<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611
-----------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 321-2299
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 10, 1998
- -------------------------- ------------------------------
Class A Common Stock
par value $.01 per share 89,986,197 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
8
PART II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K. 19
Signatures 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1998 AND JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Advertising 411,737 $ 401,621 $ 794,188 $ 760,918
Circulation 129,440 130,717 259,118 258,594
Job printing 17,518 18,980 34,129 37,353
Other 10,476 10,703 19,705 19,399
----------- ----------- ----------- -----------
Total operating revenues 569,171 562,021 1,107,140 1,076,264
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Newsprint 87,772 77,893 172,061 148,914
Compensation costs 176,527 181,078 352,091 358,938
Other operating costs 181,717 182,481 369,412 356,005
Direct subscription campaign costs, net and
infrequent items -- 6,441 -- 14,786
Depreciation and amortization 28,241 27,668 56,818 56,033
----------- ----------- ----------- -----------
Total operating costs and expenses 474,257 475,561 950,382 934,676
----------- ----------- ----------- -----------
Operating income 94,914 86,460 156,758 141,588
Other income (expense)
Interest expense (25,339) (27,212) (51,765) (55,594)
Amortization of debt issue costs (1,540) (1,451) (2,927) (5,149)
Equity in earnings (loss)
of affiliates (411) 5,380 (779) 5,622
Interest and dividend income 1,109 3,235 3,742 6,181
Other income, net 39,805 376 234,515 68,069
----------- ----------- ----------- -----------
Total other income (expense) 13,624 (19,672) 182,786 19,129
----------- ----------- ----------- -----------
Earnings before income taxes, minority
interest and extraordinary item 108,538 66,788 339,544 160,717
Provision for income taxes 43,965 24,479 134,947 52,501
----------- ----------- ----------- -----------
Earnings before minority interest and
extraordinary item 64,573 42,309 204,597 108,216
Minority interest 33,392 14,184 40,346 24,665
----------- ----------- ----------- -----------
Earnings before extraordinary item 31,181 28,125 164,251 83,551
Extraordinary loss on debt extinguishments -- -- (5,067) --
----------- ----------- ----------- -----------
Net earnings $ 31,181 $ 28,125 $ 159,184 $ 83,551
=========== =========== =========== ===========
Basic earnings per share before
extraordinary item
$ 0.28 $ 0.25 $ 1.47 $ 0.74
=========== =========== =========== ===========
Diluted earnings per share before
extraordinary item $ 0.26 $ 0.24 $ 1.36 $ 0.71
=========== =========== =========== ===========
Basic earnings per share $ 0.28 $ 0.25 $ 1.43 $ 0.74
=========== =========== =========== ===========
Diluted earnings per share $ 0.26 $ 0.24 $ 1.32 $ 0.71
=========== =========== =========== ===========
Weighted average shares outstanding-basic 111,161 112,041 111,162 112,162
=========== =========== =========== ===========
Weighted average shares outstanding-diluted 121,061 117,706 121,020 117,827
=========== =========== =========== ===========
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,072 $ 107,384
Accounts receivable, net 321,050 315,894
Due from affiliates 28,183 18,411
Inventories 53,318 32,454
Other current assets 26,756 31,110
----------- -----------
Total current assets 533,379 505,253
Property, plant and equipment, net of
accumulated depreciation 594,229 615,579
Investments in affiliates 50,140 50,011
Other investments, at cost 92,535 75,720
Intangible assets, net of accumulated amortization 1,574,704 1,671,210
Deferred financing costs and other assets 106,661 106,148
----------- -----------
$ 2,951,648 $ 3,023,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 6,283 $ 35,560
Accounts payable 106,969 101,925
Accrued expenses 177,721 195,109
Deferred revenue 75,230 85,887
Income taxes payable 72,229 30,407
----------- -----------
Total current liabilities 438,432 448,888
Long-term debt, less current installments 1,155,747 1,392,855
Other long-term liabilities 244,445 215,651
----------- -----------
Total liabilities 1,838,624 2,057,394
Minority interest 236,282 203,034
Redeemable preferred stock 73,680 75,891
Stockholders' equity:
Convertible preferred stock 195,104 195,104
Class A common stock 726 726
Class B common stock 150 150
Additional paid-in capital 361,262 358,871
Cumulative translation adjustment (38,103) (27,978)
Retained earnings 299,333 175,802
----------- -----------
818,472 702,675
Class A common stock in treasury, at cost (15,410) (15,073)
----------- -----------
Total stockholders' equity 803,062 687,602
----------- -----------
$ 2,951,648 $ 3,023,921
=========== ===========
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 159,184 $ 83,551
Items not involving cash:
Depreciation and amortization 56,818 56,033
Amortization of debt issue costs 2,927 5,149
Equity in net earnings (loss)
of affiliates, net (1,486) (2,445)
Minority interest 40,346 24,665
Gain on sale of investment -- (65,431)
Gain on sale of assets (207,380) --
Other non-cash items 369 35,160
Changes in working capital net 5,493 (40,524)
--------- ---------
Cash provided by operating activities 56,271 96,158
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (56,890) (60,078)
Additions to investments (30,705) (958)
Acquisitions, net (45,346) (30,439)
Proceeds on disposal of investments 372,093 233,082
Collections on long-term receivables 9,068 6,005
Other investing activities (3,970) 693
--------- ---------
Cash provided by investing activities 244,250 148,305
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 51,500 728,114
