<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 September 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 November 8, 1999
------------------------ -------------------------------
Class A Common Stock par
value $.01 per share 87,355,312 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 12
Condition and Results of Operations.
Item 3 Quantitative and Qualitative Disclosure about Market Risk 23
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 NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Advertising $ 352,565 $ 358,925 1,124,236 $ 1,153,113
Circulation 120,256 128,545 365,299 387,663
Job printing 10,635 14,418 41,264 48,547
Other 15,759 10,415 39,508 30,120
-------------- ------------- ------------- --------------
Total operating revenues 499,215 512,303 1,570,307 1,619,443
-------------- ------------- ------------- --------------
OPERATING COSTS AND EXPENSES
Newsprint 76,699 81,331 234,274 253,392
Compensation costs 171,943 171,743 517,400 523,834
Other operating costs 201,420 178,859 581,304 547,528
Infrequent items 462 996 1,327 1,739
Depreciation 15,641 15,057 47,342 45,134
Amortization 15,078 14,319 45,340 41,060
-------------- ------------- ------------- --------------
Total operating costs and expenses 481,243 462,305 1,426,987 1,412,687
-------------- ------------- ------------- --------------
Operating income 17,972 49,998 143,320 206,756
OTHER INCOME (EXPENSE)
Interest expense (32,790) (26,619) (97,332) (78,384)
Amortization of debt issue costs (2,669) (1,671) (7,437) (4,599)
Interest income 2,394 2,507 6,234 6,249
Other income, net 13,928 90,194 343,407 323,931
-------------- ------------- ------------- --------------
Total other income (expense) (19,137) 64,411 244,872 247,197
-------------- ------------- ------------- --------------
Earnings (loss) before income taxes, minority
interest and extraordinary item (1,165) 114,409 388,192 453,953
Provision for income taxes (2,852) 59,038 141,650 193,985
-------------- ------------- ------------- --------------
Earnings before minority interest and
extraordinary item 1,687 55,371 246,542 259,968
Minority interest 1,601 37,842 3,059 78,189
-------------- ------------- ------------- --------------
Earnings before extraordinary item 86 17,529 243,483 181,779
Extraordinary loss from debt extinguishments - - (5,183) (5,067)
-------------- ------------- ------------- --------------
Net earnings $ 86 $ 17,529 $ 238,300 $ 176,712
============== ============= ============= ==============
Basic earnings (loss) per share before
extraordinary item $ (0.02) $ (0.06) $ 2.27 $ 1.59
============== ============= ============= ==============
Diluted earnings (loss) per share before
extraordinary item $ (0.02) $ (0.06) $ 2.02 $ 1.33
============== ============= ============= ==============
Basic earnings (loss) per share $ (0.02) $ (0.06) $ 2.22 $ 1.53
============== ============= ============= ==============
Diluted earnings (loss) per share $ (0.02) $ (0.06) $ 1.98 $ 1.29
============== ============= ============= ==============
Weighted average shares outstanding - basic 101,851 98,017 104,241 90,473
============== ============= ============= ==============
Weighted average shares outstanding - diluted 101,851 98,017 120,242 121,157
============== ============= ============= ==============
</TABLE>
1
<PAGE> 4
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings $ 86 $ 17,529 $ 238,300 $ 176,712
Other comprehensive income:
Foreign currency translation adjustment 23,040 (16,318) 28,978 (26,443)
-------------- -------------- --------------- ---------------
Comprehensive income $ 23,126 $ 1,211 $ 267,278 $ 150,269
============== ============== =============== ===============
</TABLE>
2
<PAGE> 5
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,163 $ 57,788
Accounts receivable, net 299,577 333,706
Due from affiliates - 27,246
Inventories 25,583 32,312
Other current assets 19,424 18,872
------------------ ------------------
Total current assets 405,747 469,924
Property, plant and equipment, net of
accumulated depreciation 692,973 661,611
Investments 174,843 143,338
Intangible assets, net of accumulated amortization 2,025,376 1,858,750
Deferred financing costs and other assets 142,143 118,101
------------------ ------------------
$ 3,441,082 $ 3,251,724
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 143,263 $ 101,691
Accounts payable 157,947 137,691
Accrued expenses 153,224 285,859
Income taxes payable 54,637 13,890
Deferred revenue 78,386 72,481
------------------ ------------------
Total current liabilities 587,457 611,612
Long-term debt, less current installments 1,487,598 1,397,827
Other long-term liabilities 287,451 285,800
------------------ ------------------
Total liabilities 2,362,506 2,295,239
Minority interest 152,461 107,002
Redeemable preferred stock 13,355 31,562
Stockholders' equity:
Convertible preferred stock 6,377 6,377
Class A common stock 981 956
Class B common stock 150 150
Additional paid-in capital 640,225 610,440
Accumulated other comprehensive income-
cumulative foreign currency translation adjustment (36,821) (65,799)
Retained earnings 484,062 301,133
------------------ ------------------
1,094,974 853,257
Class A common stock in treasury, at cost (128,999) (16,744)
Issued shares in escrow (53,215) (18,592)
------------------ ------------------
Total stockholders' equity 912,760 817,921
------------------ ------------------
