<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, 1999
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 9, 1999
------------------------ -----------------------------
Class A Common Stock
par value $.01 per share 99,150,582 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations.
Item 3 Quantitative and Qualitative Disclosure about Market Risk 22
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and reports on Form 8-K. 24
Signatures 25
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES
Advertising $397,604 $411,737 $ 771,671 $ 794,188
Circulation 122,010 129,440 245,043 259,118
Job printing 14,816 17,518 30,629 34,129
Other 11,960 10,476 23,749 19,705
-------------- ------------- -------------- -------------
Total operating revenues 546,390 569,171 1,071,092 1,107,140
-------------- ------------- -------------- -------------
OPERATING COSTS AND EXPENSES
Newsprint 77,887 87,772 157,575 172,061
Compensation costs 173,270 176,527 345,457 352,091
Other operating costs 196,607 181,482 379,884 368,669
Infrequent items 575 235 865 743
Depreciation and amortization 30,978 28,241 61,963 56,818
-------------- ------------- -------------- -------------
Total operating costs and expenses 479,317 474,257 945,744 950,082
-------------- ------------- -------------- -------------
Operating income 67,073 94,914 125,348 156,758
Other income (expense)
Interest expense (32,942) (25,339) (64,542) (51,765)
Amortization of debt issue costs (2,858) (1,540) (4,768) (2,927)
Interest income 1,437 1,109 3,840 3,742
Other income, net 101,137 39,394 329,479 233,736
-------------- ------------- -------------- -------------
Total other income (expense) 66,774 13,624 264,009 182,786
-------------- ------------- -------------- -------------
Earnings before income taxes, minority
interest and extraordinary item 133,847 108,538 389,357 339,544
Provision for income taxes 35,869 43,965 144,502 134,947
-------------- ------------- -------------- -------------
Earnings before minority interest and
extraordinary item 97,978 64,573 244,855 204,597
Minority interest 1,748 33,392 1,458 40,346
-------------- ------------- -------------- -------------
Earnings before extraordinary item 96,230 31,181 243,397 164,251
Extraordinary loss on debt extinguishments (5,183) - (5,183) (5,067)
-------------- ------------- -------------- -------------
Net earnings $91,047 $31,181 $ 238,214 $ 159,184
============== ============= ============== =============
Basic earnings per share before extraordinary item $ 0.91 $ 0.28 $ 2.27 $ 1.73
============== ============= ============== =============
Diluted earnings per share before extraordinary item $ 0.81 $ 0.25 $ 2.02 $ 1.35
============== ============= ============== =============
Basic earnings per share $ 0.86 $ 0.28 $ 2.22 $ 1.67
============== ============= ============== =============
Diluted earnings per share $ 0.77 $ 0.25 $ 1.98 $ 1.31
============== ============= ============== =============
Weighted average shares outstanding- basic 103,221 86,640 105,299 86,641
============== ============= ============== =============
Weighted average shares outstanding- diluted 118,364 96,368 120,294 121,978
============== ============= ============== =============
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net earnings $91,047 $31,181 $238,214 $159,184
Other comprehensive income:
Foreign currency translation adjustment 5,166 (24,545) 5,938 (10,125)
---------------- ---------------- ---------------- ---------------
Comprehensive income $96,213 $ 6,636 $244,152 $149,059
================ ================ ================ ================
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1999 DECEMBER 31, 1998
--------------- --------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,502 $ 57,788
Accounts receivable, net 357,942 333,706
Due from affiliates - 27,246
Inventories 28,394 32,312
Other current assets 22,866 18,872
------------------- -------------------
Total current assets 483,704 469,924
Property, plant and equipment, net of
accumulated depreciation 689,139 661,611
Investments 157,342 143,338
Intangible assets, net of accumulated amortization 2,027,452 1,858,750
Deferred financing costs and other assets 145,808 118,101
------------------- -------------------
$3,503,445 $3,251,724
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 400,242 $ 101,691
Accounts payable 149,728 137,691
Accrued expenses 187,646 285,859
Income taxes payable 73,566 13,890
Deferred revenue 72,857 72,481
------------------- -------------------
Total current liabilities 884,039 611,612
Long-term debt, less current installments 1,215,858 1,397,827
Other long-term liabilities 299,086 285,800
------------------- -------------------
Total liabilities 2,398,983 2,295,239
Minority interest 138,168 107,002
Redeemable preferred stock 13,348 31,562
Stockholders' equity:
Convertible preferred stock 6,377 6,377
Class A common stock 961 956
Class B common stock 150 150
Additional paid-in capital 617,598 610,440
Accumulated other comprehensive income-
cumulative foreign currency translation adjustment (59,861) (65,799)
Retained earnings 499,906 301,133
------------------- -------------------
1,065,131 853,257
Class A common stock in treasury, at cost (83,701) (16,744)
Issued shares in escrow (28,484) (18,592)
------------------- -------------------
Total stockholders' equity 952,946 817,921
------------------- -------------------
$3,503,445 $3,251,724
==================== ====================
</TABLE>
3
<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $238,214 $159,184
Items not involving cash:
Depreciation and amortization 61,963 56,818
Amortization of debt issue costs 4,768 2,927
Minority interest 1,458 40,346
Gain on sale of assets (329,639) (207,380)
Other non-cash items 41,221 (1,117)
Changes in working capital net (679) 5,493
------------------- -------------------
Cash provided by operating activities 17,306 56,271
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (77,863) (56,890)
Additions to investments (394,807) (30,705)
Acquisitions, net (40,877) (45,346)
Proceeds from disposal of investments 506,930 372,093
Other investing activities 9,219 5,098
------------------- -------------------
Cash provided by investing activities 2,602 244,250
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 700,010 51,500
Repayments of long-term debt (618,953) (308,795)
Payment of debt issue costs (35,143) (638)
Repurchase of common shares (66,957) (1,671)
Redemption of preferred stock (18,214) -
Changes in amounts due to affiliates 55,205 (6,244)
Dividends to minority interests (104,359) (2,244)
Cash dividends paid (33,241) (35,653)
Issuance of Partnership units 131,379 -
Other financing activities (8,372) 2,298
------------------- -------------------
Cash provided by (used in) financing activities 1,355 (301,447)
------------------- -------------------
Effect of exchange rate changes on cash (4,549) (2,386)
------------------- -------------------
Net increase (decrease) in cash 16,714 (3,312)
Cash at beginning of period 57,788 107,384
------------------- -------------------
Cash at end of period $ 74,502 $104,072
=================== ===================
Cash paid for interest $ 68,478 $ 53,078
=================== ===================
Cash paid for taxes $ 88,993 $ 76,339
=================== ===================
</TABLE>
4
<PAGE> 7
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 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, 1998.
