<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, 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.
<TABLE>
<CAPTION>
Class Outstanding at May 11, 1999
------------------------- ---------------------------
<S> <C>
Class A Common Stock
par value $.01 per share 91,265,836 shares
Class B Common Stock
par value $.01 per share 14,990,000 shares
</TABLE>
<PAGE> 2
INDEX
HOLLINGER INTERNATIONAL INC.
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations.
Item 3 Quantitative and Qualitative Analysis of Market Risk 18
Part II OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K. 20
Signatures 21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- --------------
<S> <C> <C>
OPERATING REVENUES
Advertising $ 374,067 $ 382,451
Circulation 123,033 129,678
Job printing 15,813 16,611
Other 11,789 9,229
--------- ---------
Total operating revenues 524,702 537,969
--------- ---------
OPERATING COSTS AND EXPENSES
Newsprint 79,688 84,289
Compensation costs 172,187 175,564
Other operating costs 183,277 187,187
Infrequent items 290 508
Depreciation and amortization 30,985 28,577
--------- ---------
Total operating costs and expenses 466,427 476,125
--------- ---------
Operating income 58,275 61,844
Other income (expense)
Interest expense (31,600) (26,426)
Amortization of debt issue costs (1,910) (1,387)
Interest income 2,403 2,633
Other income, net 228,342 194,342
--------- ---------
Total other income (expense) 197,235 169,162
--------- ---------
Earnings before income taxes, minority
interest and extraordinary item 255,510 231,006
Provision for income taxes 108,633 90,982
--------- ---------
Earnings before minority interest and
extraordinary item 146,877 140,024
Minority interest (290) 6,954
--------- ---------
Earnings before extraordinary item 147,167 133,070
Extraordinary loss on debt extinguishments -- (5,067)
--------- ---------
Net earnings $ 147,167 $ 128,003
========= =========
Basic earnings per share before extraordinary item $ 1.35 $ 1.45
========= =========
Diluted earnings per share before extraordinary item $ 1.20 $ 1.09
========= =========
Basic earnings per share $ 1.35 $ 1.39
========= =========
Diluted earnings per share $ 1.20 $ 1.05
========= =========
Weighted average shares outstanding-basic 107,434 86,576
========= =========
Weighted average shares outstanding-diluted 122,537 122,084
========= =========
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Net earnings $147,167 $128,003
Other comprehensive income:
Foreign currency translation adjustment 772 14,420
-------- --------
Comprehensive income $147,939 $142,423
======== ========
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
ASSETS ----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 91,293 $ 57,788
Accounts receivable, net 347,238 333,706
Due from affiliates -- 27,246
Inventories 29,276 32,312
Other current assets 27,988 18,872
----------- -----------
Total current assets 495,795 469,924
Property, plant and equipment, net of
accumulated depreciation 661,477 661,611
Investments 141,917 143,338
Intangible assets, net of accumulated amortization 2,019,636 1,858,750
Deferred financing costs and other assets 145,845 118,101
----------- -----------
$ 3,464,670 $ 3,251,724
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 455,982 $ 101,691
Accounts payable 130,286 137,691
Accrued expenses 204,473 285,859
Income taxes payable 97,904 13,890
Deferred revenue 65,900 72,481
----------- -----------
Total current liabilities 954,545 611,612
Long-term debt, less current installments 1,230,717 1,397,827
Other long-term liabilities 292,260 285,800
----------- -----------
Total liabilities 2,477,522 2,295,239
Minority interest 71,886 107,002
Redeemable preferred stock 13,031 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 618,231 610,440
Accumulated other comprehensive income-
cumulative foreign currency translation adjustment (65,027) (65,799)
Retained earnings 431,649 301,133
----------- -----------
992,341 853,257
Class A common stock in treasury, at cost (61,908) (16,744)
Issued shares in escrow (28,202) (18,592)
----------- -----------
Total stockholders' equity 902,231 817,921
----------- -----------
$ 3,464,670 $ 3,251,724
=========== ===========
</TABLE>
3
<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 147,167 $ 128,003
Items not involving cash:
Depreciation and amortization 30,985 28,577
Amortization of debt issue costs 1,910 1,387
Minority interest (290) 6,954
Gain on sale of assets (228,105) (166,997)
Other non-cash items (470) (2,635)
Changes in working capital net 65,503 36,435
--------- ---------
Cash provided by operating activities 16,700 31,724
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,843) (44,172)
Additions to investments (372,266) (8,324)
Acquisitions, net (21,672) (44,709)
Proceeds from disposal of investments 440,600 279,055
Other investing activities 1,326 4,527
--------- ---------
Cash provided by investing activities 19,145 186,377
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 438,297 19,000
Repayments of long-term debt (261,926) (226,112)
Payment of debt issue costs (26,298) (200)
Repurchase of common shares (45,164) --
Redemption of preferred stock (18,770) --
Changes in amounts due to affiliates 28,812 (2,874)
Dividends to minority interests (102,047) (1,129)
Cash dividends paid (16,650) (15,983)
Other financing activities (1,574) 1,177