$ 3,441,082 $ 3,251,724
================== ==================
</TABLE>
3
<PAGE> 6
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 238,300 $ 176,712
Items not involving cash:
Depreciation and amortization 92,682 86,194
Amortization of debt issue costs 7,437 4,599
Minority interest 3,059 78,189
Gain on sale of assets (335,117) (332,026)
Other non-cash items 17,248 1,851
Changes in working capital net 5,174 23,046
------------------ ------------------
Cash provided by operating activities 28,783 38,565
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (95,522) (102,892)
Additions to investments (403,302) (211,217)
Acquisitions, net (38,415) (307,134)
Proceeds from disposal of investments 527,560 600,222
Other investing activities 6,027 1,365
------------------ ------------------
Cash used in investing activities (3,652) (19,656)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,272,395 355,743
Repayments of long-term debt (1,167,929) (308,454)
Payment of debt issue costs (36,218) (877)
Repurchase of common shares (112,255) (1,671)
Issue of Partnership units 154,648 -
Repurchase of common shares of a subsidiary - (22,226)
Redemption of preferred stock (18,214) -
Changes in amounts due to affiliates 34,831 (7,821)
Dividends to minority interests (109,862) (3,025)
Deemed dividend (6,201) -
Cash dividends paid (49,454) (52,773)
Other financing activities (5,601) 2,660
------------------ ------------------
Cash used in financing activities (43,860) (38,444)
------------------ ------------------
Effect of exchange rate changes on cash 22,104 3,619
------------------ ------------------
Net increase (decrease) in cash 3,375 (15,916)
Cash at beginning of period 57,788 107,384
------------------ ------------------
Cash at end of period $ 61,163 $ 91,468
================== ==================
Cash paid for interest $ 127,952 $ 96,031
================== ==================
Cash paid for taxes $ 134,810 $ 114,323
================== ==================
</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 September 30, 1999 owned approximately 42.1% of the combined equity
ownership interest and approximately 76.7% 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 - 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 nine
months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ (2,350) 101,851 $ (0.02)
Effect of dilutive securities
None
Diluted EPS
Net income available to common stockholders
and assumed conversions $ (2,350) 101,851 $ (0.02)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ (5,794) 98,017 $ (0.06)
Effect of dilutive securities
None
Diluted EPS
Net income available to common stockholders
and assumed conversions $ (5,794) 98,017 $ (0.06)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In determining basic earnings per share for the three months ended September 30,
1999, earnings available to common stockholders were reduced by dividends on
convertible preferred stock of $2,305,000 and dividends on Series E Preferred
Stock of $131,000. For the three months ended September 30, 1998, earnings
available to common stockholders were reduced by $20,909,000, which represents
the conversion premium on the PRIDES exchange and by dividends on convertible
preferred stock of $2,305,000 and dividends on Series D Preferred Stock of
$109,000.
6
<PAGE> 9
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 231,254 104,241 $ 2.22
Effect of dilutive securities
Convertible preferred stock 6,915 8,778
Series E Preferred Stock 131 956
HCPH Special Shares - 5,501
Stock options - 766
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 238,300 120,242 $ 1.98
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine months ended September 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic EPS
Net income available to common stockholders $ 138,754 90,473 $ 1.53
Effect of dilutive securities
Convertible preferred stock 16,421 20,998
Series D Preferred Stock 628 5,056
HCPH Special Shares - 4,028
Stock options - 602
Diluted EPS
Net income available to common stockholders
and assumed conversions $ 155,803 121,157 $ 1.29
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
In determining basic earnings per share for the nine months ended September 30,
1998, earnings available to common stockholders were reduced by $20,909,000,
which represents the conversion premium on the PRIDES exchange.
7
<PAGE> 10
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 4 - 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 subsequently received 20 million partnership units of the Hollinger
L.P.
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. The net
proceeds of the offerings have been applied to reduce bank debt.
The reduction in the Company's indirect ownership interest in
Hollinger L.P. due to the sale of Partnership units resulted in recognition of
dilution gains of $69.4 million and $8.4 million in the second and third quarter
of 1999, respectively.
NOTE 5 - BANK CREDIT FACILITY
On April 30, 1999, Hollinger International Publishing, Inc.
("Publishing") Hollinger Canadian Publishing Holdings Inc. ("HCPH"), the
Telegraph Group Limited, Southam, HIF Corp. 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 June 4, 1999 the revolving credit line was increased by $50,000,000.
On September 30, 1999 the Restated Credit Facility was increased to $875,000,000
when the revolving credit line and the term loan were each increased by
$50,000,000.