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, 1998
NOTE 2 - PRINCIPLES OF PRESENTATION AND CONSOLIDATION
The Company is a subsidiary of Hollinger Inc., a Canadian corporation,
which at June 30, 1999 owned approximately 43.4% of the combined equity
ownership interest and approximately 75.5% 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 remaining
Preferred Redeemable Increased Dividend Equity Securities ("PRIDES") or upon
conversion of the Company's Series C Convertible Preferred Stock ("Series C
Preferred Stock") and the Series E Redeemable Convertible Preferred Stock
("Series E Preferred Stock").
All significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made in the 1998 financial
statements to conform to the 1999 presentation.
5
<PAGE> 8
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 3 - SERIES E PREFERRED STOCK
During the second quarter 1999, 134,126 shares of Series D Redeemable
Convertible Preferred Stock ("Series D Preferred Stock") were exchanged for
134,126 shares of Series E Preferred Stock. The shares of Series E Preferred
Stock are redeemable at the option of either the holder or the Company at a
price of Cdn.$146.63 plus accrued dividends. The holder of these shares may,
at any time, convert such shares into shares of Class A Common Stock of the
Company at a conversion price of $14.00 per share of Class A Common Stock. The
Series E Preferred Stock is non-voting.
NOTE 4 - DISPOSITIONS
During the second quarter 1999, the Company entered into an agreement with
Horizon Publications Inc. to sell 33 U.S. community newspapers for $43.7
million. Horizon Publications Inc. is managed by former Community Group
executives and owned by current and former Hollinger International Inc.
executives.
NOTE 5 - EARNINGS PER SHARE
The following table reconciles the numerator and denominator for the
calculation of basic and diluted earnings per share for the three and six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $88,742 103,221 $0.86
Effect of dilutive securities
Convertible preferred stock 2,305 8,778
Series E Preferred Stock - 953
HCPH Special Shares - 4,485
Stock options - 927
Diluted EPS
Net income available to common stockholders
and assumed conversions $91,047 118,364 $0.77
</TABLE>
6
<PAGE> 9
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<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 $23,866 86,640 $0.28
Effect of dilutive securities
Series D Preferred Stock 257 5,263
HCPH Special Shares - 3,795
Stock options - 670
Diluted EPS
Net income available to common stockholders
and assumed conversions $24,123 96,368 $0.25
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $233,604 105,299 $2.22
Effect of dilutive securities
Convertible preferred stock 4,610 8,778
Series E Preferred Stock - 953
HCPH Special Shares - 4,485
Stock options - 779
Diluted EPS
Net income available to common stockholders
and assumed conversions $238,214 120,294 $1.98
</TABLE>
<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 $144,549 86,641 $1.67
Effect of dilutive securities
Convertible preferred stock 14,116 25,651
Series D Preferred Stock 519 5,263
HCPH Special Shares - 3,795
Stock options - 628
Diluted EPS
Net income available to common stockholders
and assumed conversions $159,184 121,978 $1.31
</TABLE>
7
<PAGE> 10
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 6 - HOLLINGER CANADIAN NEWSPAPERS LIMITED PARTNERSHIP
On April 30, 1999, the Company announced the formation of Hollinger
Canadian Newspapers Limited Partnership (the "Hollinger L.P."). The Hollinger
L.P. has acquired Canadian community newspapers formerly owned and operated by
Southam, UniMedia Inc. and Sterling Newspapers Company. The newspapers
acquired include 48 daily newspapers, 180 non-daily newspapers and shopping
guides and 106 magazines and specialty publications located across Canada.
A Cdn.$200 million private placement was completed April 30, 1999 and private
placement investors have received Cdn.$200 million of special warrants to
acquire partnership units of the Hollinger L.P. The Hollinger L.P. has filed a
preliminary prospectus to qualify 20 million limited partnership units issuable
upon exercise of the special warrants. Upon issue of such limited partnership
units, the Company will continue to hold indirectly approximately 87% of the
equity of the Hollinger L.P. and private placement investors will hold the
balance. The net proceeds of the special warrant issue have been applied to
reduce bank debt of the Hollinger International group of companies.
NOTE 7 - BANK CREDIT FACILITY
On April 30, 1999, Hollinger International Publishing, Hollinger Canadian
Publishing Holdings Inc. ("HCPH"), the Telegraph Group Limited, Southam and a
group of financial institutions entered into a Fourth Amended and Restated
Credit Facility ("Restated Credit Facility") for a total of $725,000,000
consisting of a $475,000,000 revolving credit line maturing on September 30,
2004 and a $250,000,000 term loan maturing on December 31, 2004. This facility
replaces the existing Bank Credit Facility. The Loans under the Restated 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.
8
<PAGE> 11
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 8 - SEGMENT INFORMATION
The Company operates principally in the business of publishing, printing
and distribution of newspapers and magazines and holds investments principally
in companies that operate in the same business as the Company. Southam, the
Canadian Newspapers and the Hollinger LP make up the Canadian Newspaper Group.