Repayments of long-term debt (308,795) (75,545)
Repayments of short-term debt -- (496,435)
Payment of debt issue costs (638) (34,117)
Changes due to affiliated companies (6,244) (242,694)
Proceeds from stock options exercised 1,515 --
Repurchase of common stock (1,671) (9,521)
Issue of common shares of a subsidiary 783 8,187
Redemption of preference shares -- (116,863)
Dividends to minority interests (2,244) (8,114)
Cash dividends paid (35,653) (27,211)
Other financing activities -- 357
--------- ---------
Cash used in financing activities (301,447) (273,842)
--------- ---------
Effect of exchange rate changes on cash (2,386) (21,483)
--------- ---------
Net decrease in cash (3,312) (50,862)
Cash at beginning of period 107,384 148,550
--------- ---------
Cash at end of period $ 104,072 $ 97,688
========= =========
</TABLE>
3
<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is presumed that the reader has already read the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the fiscal year. For further
information, refer to the consolidated financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997
NOTE 2 - PRINCIPLES OF PRESENTATION AND CONSOLIDATION
The Company is a subsidiary of Hollinger Inc., a Canadian corporation,
which owns approximately 49.4% of the combined equity ownership interest and
approximately 77.8% of the combined voting power of the outstanding Common Stock
of the Company after giving consideration to the PRIDES which were exchanged for
Class A Common Shares (see note 6), without giving effect to conversion of the
Company's Series C Convertible Preferred Stock ("Series C Preferred Stock") and
Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock").
All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 presentation.
NOTE 3 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes reporting requirements for comprehensive income and its
components; however, the adoption of this statement has no effect on the
Company's net earnings or total stockholders' equity. SFAS No. 130 requires
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Total comprehensive income for the three months ended June 30, 1998 and
1997 was $6,636,000 and $34,118,000, respectively and for the six months ended
June 30, 1998 and 1997 was $149,059,000 and $45,263,000, respectively.
4
<PAGE> 7
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 4 - EARNINGS PER SHARE
The following table reconciles the numerator and denominator for the
calculation of basic and diluted earnings per share for the three months and six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
===================================================================================================
Three months ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 30,924 111,161 $0.28
Effect of dilutive securities
Series D Preferred Stock 257 5,334
HCPH Special Shares 3,896
Stock options 670
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 31,181 121,061 $0.26
- ----------------------------------------------------------------------------------------------------
Three months ended June 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------
(in thousands)
Basic EPS
Net income available to common stockholders $ 27,857 112,041 $0.25
Effect of dilutive securities
Series D Preferred Stock 268 5,608
Stock options 57
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 28,125 117,706 $0.24
===================================================================================================
</TABLE>
5
<PAGE> 8
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
====================================================================================================
Six months ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 158,665 111,162 $1.43
Effect of dilutive securities
Series D Preferred Stock 519 5,334
HCPH Special Shares 3,896
Stock options 620
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 159,184 121,020 $1.32
- ----------------------------------------------------------------------------------------------------
Six months ended June 30, 1997
Income Shares Per-Share
(Numerator) Denominator) Amount
- ----------------------------------------------------------------------------------------------------
(in thousands)
Basic EPS
Net income available to common stockholders $ 83,015 112,162 $0.74
Effect of dilutive securities
Series D Preferred Stock 536 5,608
Stock options 57
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 83,551 117,827 $0.71
====================================================================================================
</TABLE>
NOTE 5 - SALE OF AMERICAN TRUCKER AND MEDICINE HAT NEWS
During the second quarter Southam sold its American Trucker publishing
group and 13,000 daily circulation newspaper in Western Canada. The proceeds
from the sales were used to pay down debt at Southam. The gains recognized on
the sales are included in other income.
6
<PAGE> 9
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 6 - SUBSEQUENT EVENTS
On July 1, 1998, the Company announced the acquisition of the
Times-West Virginian in Fairmount, West Virginia, and The Meadville Tribune in
Meadville, Pennsylvania. The Times-West Virginian has a daily circulation of
approximately 15,700 and The Meadville Tribune has a daily circulation of
approximately 16,300.
On July 8, 1998 the Company announced that it had commenced an Exchange
Offer to exchange any and all of its outstanding PRIDES for shares of Class A
Common Stock at an exchange ratio of 0.92 shares of Class A Common Stock for
each PRIDES. The Exchange Offer expired on August 4, 1998 and of the 20,700,000
total PRIDES outstanding 19,993,531 were exchanged for 18,394,048 shares of
Class A Common Stock.
