<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 March 31, 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.
<TABLE>
<CAPTION>
Class Outstanding at May 11, 1998
----------------------- ----------------------------
<S> <C>
Class A Common Stock
par value $.01 per share 71,651,899 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
</TABLE>
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K. 16
Signatures 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997 (AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES
Advertising $ 382,451 $ 359,297
Circulation 129,678 127,877
Job printing 16,611 18,373
Other 9,229 8,696
------------ ------------
Total operating revenues 537,969 514,243
------------ ------------
OPERATING COSTS AND EXPENSES
Newsprint 84,289 71,021
Compensation costs 175,564 177,860
Other operating costs 187,695 173,524
Direct subscription campaign costs, net and
infrequent items -- 8,345
Depreciation and amortization 28,577 28,365
------------ ------------
Total operating costs and expenses 476,125 459,115
------------ ------------
Operating income 61,844 55,128
Other income (expense)
Interest expense (26,426) (28,382)
Amortization of debt issue costs (1,387) (3,698)
Equity in earnings of affiliates (368) 242
Interest and dividend income 2,633 2,946
Other income, net 194,710 67,693
------------ ------------
Total other income (expense) 169,162 38,801
------------ ------------
Earnings before income taxes, minority
interest and extraordinary item 231,006 93,929
Provision for income taxes 90,982 28,022
------------ ------------
Earnings before minority interest and
extraordinary item 140,024 65,907
Minority interest 6,954 10,481
------------ ------------
Earnings before extraordinary item 133,070 55,426
Extraordinary loss on debt extinguishments (5,067) --
------------ ------------
Net earnings $ 128,003 $ 55,426
============ ============
Basic earnings per share before extraordinary item $ 1.20 $ 0.49
============ ============
Diluted earnings per share before extraordinary item $ 1.10 $ 0.47
============ ============
Basic earnings per share $ 1.15 $ 0.49
============ ============
Diluted earnings per share $ 1.06 $ 0.47
============ ============
Weighted average shares outstanding- basic 111,097 111,807
============ ============
Weighted average shares outstanding- diluted 121,135 117,506
============ ============
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 103,186 $ 107,384
Accounts receivable, net 317,198 315,894
Due from affiliates 26,198 18,411
Inventories 43,361 32,454
Other current assets 23,321 31,110
-------------- --------------
Total current assets 513,264 505,253
Property, plant and equipment, net of
accumulated depreciation 621,342 615,579
Investments in affiliates 50,346 50,011
Other investments, at cost 79,430 75,720
Intangible assets, net of accumulated amortization 1,631,977 1,671,210
Deferred financing costs and other assets 106,620 106,148
-------------- --------------
$ 3,002,979 $ 3,023,921
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 6,444 $ 35,560
Accounts payable 94,053 101,925
Accrued expenses 189,395 195,109
Deferred revenue 79,469 85,887
Income taxes payable 90,944 30,407
-------------- --------------
Total current liabilities 460,305 448,888
Long-term debt, less current installments 1,217,383 1,392,855
Other long-term liabilities 230,472 215,651
-------------- --------------
Total liabilities 1,908,160 2,057,394
Minority interest 209,874 203,034
Redeemable preferred stock 76,261 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 358,682 358,871
Cumulative translation adjustment (13,558) (27,978)
Retained earnings 281,657 175,802
-------------- --------------
822,761 702,675
Class A common stock in treasury, at cost (14,077) (15,073)
-------------- --------------
Total stockholders' equity 808,684 687,602
-------------- --------------
$ 3,002,979 $ 3,023,921
============== ==============
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997 (AMOUNTS IN
THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 128,003 $ 55,426
Items not involving cash:
Depreciation and amortization 28,577 28,365
Amortization of debt issue costs 1,387 3,698
Equity in net earnings of affiliates, net 368 (559)
Minority interest 6,954 10,481
Gain on sale of investment -- (66,026)
Gain on sale of assets (166,997) --
Other non-cash items (3,003) 33,721
Changes in working capital net 36,435 (64,875)
--------- ---------
Cash provided by operating activities 31,724 231
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (44,172) (24,374)
Proceeds from sales of assets 244 956
Additions to investments (8,324) --
Acquisitions, net (44,709) (1,293)
Proceeds on disposal of investments 279,055 233,082
Collections on long-term receivables 4,335 2,971
Other investing activities (52) (4,699)
--------- ---------
Cash provided by investing activities 186,377 206,643
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 19,000 550,000
Repayments of long-term debt (226,112) (77,743)
Repayments of short-term debt -- (495,478)
Payment of debt issue costs (200) (23,986)