The following is a summary of the segments of the Company:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $101,704 22,033 136,887 285,766 $546,390
Depreciation and amortization $4,836 2,178 4,825 19,139 $30,978
Operating income, excluding infrequent items $13,931 2,769 16,998 33,950 $67,648
Equity in earnings (loss) of affiliates $64 - - 282 $346
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $192,660 55,175 279,708 543,549 $1,071,092
Depreciation and amortization $9,700 5,305 9,667 37,291 $61,963
Operating income, excluding infrequent items $22,012 5,162 46,078 52,961 $126,213
Equity in earnings (loss) of affiliates $(212) - - 403 $191
Total assets $449,991 225,409 605,543 2,110,666 $3,391,609
Capital expenditures $24,574 3,674 3,089 45,439 $76,776
</TABLE>
9
<PAGE> 12
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, 1998
--------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $98,844 51,480 138,673 280,174 $569,171
Depreciation and amortization $5,016 4,610 4,838 13,777 $28,241
Operating income, excluding infrequent items $12,378 9,797 19,263 53,711 $95,149
Equity in earnings (loss) of affiliates $(411) - - - $(411)
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $188,472 98,747 279,585 540,336 $1,107,140
Depreciation and amortization $9,777 9,161 9,538 28,342 $56,818
Operating income, excluding infrequent items $17,654 16,973 38,076 84,798 $157,501
Equity in earnings (loss) of affiliates $(779) - - - $(779)
Total assets $415,287 369,839 642,299 1,389,969 $2,817,394
Capital expenditures $24,580 4,782 4,510 21,286 $55,158
</TABLE>
Capital expenditures for the corporate entities were $1,087,000 and $1,732,000
for the six months ended June 30, 1999 and 1998, respectively.
Reconciliation of segment assets to total assets:
<TABLE>
<CAPTION>
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Segment assets $3,391,609 $2,817,394
Corporate assets 111,836 134,254
---------- ----------
Total assets $3,503,445 $2,951,648
========== ==========
</TABLE>
10
<PAGE> 13
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 9 - STOCK REPURCHASES
The Company continues to repurchase shares of Class A Common Stock on the
open market. During 1999, the Company purchased 4,896,900 shares of Class A
Common Stock for total consideration of $67.0 million.
NOTE 10 - SUBSEQUENT EVENTS
During July 1999 the Hollinger L.P. completed its initial public
offering issuing 4 million units at Cdn.$10 per unit for total proceeds of
Cdn.$40 million. All Partnership units, including the 20 million units issued
through the April 30, 1999 private placement, are now listed on The Toronto
Stock Exchange. After the initial public offering the Company continues to hold
indirectly approximately 85% of the equity of the Hollinger L.P.
11
<PAGE> 14
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
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 Chicago Group, the Community Group,
the U.K. Newspaper Group and the Canadian Newspaper Group. The Chicago Group
includes the Chicago Sun-Times, Post Tribune and suburban newspapers in the
Chicago metropolitan area. The Community Group includes the Company's U.S.
community newspapers, operating in 17 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"), the Canadian Newspapers and the Hollinger
Canadian Newspapers Limited Partnership ("Hollinger L.P.").
In January 1999, a subsidiary of the Company acquired 19,845,118 outstanding
Southam common shares for an aggregate consideration of $327.5 million. This
purchase of shares brought the Company's indirect ownership interest in Southam
to approximately 97%. The remaining Southam common shares were purchased in
February 1999 for an aggregate consideration of $36.5 million.
In February 1999, the Company sold approximately 45 community newspapers for
gross cash proceeds of approximately $441.0 million. The proceeds were used to
pay down outstanding debt on the Bank Credit Facility.
On April 30, 1999, Hollinger International Publishing, Hollinger Canadian
Publishing Holdings Inc. ("HCPH"), the Telegraph Group Limited, Southam and a
group of financial institutions entered into a Fourth Amended and Restated
Credit Facility ("Restated Credit Facility") for a total of $725.0 million
consisting of a $475.0 million revolving credit line maturing on September 30,
2004 and a $250.0 million term loan maturing on December 31, 2004. This
facility replaces the existing Bank Credit Facility.
On April 30, 1999, the Company announced the formation of Hollinger Canadian
Newspapers Limited Partnership. The Hollinger L.P. has acquired Canadian
community newspapers formerly owned and operated by Southam, UniMedia Inc. and
Sterling Newspapers Company. The newspapers acquired include 48 daily
newspapers, 180 non-daily newspapers and shopping guides and 106 magazines and
specialty publications located across Canada.
A Cdn.$200 million private placement was completed on April 30, 1999 and
private placement investors have received Cdn.$200 million of special warrants
to acquire partnership units of the Hollinger L.P. The Hollinger L.P. has
filed a preliminary prospectus to qualify 20 million limited partnership units
issuable upon exercise of the special warrants. Upon issue of such limited
partnership units, the Company will continue to hold indirectly approximately
87% of the equity of the Hollinger L.P. and private placement investors will
hold the balance. The net proceeds of the special warrant issue have been
applied to reduce bank debt of the Hollinger International group of companies.
12
<PAGE> 15
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Second quarter 1999 net earnings were $91.0 million or $0.86 per share compared
to $31.2 million or $0.28 per share in 1998. Earnings before extraordinary
items for the three months ended June 30, 1999 were $96.2 million, or $0.91 per
share. There were no extraordinary items during the second quarter of 1998.
Net earnings for the six months ended June 30, 1999 were $238.2 million or
$2.22 per share compared to $159.2 million or $1.67 per share in 1998.
Earnings before extraordinary items for the six months ended June 30, 1999 were
$243.4 million or $2.27 per share compared to $164.3 million or $1.73 per
share. The extraordinary item in 1999 represents the write-off of previously
deferred financing fees related to the early retirement of a Bank Credit
Facility. The extraordinary item in 1998 represents the make-whole premium
that was paid in conjunction with retiring the AP-91 Senior Notes.
There were a number of infrequent and non-recurring items in both years
affecting the results. Infrequent and non-recurring items in 1999 primarily
include the gains on sale of assets and a gain resulting from the issuance of
Partnership units for several Canadian newspapers. Infrequent and
non-recurring items in 1998 include the gain on sale of assets and loss on
disposal of assets. Net income excluding the infrequent and non-recurring
items amounted to $23.3 million or 20 cents per share in the second quarter of
1999 compared to $29.9 million or 25 cents per share in the second quarter of
1998. Net earnings excluding infrequent and non-recurring items for the six
months ended June 30, 1999 were $41.1 million or 34 cents per share compared to
$45.1 million or 37 cents per share in 1998. This includes the deduction in
1999 of operating losses at the National Post.
There are several important factors that have affected the reported earnings
for the quarter compared to last year.