On July 20, 1998, Southam and HCPH announced that Southam had entered
into an agreement with Sun Media Corporation to purchase Sun Media's 80%
interest in The Financial Post Company. The Financial Post Company publishes The
Financial Post and other weekly newspapers. The Financial Post is national
business daily in Canada with a daily circulation of approximately 100,000.
Southam and HCPH also entered into an agreement to sell to Sun Media the
following daily newspapers that are published in Ontario, Canada: The Hamilton
Spectator, The Record in Kitchener-Waterloo, The Cambridge Reporter and The
Daily Mercury in Guelph. The combined daily circulation of these newspapers is
approximately 200,000. The closing of these sales is expected late in the third
quarter.
7
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The Company's business is concentrated in the publishing, printing and
distribution of newspapers and includes the United States Newspaper Group, the
U.K. Newspaper Group and the Canadian Newspaper Group. The United States
Newspaper Group consists of the Chicago Group, which includes the Chicago
Sun-Times, Post-Tribune in Gary, Indiana and suburban newspapers in the Chicago
metropolitan area, and the Community Group, which includes the Company's
community newspapers, operating in 23 states, and for reporting and
administrative purposes, Jerusalem Post. The U.K. Newspaper Group includes the
operating results of the Telegraph. The Canadian Newspaper Group includes
results of Southam Inc. ("Southam") and the Canadian Newspapers acquired from
Hollinger Inc.
In January 1998, the Company acquired the Post-Tribune in Gary, Indiana and sold
approximately 80 community newspapers for gross cash proceeds of approximately
$310.0 million. The proceeds were used to retire the AP-91 Senior Notes and
paydown outstanding debt on the Bank Credit Facility.
During the second quarter of 1998 Southam sold its American Trucker publishing
group and a daily newspaper in Western Canada. The proceeds from these sales
were used to pay down debt at Southam.
CONSOLIDATED RESULTS OF OPERATIONS
Second quarter 1998 net earnings were $31.2 million, or 28 cents per share
compared to $28.1 million, or 25 cents per share in 1997. Net earnings for the
six months ended June 30, 1998 were $159.2 million, or $1.43 per share compared
to $83.6 million, or $0.74 per share for the same period in 1997. Earnings
before extraordinary items for the six months ended June 30, 1998 were $164.3
million, or $1.47 per share. There were no extraordinary items in 1997. The
extraordinary item represents the make-whole premium that was paid in
conjunction with retiring the AP-91 Senior Notes.
There were a number of non-recurring items in both years affecting the results.
Non-recurring items in the second quarter of 1998 totaled $40.4 million and
consisted principally of the gains at Southam on the sale of American Trucker
and a daily newspaper. Virtually all of the reported non-recurring items, net of
taxes, related to the minority shareholders in Southam since the book values of
our share of the assets sold were adjusted to market value when the Southam
shares were purchased. As a result, the effect of non-recurring items on second
quarter 1998 net income is eliminated largely by the minority interest charge.
Non-recurring items in the second quarter of 1997 included net income totaling
$4.9 million that included a net gain of $5.2 million on the sale of a division
at the Chicago joint venture. Net earnings for the six months ended June 30,
1998 have been increased by non-recurring items totaling $234.5 that include the
second quarter items above and first quarter the gain on sale of community
newspapers, loss on disposal of assets, and redundancy costs. Net earnings for
the six months ended June 30, 1997 have been increased by non-recurring items
totaling $53.6 million, which includes the net gain on the sale of Fairfax of
$49.1 million. Excluding these non-recurring items in 1998, net earnings
contributed by operations for the second quarter of 1998 were $29.9 million or
27 cents per share compared with $23.3 million or 21 cents per share for the
second quarter of 1997 and
8
<PAGE> 11
for the six months ended June 30, 1998 were $45.1 million or 40 cents per share
compared with $29.9 million or 26 cents per share.
Operating revenue for the second quarter of 1998 increased $7.2 million to
$569.2 million from $562.0 million in 1997. Operating revenue for the six months
ended June 30, 1998 increased $30.8 million to $1,107.1 million from $1,076.3
million in 1997. The increase in revenue for both the quarter and the six months
was largely due to company wide improvements in advertising revenue, which
increased 2.5% for the second quarter and 4.4% for the first six months of 1998
over the prior year.
EBITDA for second quarter of 1998 increased 7.9% to $123.2 million from $114.1
million in 1997. EBITDA for the six months ended June 30,1998 increased 8.1% to
$213.6 million from $197.6 million in the prior year. Operating income increased
9.8% in the second quarter of 1998 and 10.7% for the first six months of 1998
from the respective periods in the prior year.
EBITDA and operating income increased notwithstanding the disposition of the
community newspapers, which had added $8.3 million to EBITDA and $6.4 million to
operating income in the second quarter of 1997 and $14.7 million to EBITDA and
$10.8 million to operating income for the six months ended June 30, 1997. The
increases in EBITDA and operating income are mainly due to increased advertising
revenue offset, in part, by increased newsprint expense but are also as a result
of the improvement in the direct prepaid subscription campaign in the United
Kingdom.