8
<PAGE> 11
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 6 - 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 L.P. make up the Canadian
Newspaper Group. The following is a summary of the segments of the Company:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1999
-----------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 96,479 20,298 127,434 255,004 $ 499,215
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 4,784 1,893 4,658 19,384 $ 30,719
- --------------------------------------------------------------------------------------------------------------------
Operating income, excluding infrequent items $ 8,941 2,114 5,919 1,460 $ 18,434
- --------------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (222) - (606) 9 $ (819)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine months ended September 30, 1999
-----------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 289,139 75,473 407,142 798,553 $ 1,570,307
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 14,484 7,198 14,326 56,674 $ 92,682
- --------------------------------------------------------------------------------------------------------------------
Operating income, excluding infrequent items $ 30,954 7,275 51,995 54,423 $ 144,647
- --------------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (434) - (606) 412 $ (628)
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 454,183 162,033 620,151 2,094,701 $ 3,331,068
- --------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 33,882 4,205 3,025 53,093 $ 94,205
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1998
-----------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 92,081 54,242 127,185 238,795 $ 512,303
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 4,988 5,212 4,942 14,234 $ 29,376
- --------------------------------------------------------------------------------------------------------------------
Operating income, excluding infrequent items $ 7,043 8,600 8,547 26,804 $ 50,994
- --------------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (538) - - - $ (538)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine months ended September 30, 1998
-----------------------------------------------------------------------------
U.K. Canadian
Chicago Community Newspaper Newspaper
Group Group Group Group Total
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues $ 280,553 152,989 406,770 779,131 $1,619,443
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 14,765 14,373 14,480 42,576 $ 86,194
- --------------------------------------------------------------------------------------------------------------------
Operating income, excluding infrequent items $ 24,697 25,573 46,623 111,602 $ 208,495
- --------------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of affiliates $ (949) - - - $ (949)
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 425,900 413,178 697,495 1,568,731 $3,105,304
- --------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 53,544 7,295 6,049 33,688 $ 100,576
- --------------------------------------------------------------------------------------------------------------------
Capital expenditures for the corporate entities were $1,317,000 and $2,316,000 for the nine months ended
September 30, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------------------------------------------
Reconciliation of segment assets to total assets:
<CAPTION>
September 30,
--------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment assets $ 3,331,068 $ 3,105,304
Corporate assets 110,014 114,345
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 3,441,082 $ 3,219,649
====================================================================================================================
</TABLE>
10
<PAGE> 13
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
NOTE 7 - STOCK REPURCHASES
During the third quarter 1999, the Company continued to repurchase shares
of Class A Common Stock on the open market. The Company has purchased in 1999
8,978,600 shares of Class A Common Stock for total consideration of $112.3
million.
11
<PAGE> 14
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 city and suburban newspapers in
the Chicago metropolitan area. The Community Group includes the Company's U.S.
community newspapers, operating in 12 states, and 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 Inc. ("Publishing"),
Hollinger Canadian Publishing Holdings Inc. ("HCPH"), Telegraph Group Limited,
Southam, HIF Corp. 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 June 4, 1999, the
revolving credit line was increased by $50.0 million. On September 30, 1999, the
Restated Credit Facility was increased to $875.0 million when the revolving
credit line and the term loan were each increased by $50.0 million
On April 30, 1999, the Company announced the formation of Hollinger L.P.
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 subsequently received 20 million partnership units of
Hollinger L.P. During July 1999 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. The net
proceeds of the offerings were applied to reduce bank debt.
12
<PAGE> 15
CONSOLIDATED RESULTS OF OPERATIONS
Third quarter 1999 net earnings were $86,000 or a loss of $0.02 per share
compared to net earnings of $17.5 million or a loss of $0.06 per share in 1998.
Net earnings for the nine months ended September 30, 1999 were $238.3 million or
$2.22 per share compared to $176.7 million or $1.53 per share in 1998. Earnings
before extraordinary items for the nine months ended September 30, 1999 were
$243.5 million or $2.27 per share compared to $181.8 million or $1.59 per share
in 1998. 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. For the 1998
earnings per share calculation earnings available to common shareholders were
reduced by $20,909,000, which represents the conversion premium on the PRIDES
exchange.
There were a number of infrequent and non-recurring items in both years
affecting the results. Infrequent and non-recurring items in both the third
quarter of 1999 and the nine months ended September 30, 1999 primarily include
the gains on sale of assets and a gain resulting from the issuance of
Partnership units. Infrequent and non-recurring items in the third quarter of
1998 primarily included the gain on sale of assets. Infrequent and non-recurring
items for the nine months ended September 30, 1998, included the gains on sale
of assets, loss on disposal of assets, and redundancy costs. Net earnings
excluding the infrequent and non-recurring items amounted to a loss of $11.5
million or loss of 14 cents per share in the third quarter of 1999 compared to
income of $10.8 million or 9 cents per share in the third quarter of 1998. Net
earnings excluding infrequent and non-recurring items for the nine months ended
September 30, 1999 were $29.7 million or 22 cents per share compared to $55.9
million or 43 cents per share in 1998. This includes the deduction in 1999 of
operating losses at the National Post.
