirement benefit obligation, a 10% annual rate of
increase in the per capita claims was assumed for 1997. This rate was
assumed to decrease 1% per year to 5% in 2002 and remain at that level
thereafter. If the health care cost trend rate were increased 1%, the
accumulated post retirement benefits of December 31, 1997 would have
increased 9%. The effect of this change on the aggregate of service and
interest cost for 1997 would have be an increased of 10%.
Southam provides post employment benefits to former or inactive
employees. The benefits are accrued in accordance with Statement of
Financial Accounting Standards No. 112 "Employers Accounting for
Postemployment Benefits."
F-37
<PAGE> 99
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(12) MINORITY INTEREST
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Common shares of subsidiary $ 128,156 109,943
Special shares of subsidiary 74,878 --
- --------------------------------------------------------------------------------
$ 203,034 109,943
- --------------------------------------------------------------------------------
</TABLE>
Minority interest in the consolidated statements of operations is
comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Minority interest in The Telegraph earnings $ -- 3,537 13,359
Minority interest in Southam earnings 41,135 17,725 --
Dividends on FDTH and DTH redeemable preferred
stock, net of related interest rate swap adjustments 4,838 11,876 9,278
- -------------------------------------------------------------------------------------------------------------
$ 45,973 33,138 22,637
- -------------------------------------------------------------------------------------------------------------
</TABLE>
HCPH, a subsidiary company, issued 6,552,425 Cdn.$10 Non-Voting Special
Shares in July 1997 for a total issue price of Cdn.$65.5 million. This
issue of the Special Shares was part of the consideration for the
purchase of Southam shares described in note 3(c).
In September 1997 an additional 4,146,107 Special Shares were issued for
a total issue price of Cdn.$41.5 million in exchange for 4,146,107
Special Shares in 3396754 (note 4(d)).
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 0.510 Class A Subordinate Voting Shares
per HCPH special share and increasing to 0.602 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
F-38
<PAGE> 100
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
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.
(13) REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Preferred stock of subsidiaries $ -- 526,412
Series D Preferred Stock of the Company 75,891 79,167
- ---------------------------------------------------------------------------------------
$ 75,891 605,579
- ---------------------------------------------------------------------------------------
</TABLE>
(a) During 1992 two wholly owned U.K. subsidiaries of the Company
issued preference shares as follows:
(i) On May 19, 1992 FDTH issued to unrelated, unaffiliated persons
60 floating rate cumulative redeemable retractable preference
shares, Series A, with a nominal value of Cdn.$500,000 per
share and 60 floating rate cumulative redeemable retractable
preference shares, Series B, with a nominal value of
Cdn.$500,000 per share to certain Canadian financial
institutions. Total gross proceeds of the issue were
$50,276,000 (Cdn.$60,000,000). The Series A and Series B
preference shares were redeemed in full in May 1997.
In addition DTH issued 2,540,000 cumulative redeemable
preference shares, Series 1 at a price of Cdn.$25 per share
and 1,100,000 cumulative redeemable preference shares, Series
2, at a price of $25 per share. The total gross proceeds were
$53,209,000 (Cdn.$63,500,000) for Series 1 and $27,500,000 for
Series 2. The preference shares Series 1 and preference shares
Series 2 were redeemed in full in June 1997.
F-39
<PAGE> 101
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(ii) In December 1995 FDTH Series A and Series B preference shares
with an aggregate redemption value of Cdn.$140,000,000
($102,600,000) held by DTH were transferred to Argsub (note
4). On September 30, 1996 FDTH issued 600 Fourth Preference
Shares Series 1996 with an aggregate redemption amount of
$300.0 million to Argsub in exchange for 600 newly issued
Second Preference Shares Series 1996 of Argsub (with an
redemption amount of $300.0 million). The newly issued Second
Preference Shares Series 1996 of Argsub have terms
substantially identical to those of the newly issued Fourth
Preference Shares Series 1996 of FDTH for which they were
exchanged. Both Argsub and FDTH have waived their rights to
dividends on both series of shares (note 4).
