-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RUEbCb7Kb1LnuUGeO4Nwl0XiX2MnLHBMCFFjGVOjAeJZ4h2iTqG/2BF2aYeFKh39 zmIePFS8yNLIIywHfrm9gQ== 0000950137-99-000787.txt : 19990403 0000950137-99-000787.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950137-99-000787 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLINGER INTERNATIONAL INC CENTRAL INDEX KEY: 0000868512 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 953518892 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14164 FILM NUMBER: 99583548 BUSINESS ADDRESS: STREET 1: 401 N WABASH AVE STREET 2: STE 740 CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3123212299 MAIL ADDRESS: STREET 1: 401 NORTH WABASH AVE STREET 2: SUITE 740 CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PUBLISHING COMPANY DATE OF NAME CHANGE: 19940204 10-K405 1 FORM 10-K405 DATED 12/31/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] 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 (I.R.S. Employer Identification Number) of incorporation or organization) 401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611 - ----------------------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (312) 321-2299 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS: WHICH REGISTERED: - -------------------- ----------------- Class A Common Stock par value $.01 per share New York Stock Exchange 9 1/4% Senior Subordinated Notes due 2006 New York Stock Exchange 9 3/4% Preferred Redeemable Increased Dividend New York Stock Exchange Equity Securities 8 5/8% Senior Notes due 2005 New York Stock Exchange 9 1/4% Senior Subordinated Notes due 2007 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None 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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[x] The aggregate market value of Class A Common Stock held by non-affiliates as of March 22,1999, was approximately $573,171,000. As of such date, non-affiliates held no shares of Class B Common Stock. There is no active market for the Class B Common Stock. The number of outstanding shares of each class of the registrant's common stock as of March 22, 1999, was as follows: 94,538,723 shares of Class A Common Stock and 14,990,000 shares of Class B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT LOCATION - -------- -------- Proxy Statement for 1998 Annual Meeting of Stockholders filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.................................................Part III 2 HOLLINGER INTERNATIONAL INC. 1998 FORM 10-K -------------- PART I PAGE ---- Item 1. Business.......................................................... 1 Item 2. Properties........................................................ 21 Item 3. Legal Proceedings................................................. 22 Item 4. Submission of Matters to a Vote of Security Holders............... 22 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 25 Item 6. Selected Financial Data........................................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 29 Item 7A. Quantitative and Qualitative Disclosure about Market Risk......... 44 Item 8. Financial Statements and Supplementary Data....................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 46 PART III Item 10. Directors and Executive Officers of the Registrant................ 47 Item 11. Executive Compensation............................................ 47 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 47 Item 13. Certain Relationships and Related Transactions.................... 47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 48 3 PART 1 ITEM 1. BUSINESS OVERVIEW Hollinger International Inc. (the "Company"), through subsidiaries and affiliated companies, is a leading publisher of English-language newspapers in the United States, the United Kingdom, Canada and Israel. Included among the 113 paid daily newspapers, which at December 31, 1998, the Company owned or had an interest in, are the Chicago Sun-Times, The Daily Telegraph and the Ottawa Citizen. These 113 newspapers had a worldwide daily combined circulation of approximately 4,468,000. In addition, the Company owned or had an interest in 349 non-daily newspapers as well as magazines and other publications. The Company's strategy is to achieve growth through acquisitions and improvements in the cash flow and profitability of its newspapers. Since the Company's formation in 1986, the existing senior management team has acquired over 400 newspapers and related publications (net of dispositions) in the United States, The Daily Telegraph in the United Kingdom, The Jerusalem Post in Israel, and has made significant investments in newspapers in Canada, including a controlling interest in Southam Inc. ("Southam"), Canada's largest newspaper publisher and the acquisition of the Canadian Newspapers in 1997 from Hollinger Inc. The operations of the Company consist of its United States Newspaper Group, its U.K. Newspaper Group, and Canadian Newspaper Group, which accounted for 27%, 25% and 48%, respectively, of the Company's total operating revenues of $2,197.8 million for the year ended December 31, 1998. Unless the context requires otherwise, all references herein to the "Company" mean Hollinger International Inc., its predecessors and combined subsidiaries, "Publishing" refers to Hollinger International Publishing Inc. and "Hollinger Inc." refers to Hollinger Inc. UNITED STATES NEWSPAPER GROUP The Company's United States operations consist of its Chicago Group, made up of three daily and 78 non-daily newspapers, including the Chicago Sun-Times, the eighth largest circulation metropolitan daily newspaper in the United States, and its Community Group, consisting of 166 