Changes due to affiliated companies (2,874) 22,739
Proceeds from stock options exercised 996 --
Dividends to minority interests (1,129) (4,119)
Cash dividends paid (15,983) (13,643)
Other financing activities 181 3,634
--------- ---------
Cash used in financing activities (226,121) (38,596)
--------- ---------
Effect of exchange rate changes on cash 3,822 (15,753)
--------- ---------
Net increase (decrease) in cash (4,198) 152,525
Cash at beginning of period 107,384 148,550
--------- ---------
Cash at end of period $ 103,186 $ 301,075
========= =========
</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 59.9% of the combined equity ownership interest and
approximately 84.3% of the combined voting power of the outstanding Common
Stock of the Company, without giving effect to the future issuance of Class A
Common Stock in connection with the Company's Preferred Redeemable Increased
Dividend Equity Securities ("PRIDES") or upon 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 March 31, 1998
and 1997 was $142,423,000 and $11,145,000, 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 ended
March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended March 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 127,741 111,097 $ 1.15
Effect of dilutive securities
Series D Preferred Stock 262 5,484
HCPH Special Shares 3,985
Stock options 569
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 128,003 121,135 $ 1.06
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 55,159 111,807 $ 0.49
Effect of dilutive securities
Series D Preferred Stock 267 5,598
Stock options 101
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 55,426 117,506 $ 0.47
========== ========== ==========
</TABLE>
NOTE 5 - AMENDMENT TO THE CREDIT AGREEMENT
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.
5
<PAGE> 8
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 6 - SALE OF COMMUNITY NEWSPAPERS
In January 1998 the Company sold approximately 80 community newspapers
with a paid daily circulation of approximately 420,000. The proceeds from the
sale were $310.0 million and the pre-tax gain recognized was $196.0 million.
The proceeds from the sale were used to payoff the AP-91 Senior Notes and
paydown the Bank Credit Facility.
6
<PAGE> 9
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 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.
CONSOLIDATED RESULTS OF OPERATIONS
First quarter 1998 net earnings were $128.0 million or $1.15 per share compared
with $55.4 million or $0.49 per share in 1997. Earnings before extraordinary
items in 1998 were $133.1 million, or $1.20 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
for the quarter. Non-recurring items in 1998 include the gain on sale of
community newspapers, loss on disposal of assets, and redundancy costs. The
non-recurring item in 1997 was the gain on the sale of the Fairfax interest.
Net income excluding the non-recurring items amounted to $15.2 million or 13
cents per share in the first quarter of 1998 compared to $6.7 million or 6
cents per share in the first quarter of 1997.
Operations in the Community Group and at Southam were affected by acquisitions
and disposals. On a "same store" basis the Community Group revenues and EBITDA
were $39.4 million and $10.6 million, respectively, in 1998 compared to $38.2
million and $10.4 million, respectively, in 1997. For Southam, on a "same
store" basis, revenue and EBITDA were $205.1 million and $37.8 million,
respectively, in 1998 compared to $193.2 million and $35.1 million,
respectively, in 1997.
Operating revenue for the first quarter of 1998 increased $23.8 million to
$538.0 million from $514.2 million in 1997. The increase in revenue was
largely due to company wide improvements in advertising revenue, which
increased 6.4% over the prior year.
EBITDA for the first quarter of 1998 increased 8.3% to $90.4 million from $83.5
million in 1997. Operating income increased 12.2% to $61.8 million in the
first quarter of 1998 from $55.1 million for the same period in 1997.
EBITDA and operating income increased not withstanding the disposition of the
community newspapers, which had added $6.4 million to EBITDA and $4.5 million
to operating income in
7
<PAGE> 10
the first quarter of 1997. The increases in EBITDA and operating income are
primarily due to increased advertising and circulation revenue offset, in part,
by increased newsprint expense.
Newsprint expense for the first quarter 1998 increased 13.0% to $84.3 million
from $74.6 million in 1997 (including $3.6 million of newsprint related to the
direct prepaid subscription campaign). The increase is due to both increased
prices and increased consumption. The Company doesn't expect significant price
fluctuations in the near future. Compensation costs as a percentage of sales
were 32.6% for the first quarter of 1998 and 34.6% for the first quarter of
1997. Other operating costs (including $4.7 million of costs in 1997 related
to the direct prepaid subscription campaign) remained fairly consistent at
34.9% and 34.7% as a percentage of sales for the first quarter of 1998 and
1997, respectively.