There have been sales of Community Group newspapers in 1998 and
1999. Included in revenue and EBITDA for the second quarter and first
six months of 1998 were $32.1 million of revenue and $10.9 million of
EBITDA and $61.5 million of revenue and $18.5 million of EBITDA,
respectively, related to newspapers that were subsequently sold. Included
in revenue and EBITDA for the second quarter of 1999 were $13.8 million and
$2.5 million, respectively, related to newspapers that were subsequently
sold.
Another major element was the start-up in October 1998 of the new National
Post. The EBITDA loss from the National Post was $11.9 million for the
second quarter of 1999 and $23.5 million for the six months ended June 30,
1999. This loss is greater than initially expected because circulation has
been higher than expected without, yet, delivering the inevitable
advertising revenues. In addition, four newspapers that were sold as part
of the purchase of the Financial Post added $5.1 million and $8.6 million
to EBITDA in the second quarter and first six months of 1998.
Operating revenue for the second quarter of 1999 was $546.4 million compared to
$569.2 million in 1998, a decrease of 4.0%. Operating revenue for the six
months ended June 30, 1999 was $1,071.1 million compared to $1,107.1 million in
1998. EBITDA for the second quarter of 1999 decreased to $98.1 million from
$123.2 million in 1998 and for the first six months of 1999 EBITDA decreased to
$187.3 million from $213.6 in 1998. Operating income was $67.1 million in the
second quarter of 1999 compared to $94.9 million for the same period in 1998
and $125.3 million for the first six months of 1999 compared to $156.8 million
in 1998.
Newsprint as a percentage of sales for the second quarter of 1999 was 14.3%
compared to 15.4% in 1998 and 14.7% for the six months ended June 30, 1999
compared to 15.5% for the same
13
<PAGE> 16
period in 1998. The decrease in newsprint expense is due primarily to price
decreases. Compensation costs as a percentage of sales were fairly consistent
at 31.7% for the second quarter of 1999 compared to 31.0% for the second quarter
of 1998 and 32.3% for the six months ended June 30, 1999 compared to 31.8% for
1998. Other operating costs, excluding infrequent items, increased to 36.0% for
the second quarter of 1999 from 31.9% in the second quarter of 1999. For the
six months ended June 30, 1999, other operating costs, excluding infrequent
items, as a percentage of sales were 35.5% compared to 33.3% in 1998. The
increase in other operating costs in 1999 is primarily due to costs at the
National Post.
Depreciation and amortization increased 9.7% and 9.1%, respectively, for the
second quarter and first six months of 1999 compared to the respective periods
in the prior year. A decrease in depreciation and amortization from the sales
of newspapers at the Community Group and Canadian Newspaper Group was offset by
increased depreciation and amortization related to the acquisition of the
Financial Post and increased amortization from the acquisition of the Southam
minority shares in August 1998 and January 1999.
Interest expense increased $7.6 million to $32.9 million for the second quarter
of 1999 from $25.3 million in 1998 and increased $12.8 million to $64.5 million
for the six months ended June 30, 1999 from the same period in 1998. The
increase in interest expense was primarily due to additional debt related to the
January 1999 acquisition of 29.0% of Southam.
Other income for the first six months of 1999 and 1998 primarily includes gains
on the sale of the U.S. community newspapers. Other income in the second
quarter of 1999 also includes the gain resulting from the issuance of
Partnership units for several Canadian newspapers.
Minority interest in 1999 primarily represents the minority's share of net
earnings of the Hollinger L.P. Minority interest in 1998 represents the
minority's share of the net earnings of Southam.
14
<PAGE> 17
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Amount Amount Amount Amount
---------------- ---------------- ---------------- ----------------
(dollar amounts in thousands) (dollar amounts in thousands)
<S> <C> <C> <C> <C>
Operating revenues:
Chicago Group $101,704 $ 98,844 $ 192,660 $ 188,472
Community Group 22,033 51,480 55,175 98,747
U.K. Newspaper Group 136,887 138,673 279,708 279,585
Canadian Newspaper Group 285,766 280,174 543,549 540,336
--------------- --------------- --------------- ---------------
Total operating revenue $546,390 $569,171 $1,071,092 $1,107,140
=============== =============== =============== ===============
Operating income,
excluding infrequent
items:
Chicago Group $ 13,931 $ 12,378 $ 22,012 $ 17,654
Community Group 2,769 9,797 5,162 16,973
U.K. Newspaper Group 16,998 19,263 46,078 38,076
Canadian Newspaper Group 33,950 53,711 52,961 84,798
--------------- --------------- --------------- ---------------
Total operating income,
excluding infrequent
items $ 67,648 $ 95,149 $ 126,213 $ 157,501
=============== =============== =============== ===============
EBITDA
Chicago Group $ 18,767 $ 17,394 $ 31,712 $ 27,431
Community Group 4,947 14,407 10,467 26,134
U.K. Newspaper Group 21,823 24,101 55,745 47,614
Canadian Newspaper Group 53,089 67,488 90,252 113,140
--------------- --------------- --------------- ---------------
Total EBITDA $ 98,626 $123,390 $ 188,176 $ 214,319
=============== =============== =============== ===============
Operating revenues:
Chicago Group 18.6% 17.4% 18.0% 17.0%
Community Group 4.0% 9.0% 5.2% 8.9%
U.K. Newspaper Group 25.1% 24.4% 26.1% 25.3%
Canadian Newspaper Group 52.3% 49.2% 50.7% 48.8%
--------------- --------------- --------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
Operating income:
Chicago Group 20.6% 13.0% 17.4% 11.2%
Community Group 4.1% 10.3% 4.1% 10.8%
U.K. Newspaper Group 25.1% 20.2% 36.5% 24.2%
Canadian Newspaper Group 50.2% 56.5% 42.0% 53.8%
--------------- --------------- --------------- ---------------
Total operating income 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
EBITDA:
Chicago Group 19.0% 14.1% 16.8% 12.8%
Community Group 5.0% 11.7% 5.6% 12.2%
U.K. Newspaper Group 22.2% 19.5% 29.6% 22.2%
Canadian Newspaper Group 53.8% 54.7% 48.0% 52.8%
--------------- --------------- --------------- ---------------