--------- ---------
Cash used in financing activities (5,320) (226,121)
--------- ---------
Effect of exchange rate changes on cash 2,980 3,822
--------- ---------
Net increase (decrease) in cash 33,505 (4,198)
Cash at beginning of period 57,788 107,384
--------- ---------
Cash at end of period $ 91,293 $ 103,186
========= =========
Cash paid for interest $ 47,230 $ 43,215
========= =========
Cash paid for taxes $ 22,478 $ 21,296
========= =========
</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 March 31, 1999 owned approximately 42.8% of the combined equity
ownership interest and approximately 75.1% 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 remaining 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 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 - 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, 1999 and 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 144,862 107,434 $ 1.35
Effect of dilutive securities
Convertible preferred stock 2,305 8,778
Series D Preferred Stock -- 931
HCPH Special Shares -- 4,831
Stock options -- 563
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 147,167 122,537 $ 1.20
- -------------------------------------------------------------------------------------------------------------------
<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 $ 120,683 86,576 $ 1.39
Effect of dilutive securities
Convertible preferred stock 7,058 25,651
Series D Preferred Stock 262 5,447
HCPH Special Shares - 3,841
Stock options - 569
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 128,003 122,084 $ 1.05
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
In February 1, 1999, the Company completed the sale of 45 U.S.
community newspapers for proceeds of approximately $460,000,000 of which
approximately $441,000,000 was cash. The proceeds from the sale were used to pay
down outstanding debt of the Bank Credit Facility. The pre-tax gain resulting
from this transaction was recorded in other income.
In January 1999, Hollinger Canadian Publishing Holdings Inc. ("HCPH")
acquired 19,845,118 outstanding Southam common shares for an aggregate
consideration of $327,500,000. This purchase of shares brought HCPH's ownership
interest in Southam to approximately 97%. The remaining Southam common shares
were purchased by HCPH in February 1999 pursuant to applicable Canadian law for
an aggregate consideration of $36,500,000.
6
<PAGE> 9
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 5 - 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 and the Canadian Newspapers make up the Canadian Newspaper Group. The
following is a summary of the segments of the Company:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1999
------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 90,956 33,142 142,821 257,783 $ 524,702
- ---------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 4,864 3,127 4,842 18,152 $ 30,985
- ---------------------------------------------------------------------------------------------------------------
Infrequent items $ -- -- -- (290) $ (290)
- ---------------------------------------------------------------------------------------------------------------
Operating income $ 8,081 2,393 29,080 18,721 $ 58,275
- ---------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (276) -- -- 121 $ (155)
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 431,166 230,587 633,829 2,046,919 $ 3,342,501
- ---------------------------------------------------------------------------------------------------------------
Capital expenditures $ 12,986 2,203 1,706 11,295 $ 28,190
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1998
-----------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 89,628 47,267 140,912 260,162 $ 537,969
- ---------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 4,761 4,551 4,700 14,565 $ 28,577
- ---------------------------------------------------------------------------------------------------------------
Infrequent items $ -- -- -- (508) $ (508)
- ---------------------------------------------------------------------------------------------------------------
Operating income $ 5,276 7,176 18,813 30,579 $ 61,844
- ---------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (368) -- -- -- $ (368)
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 386,561 367,635 672,880 1,465,682 $ 2,892,758
- ---------------------------------------------------------------------------------------------------------------
Capital expenditures $ 19,912 8,768 2,486 12,130 $ 43,296
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
Capital expenditures for the corporate entities were $653,000 and $876,000 for
the quarters ended March 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
Reconciliation of segment assets to total assets:
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Segment assets $ 3,342,501 $ 2,892,758
Corporate assets 122,169 110,221
- --------------------------------------------------------
Total assets $ 3,464,670 $ 3,002,979
- --------------------------------------------------------
</TABLE>
NOTE 6 - STOCK REPURCHASES
The Company continues to repurchase shares of Class A Common Stock on
the open market. During the first quarter 1999, the Company purchased 3,684,400
shares of Class A Common Stock for total consideration of $45,164,000.