Total newsprint expense increased 7.0% and 9.9%, respectively, for the second
quarter 1998 and the six months ended June 30, 1998 compared to the respective
periods in the 1997 after including newsprint costs of $4.1 million for the
second quarter 1997 and $7.7 million for the six months ended June 30, 1997
associated with the direct subscription campaign. The increase is due to both
increased prices and increased consumption. The Company doesn't expect
significant newsprint price fluctuations in the near future. Compensation costs
decreased both in total and as a percentage of sales. Compensation costs as a
percentage of sales were 31.0% and 31.8% for the second quarter and the first
six months of 1998, respectively compared to 32.2% and 33.5% for the second
quarter and first six months of 1997, respectively. Other operating costs,
excluding the direct prepaid subscription campaign costs in 1997, as a
percentage of sales declined slightly from 32.5% in the second quarter of 1997
to 31.9% in 1998 and remained fairly consistent at 33.1% for the six months
ended June 30, 1997 compared to 33.4% in 1998.
Operating results during 1997 were affected by net costs of the direct prepaid
subscription campaign; these costs were disclosed separately on the income
statement. However, significant renewals at higher subscription prices and the
related improved advertising revenue eliminated the loss from the direct prepaid
subscription campaign and the costs and revenues related to the campaign are no
longer disclosed separately.
Interest expense decreased 6.9% for both the second quarter 1998 and the six
months ended June 30, 1998 from the respective periods in 1997. The lower
interest expense was due to lower debt levels as the proceeds from the sale of
the community newspapers in the first quarter of 1998 were used to retire the
AP-91 Senior Notes and pay down debt on the Bank Credit Facility and proceeds
from the sales at Southam in the second quarter 1998 were used to pay down debt
at Southam. This was offset, in part, by increased debt as a result of the
acquisition of an additional shares in Southam in July 1997.
9
<PAGE> 12
Equity in earnings of affiliates was a loss of $0.4 million in the second
quarter of 1998 compared to income of $5.4 million in 1997 and for the six
months ended June 30, 1998 was a loss of $0.8 compared to income of $5.6 million
in 1997. Equity earnings in 1997 included a $5.2 million gain on the sale of a
division at the Chicago joint venture.
Other income in 1998 includes the second quarter gains on the sales by Southam
of American Trucker and the daily newspaper in Western Canada and the first
quarter gain on the sale of the community newspapers. 1997 included a $65.0
million pre-tax gain on the sale of the Fairfax investment.
Minority interest increased $19.2 million to $33.4 million in the second quarter
of 1998 from $14.2 million in 1997. The increase in the minority is mainly due
to increased earnings at Southam as a result of the gains on sale of American
Trucker and the Western Canadian daily newspaper. Minority interest in the
second quarter of 1997 and six months ended June 30,1997 included dividends on
preferred stock at DTH and FDTH of $2.2 million and $4.8 million, respectively.
The preferred stock was retired in the second quarter of 1997.
10
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
-------- -------- ------------ ------------
Amount Amount Amount Amount
-------- -------- ------------ ------------
Operating revenues: (dollar amounts in thousands) (dollar amounts in thousands)
<S> <C> <C> <C> <C>
United States Newspaper Group $150,324 $ 160,064 $ 287,219 $ 306,341
U.K. Newspaper Group 138,673 128,020 279,585 250,336
Canadian Newspaper Group 280,174 273,937 540,336 519,587
-------- --------- ------------ ------------
Total operating revenue $569,171 $ 562,021 $ 1,107,140 $ 1,076,264
======== ========= ============ ============
Operating income:
United States Newspaper Group $ 22,175 $ 28,155 $ 34,627 $ 45,032
U.K. Newspaper Group 19,263 8,915 38,076 16,912
Canadian Newspaper Group 53,476 49,390 84,055 79,644
-------- --------- ------------ ------------
Total operating income $ 94,914 $ 86,460 $ 156,758 $ 141,588
======== ========= ============ ============
EBITDA:
United States Newspaper Group $ 31,801 $ 37,770 $ 53,565 $ 64,992
U.K. Newspaper Group 24,101 13,279 47,614 25,918
Canadian Newspaper Group 67,253 63,079 112,397 106,711
-------- --------- ------------ ------------
Total EBITDA $123,155 $ 114,128 $ 213,576 $ 197,621
======== ========= ============ ============
Operating revenues:
United States Newspaper Group 26.4% 28.5% 25.9% 28.5%