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.
(iii)In 1992, Hollinger Inc. entered into interest rate swap and
currency swap arrangements until June 30, 1997 to effectively
convert substantially all of the DTH Series 1 and Series 2
preference dividends to U.S. dollar variable rate dividends
and to convert Cdn.$60,000,000 of the capital amount of the
DTH Series 1 preference shares to $50,300,000. In connection
with the Reorganization, the Company entered into interest
rate and currency exchange arrangements with Hollinger Inc.
that are intended to permit the Company to receive benefits
that correspond to those obtained by Hollinger Inc. under
these swap arrangements. These swap arrangements were closed
out in 1997 when the related DTH preference shares were
redeemed.
(iv) The carrying value at December 31, 1996 of the redeemable
preference shares of DTH and FDTH reflect exchange rates in
effect at that time.
(b) The Company is authorized to issue 20,000,000 shares of preferred
stock in one or more series and to designate the rights,
preferences, limitations and restrictions of and upon shares of
each series, including voting, redemption and conversion rights.
Pursuant to the Reorganization, on October 13, 1995, the Company
issued 739,500 shares of Series A Preferred Stock to Hollinger Inc.
as a partial consideration for all of the ordinary shares of DTH.
In conjunction with the Hollinger Inc. Transaction, the Series A
Preferred Stock was exchanged for Series D Preferred Stock. The
value ascribed to the Series A Preferred Stock at December 31, 1996
is the redemption value of the shares expressed in U.S. dollars
based on actual rates of exchange on December 31, 1996. The value
ascribed to the
F-40
<PAGE> 102
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Series D Preferred Stock at December 31, 1997 is the redemption
value of the shares expressed in U.S. dollars based on actual rates
of exchange on December 31, 1997.
The Series D Preferred Stock is non-voting and is entitled to
receive cumulative cash dividends, payable quarterly. The amount of
each quarterly dividend per share will be equal to the aggregate
amount of ordinary course cash dividends paid during the proceeding
calendar quarter on 7,395,000 of the Southam shares held by HCPH,
divided by 739,500. The Series D Preferred Stock has the same terms
as the Series A Preferred Stock for which it was exchanged.
The Series D Preferred Stock is redeemable in whole or in part, at
any time by the Company or a holder of such shares, subject to
restrictions in the Company's credit facilities. In addition, the
Company is not obligated to redeem the Series D Preferred Stock
held by Hollinger Inc. in the event that clear legal title to the
shares of Southam previously transferred by Hollinger Inc. on or
prior to April 1, 1999 is not delivered to HCPH. The redemption
price per share will be Cdn.$146.63 ($102.63 based on December 31,
1997 exchange rates) plus accrued dividends.
A holder of shares of this Series may convert such shares at any
time into shares of Class A Common Stock of the Company. The
conversion price will initially be $14.00 per share of Class A
Common Stock, subject to adjustment upon the occurrence of certain
events.
(14) STOCKHOLDERS' EQUITY
In February 1996, the Company sold 16,100,000 shares of Class A Common
Stock, at $9.25 per share and $250,000,000 principal amount of
Subordinated Notes (see note 7). Combined net proceeds of $384,628,000,
were used to repay short-term bank loans of $130,000,000 due September
6, 1996 and long-term bank loans, due 1996-2001, of $160,000,000. The
Company also repaid short-term debt due to Hollinger Inc. of
$20,843,000. The Company expensed as an extraordinary item the related
unamortized deferred financing fees of approximately $3,600,000 upon
repayment of the short-term and long-term debt. The remaining proceeds,
after paying accrued interest and costs associated with this offering,
were added to the Company's cash and cash equivalents for general
corporate purposes.
In a series of transactions occurring in early August 1996, the Company
sold 11,500,000 shares of Class A Common Stock at a price of $9.75 per
share and 20,700,000 9-3/4% PRIDES at a price of $9.75 per PRIDES. The
combined net proceeds of these sales were $301.1 million were used in
the acquisition of the Telegraph shares (note 2(b)), to paydown
Telegraph indebtedness and to pay transaction costs.