NOTE 7 - SUBSEQUENT EVENTS
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 $725,000,000 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.
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 49 daily newspapers, 146 non-daily newspapers and shopping guides and
140 specialty publications located across Canada.
A Cdn.$200 million private placement has been completed and private
placement investors have received Cdn.$200 million of special warrants to
acquire partnership units of 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 approximately 89% 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.
8
<PAGE> 11
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 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") and the Canadian Newspapers acquired from Hollinger
Inc.
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.
CONSOLIDATED RESULTS OF OPERATIONS
First quarter 1999 net earnings were $147.2 million or $1.35 per share compared
to $128.0 million or $1.39 per share in 1998. Earnings before extraordinary
items in 1998 were $133.1 million, or $1.45 per share. There were no
extraordinary items in 1999. 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 non-recurring items in both years affecting the results
for the quarter. Non-recurring items in 1999 primarily include the gain on the
February 1999 sale of community newspapers, net of costs. Non-recurring items in
1998 include the gain on sale of community newspapers, loss on disposal of
assets and redundancy costs. Net income excluding the non-recurring items
amounted to $17.8 million or 15 cents per share in the first quarter of 1999
compared to $15.2 million or 13 cents per share in the first quarter of 1998.
This includes the deduction in 1999 of operating losses at the National Post.
There are three very important factors that have affected the reported earnings
for the quarter compared to last year.
There have been two sales of Community Group newspapers - one in the first
quarter of 1998 and the second in the first quarter of 1999. The
newspapers that were sold added $24.0 million to revenue and $7.1 million
to EBITDA in the first quarter of 1998 and $8.3 million to revenue and
$1.3 million to EBITDA in the first quarter of 1999. After accounting for
depreciation and amortization, the effect of these sales on net income
(excluding capital gains and resulting taxes from the sales) has been a
reduction of $2.6 million.
9
<PAGE> 12
In August 1998, the Company purchased 10.5% of the shares of Southam for a
cost of $168.6 million. During the first quarter of 1999, the Company
purchased the remaining 29.0% shares of Southam that were owned by the
minority for $465.2 million (including a Cdn.$7.00 per share dividend).
These two purchases have increased first quarter amortization by $2.6
million. Amortization is taken on a straight-line basis but income in the
newspaper business is quite seasonal. The first quarter is always a weak
quarter so the negative effect of amortization from recent purchases will
usually result in declines in income. The result of the purchases has been
the elimination of minority interest, but, in a quarter with lower
earnings as a result of amortization and losses at the National Post, the
benefits of eliminating the minority may be somewhat hidden.
The third major element was the start-up in October 1998 of the new
National Post. The EBITDA loss from the National Post for the first
quarter of 1999 was $11.6 million. 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 $3.3 million to EBITDA in the first quarter of 1998.
Operating revenue for the first quarter of 1999 was $524.7 million compared to
$538.0 million in 1998, a decrease of 2.5%. EBITDA for the first quarter of 1999
decreased to $89.3 million from $90.4 million in 1998. Operating income
decreased 5.7% to $58.3 million in the first quarter of 1999 from $61.8 million
for the same period in 1998.
Newsprint expense for the first quarter of 1999 decreased by 5.5% to $79.7
million from $84.3 million in 1998. This is primarily the result of lower
average newsprint prices in 1999 compared to 1998. Compensation costs as a
percentage of sales were fairly consistent at 32.8% for the first quarter of
1999 compared to 32.6% for the first quarter of 1998. Other operating costs,
excluding infrequent items, remained flat at 34.9% and 34.8%, as a percentage of
sales for the first quarter of 1999 and 1998, respectively.