There are two significant 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 results for the third quarter and first nine months of 1998
were $36.1 million of revenue and $10.7 million of EBITDA and $100.3
million of revenue and $30.1 million of EBITDA, respectively, related to
newspapers that were subsequently sold. Included in revenue and EBITDA for
the nine months ended September 30, 1999 were $17.3 million and $2.9
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 $14.1 million for the
third quarter of 1999 and $37.6 million for the nine months ended September
30, 1999. This loss is greater than initially expected because circulation
has been higher than expected without, yet, delivering the inevitable
advertising revenues. NAD Bank (National Audience Databank -- an
independent national readership survey) Canadian circulation statistics
which were released at the end of October are expected to boost advertising
revenues at the National Post starting in the fourth quarter 1999. In
addition, four newspapers that were sold as part of the purchase of the
Financial Post added Cdn.$0.4 million and Cdn.$9.0 million to EBITDA in the
third quarter and first nine months of 1998.
Operating revenue for the third quarter of 1999 was $499.2 million compared to
$512.3 million in 1998, a decrease of 2.6%. Operating revenue for the nine
months ended September 30, 1999 was $1,570.3 million compared to $1,619.4
million in 1998. EBITDA for the third quarter of 1999 was $48.7 million compared
to $79.4 million in 1998 and for the nine months ended September 30, 1999 EBITDA
was $236.0 million compared to $293.0 million in the same period of 1998.
13
<PAGE> 16
Operating income was $18.0 million in the third quarter of 1999 compared to
$50.0 million for the same period in 1998 and $143.3 million for the first nine
months of 1999 compared to $206.8 million in 1998.
The decrease in newsprint expense is due primarily to price decreases with
prices decreasing by 14% at the Chicago Sun-Times and 16% at the Community Group
during the third quarter of 1999 compared to the same period in 1998. However,
decreases in prices were offset by increases in volume at the Canadian Group due
to the startup of the National Post during the fourth quarter in 1998 and at The
Daily Telegraph due to of the introduction of new sections. The same factors
were applicable to the decrease in newsprint expense for the nine months ended
September 30, 1999 compared to the same period in 1998. The increase in other
operating costs in 1999 is primarily due to costs at the National Post and
higher editorial expenditures at The Daily Telegraph related to the new
sections.
Depreciation increased 3.9% and 4.9%, respectively, for the third quarter and
first nine months of 1999 compared to the respective periods in the prior year.
Amortization increased 5.3% in the third quarter of 1999 and 10.4% for the nine
months ended September 30, 1999 compared to the same 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,
increased depreciation from a new press plant at Southam that was put into
operation in stages starting in late 1997 and continuing throughout 1999 and
increased amortization from the acquisition of the Southam minority shares in
August 1998 and January and February 1999.
Interest expense increased $6.2 million to $32.8 million for the third quarter
of 1999 from $26.6 million in 1998 and increased $18.9 million to $97.3 million
for the nine months ended September 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 nine months of both 1999 and 1998 primarily consists
of gains on the sale of the U.S. community newspapers, gains on asset sales in
Canada and the gains resulting from the issuance of Partnership units.
Minority interest in 1999 primarily represents the minority's share of net
earnings of Hollinger L.P. Minority interest in 1998 represents the minority's
share of the net earnings of Southam. The decrease in minority interest is due
to the acquisition of the remaining minority shares of Southam in January and
February 1999.