Total EBITDA 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
EBITDA Margin:
Chicago Group 18.5% 17.6% 16.5% 14.6%
Community Group 22.5% 28.0% 19.0% 26.5%
U.K. Newspaper Group 15.9% 17.4% 19.9% 17.0%
Canadian Newspaper Group 18.6% 24.1% 16.6% 20.9%
Total EBITDA Margin 18.1% 21.7% 17.6% 19.4%
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ -----------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ----------------
Amount Amount Amount Amount
----------------- ----------------- ----------------- ----------------
(dollar amounts in thousands) (dollar amounts in thousands)
<S> <C> <C> <C> <C>
Chicago Group
Operating revenue
Advertising $ 77,059 $ 73,687 $144,288 $139,248
Circulation 20,701 21,323 40,672 42,118
Job printing and other 3,944 3,834 7,700 7,106
----------------- ----------------- ----------------- ----------------
Total operating revenue 101,704 98,844 192,660 188,472
----------------- ----------------- ----------------- ----------------
Operating costs
Newsprint 17,623 18,108 34,232 34,753
Compensation costs 37,141 36,710 73,391 73,001
Other operating costs 28,173 26,632 53,325 53,287
Depreciation and amortization 4,836 5,016 9,700 9,777
----------------- ----------------- ----------------- ----------------
Total operating costs 87,773 86,466 170,648 170,818
----------------- ----------------- ----------------- ----------------
Operating income, excluding
infrequent items $ 13,931 $ 12,378 $ 22,012 $ 17,654
================= ================= ================= ================
Community Group
Operating revenue
Advertising $ 13,051 $ 33,090 $ 33,068 $ 62,225
Circulation 5,840 11,727 14,893 23,477
Job printing and other 3,142 6,663 7,214 13,045
----------------- ----------------- ----------------- ----------------
Total operating revenue 22,033 51,480 55,175 98,747
----------------- ----------------- ----------------- ----------------
Operating costs
Newsprint 1,909 5,886 5,657 11,220
Compensation costs 8,289 17,044 20,832 33,635
Other operating costs 6,888 14,143 18,219 27,758
Depreciation and amortization 2,178 4,610 5,305 9,161
----------------- ----------------- ----------------- ----------------
Total operating costs 19,264 41,683 50,013 81,774
----------------- ----------------- ----------------- ----------------
Operating income, excluding
infrequent items $ 2,769 $ 9,797 $ 5,162 $ 16,973
================= ================= ================= ================
U.K. Newspaper Group
Operating revenue
Advertising $ 90,764 $ 93,224 $187,529 $189,956
Circulation 39,665 40,159 79,412 80,395
Job printing and other 6,458 5,290 12,767 9,234
----------------- ----------------- ----------------- ----------------
Total operating revenue 136,887 138,673 279,708 279,585
----------------- ----------------- ----------------- ----------------
Operating costs
Newsprint 24,577 25,881 49,262 51,970
Compensation costs 22,197 22,886 44,683 44,810
Other operating costs 68,290 65,805 130,018 135,191
Depreciation and amortization 4,825 4,838 9,667 9,538
----------------- ----------------- ----------------- ----------------
Total operating costs 119,889 119,410 233,630 241,509
----------------- ----------------- ----------------- ----------------
Operating income, excluding
infrequent items $ 16,998 $ 19,263 $ 46,078 $ 38,076
================= ================= ================= ================
Canadian Newspaper Group
Operating revenue
Advertising $216,730 $211,736 $406,786 $402,759
Circulation 55,804 56,231 110,066 113,128
Job printing and other 13,232 12,207 26,697 24,449
----------------- ----------------- ----------------- ----------------
Total operating revenue 285,766 280,174 543,549 540,336
----------------- ----------------- ----------------- ----------------
Operating costs
Newsprint 33,778 37,897 68,424 74,118
Compensation costs 105,643 99,887 206,551 200,645
Other operating costs 93,256 74,902 178,322 152,433
Depreciation and amortization 19,139 13,777 37,291 28,342
----------------- ----------------- ----------------- ----------------
Total operating costs 251,816 226,463 490,588 455,538
----------------- ----------------- ----------------- ----------------
Operating income, excluding
infrequent items $ 33,950 $ 53,711 $ 52,961 $ 84,798
================= ================= ================= ================
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ----------------------------------
1999 1998 1999 1998
-------------- -------------- ---------------- ----------------
Percentage Percentage Percentage Percentage
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Chicago Group
Operating revenue
Advertising 75.8% 74.5% 74.9% 73.9%
Circulation 20.3% 21.6% 21.1% 22.3%
Job printing and other 3.9% 3.9% 4.0% 3.8%
------------- ------------- ------------ -------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------ -------------
Operating costs
Newsprint 17.3% 18.3% 17.8% 18.4%
Compensation costs 36.5% 37.1% 38.1% 38.7%
Other operating costs 27.7% 26.9% 27.7% 28.3%
Depreciation and amortization 4.8% 5.1% 5.0% 5.2%
------------- ------------- ------------ -------------
Total operating costs 86.3% 87.4% 88.6% 90.6%
------------- ------------- ------------ -------------
Operating income, excluding
infrequent items 13.7% 12.6% 11.4% 9.4%
============= ============= ============ =============
Community Group
Operating revenue
Advertising 59.2% 64.3% 59.9% 63.0%
Circulation 26.5% 22.8% 27.0% 23.8%
Job printing and other 14.3% 12.9% 13.1% 13.2%
------------- ------------- ------------ -------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------ -------------
Operating costs
Newsprint 8.7% 11.4% 10.3% 11.4%
Compensation costs 37.6% 33.1% 37.8% 34.1%
Other operating costs 31.3% 27.5% 33.0% 28.1%
Depreciation and amortization 9.9% 9.0% 9.6% 9.3%
------------- ------------- ------------ -------------
Total operating costs 87.5% 81.0% 90.7% 82.9%
------------- ------------- ------------ -------------
Operating income, excluding
infrequent items 12.5% 19.0% 9.3% 17.1%
============= ============= ============ =============
U.K. Newspaper Group
Operating revenue
Advertising 66.3% 67.2% 67.0% 67.9%
Circulation 29.0% 29.0% 28.4% 28.8%
Job printing and other 4.7% 3.8% 4.6% 3.3%
------------- ------------- ------------ -------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------ -------------
Operating costs