Depreciation and amortization for first quarter of 1999 increased $2.4 million
from 1998. The decrease in depreciation 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 $5.2 million to $31.6 million for the first quarter
of 1999 from $26.4 million 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 in 1999 and 1998 primarily includes gains on the sale of the
community newspapers in both February 1999 and January 1998.
10
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1999 1998
---------- ----------
Amount Amount
---------- ----------
Operating revenues: (dollar amounts in thousands)
<S> <C> <C>
Chicago Group $ 90,956 $ 89,628
Community Group 33,142 47,267
U.K. Newspaper Group 142,821 140,912
Canadian Newspaper Group 257,783 260,162
---------- ----------
Total operating revenue $ 524,702 $ 537,969
========== ==========
Operating income:
Chicago Group $ 8,081 $ 5,276
Community Group 2,393 7,176
U.K. Newspaper Group 29,080 18,813
Canadian Newspaper Group 18,721 30,579
---------- ----------
Total operating income $ 58,275 $ 61,844
========== ==========
EBITDA:
Chicago Group $ 12,945 $ 10,037
Community Group 5,520 11,727
U.K. Newspaper Group 33,922 23,513
Canadian Newspaper Group 36,873 45,144
---------- ----------
Total EBITDA $ 89,260 $ 90,421
========== ==========
Operating revenues:
Chicago Group 17.4% 16.6%
Community Group 6.3% 8.8%
U.K. Newspaper Group 27.2% 26.2%
Canadian Newspaper Group 49.1% 48.4%
---------- ----------
Total operating revenue 100.0% 100.0%
========== ==========
Operating income:
Chicago Group 13.9% 8.5%
Community Group 4.1% 11.6%
U.K. Newspaper Group 49.9% 30.4%
Canadian Newspaper Group 32.1% 49.5%
---------- ----------
Total operating income 100.0% 100.0%
========== ==========
EBITDA:
Chicago Group 14.5% 11.1%
Community Group 6.2% 13.0%
U.K. Newspaper Group 38.0% 26.0%
Canadian Newspaper Group 41.3% 49.9%
---------- ----------
Total EBITDA 100.0% 100.0%
========== ==========
EBITDA Margin:
Chicago Group 14.2% 11.2%
Community Group 16.7% 24.8%
U.K. Newspaper Group 23.8% 16.7%
Canadian Newspaper Group 14.3% 17.4%
Total EBITDA Margin 17.0% 16.8%
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ -------------
Amount Amount
------------ -------------
Chicago Group (dollar amounts in thousands)
<S> <C> <C>
Operating revenue
Advertising $ 67,229 $ 65,561
Circulation 19,971 20,795
Job printing and other 3,756 3,272
-------- --------
Total operating revenue 90,956 89,628
-------- --------
Operating costs
Newsprint 16,609 16,645
Compensation costs 36,250 36,291
Other operating costs 25,152 26,655
Infrequent items -- --
Depreciation and amortization 4,864 4,761
-------- --------
Total operating costs 82,875 84,352
-------- --------
Operating income $ 8,081 $ 5,276
======== ========
Community Group
Operating revenue
Advertising $ 20,017 $ 29,135
Circulation 9,053 11,750
Job printing and other 4,072 6,382
-------- --------
Total operating revenue 33,142 47,267
-------- --------
Operating costs
Newsprint 3,748 5,334
Compensation costs 12,543 16,591
Other operating costs 11,331 13,615
Infrequent items -- --
Depreciation and amortization 3,127 4,551
-------- --------
Total operating costs 30,749 40,091
-------- --------
Operating income $ 2,393 $ 7,176
======== ========
U.K. Newspaper Group
Operating revenue
Advertising $ 96,765 $ 96,732
Circulation 39,747 40,236
Job printing and other 6,309 3,944
-------- --------
Total operating revenue 142,821 140,912
-------- --------
Operating costs
Newsprint 24,685 26,089
Compensation costs 22,486 21,924
Other operating costs 61,728 69,386
Infrequent items -- --
Depreciation and amortization 4,842 4,700
-------- --------
Total operating costs 113,741 122,099
-------- --------
Operating income $ 29,080 $ 18,813
======== ========
Canadian Newspaper Group
Operating revenue
Advertising $190,056 $191,023
Circulation 54,262 56,897
Job printing and other 13,465 12,242
-------- --------
Total operating revenue 257,783 260,162
-------- --------
Operating costs
Newsprint 34,646 36,221
Compensation costs 100,908 100,758