14
<PAGE> 17
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 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 $ 96,479 $ 92,081 $ 289,139 $ 280,553
Community Group 20,298 54,242 75,473 152,989
U.K. Newspaper Group 127,434 127,185 407,142 406,770
Canadian Newspaper Group 255,004 238,795 798,553 779,131
--------------- --------------- --------------- ---------------
Total operating revenue $ 499,215 $ 512,303 $ 1,570,307 $ 1,619,443
=============== =============== =============== ===============
Operating income, excluding infrequent items:
Chicago Group $ 8,941 $ 7,043 $ 30,954 $ 24,697
Community Group 2,114 8,600 7,275 25,573
U.K. Newspaper Group 5,919 8,547 51,995 46,623
Canadian Newspaper Group 1,460 26,804 54,423 111,602
--------------- --------------- --------------- ---------------
Total operating income, excluding infrequent
items $ 18,434 $ 50,994 $ 144,647 $ 208,495
=============== =============== =============== ===============
EBITDA, excluding infrequent items:
Chicago Group $ 13,725 $ 12,031 $ 45,438 $ 39,462
Community Group 4,007 13,812 14,473 39,946
U.K. Newspaper Group 10,577 13,489 66,321 61,103
Canadian Newspaper Group 20,844 41,038 111,097 154,178
--------------- --------------- --------------- ---------------
Total EBITDA, excluding infrequent items $ 49,153 $ 80,370 $ 237,329 $ 294,689
=============== =============== =============== ===============
Operating revenues:
Chicago Group 19.3% 18.0% 18.4% 17.4%
Community Group 4.1% 10.6% 4.8% 9.4%
U.K. Newspaper Group 25.5% 24.8% 25.9% 25.1%
Canadian Newspaper Group 51.1% 46.6% 50.9% 48.1%
--------------- --------------- --------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
Operating income:
Chicago Group 48.5% 13.8% 21.4% 11.8%
Community Group 11.5% 16.9% 5.0% 12.3%
U.K. Newspaper Group 32.1% 16.8% 36.0% 22.4%
Canadian Newspaper Group 7.9% 52.5% 37.6% 53.5%
--------------- --------------- --------------- ---------------
Total operating income 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
EBITDA:
Chicago Group 27.9% 14.9% 19.2% 13.4%
Community Group 8.2% 17.2% 6.1% 13.6%
U.K. Newspaper Group 21.5% 16.8% 27.9% 20.7%
Canadian Newspaper Group 42.4% 51.1% 46.8% 52.3%
-------------- --------------- --------------- ---------------
Total EBITDA 100.0% 100.0% 100.0% 100.0%
=============== =============== =============== ===============
EBITDA Margin:
Chicago Group 14.2% 13.1% 15.7% 14.1%
Community Group 19.7% 25.5% 19.2% 26.1%
U.K. Newspaper Group 8.3% 10.6% 16.3% 15.0%
Canadian Newspaper Group 8.2% 17.2% 13.9% 19.8%
Total EBITDA Margin 9.8% 15.7% 15.1% 18.2%
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 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 $ 72,509 $ 68,373 $ 216,797 $ 207,621
Circulation 20,128 20,273 60,800 62,391
Job printing and other 3,842 3,435 11,542 10,541
--------------- --------------- --------------- ---------------
Total operating revenue 96,479 92,081 289,139 280,553
--------------- --------------- --------------- ---------------
Operating costs
Newsprint 15,807 17,360 50,039 52,113
Compensation costs 37,385 36,784 110,776 109,785
Other operating costs 29,562 25,906 82,886 79,193
Depreciation and amortization 4,784 4,988 14,484 14,765
--------------- --------------- --------------- ---------------
Total operating costs 87,538 85,038 258,185 255,856
--------------- --------------- --------------- ---------------
Operating income, excluding infrequent items $ 8,941 $ 7,043 $ 30,954 $ 24,697
=============== =============== =============== ===============
Community Group
Operating revenue
Advertising $ 11,926 $ 35,049 $ 44,994 $ 97,274
Circulation 5,898 12,760 20,791 36,237
Job printing and other 2,474 6,433 9,688 19,478
--------------- --------------- --------------- ---------------
Total operating revenue 20,298 54,242 75,473 152,989
--------------- --------------- --------------- ---------------
Operating costs
Newsprint 1,895 6,022 7,552 17,242
Compensation costs 7,319 18,291 28,151 51,926
Other operating costs 7,077 16,117 25,297 43,875
Depreciation and amortization 1,893 5,212 7,198 14,373
--------------- --------------- --------------- ---------------
Total operating costs 18,184 45,642 68,198 127,416
--------------- --------------- --------------- ---------------
Operating income, excluding infrequent items $ 2,114 $ 8,600 $ 7,275 $ 25,573
=============== =============== =============== ===============
U.K. Newspaper Group
Operating revenue
Advertising $ 81,604 $ 80,586 $ 269,133 $ 270,542
Circulation 39,363 41,251 118,775 121,646
Job printing and other 6,467 5,348 19,234 14,582
--------------- --------------- --------------- ---------------
Total operating revenue 127,434 127,185 407,142 406,770
--------------- --------------- --------------- ---------------
Operating costs
Newsprint 23,466 24,729 72,728 76,699
Compensation costs 22,660 20,203 67,343 65,013
Other operating costs 70,731 68,764 200,750 203,955
Depreciation and amortization 4,658 4,942 14,326 14,480
--------------- --------------- --------------- ---------------
Total operating costs 121,515 118,638 355,147 360,147
--------------- --------------- --------------- ---------------
Operating income, excluding infrequent items $ 5,919 $ 8,547 $ 51,995 $ 46,623