U.K. Newspaper Group 24.4% 22.8% 25.3% 23.3%
Canadian Newspaper Group 49.2% 48.7% 48.8% 48.2%
-------- --------- ------------ ------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
======== ========= ============ ============
Operating income:
United States Newspaper Group 23.4% 32.6% 22.1% 31.8%
U.K. Newspaper Group 20.3% 10.3% 24.3% 11.9%
Canadian Newspaper Group 56.3% 57.1% 53.6% 56.3%
-------- --------- ------------ ------------
Total operating income 100.0% 100.0% 100.0% 100.0%
======== ========= ============ ============
EBITDA:
United States Newspaper Group 25.8% 33.1% 25.1% 32.9%
U.K. Newspaper Group 19.6% 11.6% 22.3% 13.1%
Canadian Newspaper Group 54.6% 55.3% 52.6% 54.0%
-------- --------- ------------ ------------
Total EBITDA 100.0% 100.0% 100.0% 100.0%
======== ========= ============ ============
EBITDA Margin:
United States Newspaper Group 21.2% 23.6% 18.6% 21.2%
U.K. Newspaper Group 17.4% 10.4% 17.0% 10.4%
Canadian Newspaper Group 24.0% 23.0% 20.8% 20.5%
Total EBITDA Margin 21.6% 20.3% 19.3% 18.4%
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- -------- -------- --------------
Amount Amount Amount Amount
--------- -------- -------- --------------
United States Newspaper Group (dollar amount in thousands)
<S> <C> <C> <C> <C>
Operating revenue
Advertising $106,777 $109,381 $201,473 $206,286
Circulation 33,050 37,709 65,595 74,923
Job printing and other 10,497 12,974 20,151 25,132
-------- -------- -------- --------
Total operating revenue 150,324 160,064 287,219 306,341
-------- -------- -------- --------
Operating costs
Newsprint 23,994 22,541 45,973 42,928
Compensation costs 53,754 57,856 106,636 113,398
Other operating costs 40,775 41,897 81,045 85,023
Depreciation and amortization 9,626 9,615 18,938 19,960
-------- -------- -------- --------
Total operating costs 128,149 131,909 252,592 261,309
-------- -------- -------- --------
Operating income $ 22,175 $ 28,155 $ 34,627 $ 45,032
======== ======== ======== ========
U.K. Newspaper Group
Operating revenue
Advertising $ 93,224 $ 88,575 $189,956 $173,529
Circulation 40,159 34,225 80,395 67,442
Job printing and other 5,290 5,220 9,234 9,365
-------- -------- -------- --------
Total operating revenue 138,673 128,020 279,585 250,336
-------- -------- -------- --------
Operating costs
Newsprint 25,881 22,281 51,970 44,808
Compensation costs 22,886 22,695 44,810 43,483
Other operating costs 65,805 63,324 135,191 121,341
Direct subscription campaign costs -- 6,441 -- 14,786
Depreciation and amortization 4,838 4,364 9,538 9,006
-------- -------- -------- --------
Total operating costs 119,410 119,105 241,509 233,424
-------- -------- -------- --------
Operating income $ 19,263 $ 8,915 $ 38,076 $ 16,912
======== ======== ======== ========
Canadian Newspaper Group
Operating revenue
Advertising $211,736 $203,665 $402,759 381,103
Circulation 56,231 58,783 113,128 116,229
Job printing and other 12,207 11,489 24,449 22,255
-------- -------- -------- --------
Total operating revenue 280,174 273,937 540,336 519,587
-------- -------- -------- --------
Operating costs
Newsprint 37,897 33,071 74,118 61,178
Compensation costs 99,887 100,527 200,645 202,057
Other operating costs 75,137 77,260 153,176 149,641
Depreciation and amortization 13,777 13,689 28,342 27,067
-------- -------- -------- --------
Total operating costs 226,698 224,547 456,281 439,943
-------- -------- -------- --------
Operating income $ 53,476 $ 49,390 $ 84,055 $ 79,644
======== ======== ======== ========
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ------------
Percentage Percentage Percentage Percentage
---------- ---------- ---------- ------------
United States Newspaper Group
<S> <C> <C> <C> <C>
Operating revenue
Advertising 71.0% 68.3% 70.1% 67.3%
Circulation 22.0% 23.6% 22.8% 24.5%
Job printing and other 7.0% 8.1% 7.1% 8.2%
----- ----- ----- -----
Total operating revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating costs
Newsprint 16.0% 14.2% 16.0% 14.0%
Compensation costs 35.8% 36.1% 37.1% 37.0%
Other operating costs 27.1% 26.2% 28.2% 27.8%
Depreciation and amortization 6.4% 6.0% 6.6% 6.5%
----- ----- ----- -----
Total operating costs 85.3% 82.5% 87.9% 85.3%
----- ----- ----- -----
Operating income 14.7% 17.5% 12.1% 14.7%
===== ===== ===== =====
U.K. Newspaper Group
Operating revenue
Advertising 67.2% 69.2% 67.9% 69.4%
Circulation 29.0% 26.7% 28.8% 26.9%
Job printing and other 3.8% 4.1% 3.3% 3.7%
----- ----- ----- -----
Total operating revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating costs
Newsprint 18.7% 17.4% 18.6% 17.9%
Compensation costs 16.5% 17.7% 16.0% 17.4%
Other operating costs 47.5% 49.5% 48.3% 48.5%
Direct subscription campaign costs -- 5.0% -- 5.9%