Newsprint 18.0% 18.7% 17.6% 18.6%
Compensation costs 16.2% 16.5% 16.0% 16.0%
Other operating costs 49.9% 47.5% 46.5% 48.4%
Depreciation and amortization 3.5% 3.5% 3.5% 3.4%
------------- ------------- ------------ -------------
Total operating costs 87.6% 86.2% 83.6% 86.4%
------------- ------------- ------------ -------------
Operating income, excluding
infrequent items 12.4% 13.8% 16.4% 13.6%
============= ============= ============ =============
Canadian Newspaper Group
Operating revenue
Advertising 75.9% 75.6% 74.8% 74.5%
Circulation 19.5% 20.0% 20.3% 21.0%
Job printing and other 4.6% 4.4% 4.9% 4.5%
------------- ------------- ------------ -------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------ -------------
Operating costs
Newsprint 11.8% 13.5% 12.6% 13.7%
Compensation costs 37.0% 35.7% 38.0% 37.1%
Other operating costs 32.6% 26.7% 32.8% 28.2%
Depreciation and amortization 6.7% 5.0% 6.9% 5.3%
------------- ------------- ------------ -------------
Total operating costs 88.1% 80.9% 90.3% 84.3%
------------- ------------- ------------ -------------
Operating income, excluding
infrequent items 11.9% 19.1% 9.7% 15.7%
============= ============= ============ =============
</TABLE>
17
<PAGE> 20
GROUP OPERATING RESULTS
- -----------------------
CHICAGO GROUP
Revenue for the Chicago Group was $101.7 million for the second quarter of
1999, an increase of 2.9% over 1998. Revenue for the six months ended June 30,
1999 compared to 1998 increased 2.2% to $192.7 million. Advertising revenue for
the second quarter and first six months of 1999 increased 4.6% and 3.6%,
respectively over the same period in the prior year. Classified advertising
showed the largest increases. Circulation revenue for the second quarter and
first six months of 1999 decreased 2.9% and 3.4%, respectively from the same
periods in the prior year primarily as a result of both unusual competitive
pricing in the market and a slight decrease in volume.
EBITDA in the second quarter of 1999 increased 7.9% over 1998. EBITDA for the
six months ended June 30, 1999 was $31.7 million, an increase of 15.6% over
1998. Operating income, excluding infrequent items, for the second quarter and
first six months of 1999 increased 12.6% and 24.7%, respectively, over the same
periods in the prior year. The increases in EBITDA and operating income are
primarily due to increased revenue and lower average newsprint prices.
Newsprint expense decreased for both the second quarter and first six months of
1999 primarily as a result of a decrease in newsprint prices. Compensation
costs as a percentage of revenues for the second quarter were 36.5% in 1999
compared to 37.1% in 1998 and for the six months ended June 30, 1999 were 38.1%
compared to 38.7% in 1998. Other operating costs, excluding infrequent items,
as a percentage of revenues were 27.7% for the second quarter of 1999 compared
to 26.9% in 1998. Other operating costs, excluding infrequent items, as a
percentage of revenues for the six months ended June 30, 1999 were 27.7%
compared to 28.3% for the respective period in 1998.
COMMUNITY GROUP
The overall decrease in Community Group operating revenues, EBITDA and
operating income is due to the sale of the community newspapers during both
1999 and 1998. Revenue attributable to the newspapers sold was $13.8 million
for the six months ended June 30, 1999 and $61.5 million in 1998. On a "same
store" basis, the Community Group revenues and EBITDA were $14.4 million and
$4.3 million for the second quarter of 1999 compared to $14.2 million and $3.9
million in 1998. For the six months ended June 30, 1999, on a "same store"
basis, the Community Group revenue and EBITDA were $27.7 million and $7.0
million compared to $27.0 million and $6.6 million in 1998. For properties
owned in both years, compensation costs as a percentage of revenues were 34.5%
and 35.5% for the second quarter and first six months of 1999, respectively,
compared to 34.0% and 34.0% for the respective periods in 1998. For properties
owned in both years, other operating costs as a percentage of revenue were
23.8% for the second quarter of 1999 compared to 25.9% in 1998 and 26.1% for
the six months ended June 30, 1999 compared to 25.4% in 1998.
18
<PAGE> 21
U.K. NEWSPAPER GROUP
Second quarter operating revenue for the U.K. Newspaper Group was $136.9
million in 1999 compared to $138.7 million in 1998. Operating revenue for the
six months ended June 30, 1999 was $279.7 million compared to $279.6 million in
1998. The results were affected by fluctuations in foreign exchange rates.
In pounds sterling, operating revenue for the second quarter of 1999 increased
1.4% and for the six months ended June 30, 1999 increased 1.9%. Advertising
revenue continues to increase primarily a result of a continued buoyant
advertising market in all sectors except recruitment advertising. However, the
slowdown in recruitment classifieds in more than offset by growth in other
classified categories and display advertising. Other operating revenue, in
pounds sterling increased 25.8% for the second quarter 1999 and 41.2% for the
first six months of 1999 both compared to 1998. The increases are primarily
due to increased revenue from Telegraph Enterprises, a division of Telegraph
Group Limited, which uses the Telegraph brand to facilitate sales of goods and
services to readers.
EBITDA, when expressed in pounds sterling, decreased 6.8% for the second
quarter 1999 from 1998. The decrease in EBITDA is primarily due to the timing
of promotional expenditures. For the six months ended June 30, 1999, EBITDA in
pounds sterling increased 19.0%. Newsprint expense decreased in the second
quarter and first six months of 1999 both compared with 1998 primarily due to
lower newsprint prices. For the second quarter and the six months ended June
30, compensation costs, as a percentage of revenues, remained fairly consistent
at 16.2% and 16.0%, respectively in 1999 compared to 16.5% and 16.0%,
respectively, in 1998. Other operating costs as a percentage of revenues
increased to 49.9% for the second quarter of 1999 from 47.5% in 1998. Other
operating costs as a percentage of revenues decreased to 46.5% for the six
months ended June 30, 1999 from 48.4% in 1998. The fluctuation in other
operating costs is primarily due to the timing of promotional expenditures.