Other operating costs 85,066 77,531
Infrequent items 290 508
Depreciation and amortization 18,152 14,565
-------- --------
Total operating costs 239,062 229,583
-------- --------
Operating income $ 18,721 $ 30,579
======== ========
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
Percentage Percentage
---------- ----------
<S> <C> <C>
Chicago Group
Operating revenue
Advertising 73.9% 73.1%
Circulation 22.0% 23.2%
Job printing and other 4.1% 3.7%
----- -----
Total operating revenue 100.0% 100.0%
----- -----
Operating costs
Newsprint 18.3% 18.6%
Compensation costs 39.9% 40.5%
Other operating costs 27.7% 29.7%
Infrequent items -- --
Depreciation and amortization 5.3% 5.3%
----- -----
Total operating costs 91.2% 94.1%
----- -----
Operating income 8.8% 5.9%
===== =====
Community Group
Operating revenue
Advertising 60.4% 61.6%
Circulation 27.3% 24.9%
Job printing and other 12.3% 13.5%
----- -----
Total operating revenue 100.0% 100.0%
----- -----
Operating costs
Newsprint 11.3% 11.3%
Compensation costs 37.8% 35.1%
Other operating costs 34.2% 28.8%
Infrequent items -- --
Depreciation and amortization 9.4% 9.6%
----- -----
Total operating costs 92.7% 84.8%
----- -----
Operating income 7.3% 15.2%
===== =====
U.K. Newspaper Group
Operating revenue
Advertising 67.8% 68.6%
Circulation 27.8% 28.6%
Job printing and other 4.4% 2.8%
----- -----
Total operating revenue 100.0% 100.0%
----- -----
Operating costs
Newsprint 17.3% 18.5%
Compensation costs 15.7% 15.6%
Other operating costs 43.2% 49.2%
Infrequent items -- --
Depreciation and amortization 3.4% 3.3%
----- -----
Total operating costs 79.6% 86.6%
----- -----
Operating income 20.4% 13.4%
===== =====
Canadian Newspaper Group
Operating revenue
Advertising 73.8% 73.4%
Circulation 21.0% 21.9%
Job printing and other 5.2% 4.7%
----- -----
Total operating revenue 100.0% 100.0%
----- -----
Operating costs
Newsprint 13.4% 13.9%
Compensation costs 39.1% 38.7%
Other operating costs 33.0% 29.8%
Infrequent items 0.1% 0.2%
Depreciation and amortization 7.0% 5.7%
----- -----
Total operating costs 92.6% 88.3%
----- -----
Operating income 7.4% 11.7%
===== =====
</TABLE>
13
<PAGE> 16
GROUP OPERATING RESULTS
CHICAGO GROUP
Revenue for the Chicago Group increased $1.4 million to $91.0 million in the
first quarter of 1999 from $89.6 million for the same period in 1998.
Advertising revenue in 1999 increased $1.7 million over the same period in the
prior year. Classified advertising showed the largest increases, followed by
retail advertising. Circulation revenue decreased by $0.8 million from the first
quarter in 1998 primarily as a result of a decrease in volume at the Chicago
Sun-Times.
EBITDA increased 29.0% primarily due to increased revenue and lower operating
costs. Newsprint expense decreased slightly due to decreased consumption.
Compensation costs as a percentage of revenues were 39.9% in 1999 compared to
40.5% in 1998. Other operating costs as a percentage of revenues were 27.7% in
1999 compared to 29.7% in 1998. The decrease in other operating costs is
primarily due to lower promotional advertising and miscellaneous operating
efficiencies. Operating income increased 53.2% to $8.1 million in 1999 from $5.3
million 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 in both February 1999 and
January 1998. Revenue attributable to the newspapers sold was $8.3 million in
the first quarter of 1999 and $24.0 million in the first quarter of 1998. On a
"same store" basis, the Community Group revenues and EBITDA were $18.7 million
and $4.5 million in 1999 compared to $18.3 million and $4.8 million in 1998. For
properties owned in both years, newsprint expense remained relatively flat at
$2.3 million in both 1999 and 1998 and compensation costs as a percentage of
revenues were 36.3% in 1999 compared to 35.9% in 1998. This increase in
compensation costs is primarily due to annual wage increases. In addition, for
properties owned in both years, other operating costs increased $0.4 million in
1999 and as a percentage of revenue were 27.4% in 1999 compared to 25.6% in
1998.