Depreciation and amortization 3.5% 3.5% 3.4% 3.5%
----- ----- ----- -----
Total operating costs 86.2% 93.1% 86.3% 93.2%
----- ----- ----- -----
Operating income 13.8% 6.9% 13.7% 6.8%
===== ===== ===== =====
Canadian Newspaper Group
Operating revenue
Advertising 75.5% 74.3% 74.5% 73.3%
Circulation 20.1% 21.5% 20.9% 22.4%
Job printing and other 4.4% 4.2% 4.6% 4.3%
----- ----- ----- -----
Total operating revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating costs
Newsprint 13.5% 12.2% 13.7% 11.8%
Compensation costs 35.7% 36.7% 37.1% 38.9%
Other operating costs 26.8% 28.2% 28.3% 28.8%
Depreciation and amortization 4.9% 5.0% 5.2% 5.3%
----- ----- ----- -----
Total operating costs 80.9% 82.1% 84.3% 84.8%
----- ----- ----- -----
Operating income 19.1% 17.9% 15.7% 15.2%
===== ===== ===== =====
</TABLE>
13
<PAGE> 16
GROUP OPERATING RESULTS
UNITED STATES NEWSPAPER GROUP
CHICAGO GROUP
Revenue for the Chicago Group increased $13.2 million to $98.8 million in the
second quarter of 1998 from $85.6 million for the same period in 1997. For the
six months ended June 30, 1998, Chicago Group revenue increased $23.6 million
from $164.9 million in 1997 to $188.5 million in 1998. The acquisition of the
Gary Post-Tribune in January 1998 added $7.7 million and $14.7 million to
revenue in the second quarter of 1998 and the first six months of 1998,
respectively. All areas of advertising, national, retail and classified, showed
increases with advertising revenues for Chicago Group entities owned in both
years increasing 9.3% and 9.1% for the second quarter 1998 and the six months
ended June 30, 1998, respectively. Circulation revenue for entities owned in
both years decreased by 2.6% and 3.6% for the second quarter of 1998 and first
six months of 1998, respectively from the same periods in the prior year. The
decrease was primarily as a result of a promotional campaign in the first
quarter at the Chicago Sun-Times, which reduced the cover price on Sundays. The
promotional campaign was launched in response to cover price reductions made by
a competitor. The promotional campaign at the Chicago Sun-Times is not
continuing.
On a "same store" basis, compensation costs as a percentage of revenues at the
Chicago Group were 37.1% and 38.5% for the second quarter 1998 and the six
months ended June 30, 1998, respectively compared to 38.1% and 39.3% in the
respective period of 1997. Newsprint expense increased due to higher newsprint
prices and increased consumption. EBITDA on a "same store" basis increased for
both the second quarter and first six months of 1998 by $1.5 million and $1.4
million, respectively. The increases are due to increased advertising revenues,
offset, in part, by a slight decrease in circulation revenue and an increase in
newsprint expense.
COMMUNITY GROUP
The overall decrease in Community Group operating revenues, EBITDA and operating
income is due to the sale of the 80 community newspapers in January 1998.
Revenue attributable to the newspapers sold was $26.3 million in the second
quarter of 1997 and $50.1 million for the six months ended June 30, 1997. On a
"same store" basis, the Community Group revenues and EBITDA were $42.8 million
and $13.7 million in the second quarter 1998 compared to $42.1 million and $13.8
million in the second quarter of 1997. For the six months ended June 30, 1998,
the Community Group revenues and EBITDA, on a "same store" basis, were $82.2
million and $25.3 million compared to $80.2 million and $25.0 million in 1997.
For properties owned in both years, newsprint expense increased 17.9% and 15.2%
for the second quarter and first six months of 1998 from the respective periods
in the prior year due to both higher newsprint prices and increased consumption.
For properties owned in both years, compensation costs as a percentage of
revenues for the second quarter declined to 32.0% in 1998 from 33.0% in 1997,
and other operating costs remained consistent at 23.9% in both years. For
properties owned in both years, compensation costs as a percentage of revenues
for the first six months of 1998 were 32.9% compared to 33.0% in the same period
of 1997, and other operating costs declined to 24.3% in 1998 from 25.2% in 1997.
14
<PAGE> 17
U.K. NEWSPAPER GROUP
Second quarter operating revenues for the U.K. Newspaper Group increased 8.3%
from 1997. In pounds sterling, second quarter advertising revenue increased 4.1%
and circulation revenue increased 16.1%. For the six months ended June 30, 1998,
operating revenue increased 11.7% to $279.6 million. The increase in circulation
revenue is primarily the result of the participants in the direct prepaid
subscription campaign renewing at higher prices.