CANADIAN NEWSPAPER GROUP
Second quarter operating revenue for the Canadian Newspaper Group was $285.8
million in 1999 compared to $280.2 million in 1998. Operating revenue for the
six months ended June 30, 1999 was $543.5 million compared to $540.3 million in
1998. EBITDA for the second quarter and first six months of 1999 was $53.1
million and $90.3 million, respectively, compared to $67.5 million and $113.1
million, respectively, in 1998. Operating income for the second quarter and
first six months of 1999 was $34.0 million and $53.0 million, respectively,
compared to $53.7 million and $84.8 million, respectively, in 1998.
The reported operating results for of 1999 and 1998 are not readily comparable
as a result of acquisitions and disposals in 1998. 1998 included the results
of operations in Hamilton, Kitchener, Cambridge, Guelph, Medicine Hat and at
American Trucker, which were subsequently sold. In addition, 1999 includes the
results of the Victoria newspaper acquired in 1998 and the National Post, which
commenced operating in October 1998.
On a "same store" basis, the second quarter 1999 operating revenue was
Cdn.$372.5 million compared to Cdn.$367.1 million in 1998, an increase of 1.5%
and second quarter 1999 EBITDA was Cdn.$94.9 million compared to Cdn.$88.9
million in 1998, an increase of 6.7%. On a "same store" basis, for the six
months ended June 30, 1999 operating revenue was Cdn.$724.7 million compared to
Cdn.$700.4 million in 1998, an increase of 3.5% and EBITDA was Cdn.$165.8
million compared to Cdn.$147.3 million in 1998, an increase of 12.6%.
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
WORKING CAPITAL
- ---------------
Working capital consists of current assets less current liabilities. At June
30, 1999, there was a working capital deficiency of $400.3 million compared to
a deficiency of $141.7 million at December 31, 1998. The increase in the
working capital deficiency was primarily due to short-term debt that is
expected to be converted to long term debt during the third quarter of 1999.
Current assets were $483.7 million at June 30, 1999 compared with $469.9
million at December 31, 1998. Current liabilities, excluding debt obligations,
were $483.8 million at June 30, 1999, compared with $509.9 million at December
31, 1998. The decrease in current liabilities is primarily due to a reduction
in accrued expenses resulting from the payment of the special dividend by
Southam offset, in part, by the tax provided on the gain related to the sales
of the community newspapers.
DEBT
- ----
Long-term debt, including the current portion, was $1.62 billion at June 30,
1999 compared with $1.50 billion at December 31, 1998. The increase is
primarily due to additional debt incurred to purchase the 29.0% minority in
Southam, payment of the Southam special dividend and share repurchases offset
by the proceeds on the February 1999 sale of community newspaper properties and
the proceeds from the sale of Partnership units.
BANK CREDIT FACILITY
- --------------------
On April 30, 1999, Hollinger International Publishing, HCPH, the Telegraph
Group Limited, Southam and a group of financial institutions entered into a
Fourth Amended and Restated Credit Facility ("Restated Credit Facility") for a
total of $725.0 million consisting of a $475.0 million revolving credit line
maturing on September 30, 2004 and a $250.0 million term loan maturing on
December 31, 2004. This facility replaces the existing Bank Credit Facility.
The Loans under the Restated Credit Facility bear interest, at the option of
the borrowers, 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.
EBITDA
- ------
EBITDA, which represents the Company's earnings before interest expense,
amortization of debt issue costs, interest income, income taxes, depreciation
and amortization, minority interest, other income and extraordinary items was
$98.1 million for the second quarter of 1999 compared with $123.2 million for
the second quarter 1998 and $187.3 million for the six months ended June 30,
1999 compared to $213.6 million in 1998. 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. When acquisitions, dispositions, and the start-up
of the National Post are excluded, EBITDA on a "same store" basis would have
been $109.1 million for the second quarter of 1999 compared to $106.8 million
in 1998 and $205.04 million for the six months ended June 30, 1999 compared to
$183.4 million in 1998.
20
<PAGE> 23
CASH FLOWS
- ----------
Cash flows from operating activities were $17.3 million for the six months
ended June 30, 1999, compared with $56.3 million in 1998. Excluding changes in
working capital (other than cash), cash provided by operating activities was
$18.0 million in 1999 and $50.8 million in 1998.
Cash flows provided by investing activities were $2.6 million in 1999, and
$244.3 million in 1998. Both years had large cash inflows from the sale of
community newspapers. The inflows in 1999 were offset by the acquisition of
the remaining interest in Southam.
Cash flows provided by financing activities were $1.4 million in 1999. Cash
flows used in financing activities were $301.4 million in 1998, primarily due
to the pay down of debt.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING
- ----------------------------------------------
The Chicago Group, Community 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 and borrowings under the Bank Credit Facilities.
DIVIDENDS AND OTHER COMMITMENTS
- -------------------------------
The amount available for the payment of dividends and other obligations by the
Company at any time is a function of (i) restrictions in agreements binding the
Company limiting its ability to pay dividends, management fees and other
payments and (ii) restrictions in agreements binding the Company's subsidiaries
limiting their ability to pay dividends, management fees and other payments to
the Company. The Company is not a party to a debt agreement that restricts the
payment of dividends. However, certain agreements binding Publishing and other
subsidiaries of the Company contain such restrictive provisions. As of June
30, 1999, 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 $306.5 million. The foregoing
calculation is based on the sum of the following for the period October 1, 1998
to June 30, 1999: (i) an amount equal to the sum of (x) 50% of the consolidated
net income (as defined by the Note indentures) of Publishing and its Restricted
Subsidiaries or if it is a loss, reduced by 100% of such loss, and (y) 100% of
the 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) one third of Publishing's share of net
after tax gain on sales of assets after March 31, 1999 up to a maximum
aggregate of $50 million; and (iv) $270 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.