Operating results in the first quarter of 1997 were affected by net costs of
the direct prepaid subscription campaign in the United Kingdom; 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% to $26.4 million for the first quarter of 1998
from $28.4 million in 1997. The lower interest expense was due to lower debt
levels as the proceeds from the sale of the community newspapers were used to
retire the AP-91 Senior Notes and paydown debt on the Bank Credit Facility
offset, in part, by increased debt as a result of the acquisition of additional
interest in Southam in July 1997. Amortization of debt issue costs decreased
$2.3 million from $3.7 million in the first quarter of 1997 to $1.4 million in
1998. The expense in the first quarter of 1997 included amortization on debt
issue costs that were written off in the fourth quarter of 1997.
Other income in 1998 includes a $196.0 million gain on the sale of the
community newspapers offset by a $1.4 million loss on disposal of assets and in
1997 included a $65.0 million pre-tax gain on the sale of the Fairfax
investment.
Minority interest decreased $3.5 million to $7.0 million in the first quarter
of 1998 from $10.5 million in 1997. Minority interest in the first quarter
1997 included $2.6 million in dividends on preferred stock at DTH and FDTH; the
preferred stock was retired in the second quarter of 1997. In addition, the
Company had a higher ownership percentage in Southam in the first quarter of
1998 as compared to 1997 resulting in the lower minority interest.
8
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
Amount Amount
Operating revenues: (dollar amounts in thousands)
<S> <C> <C>
United States Newspaper Group $ 136,895 $ 146,277
U.K. Newspaper Group 140,912 122,316
Canadian Newspaper Group 260,162 245,650
------------ ------------
Total operating revenue $ 537,969 $ 514,243
============ ============
Operating income:
United States Newspaper Group $ 12,452 $ 16,877
U.K. Newspaper Group 18,813 7,997
Canadian Newspaper Group 30,579 30,254
------------ ------------
Total operating income $ 61,844 $ 55,128
============ ============
EBITDA:
United States Newspaper Group $ 21,764 $ 27,222
U.K. Newspaper Group 23,513 12,639
Canadian Newspaper Group 45,144 43,632
------------ ------------
Total EBITDA $ 90,421 $ 83,493
============ ============
Operating revenues:
United States Newspaper Group 25.4% 28.4%
U.K. Newspaper Group 26.2% 23.8%
Canadian Newspaper Group 48.4% 47.8%
------------ ------------
Total operating revenue 100.0% 100.0%
============ ============
Operating income:
United States Newspaper Group 20.1% 30.6%
U.K. Newspaper Group 30.4% 14.5%
Canadian Newspaper Group 49.5% 54.9%
------------ ------------
Total operating income 100.0% 100.0%
============ ============
EBITDA Margin:
United States Newspaper Group 15.9% 18.6%
U.K. Newspaper Group 16.7% 10.3%
Canadian Newspaper Group 17.4% 17.8%
Total EBITDA Margin 16.8% 16.2%
EBITDA:
United States Newspaper Group 24.1% 32.6%
U.K. Newspaper Group 26.0% 15.1%
Canadian Newspaper Group 49.9% 52.3%
------------ ------------
Total EBITDA 100.0% 100.0%
============ ============
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1997
------------ ------------
Amount Amount
------------ ------------
United States Newspaper Group (dollar amounts in thousands)
<S> <C> <C>
Operating revenue
Advertising $ 94,696 $ 96,905
Circulation 32,545 37,214
Job printing 9,654 12,158
------------ ------------
Total operating revenue 136,895 146,277
------------ ------------
Operating costs
Newsprint 21,979 20,387
Compensation costs 52,882 55,542
Other operating costs 40,270 43,126
Depreciation and amortization 9,312 10,345
------------ ------------
Total operating costs 124,443 129,400
------------ ------------
Operating income $ 12,452 $ 16,877
============ ============
U.K. Newspaper Group
Operating revenue
Advertising $ 96,732 $ 84,954
Circulation 40,236 33,217
Job Printing 3,944 4,145
------------ ------------
Total operating revenue 140,912 122,316
------------ ------------
Operating costs
Newsprint 26,089 22,527
Compensation costs 21,924 20,788
Other operating costs 69,386 58,017
Direct subscription campaign costs, net
and infrequent items -- 8,345
Depreciation and amortization 4,700 4,642
------------ ------------
Total operating costs 122,099 114,319
------------ ------------
Operating income $ 18,813 $ 7,997
============ ============
Canadian Newspaper Group