=============== =============== =============== ===============
Canadian Newspaper Group
Operating revenue
Advertising $ 186,526 $ 174,917 $ 593,312 $ 577,676
Circulation 54,867 54,261 164,933 167,389
Job printing and other 13,611 9,617 40,308 34,066
--------------- --------------- --------------- ---------------
Total operating revenue 255,004 238,795 798,553 779,131
--------------- --------------- --------------- ---------------
Operating costs
Newsprint 35,531 33,220 103,955 107,338
Compensation costs 104,579 96,465 311,130 297,110
Other operating costs 94,050 68,072 272,371 220,505
Depreciation and amortization 19,384 14,234 56,674 42,576
--------------- --------------- --------------- ---------------
Total operating costs 253,544 211,991 744,130 667,529
--------------- --------------- --------------- ---------------
Operating income, excluding infrequent items $ 1,460 $ 26,804 $ 54,423 $ 111,602
=============== =============== =============== ===============
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Percentage Percentage Percentage Percentage
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Chicago Group
Operating revenue
Advertising 75.2% 74.3% 75.0% 74.0%
Circulation 20.9% 22.0% 21.0% 22.2%
Job printing and other 3.9% 3.7% 4.0% 3.8%
--------------- --------------- ---------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
--------------- --------------- ---------------- ---------------
Operating costs
Newsprint 16.4% 18.9% 17.3% 18.6%
Compensation costs 38.7% 39.9% 38.3% 39.1%
Other operating costs 30.6% 28.1% 28.7% 28.2%
Depreciation and amortization 5.0% 5.4% 5.0% 5.3%
--------------- --------------- ---------------- ---------------
Total operating costs 90.7% 92.3% 89.3% 91.2%
--------------- --------------- ---------------- ---------------
Operating income, excluding infrequent items 9.3% 7.7% 10.7% 8.8%
=============== =============== ================ ===============
Community Group
Operating revenue
Advertising 58.7% 64.6% 59.7% 63.6%
Circulation 29.1% 23.5% 27.5% 23.7%
Job printing and other 12.2% 11.9% 12.8% 12.7%
--------------- --------------- ---------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
--------------- --------------- ---------------- ---------------
Operating costs
Newsprint 9.3% 11.1% 10.0% 11.3%
Compensation costs 36.1% 33.7% 37.3% 33.9%
Other operating costs 34.9% 29.7% 33.5% 28.7%
Depreciation and amortization 9.3% 9.6% 9.5% 9.4%
--------------- --------------- ---------------- ---------------
Total operating costs 89.6% 84.1% 90.3% 83.3%
--------------- --------------- ---------------- ---------------
Operating income, excluding infrequent items 10.4% 15.9% 9.7% 16.7%
=============== =============== ================ ===============
U.K. Newspaper Group
Operating revenue
Advertising 64.0% 63.4% 66.1% 66.5%
Circulation 30.9% 32.4% 29.2% 29.9%
Job printing and other 5.1% 4.2% 4.7% 3.6%
--------------- --------------- ---------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
--------------- --------------- ---------------- ---------------
Operating costs
Newsprint 18.4% 19.4% 17.9% 18.9%
Compensation costs 17.8% 15.9% 16.5% 16.0%
Other operating costs 55.5% 54.1% 49.3% 50.1%
Depreciation and amortization 3.7% 3.9% 3.5% 3.6%
--------------- --------------- ---------------- ---------------
Total operating costs 95.4% 93.3% 87.2% 88.6%
--------------- --------------- ---------------- ---------------
Operating income, excluding infrequent items 4.6% 6.7% 12.8% 11.4%
=============== =============== ================ ===============
Canadian Newspaper Group
Operating revenue
Advertising 73.2% 73.2% 74.3% 74.1%
Circulation 21.5% 22.8% 20.7% 21.5%
Job printing and other 5.3% 4.0% 5.0% 4.4%
--------------- --------------- ---------------- ---------------
Total operating revenue 100.0% 100.0% 100.0% 100.0%
--------------- --------------- ---------------- ---------------
Operating costs
Newsprint 13.9% 13.9% 13.0% 13.8%
Compensation costs 41.0% 40.4% 39.0% 38.1%
Other operating costs 36.9% 28.5% 34.1% 28.3%
Depreciation and amortization 7.6% 6.1% 7.1% 5.6%
--------------- --------------- ---------------- ---------------
Total operating costs 99.4% 88.9% 93.2% 85.8%
--------------- --------------- ---------------- ---------------
Operating income, excluding infrequent items 0.6% 11.1% 6.8% 14.2%
=============== =============== ================ ===============
</TABLE>
17
<PAGE> 20
GROUP OPERATING RESULTS
CHICAGO GROUP
Revenue for the Chicago Group was $96.5 million for the third quarter of 1999,
an increase of 4.8% over 1998. Revenue for the nine months ended September 30,
1999 compared to 1998 increased 3.1% to $289.1 million. Advertising revenue for
the third quarter and first nine months of 1999 increased 6.0% and 4.4%,
respectively over the same period in the prior year. Classified advertising
showed the largest increases followed by national advertising. Circulation
revenue for the third quarter and first nine months of 1999 decreased 0.7% and
2.6%, respectively from the same periods in the prior year. The third quarter
decrease is due to volume decreases while the year to date decrease is primarily
a result of both unusual competitive pricing in the market and a decrease in
volume.