YEAR 2000 The Company has analyzed its internally developed and purchased
software that utilize embedded date codes. Such embedded date codes may
experience operating 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. Exposure to this issue
differs considerably from subsidiary to subsidiary. The Company has already
made modifications and during 1999 plans to make further necessary
modifications to the identified
21
<PAGE> 24
software and has begun testing and will continue to test systems. Community
Group modifications are almost complete, with individual company systems testing
and verification underway, while at the Chicago Group, primarily the Chicago
Sun-Times, the necessary changes are anticipated to be completed during the
third quarter of 1999. Within the U.K. Newspaper Group and the Canadian
Newspaper Group, critical systems have been modified or replaced and individual
systems testing and verification are underway. The Company's most reasonably
likely worst case Year 2000 scenario is that the Company would incur additional
costs and lose some timeliness in producing some newspapers; however, the
Company believes that it will be able to produce all of its newspapers without
interruption. Because the Company's systems are not integrated, the Company is
preparing to handle the worst case scenario on a case by case basis and will be
developing contingency plans related thereto. The Company is also communicating
with key suppliers, most notably newsprint vendors, and others with whom we do
business to ensure they are Year 2000 compliant. 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 on the Company's financial statements or results of operations
taken as a whole. The Company estimates that the total cost of Year 2000
remediation, including costs of modifying software and hiring Year 2000 solution
providers will not exceed $14.5 million, of which the Company estimates $11.5
million, has already been expended. Funding for such remediation efforts will
be generated from normal operations. No other information technology projects
have been materially deferred or delayed due to Year 2000 efforts.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NEWSPRINT Newsprint prices continued to fluctuate and on a consolidated
basis newsprint expense amounted to $157.6 million in 1999 and $172.1 million in
1998. Management believes that while newsprint prices could show wide price
variations in the future, they will be more stable than they were a few years
ago. Operating divisions take steps to ensure that they have sufficient supply
of newsprint and have mitigated cost increases by adjusting pagination and page
sizes and printing and distributing practices. Based on levels of usage during
the six months ended June 30, 1999 and based on properties and ownership levels
at June 30, 1999, a change in the price of newsprint of $50 per ton would
increase or decrease year to date net earnings by about $8.9 million.
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
and Canada.
INTEREST RATES The Company has significant debt on which interest is
calculated at floating rates. As a result the Company is vulnerable to changes
in interest rates. Increases in interest rates will reduce net earnings and
declines in interest rates can result in increased earnings. Based on debt at
June 30, 1999 which is subject to floating interest rates and June 30, 1999
ownership levels and foreign exchanges rates, a 1% change in the floating
interest rates would increase or decrease the Company's year to date net
earnings by approximately $1.2 million.
22
<PAGE> 25
FOREIGN EXCHANGE RATES A substantial portion of the Company's income is
earned outside of the United States in currencies other than the United States
dollar. As a result the Company's income is vulnerable to changes in the value
of the United States dollar. Increases in the value of the United States
dollar can reduce net earnings and declines can result in increased earnings.
Based on year to date 1999 earnings and ownership levels, a $0.05 change in the
important foreign currencies would have the following effect on the Company's
reported year to date net earnings:
<TABLE>
<CAPTION>
Actual Average
1999 Rate Increase/Decrease
----------------- ------------------
<S> <C> <C>
United Kingdom $1.62/L. $931,000
Canada $0.67/Cdn.$ $3,504,000
</TABLE>
ELECTRONIC MEDIA Management holds the view that newspapers will continue
to be an important business segment. Alternate forms of information delivery
that could replace newspapers continue to be actively explored throughout the
world and the management of the Company is closely monitoring the situation to
ensure that we will be in a position to continue to take advantage of technology
changes as they occur. It is our view that our franchises are very strong and
will continue to be viable revenue generators whether or not the product
continues to be delivered on paper. Among educated and affluent people,
indications are that strong newspaper readership will continue. There has been
and, we expect, will continue to be a shift in readership away from evening or
all day reading to mornings or weekends, but we expect our readers will continue
to read newspapers. To the extent that readers seek alternate means of delivery
to newsprint, as we have already demonstrated with our on-line leadership in
several countries, we will endeavor to provide it.
23
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1999, the Company's annual meeting of stockholders was
held. At the meeting the following persons were elected to serve
as directors for a one year term: Dwayne O Andreas, Conrad M.
Black, Barbara Amiel-Black, Richard R. Burt, Raymond G. Chambers,
Daniel W. Colson, Henry A. Kissinger, Marie-Josee Kravis, Shmuel
Meitar, Richard N. Perle, F. David Radler, A. Alfred Taubman,
James R. Thompson, Lord Weidenfeld, Leslie H. Wexner. The voting
for the directors was as follows: For-229,891,882 and
Abstain-70,118. The stockholders also voted to approve and adopt
the 1999 Stock Incentive Plan. The voting for the 1999 Stock
Incentive Plan was as follows: For-204,711,040,
Against-17,656,234, and Abstain-123,712.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
24
<PAGE> 27
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 13, 1999 By: /s/ J. A. Boultbee
-------------------------------
J. A. Boultbee
Executive Vice President
By: /s/ Cindy Horowitz
-------------------------------
Cindy Horowitz
Executive Vice President and
Chief Financial Officer
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 74,502 104,072
<SECURITIES> 0 0
<RECEIVABLES> 383,440 345,040
<ALLOWANCES> 25,498 23,990
<INVENTORY> 28,394 53,318
<CURRENT-ASSETS> 22,866 533,379
<PP&E> 1,081,738 1,025,985
<DEPRECIATION> 392,599 431,756
<TOTAL-ASSETS> 3,503,445 2,951,648
<CURRENT-LIABILITIES> 884,039 438,432
<BONDS> 1,215,858 1,162,030
13,348 268,784
6,377 0
<COMMON> 1,111 876
<OTHER-SE> 945,458 607,082
<TOTAL-LIABILITY-AND-EQUITY> 3,503,445 2,951,648
<SALES> 546,390 569,171
<TOTAL-REVENUES> 546,390 569,171
<CGS> 0 0
<TOTAL-COSTS> 479,317 474,257
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,942 25,339
<INCOME-PRETAX> 133,847 108,538
<INCOME-TAX> 35,869 43,965
<INCOME-CONTINUING> 96,230 31,181
<DISCONTINUED> 0 0
<EXTRAORDINARY> 5,183 0
<CHANGES> 0 0
<NET-INCOME> 91,047 31,181
<EPS-BASIC> 0.86 0.28
<EPS-DILUTED> 0.77 0.25
</TABLE>