newspapers and related publications. At December 31, 1998, the Company published a total of 241 newspapers and related publications in the United States consisting of 54 daily newspapers with a total paid circulation of approximately 1,093,000, 108 paid non-daily newspapers with a combined paid circulation of approximately 1,527,000 and 79 free circulation publications with a combined circulation of approximately 1,502,000, and a total combined circulation of approximately 4,122,000. For accounting and management purposes, the Community Group also includes the Company's wholly-owned subsidiary ("Jerusalem Post") which publishes The Jerusalem Post, Israel's most important English-language daily newspaper, with a paid daily circulation of approximately 14,000. The related weekend edition of The Jerusalem Post, including the English and French-language international weekly editions, have a combined paid circulation of approximately 128,600. The Chicago Group and the Community Group accounted for $379.2 million and $210.1 million, respectively, of the Company's total operating revenues for the year ended December 31, 1998. U.K. NEWSPAPER GROUP The Company's U.K. Newspaper Group consists of its wholly owned subsidiary, The Telegraph Group Limited and its consolidated subsidiaries ("The Telegraph"). The Telegraph publishes The Daily Telegraph, the leading quality daily newspaper in the United Kingdom. The Telegraph also publishes The Sunday Telegraph, The Weekly Telegraph, the Electronic Telegraph and The Spectator magazine. The Daily Telegraph is the largest circulation quality daily newspaper in the United Kingdom with an average daily circulation of approximately 1,064,000, representing a 37% share of the quality daily newspaper market. The Daily Telegraph's Saturday edition has the highest average daily circulation (approximately 1,208,000) among quality daily newspapers in the United Kingdom. The Sunday Telegraph is the second largest circulation quality Sunday newspaper in the United Kingdom with an average Sunday circulation of approximately 835,000. The Telegraph's operating revenues were $550.5 million for the year ended December 31, 1998. 4 CANADIAN NEWSPAPER GROUP At December 31, 1998, the Company's Canadian Newspaper Group consisted of the Canadian Newspapers and its 71.0% equity interest in Southam and its consolidated subsidiaries. During the first quarter of 1999, the Company acquired the remaining shares of Southam that it did not already own. During 1998, the Company increased its indirect interest in Southam from 58.6% to 71.0%. Southam has operations in newspaper publishing, and to a lesser extent, in business communications. Southam is Canada's largest publisher of daily newspapers with 34 daily newspapers and 72 non-daily newspapers with a total daily circulation of approximately 1,913,000. Southam's principal publications include the National Post, The Gazette (Montreal), The Ottawa Citizen, the Calgary Herald, The Vancouver Sun, The Province (Vancouver) and The Edmonton Journal. In addition, the Southam Magazine and Information Group publishes Canadian business magazines and tabloids for the automotive, trucking, construction, natural resources, manufacturing and other industries. Southam's operating revenues were $844.8 million for the year ended December 31, 1998. The Canadian Newspapers consist of 24 daily, 14 non-daily and 76 free distribution newspapers located in five provinces. Total paid daily circulation for the Canadian Newspapers is approximately 426,000. Canadian Newspapers' operating revenues were $213.2 million for the year ended December 31, 1998. PRIDES EXCHANGE In July 1998, pursuant to an exchange offer, 19,993,531 PRIDES were exchanged for 18,394,048 shares of Class A Common Stock, leaving 706,469 PRIDES outstanding. TOTAL RETURN EQUITY SWAP In August and September 1998, the Company entered into an arrangement with four banks, pursuant to which the banks purchased 12,640,305 shares of the Company's Class A Common Stock. 2,522,600 of these shares were purchased on the open market at an average price of $15.24 and 10,117,705 were purchased from affiliates of the Company at an average price of $13.88. The Company has the option during the second year following these purchases to buy the shares from the banks at the same cost or to have the banks resell those shares in the open market. In the latter case, any gain or loss realized by the banks will be for the Company's account. Until the Company purchases the shares or the banks resell them, dividends paid on the shares belong to the Company and the Company pays interest to the banks at the rate of LIBOR plus 1.25%. If the Company's stock price falls below the average purchase price of these shares, the Company is required to deposit cash or shares into an escrow account as additional security. SHARE REPURCHASES The Company continues to repurchase shares of Class A Common Stock on the open market. During 1998, the Company purchased 107,500 shares of Class A Common Stock. As of March 22, 1999, the Company had repurchased in 1999 an additional 2,362,400 shares of Class A Common Stock. OWNERSHIP BY HOLLINGER INC. At December 31, 1998, Hollinger Inc. directly and indirectly owned 41.3% of the combined equity interest and 73.9% of the combined voting power of the outstanding Class A Common Stock and Class B Common Stock of the Company (without giving effect to the future issuance of Class A Common Stock in connection with the Company's remaining PRIDES or upon conversion of the Company's Series C Preferred Stock or remaining Series D Preferred Stock or the Special Shares of HCPH as defined in Note 6 of the Consolidated Financial Statements). As a result, Hollinger Inc. will continue