EBITDA, excluding infrequent items, in the third quarter of 1999 increased 14.1%
over 1998. EBITDA, excluding infrequent items, for the nine months ended
September 30, 1999 was $45.4 million, an increase of 15.1% over 1998. Operating
income, excluding infrequent items, for the third quarter and first nine months
of 1999 increased 26.9% and 25.3%, 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 prices in the
third quarter of 1999 declined approximately 14% at the Chicago Sun-Times
compared to the same period in the prior year. Other operating costs, excluding
infrequent items, as a percentage of revenues were 30.6% for the third quarter
of 1999 compared to 28.1% in 1998. The increase is due in part to the timing of
promotional expenditures. Other operating costs, excluding infrequent items, as
a percentage of revenues for the nine months ended September 30, 1999 were 28.7%
compared to 28.2% for the respective period in 1998.
COMMUNITY GROUP
The overall decrease in Community Group operating revenues, EBITDA and operating
income is due to the sales of community newspapers during both 1999 and 1998.
Revenue attributable to the newspapers sold was $17.3 million for the nine
months ended September 30, 1999 and $100.3 million in 1998. On a "same store"
basis, the Community Group revenues and EBITDA were $12.8 million and $3.4
million for the third quarter of 1999 compared to $12.7 million and $2.9 million
in 1998. For the nine months ended September 30, 1999, on a "same store" basis,
the Community Group revenue and EBITDA were $37.5 million and $10.1 million
compared to $37.0 million and $8.7 million in 1998. This improvement results
from slightly increased revenue, as well as a 16% reduction in newsprint prices
during the third quarter of 1999 versus the same period in 1998. The nine-month
period improvement is driven by the same factors.
18
<PAGE> 21
U.K. NEWSPAPER GROUP
Third quarter operating revenue for the U.K. Newspaper Group was $127.4 million
in 1999 compared to $127.2 million in 1998. Operating revenue for the nine
months ended September 30, 1999 was $407.1 million compared to $406.8 million in
1998. The results were affected by fluctuations in foreign exchange rates. In
pounds sterling, operating revenue for the third quarter of 1999 increased 3.5%
and for the nine months ended September 30, 1999 increased 2.4%. Revenue
increased primarily due to increased advertising revenue in all areas except
recruitment. Other operating revenue, in pounds sterling, increased 25.2% for
the third quarter 1999 and 35.3% for the first nine 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 18.5% for the third quarter
1999 from 1998. The decrease in EBITDA is primarily due to the timing of
promotional expenditures and additional editorial costs for new sections. For
the nine months ended September 30, 1999, EBITDA in pounds sterling increased
11.1%. Newsprint expense decreased in the third quarter and first nine months of
1999 both compared with 1998 primarily due to lower newsprint prices. For the
third quarter and the nine months ended September 30, compensation costs, as a
percentage of revenues, were 17.8% and 16.5%, respectively in 1999 compared to
15.9% and 16.0%, respectively, in 1998. The increase in compensation costs is
primarily due to additional editorial staff added for the new sections and for
product improvement. Other operating costs as a percentage of revenues increased
to 55.5% for the third quarter of 1999 from 54.1% in 1998. Other operating costs
as a percentage of revenues decreased to 49.3% for the nine months ended
September 30, 1999 from 50.1% in 1998. The fluctuation in other operating costs
is due to the timing of promotional expenditures and the additional editorial
costs.
CANADIAN NEWSPAPER GROUP
Third quarter operating revenue for the Canadian Newspaper Group was $255.0
million in 1999 compared to $238.8 million in 1998. Operating revenue for the
nine months ended September 30, 1999 was $798.6 million compared to $779.1
million in 1998. EBITDA, excluding infrequent items, for the third quarter and
first nine months of 1999 was $20.8 million and $111.1 million, respectively,
compared to $41.0 million and $154.2 million, respectively, in 1998. Operating
income, excluding infrequent items, for the third quarter and first nine months
of 1999 was $1.5 million and $54.4 million, respectively, compared to $26.8
million and $111.6 million, respectively, in 1998.
The reported operating results for 1999 and 1998 are not readily comparable as a
result of acquisitions, a start-up and disposals in 1998. 1998 included the
results of operations in Hamilton, Kitchener, Cambridge, Guelph, Medicine Hat
and at American Trucker, which were sold during 1998. 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 third quarter 1999 operating revenue was $228.6
million compared to $213.4 million in 1998, an increase of 7.1% and third
quarter 1999 EBITDA was $37.4 million compared to $38.8 million in 1998. On a
"same store" basis, for the nine months ended September 30, 1999 operating
revenue was $711.7 million compared to $697.3 million in 1998, an increase of
2.1% and EBITDA was $144.6 million compared to $141.5 million in 1998.