F-41
<PAGE> 103
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Pursuant to the Hollinger Inc. Transaction the Company issued 829,409
shares of a new series of mandatorily convertible preferred stock of the
Company similar to the PRIDES having a face value of approximately $90.0
million, and 3,207,045 shares of Class A Common Stock of the Company
having a nominal agreed value of approximately $42.0 million.
Class A Common Stock and Class B Common Stock have identical rights with
respect to cash dividends and in any sale of liquidation, but different
voting rights. Each share of Class A Common Stock is entitled to one
vote per share and each share of Class B Common Stock is entitled to ten
votes per share, on all matters, including the election of directors,
where the two classes vote together as a single class.
Class B Common Stock is convertible at any time at the option of
Hollinger Inc. into Class A Common Stock on a share-for-share basis and
is transferable by Hollinger Inc. under certain conditions.
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 thereon, unless either previously
redeemed by the Company or converted at the option of their holder. The
PRIDES will pay cumulative quarterly dividends at a rate of 9.75% per
annum (equivalent to $0.9506 per PRIDES) and will have an aggregate
liquidation preference equal to their price plus any accrued and unpaid
dividends thereon.
A significant portion of the Company's operating income and net earnings
is derived from foreign subsidiaries and affiliated companies. As an
international holding company, the Company's ability to meet its
financial obligations is dependent upon the availability of cash flows
from foreign subsidiaries and affiliated companies (subject to
applicable withholding taxes) through dividends, intercompany advances,
management fees and other payments. The Company's subsidiaries and
affiliated companies are under no obligation to pay dividends.
The contributions by Hollinger Inc. represent amounts paid for by
Hollinger Inc. and net distributions prior to the Reorganization and the
Hollinger Inc. Transaction.
F-42
<PAGE> 104
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(15) EARNINGS PER SHARE
The following table reconciles the numerator and denominator for the
calculation of basic and diluted earnings per share for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 81,052 87,130 $0.93
Effect of dilutive securities
PRIDES 22,409 24,521
Series D redeemable preferred stock 1,060 5,421
HCPH Special Shares 2,237
Stock options 177
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 104,521 119,486 $0.87
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-43
<PAGE> 105
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 32,077 79,081 $ 0.41
Effect of dilutive securities
Series D redeemable preferred stock 1,087 5,655
Stock options 48
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 33,164 84,784 $ 0.39
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1995
Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 6,052 67,215 $ 0.09
Effect of dilutive securities
Series D redeemable preferred stock 271 1,228
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 6,323 68,443 $ 0.09
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-44
<PAGE> 106
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(16) DIRECT SUBSCRIPTION CAMPAIGN COSTS, NET AND INFREQUENT ITEMS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Costs related to direct subscription campaign $ 22,191 32,327 --
Costs incurred with respect to terminated employees 3,052 9,240 --
Reorganization expenses -- -- 8,000
- -----------------------------------------------------------------------------------------------------------------------
$ 25,243 41,567 8,000
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(17) OTHER INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gain on sale of Fairfax investment (note 3) $ 66,128 53,518 --
Gain on sale of marketable securities -- -- 11,968
Gain on sales of assets (note 2(a)) 2,768 17,899 --
Other (1,635) (13,158) 2,730
- --------------------------------------------------------------------------------------------------------------
$ 67,261 58,259 14,698
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The other in 1996 represents the write off of the carrying value of
fixed assets and certain investments at Southam.
(18) STOCK OPTION PLAN
During May 1994, the Company adopted the Hollinger International Inc.
1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan was amended in
September 1996 to increase the numbers of shares authorized for issuance
up to 1,471,140 shares. In 1997, the Company adopted the 1997 Stock
Incentive Plan (the "Incentive Plan") which replaces the 1994 Plan. The
Plan is administered by a committee of the Board of Directors. The
Committee has the authority to determine the employees to whom awards
will be made, the amount and type of awards, and the other terms and
conditions of the awards.