U.K. NEWSPAPER GROUP
First quarter operating revenue for the U.K. Newspaper Group was $142.8 million
in 1999 compared to $140.9 million in 1998. In pounds sterling, advertising
revenue increased 1.0% and circulation revenue decreased 0.5%. The increase in
advertising revenue is primarily a result of a continued buoyant advertising
market in all sectors except recruitment advertising. Property advertising
increased by 27.4% in the quarter while display advertising and classified
sections continued to perform well and compensated for the slowdown in
recruitment advertising. Other operating revenue was $6.3 million in the first
quarter of 1999 compared to $3.9 million in 1998. The increase in pounds
sterling was 62.0% which includes a net revenue increase of 33.0% by Telegraph
Enterprises, a revenue division of Telegraph Group Limited which uses the
Telegraph brand to facilitate sales of goods and services to readers.
EBITDA for the U.K. Newspaper Group was $33.9 million in the first quarter of
1999 compared to $23.5 million in 1998. Operating income in 1999 was $29.1
million compared to $18.8 million in 1998. Newsprint expense for the first
quarter 1999 was $24.7 million compared $26.1 million in 1998. The decrease in
newsprint expense was primarily the result of lower newsprint prices.
Compensation costs as a percentage of revenues remained fairly consistent at
15.7% in 1999
14
<PAGE> 17
compared to 15.6% in 1998. Other operating costs as a percentage of revenues
decreased to 43.2% in 1999 from 49.2% in 1998. The decrease in other operating
costs is primarily due to decreased promotional costs incurred in the first
quarter of 1999 compared to 1998 as less resources were deemed necessary to
support The Daily Telegraph's market leading circulation. These expenses
throughout the period of intensified cover price and circulation competition
over the past five years have been subject to wide quarterly fluctuations.
CANADIAN NEWSPAPER GROUP
First quarter operating revenue for the Canadian Newspaper Group was $257.8
million in 1999 compared to $260.2 million in 1998. EBITDA and operating income
for the first quarter of 1999 were $36.9 million and $18.7 million,
respectively, compared to $45.1 million and $30.6 million, respectively, in
1998.
The reported operating results for the first quarter of 1999 and 1998 are not
readily comparable as a result of acquisitions and disposals in 1998. The first
quarter of 1998 included the results of operations in Hamilton, Kitchener,
Cambridge, Guelph, Medicine Hat and at American Trucker, which were subsequently
disposed of. In addition, the first quarter of 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 first quarter 1999 operating revenue was Cdn.
$339.3 million compared to Cdn.$332.4 million in 1998, an increase of 2.1% and
first quarter 1999 EBITDA was Cdn.$78.9 million compared to Cdn.$65.4 million in
1998, an increase of 20.6%. In Canadian dollars, newsprint expense decreased
5.4%, primarily as a result of lower newsprint prices. For properties owned in
both years, compensation costs as a percentage of revenue were 38.7% in 1999
compared to 38.9% in 1998 and other operating costs as a percentage of revenue
declined to 24.8% in 1999 from 27.2% in 1998. The decrease in other operating
costs was primarily the result of lower promotional costs and the continued
application of normal Hollinger operational expenditure controls.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital consists of current assets less current liabilities. At March
31, 1999, there was a working capital deficiency of $458.8 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 incurred by Southam
related to the special dividend of Cdn.$7.00 per share that was paid in January
1999. The short-term debt was refinanced in April 1999 as part of the Bank
Credit Facility discussed below. Current assets were $495.8 million at March 31,
1999 compared with $469.9 million at December 31, 1998. Current liabilities,
excluding debt obligations, were $498.6 million at March 31, 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 February 1999 sale of community newspapers.
15
<PAGE> 18
DEBT
Long-term debt, including the current portion, was $1.69 billion at March 31,
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.
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 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.
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, and other income was $89.3 million for the
first quarter of 1999 compared with $90.4 million for the first quarter 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.
CASH FLOWS
Cash flows from operating activities were $16.7 million in the first quarter of
1999, compared with $31.7 million in the first quarter of 1998. Excluding
changes in working capital (other than cash), cash used in operating activities
was $48.8 million in 1999 and $4.7 million in 1998.