19
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital consists of current assets less current liabilities. At
September 30, 1999, there was a working capital deficiency of $181.7 million
compared to a deficiency of $141.7 million at December 31, 1998. Current assets
were $405.7 million at September 30, 1999 compared with $469.9 million at
December 31, 1998. Current liabilities, excluding debt obligations, were $444.2
million at September 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 $1.63 billion at September
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 sales of community newspaper properties and the proceeds
from the sale of Partnership units.
BANK CREDIT FACILITY
On April 30, 1999, Publishing, HCPH, the Telegraph Group Limited, Southam, HIF
Corp. 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 replaced 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.
On June 4, 1999 the revolving credit line was increased by $50.0 million. On
September 30, 1999 the Restated Credit Facility was increased to $875.0 million
when the revolving credit line and the term loan were each increased by $50.0
million.
20
<PAGE> 23
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
$48.7 million for the third quarter of 1999 compared with $79.4 million for the
third quarter 1998 and $236.0 million for the nine months ended September 30,
1999 compared to $293.0 million in 1998. 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 $65.7 million for the third
quarter of 1999 compared to $67.2 million in 1998 and $267.7 million for the
nine months ended September 30, 1999 compared to $250.7 million in 1998.
CASH FLOWS
Cash flows from operating activities were $28.8 million for the nine months
ended September 30, 1999, compared with $38.6 million in 1998.
Cash flows used in investing activities were $3.7 million in 1999 and $19.7
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. The acquisition of the Financial Post and the acquisition
of additional shares of Southam offset the inflows in 1998.
Cash flows used in financing activities were $43.9 million in 1999 and $38.4
million in 1998.
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. At September
30, 1999, the total amount of funds that would be unrestricted for the payment
of dividends by Publishing under its debt instruments would, under the more
restrictive provisions, have been approximately $275.3 million. The foregoing
calculation is based on the sum of the following for the period October 1, 1998
to September 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
21
<PAGE> 24
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 was formed, with
all major business segments involved. Exposure to this issue differs
considerably from subsidiary to subsidiary. The Company has already made all of
the necessary significant modifications, has tested extensively and will
continue to test systems. Community Group modifications and testing are almost
complete, while at the Chicago Group, primarily the Chicago Sun-Times, the
significant portion of the necessary changes were completed during the third
quarter of 1999 with final testing and verification to be completed during the
fourth 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 has and
will be developing contingency plans related thereto. The Company continues to
communicate 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, the Year 2000 problem will not pose significant
operational difficulties for the Company. It is not anticipated that any
remaining software modifications or replacements 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 $16.0 million, of which approximately $14.0 million, was expended by the
end of the third quarter 1999. Funding for remediation efforts has and will
continue to 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.
22
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NEWSPRINT Newsprint prices continued to fluctuate and on a consolidated
basis newsprint expense amounted to $234.3 million in 1999 and $253.4 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 nine months ended September 30, 1999 and based on properties and ownership
levels at September 30, 1999, a change in the price of newsprint of $50 per ton
would increase or decrease year to date net earnings by about $13.6 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
September 30, 1999 which is subject to floating interest rates and September 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 $3.8 million. The Company has $1.62 billion of
interest bearing debt at September 30, 1999 of which approximately 50% was
floating rate.
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 $1.61/(pound) $900,000
Canada $0.67/Cdn.$ $3,400,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
ELECTRONIC MEDIA Management holds the view that newspapers will
continue to be an important business segment. Alternate forms of information
delivery, advertising sales and e-commerce, that could impact 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. In addition to the strength of many of our newspaper
titles, management believes that we will have the ability to leverage those
strengths into profitable joint ventures and other opportunities in the
electronic media area.
23
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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: November 12, 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> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 61,163 91,468
<SECURITIES> 0 0
<RECEIVABLES> 315,302 278,566
<ALLOWANCES> 15,725 22,514
<INVENTORY> 25,583 48,984
<CURRENT-ASSETS> 405,747 320,639
<PP&E> 1,108,150 1,021,743
<DEPRECIATION> 415,177 402,027
<TOTAL-ASSETS> 3,441,082 3,219,649
<CURRENT-LIABILITIES> 444,194 451,241
<BONDS> 1,630,861 1,448,644
13,355 39,702
0 0
<COMMON> 1,131 1,090
<OTHER-SE> 911,629 820,416
<TOTAL-LIABILITY-AND-EQUITY> 3,441,082 3,219,649
<SALES> 499,215 512,303
<TOTAL-REVENUES> 499,215 512,303
<CGS> 0 0
<TOTAL-COSTS> 481,243 462,305
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,790 26,619
<INCOME-PRETAX> (1,165) 114,409
<INCOME-TAX> (2,852) 59,038
<INCOME-CONTINUING> 86 17,529
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 86 17,529
<EPS-BASIC> (0.02) (0.06)
<EPS-DILUTED> (0.02) (0.06)
</TABLE>