F-45
<PAGE> 107
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Incentive Plan provides for awards of up to 5,156,915 shares of
Class A Common Stock. The Incentive Plan authorizes the grant of
incentive stock options and nonqualified stock options. The exercise
price for stock options must be at least equal to 100% of the fair
market value of the Class A Common Stock on the date of grant of such
option.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had the Company determined
compensation costs based on the fair value at the grant date of its
stock options under FASB Statement of Financial Accounting Standards No.
123 ("FAS 123"), the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below. The pro
forma effect includes compensation expense related to stock options at
Southam.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(in thousand except per share amounts)
<S> <C> <C> <C>
Net earnings as reported $ 104,521 42,785 6,323
Pro forma net earnings 102,469 41,924 5,872
Basic earnings per share as reported $ 0.93 0.41 0.09
Diluted earnings per share as reported 0.87 0.39 0.09
Pro forma basic earnings per share $ 0.90 0.39 0.08
Pro forma diluted earnings per share 0.85 0.38 0.08
- -----------------------------------------------------------------------------------------------------
</TABLE>
Pro forma net earnings reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under FAS 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected
over the options' vesting period of 4 years and the compensation cost
for options granted prior to January 1, 1995 is not considered.
Calculating the compensation cost consistent with FAS 123, the fair
value of each stock option granted during 1997, 1996 and 1995 was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in
fiscal 1997, 1996 and 1995, respectively: dividend yield of 2.9%, 4.0%
and 0.8%; expected volatility of 25.7%,47.5% and 47.4%; risk-free
interest rates of 5.4%, 6.6% and 6.1%, and expected lives of ten years.
Weighted average fair value of options granted by the Company during
1997, 1996 and 1995 was $5.80, $4.11 and $7.64, respectively. For
Southam, the fair value of each stock option granted during 1996 and
1995 was estimated on the date of grant using the Black-Scholes
option-
F-46
<PAGE> 108
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
pricing model with the following weighted-average assumptions used in
grants in fiscal 1996 and 1995, respectively: dividend yield of 1.3% and
1.1%; expected volatility of 30.4% and 30.4%; risk-free interest rates
of 6.1% and 7.5%; and expected lives of six years. The weighted average
fair value of options granted by Southam during 1996 and 1995 was $4.24
and $4.29, respectively. The were no stock options granted by Southam in
1997.
Stock option activity with respect of the Company's stock options was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1994 505,500 $ 13.00
Options granted 355,000 12.40
Options canceled (29,000) 13.00
- -------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 831,500 12.74
Options granted 492,000 9.93
Options canceled (42,000) 13.00
- -------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 1,281,500 11.65
Options granted 832,000 10.06
Options canceled (14,000) 9.71
- -------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 2,099,500 $ 11.01
- -------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1995 119,125 $ 13.00
Options exercisable at December 31, 1996 306,000 $ 12.82
Options exercisable at December 31, 1997 601,875 $ 12.22
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Southam has a stock option plan under which options have been granted to
executives and employees. At December 31, 1997, 10,000 options for
shares had been granted and 5,000 shares were exercisable at that date.
At December 31, 1996, options for 683,400 shares had been granted with
185,700 options exercisable at that date. Southam's total common shares
outstanding at December 31, 1997 were 77,974,023.
F-47
<PAGE> 109
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(19) COMMITMENTS AND CONTINGENCIES
(a) The Telegraph has guaranteed the joint venture partners' share of
leasing obligations to third parties of the printing joint ventures
which amounted to $22,959,000 ((pound)13,976,000) at December 31,
1997. These obligations are also guaranteed jointly and severally
by each joint venture partner.
(b) In connection with the Company's insurance program, letters of
credit are required to support certain projected workers'
compensation obligations. At December 31, 1997, letters of credit
in the amount of $2,441,0000 were outstanding.