Operating revenue
Advertising $ 191,023 $ 177,438
Circulation 56,897 57,446
Job Printing 12,242 10,766
------------ ------------
Total operating revenue 260,162 245,650
------------ ------------
Operating costs
Newsprint 36,221 28,107
Compensation costs 100,758 101,530
Other operating costs 78,039 72,381
Depreciation and amortization 14,565 13,378
------------ ------------
Total operating costs 229,583 215,396
------------ ------------
Operating income $ 30,579 $ 30,254
============ ============
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
------------ ------------
Percentage Percentage
------------ ------------
United States Newspaper Group (dollar amounts in thousands)
<S> <C> <C>
Operating revenue
Advertising 69.1% 66.3%
Circulation 23.8% 25.4%
Job printing 7.1% 8.3%
------------ ------------
Total operating revenue 100.0% 100.0%
------------ ------------
Operating costs
Newsprint 16.1% 13.9%
Compensation costs 38.6% 38.0%
Other operating costs 29.4% 29.5%
Depreciation and amortization 6.8% 7.1%
------------ ------------
Total operating costs 90.9% 88.5%
------------ ------------
Operating income 9.1% 11.5%
============ ============
U.K. Newspaper Group
Operating revenue
Advertising 68.6% 69.4%
Circulation 28.6% 27.2%
Job Printing 2.8% 3.4%
------------ ------------
Total operating revenue 100.0% 100.0%
------------ ------------
Operating costs
Newsprint 18.5% 18.4%
Compensation costs 15.6% 17.0%
Other operating costs 49.3% 47.4%
Direct subscription campaign costs, net
and infrequent items - 6.8%
Depreciation and amortization 3.3% 3.8%
------------ ------------
Total operating costs 86.7% 93.4%
------------ ------------
Operating income 13.3% 6.6%
============ ============
Canadian Newspaper Group
Operating revenue
Advertising 73.4% 72.2%
Circulation 21.9% 23.4%
Job Printing 4.7% 4.4%
------------ ------------
Total operating revenue 100.0% 100.0%
------------ ------------
Operating costs
Newsprint 13.9% 11.4%
Compensation costs 38.7% 41.3%
Other operating costs 30.0% 29.5%
Depreciation and amortization 5.7% 5.4%
------------ ------------
Total operating costs 88.3% 87.6%
------------ ------------
Operating income 11.7% 12.4%
============ ============
</TABLE>
11
<PAGE> 14
GROUP OPERATING RESULTS
UNITED STATES NEWSPAPER GROUP
CHICAGO GROUP
Revenue for the Chicago Group increased $10.3 million to $89.6 million in the
first quarter of 1998 from $79.3 million for the same period in 1997. The
acquisition of the Gary Post-Tribune in January 1998 added $7.0 million to
revenue in the first quarter of 1998. All areas of advertising, national,
retail and classified, showed increases with advertising revenues for Chicago
Group entities owned in both years increasing $5.6 million. Circulation
revenue for entities owned in both years decreased by 4.3% from the first
quarter in 1997 primarily as a result of a promotional campaign 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 the competition,
which is not continuing.
On a "same store" basis, compensation costs as a percentage of revenues at the
Chicago Group remained relatively flat at 40.1% in 1998 compared to 40.7% in
1997. Newsprint expense increased due to higher newsprint prices and increased
consumption. EBITDA on a "same store" basis declined $0.8 million due to
increased head office cost allocation and increased newsprint expense being
partly offset by increased operating revenue. However, the acquisition of the
Gary Post-Tribune added $0.8 million to EBITDA; EBITDA for the Chicago Group in
total remained flat at $10.0 million in both periods. Operating income
declined $0.7 million.
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 $23.8 million in the
first quarter of 1997. On a "same store" basis the Community Group revenues
and EBITDA were $39.4 million and $10.6 million in 1998 compared to $38.2
million and $10.4 million in 1997. For properties owned in both years
newsprint expense increased 12.2% primarily due to increased newsprint prices.
For properties owned in both years, compensation costs as a percentage of
revenues were 34.1% in 1998 compared to 33.2% in 1997, while other operating
costs declined from 28.4% in 1997 to 26.9% in 1998.
U.K. NEWSPAPER GROUP
First quarter operating revenues for the U.K. Newspaper Group increased 15.2%
to $140.9 million in 1998 from $122.3 million in 1997. In pounds sterling,
advertising revenue increased 12.7% and circulation revenue increased 20.0%.