EBITDA for the U.K. Newspaper Group was $24.1 million in the second quarter of
1998 compared to $13.3 million in 1997. EBITDA for the six months ended June 30,
1998 increased to $47.6 million from $25.9 million in 1997. The results in 1997
included deductions of $6.4 million and $14.8 million in the second quarter and
first six months, respectively, for costs related to the direct prepaid
subscription campaign, which were shown as a separate item. This expense
included all costs net of direct revenue related to the campaign. Beginning with
the fourth quarter of 1997, the net costs of the campaign had declined and
advertising revenue had increased, sufficient that no separate charge is
necessary. Newsprint expense for the second quarter 1998 decreased to $25.9
million from $26.4 million (including $4.1 million of newsprint costs associated
with the direct subscription campaign) in 1997. Newsprint expense for the six
months ended June 30, 1998 was $52.0 million compared to $52.5 million
(including $7.7 million of newsprint costs associated with the direct
subscription campaign). Even though newsprint consumption had increased,
newsprint prices remained lower as a result of longer term pricing contracts
entered into in the U.K. Compensation costs as a percentage of revenues
decreased to 16.5% in the second quarter of 1998 from 17.7% in 1997 and 16.0%
for the six months ended June 30, 1998 from 17.4% in 1997. Other operating
costs, excluding costs associated with the direct prepaid subscription campaign
in 1997, as a percentage of revenues decreased to 47.5% in the second quarter of
1998 compared to 49.5% in 1997 and remained fairly consistent at 48.4% for the
first six months of 1998 compared to 48.5% in 1997.
CANADIAN NEWSPAPER GROUP
Second quarter operating revenue for the Canadian Newspaper Group increased $6.3
million from $273.9 million in 1997 to $280.2 million in 1998, an increase of
2.3%. Advertising revenue increased $8.1 million in the second quarter of 1998
from the second quarter of 1997 with Southam representing $7.0 million of the
increase. For the six months ended June 30, 1998 operating revenue increased
$20.7 million from $519.6 million in 1997 to $540.3 million in 1998, an increase
of 4.0%. Advertising revenue increased 5.7% in the six months ended June 30,
1998 from the comparable period in the prior year.
Operations at Southam were affected by acquisitions and disposals. Revenue and
EBITDA for the second quarter, on a "same store" basis, were Cdn.$326.4 million
and Cdn.$84.2 million, respectively, in 1998 compared to Cdn.$301.1 million and
Cdn.$75.6 million, respectively, in 1997. Revenue and EBITDA for the first six
months, on a "same store" basis, were Cdn.$625.7 million and Cdn.$144.4 million,
respectively, in 1998 compared to Cdn.$568.5 million and Cdn.$123.4 million,
respectively, in 1997.
15
<PAGE> 18
The Canadian Newspaper Group's operating income for the second quarter increased
by 8.3% from 1997 and increased 5.5% for the six months ended June 30, 1998 from
1997. Newsprint expense increased 14.6% and 21.2% for the second quarter and
first six months of 1998, respectively, from the prior year due to both higher
newsprint prices and increased consumption. Compensation costs as a percentage
of sales for the second quarter decreased to 35.7% in 1998 from 36.7% in 1997
and for the six months ended June 30, 1998 decreased to 37.1% from 38.9% in the
same period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital consists of current assets less current liabilities. Working
capital was $94.9 million at June 30, 1998 compared to $56.4 million at December
31, 1997. Current assets were $533.4 million at June 30, 1998 compared with
$505.3 million at December 31, 1997. Inventories increased $20.9 million
resulting from increased newsprint buying prior to a price increase in the
second quarter of 1998. Current liabilities, excluding debt obligations, were
$432.1 million at June 30, 1998, compared with $413.3 million at December 31,
1997. The increase is primarily due to the tax payable on the gain on sale of
the community newspapers and the gains on the sales of American Trucker and the
daily newspaper at Southam.
DEBT
Long-term debt, including the current portion, was $1.16 billion at June 30,
1998 compared with $1.43 billion at December 31, 1997. The decrease is primarily
due to the retirement of the AP-91 Senior Notes and the paydown of debt on the
Bank Credit Facility with proceeds from the sale of community newspapers and the
paydown of debt by Southam with the proceeds from the sale of the American
Trucker publishing division and the daily newspaper.
BANK CREDIT FACILITY
On March 30, 1998 the parties to the Bank Credit Facility entered into a Third
Amended and Restated Credit Agreement (the "Third Amendment"), amending and
restating the Bank Credit Facility. The Third Amendment amends certain terms and
conditions of the Bank Credit Facility, primarily extending the maturity date to
December 31, 2004, decreasing commitment fees, and increasing the amount of
Company stock permitted to be repurchased to $30 million.
EBITDA
EBITDA, which represents the Company's earnings before interest expense,
amortization of debt issue costs, interest and dividend income, income taxes,
depreciation and amortization, minority interest, equity in earnings of
affiliates and other income was $123.2 million for the second quarter of 1998
compared with $114.1 million for the same period in 1997 and $213.6 million for
the six months ended June 30, 1998 and $197.6 million in 1997. The Company
believes that EBITDA is an important measure of its ability to fund current
operations and to service debt. The significant
16
<PAGE> 19
number of acquisitions made by the Company which have resulted in non-cash
charges for depreciation and amortization have reduced net earnings, but have
not affected EBITDA.
CASH FLOWS
Cash flows from operating activities were $56.3 million for the first six months
of 1998, compared with $96.2 million for the first six months of 1997. Excluding
changes in working capital (other than cash), cash provided by operating
activities was $50.8 million in 1998 compared to $136.7 million in 1997.