(20) SEGMENT INFORMATION
The Company operates principally in the business of publishing, printing
and distribution of newspapers and magazines and holds investments
principally in companies which operate in the same business as the
Company. The following is a summary of the geographic segments of the
Company:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
-----------------------------------------------------------------------
United United
Total States Kingdom Canada
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Operating revenues $2,211,530 633,633 492,270 1,085,627
- -------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,923,808 551,962 463,428 908,418
- -------------------------------------------------------------------------------------------------------------------
Operating income $ 287,722 81,672 28,842 177,208
- -------------------------------------------------------------------------------------------------------------------
Equity in earnings of affiliates $ 5,807 5,765 -- 42
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,973,910 899,261 627,182 1,447,467
Investments in affiliates 50,011 2,027 17,367 30,617
- -------------------------------------------------------------------------------------------------------------------
Total assets $3,023,921 901,288 644,549 1,478,084
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-48
<PAGE> 110
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1996
---------------------------------------------------------------------------------
United United Other
Total States Kingdom Canada Countries
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $2,074,022 607,372 451,902 1,014,748 --
- -----------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,926,055 549,862 443,930 932,263 --
- -----------------------------------------------------------------------------------------------------------------------------
Operating income $ 147,967 57,510 7,972 82,485 --
- -----------------------------------------------------------------------------------------------------------------------------
Equity in earnings of affiliates $ 12,050 911 -- 13 11,126
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets $3,227,048 818,163 1,071,846 1,337,039 --
Investments in affiliates 198,496 1,513 194,946 2,037 --
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $3,425,544 819,676 1,266,792 1,339,076 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-49
<PAGE> 111
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1995
---------------------------------------------------------------------------------
United United Other
Total States Kingdom Canada Countries
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Operating revenues $1,078,514 559,214 405,037 114,263 --
- -----------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,016,650 527,774 377,352 111,524 --
- -----------------------------------------------------------------------------------------------------------------------------
Operating income $ 61,864 31,440 27,685 2,739 --
- -----------------------------------------------------------------------------------------------------------------------------
Equity in earnings of affiliates $ 14,356 716 -- (11,022) 24,662
- -----------------------------------------------------------------------------------------------------------------------------
Identifiable assets $1,274,171 745,051 361,527 167,593 --
Investments in affiliates 463,809 1,102 462,425 282 --
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,737,980 746,153 823,952 167,875 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The "Other Countries" geographic segment includes equity earnings from
Australia.
F-50
<PAGE> 112
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(21) RELATED-PARTY TRANSACTIONS
During 1996, the Company paid Hollinger Inc. the remaining balance of
the working capital adjustment of $13,832,000 due under the terms of the
Reorganization. Approximately $6,000,000 of the working capital
adjustment was paid in 1995. In 1996, the Company also paid Hollinger
Inc. $3,500,000 for expenses incurred in connection with the
Reorganization.
Other than the amounts due to Hollinger Inc. with respect to the
Reorganization, all other amounts due to Hollinger Inc. represent cash
advances and management and administrative expenses billed by Hollinger
Inc. and a corporate affiliate of Hollinger Inc. Hollinger Inc. and its
affiliate billed the Company for allocable expenses amounting to
$26,506,000, $8,485,000 and $5,605,000 for 1997, 1996 and 1995,
respectively.
(22) SUBSEQUENT EVENTS
On January 27, 1998, the Company completed a sale of approximately 80
community newspapers for aggregate cash consideration of approximately
$310.0 million. The proceeds from the sale were used to pay off the
AP-91 Notes and pay down $175.0 million of outstanding debt on the Bank
Credit Facility. A pre-tax gain resulting from this transaction of
approximately $206.0 million will be accounted for in 1998.