The increase in circulation revenue is primarily the result of the participants
in the prepaid direct subscription campaign renewing at higher prices.
Advertising revenue increased due to the direct prepaid subscription campaign
and a stronger economy in the U.K.
EBITDA for the U.K. Newspaper Group was $23.5 million in the first quarter of
1998 compared to $12.6 million in 1997. Operating income in 1998 was $18.8
million compared to $8.0 million in 1997. The results in 1997 included a
deduction of $8.3 million 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. As of 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 first quarter 1998 were unchanged from the
12
<PAGE> 15
newsprint expense of $26.1 million (including $3.6 million of newsprint costs
associated with the direct subscription campaign) in 1997. 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 15.6% in 1998 compared to 17.0% in 1997.
Other operating costs (including $4.7 million of costs in 1997 related to the
direct prepaid subscription campaign) as a percentage of revenues decreased to
49.2% in 1998 compared to 51.3% in 1997.
CANADIAN NEWSPAPER GROUP
First quarter operating revenue for the Canadian Newspaper Group increased
$14.5 million from $245.7 million in the first quarter of 1997 to $260.2
million for the comparable period in 1998, an increase of 5.9%. Advertising
revenue increased $13.6 million in the first quarter of 1998 from the
comparable period in the prior year with Southam representing $13.0 million of
the increase.
Operations in Southam were affected by acquisitions and disposals. Revenue and
EBITDA, on a "same store" basis, were $205.1 million and $37.8 million,
respectively, in 1998 compared to $193.2 million and $35.1 million,
respectively, in 1997.
The Canadian Newspaper Group's operating income for the first quarter increased
by $0.3 million from first quarter 1997. Newsprint expense increased 28.9% due
to both higher newsprint prices and increased consumption. Compensation
expense as a percentage of sales decreased to 38.7% for the first quarter of
1998 from 41.3% for the first quarter of 1997. Depreciation and amortization
in 1998 was $14.6 million, an increase of $1.2 million from 1997. This
primarily related to the increased intangible asset resulting from the
acquisition of the additional Southam interest in July 1997.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital consists of current assets less current liabilities. Working
capital was $53.0 million at March 31, 1998 compared to $56.4 million at
December 31, 1997. Current assets were $513.3 million at March 31, 1998
compared with $505.3 million at December 31, 1997. Inventories increased $10.9
million resulting from increased newsprint buying prior to a price increase in
the second quarter of 1998. Current liabilities, excluding debt obligations,
were $453.9 million at March 31, 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.
DEBT
Long-term debt, including the current portion, was $1.22 billion at March 31,
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.
13
<PAGE> 16
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, income taxes, depreciation and amortization,
minority interest, equity in earnings of affiliates and other income was $90.4
million for the first quarter of 1998 compared with $83.5 million for the first
quarter 1997. The Company believes that EBITDA is important to its ability to
fund current operations and to service debt. The significant number of
acquisitions made by the Company which have resulted in non-cash charges for
depreciation and amortization have reduced net earnings, but have not affected
EBITDA.
CASH FLOWS
Cash flows from operating activities were $31.7 million in the first quarter of
1998, compared with $0.2 million in the first quarter of 1997. Excluding
changes in working capital (other than cash), cash used in operating activities
was $4.7 million in 1998 and cash provided by operating activities was $65.1
million in 1997.
Cash flows provided by investing activities were $186.4 million in 1998,
largely due to the sale of a group of community newspapers, and $206.6
million in 1997, largely due to the sale of the interest in Fairfax.
Cash flows used in financing activities were $226.1 million in 1998, primarily
to paydown debt and $38.6 million in 1997.
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 obligation 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
14
<PAGE> 17
Company's subsidiaries limiting their ability to pay dividends, management fees
and other payments to the Company. The Company is not a party to a debt
agreement that restricts the payment of dividends. However, certain agreements
binding Publishing and other subsidiaries of the Company contain such
restrictive provisions. As of March 31, 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 $41.1 million. The foregoing calculation is based on the sum of
the following for the period January 1, 1998 to March 31, 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 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.
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.
15
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Item 2 on
January 27, 1998.
16
<PAGE> 19
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: May 15, 1998 By: /S/ J. A. Boultbee
--------------------------------
J. A. Boultbee
Executive Vice President, and
Chief Financial Officer
17
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76,261 603,705
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