Cash flows provided by investing activities were $244.3 million in 1998, largely
due to the sale of a group of community newspapers and the sales of American
Trucker and a daily newspaper at Southam. In 1997 cash flows provided by
investing activities were $148.3 million, largely due to the sale of the
interest in Fairfax.
Cash flows used in financing activities were $301.4 million in 1998, primarily
to paydown debt and $273.8 million in 1997 primarily as a result of the payment
to Hollinger Inc. for the Canadian Newspapers, the redemption of the preference
shares at DTH and FDTH and the repayment of short term debt.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING
The United States Newspaper Group, the U.K. Newspaper Group and the Canadian
Newspaper Group have funded their capital expenditures and acquisition and
investment activities out of cash provided by their respective operating
activities, borrowings under their bank credit facilities and, in the case of
the United States Newspaper Group, borrowings from institutional lenders,
proceeds from one debt offering, two equity offerings, one PRIDES offering in
1996 and two debt offerings in March 1997.
DIVIDENDS AND OTHER COMMITMENTS
The Company's sales of Class A Common Stock and PRIDES have significantly
increased its dividend obligations and the Company also has significant debt
service obligations, capital expenditures, management fees due to Hollinger Inc.
and its affiliates and dividends on its Series C Preferred Stock and Series D
Preferred Stock.
The amount available for the payment of dividends and other obligations by the
Company at any time is a function of (i) restrictions in agreements binding the
Company limiting its ability to pay dividends, management fees and other
payments and (ii) restrictions in agreements binding the Company's subsidiaries
limiting their ability to pay dividends, management fees and other payments to
the Company. The Company is not a party to any debt agreement that restricts the
payment of dividends. However, certain agreements binding Publishing and other
subsidiaries of the Company contain such restrictive provisions. As of June 30,
1998, the total amount of funds that would be unrestricted as to payment of
dividends by Publishing under its debt instruments would, under the more
restrictive provisions, have been approximately $41.5 million. The foregoing
calculation is based on the sum of the following for the period January 1, 1998
to June 30, 1998: (i) 50% of the sum of (x) consolidated net income of
Publishing and its Restricted Subsidiaries or if it is a loss, reduced by 100%
of such loss, and (y) amortization expense of Publishing and its subsidiaries;
(ii) 50% of the cash dividends received by Publishing and its restricted
subsidiaries from any unrestricted subsidiaries; and (iii) $25 million. In
addition, the
17
<PAGE> 20
amount available for dividends is permitted to be increased, among other
provisions, by the amount of net cash proceeds from capital contributions made
to Publishing.
The amount available for the payment of dividends and other obligations by the
Company at any time is limited by a number of binding agreements, but the
Company expects its internal cash flow and financing resources to be adequate to
meet its foreseeable requirements. On June 29, 1998, the Company announced an
increase in the quarterly dividend to $0.1375 per issued and outstanding share
of Class A and B Common Stock from $0.10 per share. The increase will be
effective for the dividends paid October 15, 1998 to stockholders of record on
October 1, 1998.
SUBSEQUENT EVENTS
On July 8, 1998 the Company announced that it had commenced an Exchange Offer to
exchange any and all of its outstanding PRIDES for shares of Class A Common
Stock at an exchange ratio of 0.92 shares of Class A Common Stock for each
PRIDES. The Exchange Offer expired on August 4, 1998 and of the 20,700,000 total
PRIDES outstanding 19,993,531 were exchanged for 18,394,048 shares of Class A
Common Stock.
OTHER
Certain of the statements in this Form 10-Q may be deemed to be "forward
looking" statements. Refer to the Company's Annual Report on Form 10-K for a
discussion of factors that may affect such statements.
18
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOLLINGER INTERNATIONAL INC.
Registrant
Date: August 14, 1998 By: /S/ J. A. Boultbee
------------------------------
J. A. Boultbee
Executive Vice President, and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> APR-01-1998 APR-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 104,072 97,688
<SECURITIES> 0 0
<RECEIVABLES> 345,040 346,108
<ALLOWANCES> 23,990 25,271
<INVENTORY> 53,318 30,153
<CURRENT-ASSETS> 533,379 475,091
<PP&E> 1,025,985 1,042,518
<DEPRECIATION> 431,756 450,544
<TOTAL-ASSETS> 2,951,648 2,836,502
<CURRENT-LIABILITIES> 438,432 441,895
<BONDS> 1,162,030 1,323,537
268,784 273,622
0 0
<COMMON> 876 876
<OTHER-SE> 607,082 551,605
<TOTAL-LIABILITY-AND-EQUITY> 2,951,648 2,836,502
<SALES> 569,171 562,021
<TOTAL-REVENUES> 569,171 562,021
<CGS> 0 0
<TOTAL-COSTS> 474,257 475,561
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 25,339 27,212
<INCOME-PRETAX> 108,538 66,788
<INCOME-TAX> 43,965 24,479
<INCOME-CONTINUING> 31,181 28,125
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 31,181 28,125
<EPS-PRIMARY> .28 .25
<EPS-DILUTED> .26 .24
</TABLE>