F-51
<PAGE> 113
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(23) SUMMARIZED FINANCIAL INFORMATION
Summarized balance sheet and income statement data for Hollinger
International Publishing Inc. is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Current assets $ 344,365 261,193 197,567
Total assets 2,454,324 2,143,519 1,443,651
Current liabilities 282,386 665,221 263,929
Total liabilities 1,615,954 1,145,514 813,299
Minority interest 74,878 -- 97,297
Redeemable preferred stock 75,891 526,412 226,982
Stockholder's equity 687,602 471,593 306,073
Income Statement Data:
Operating revenues 1,349,766 1,059,274 964,251
Operating income 142,386 76,715 59,125
Net earnings 104,520 55,574 10,135
- -----------------------------------------------------------------------------------------------------
</TABLE>
F-52
<PAGE> 114
HOLLINGER INTERNATIONAL INC, AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(24) QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Total operating revenues $ 514,243 562,021 523,658 611,608
Total operating income $ 55,128 86,460 45,692 100,442
Net earnings 55,426 28,125 5,609 15,361
Basic earnings per share 0.57 0.26 0.00 0.09
Diluted earnings per share 0.47 0.24 0.00 0.09
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues as reported $ 303,024 324,027 300,609 342,922
Operating revenues for Southam 181,875 208,629 194,557 218,379
----------- ----------- ----------- -----------
Total operating revenues $ 484,899 532,656 495,166 561,301
Operating income $ 14,565 35,327 21,999 13,725
Operating income for Southam 5,045 19,402 9,002 28,902
----------- ----------- ----------- -----------
Total operating income $ 19,610 54,729 31,001 42,627
Net earnings (loss) (4,540) 10,864 (3,993) 40,454
Basic earnings (loss) per share (0.07) 0.15 (0.11) 0.40
Diluted earnings (loss) per share (0.07) 0.14 (0.11) 0.34
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-53
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Hollinger International Inc.:
We consent to incorporation by reference in the registration statements
No. 333-17111 on Form S-3 and No. 33-88810 on Form S-8 of Hollinger
International Inc. of our report dated February 23, 1998 relating to the
consolidated balance sheets of Hollinger International Inc. and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 annual report on Form 10-K of Hollinger International Inc.
/s/ KPMG Peat Marwick LLP /s/
Chicago, Illinois
March 27, 1998
-1 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 107,384
<SECURITIES> 0
<RECEIVABLES> 340,860
<ALLOWANCES> 24,966
<INVENTORY> 32,454
<CURRENT-ASSETS> 502,253
<PP&E> 1,083,197
<DEPRECIATION> 467,618
<TOTAL-ASSETS> 3,023,921
<CURRENT-LIABILITIES> 448,888
<BONDS> 1,392,855
75,891
195,104
<COMMON> 876
<OTHER-SE> 491,622
<TOTAL-LIABILITY-AND-EQUITY> 3,023,921
<SALES> 2,211,530
<TOTAL-REVENUES> 2,211,530
<CGS> 0
<TOTAL-COSTS> 1,923,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,558
<INCOME-PRETAX> 244,149
<INCOME-TAX> 93,655
<INCOME-CONTINUING> 104,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,521
<EPS-PRIMARY> .93
<EPS-DILUTED> .87
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 148,550 23,810
<SECURITIES> 0 0
<RECEIVABLES> 339,253 171,401
<ALLOWANCES> 17,667 13,946
<INVENTORY> 30,056 29,728
<CURRENT-ASSETS> 523,686 255,276
<PP&E> 986,752 357,614
<DEPRECIATION> 425,021 116,568
<TOTAL-ASSETS> 3,425,544 1,737,980
<CURRENT-LIABILITIES> 1,219,446 615,949
<BONDS> 675,428 446,914
605,579 306,452
195,104 0
<COMMON> 876 600
<OTHER-SE> 490,346 159,373
<TOTAL-LIABILITY-AND-EQUITY> 3,425,544 1,737,980
<SALES> 2,074,022 1,078,514
<TOTAL-REVENUES> 2,074,022 1,078,514
<CGS> 0 0
<TOTAL-COSTS> 1,926,055 1,016,650
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 84,356 44,727
<INCOME-PRETAX> 129,938 49,524
<INCOME-TAX> 51,865 20,564
<INCOME-CONTINUING> 44,935 6,323
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 2,150 0
<NET-INCOME> 42,785 6,323
<EPS-PRIMARY> .41 .09
<EPS-DILUTED> .39 .09
</TABLE>