Cash flows provided by investing activities were $19.1 million in 1999, and
$186.4 million in 1998, largely due to the sale of a group of community
newspapers.
Cash flows used in financing activities were $5.3 million in 1999 and $226.1
million in 1998, primarily due to the pay down of debt.
CAPITAL EXPENDITURES AND ACQUISITION FINANCING
The United States Newspaper Group, the U.K. Newspaper Group and the Canadian
Newspaper Group have funded their capital expenditures and acquisition and
investment activities out of cash provided by their respective operating
activities and borrowings under the Bank Credit Facility.
16
<PAGE> 19
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 March 31,
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 $281.8 million. The foregoing
calculation is based on the sum of the following for the period October 1, 1998
to March 31, 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; (iii) one third of Publishing's share of the 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 software and has begun testing and will continue to test systems.
Within the United States Newspaper Group, 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 not anticipated to be complete until 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
most reasonably likely 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 which 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
17
<PAGE> 20
replacing software will have a material effect in any one year on the Company's
financial statements or results of operations taken as a whole. 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 $13.9
million, of which the Company estimates $9.0 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 $79.7 million in 1999 and $84.3 million in
1998. Management believes that while newsprint prices could continue to show
wide price variations in the future, they will be more stable than they were
through 1996. Operating divisions take steps to ensure that they have sufficient
supply of newsprint and have mitigated cost increases by adjusting pagination
and page sizes and printing and distributing practices. For the Company and
subsidiaries for the first quarter of 1999, total newsprint usage was about
148,000 tonnes. At those levels of usage and based on properties and ownership
levels at March 31, 1999, a change in the price of newsprint of $50 per ton
would increase or decrease quarterly net earnings by about $4.4 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
March 31, 1999 which is subject to floating interest rates and March 31, 1999
ownership levels and foreign exchanges rates, a 1% change in the floating
interest rates would increase or decrease the Company's quarterly net earnings
by approximately $1.2 million.
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
first quarter 1999 earnings and ownership levels, a $0.05 change in the
important foreign currencies would have the following effect on the Company's
reported quarterly net earnings:
<TABLE>
<CAPTION>
Actual Average
1999 Rate Increase/Decrease
- ------------------------------------------------------------------
<S> <C> <C>
United Kingdom $1.63/pound $630,000
Canada $0.66/Cdn.$ $420,000
- ------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
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 take advantage of
technology changes as the 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. In fact, it is
possible that readership will increase as the population ages. 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.
19
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed reports on Form 8-K under
Item 5 to report an event dated December 4, 1998 and
under Item 2 to report an event dated January 22,
1999. The Company filed a report on Form 8-K/A under
Item 7 to report an event dated January 22, 1999.
20
<PAGE> 23
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 14, 1999 By: /s/ J. A. Boultbee
-----------------------------------
J. A. Boultbee
Executive Vice President, and
Chief Financial Officer
21
<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> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 91,293 103,186
<SECURITIES> 0 0
<RECEIVABLES> 372,798 341,160
<ALLOWANCES> 25,560 23,962
<INVENTORY> 29,276 43,361
<CURRENT-ASSETS> 27,988 513,264
<PP&E> 1,048,148 1,077,042
<DEPRECIATION> 386,671 455,700
<TOTAL-ASSETS> 3,464,670 3,002,979
<CURRENT-LIABILITIES> 954,545 460,305
<BONDS> 1,230,717 1,217,383
13,031 76,261
6,377 195,104
<COMMON> 1,111 876
<OTHER-SE> 984,853 612,704
<TOTAL-LIABILITY-AND-EQUITY> 3,464,670 3,002,979
<SALES> 524,702 537,969
<TOTAL-REVENUES> 524,702 537,969
<CGS> 0 0
<TOTAL-COSTS> 466,427 476,125
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 31,600 26,426
<INCOME-PRETAX> 255,510 231,006
<INCOME-TAX> 108,633 90,982
<INCOME-CONTINUING> 147,167 133,070
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 5,067
<CHANGES> 0 0
<NET-INCOME> 147,167 128,003
<EPS-PRIMARY> 1.35 1.39
<EPS-DILUTED> 1.20 1.05
</TABLE>