to be able to control the outcome of any election of directors and to direct management policy, strategic direction and financial decisions of the Company and its subsidiaries. Hollinger Inc. owns all of the outstanding Series C Preferred Stock which shall convert automatically on June 1, 2001 pursuant to the conversion formula set forth in its Certificate of Designations and Series D Preferred Stock of the Company, 2 5 which is convertible at any time into shares of Class A Common Stock at the initial conversion price of the Canadian dollar equivalent of $14 per share. During 1998, 408,551 shares of Series D Preferred Stock were converted into 2,795,165 shares of Class A Common Stock and these shares were purchased by a group of banks pursuant to the Total Return Equity Swap described above. In February 1999, 196,823 shares of Series D Preferred Stock were redeemed for cash leaving 134,126 shares of Series D Preferred Stock outstanding. Based on the foreign exchange rates in effect, 931,642 shares of Class A Common Stock would have been issuable as of March 22, 1999 on conversion of the Series D Preferred Stock. Hollinger Inc. is effectively controlled by The Hon. Conrad M. Black, Chairman of the Board and Chief Executive Officer of Hollinger Inc. and of the Company, through his direct and indirect ownership and control of Hollinger Inc.'s securities. Mr. Black has advised the Company that Hollinger Inc. does not presently intend to reduce its voting power in the Company's outstanding Common Stock to less than 50%. Furthermore, Mr. Black has advised the Company that he does not presently intend to reduce his voting control over Hollinger Inc. such that a third party would be able to exercise effective control over it. COMMUNITY GROUP SALES In January 1998, the Company completed the sale of 80 community newspapers for proceeds of $310.0 million. In February 1999, the Company sold 45 community newspapers for approximately $472.0 million of which approximately $456.0 million was cash. On a pre-tax basis, the sales generated capital gains of $201.2 million and approximately $241.0 million, respectively. GENERAL The Company was incorporated in the State of Delaware on December 28, 1990 and its wholly owned subsidiary, Hollinger International Publishing Inc. ("Publishing") was incorporated in the State of Delaware on December 12, 1995. Each of the Company and Publishing has its executive offices at 401 North Wabash Avenue, Chicago, Illinois 60611, telephone number (312) 321-2299. 3 6 BUSINESS STRATEGY The Company's strategy for achieving growth in its newspaper business is based on achieving two principal objectives: improvements in the cash flow and profitability of its newspapers principally through cost reductions and revenue enhancement and growth through acquisitions. The approach of both the Company and Hollinger Inc. to improving profitability typically includes measures to reduce costs, improve efficiency and enhance product quality, including the visual quality of printed pages. The Company's newspaper operating strategy in the Community Group has been to operate newspapers in regional clusters where feasible. This enables the Company to market advertising on a regional basis and allows for regionalized management that results in cost savings from reduction in overhead, centralized purchasing and, to the extent practicable, regionalized printing. The Company intends to generate additional cost savings opportunities through operating efficiencies and automation in the Community Group. Further, improvements in profitability at properties acquired during the past three years will be emphasized. In Chicago, the focus on overall cost reduction will continue. Significant emphasis on increasing circulation at the Chicago Sun-Times and the continued focus on deploying human resources to sales and marketing, both locally through a combined network of all Chicago Group newspapers, and nationally by bringing national salesmen in-house and opening national sales offices in major business centers. In addition, efficiencies through automation and an upgrade of printing facilities are planned. The focus for The Daily Telegraph will continue to be to retain its circulation dominance in its market and to increase the resulting advertising revenue. The successful prepaid subscription program will continue, albeit at higher subscription prices than the initial introductory offer. The Company will continue to focus on maintaining and increasing the circulation increase for The Sunday Telegraph. Operationally, continued efficiencies in producing the newspapers through joint ventures in West Ferry Printers and Trafford Park Printers are expected. Through its new joint venture with Express Newspapers, Newsprint Management and Supply Services, Ltd. ("NMSS"), The Telegraph expects to realize efficiencies in the control of waste with a resulting decrease in newsprint costs. The Company intends to continue its current efforts at the Canadian Newspapers to improve the profitability of the papers through the centralization of newsprint purchasing and certain other functions, such as accounting and personnel. The Company intends to coordinate, to the extent practicable, its newsprint purchases for its United States newspapers with those of the Canadian newspapers. To achieve greater product quality and cost reductions, the Company, where justified by economic and operational criteria, may regionalize production operations at its Canadian community newspapers and may explore the feasibility of such regionalization with Southam's newspaper operations in Canada. The Company also intends to enhance advertising and circulation revenues by focusing on the natural circulation and readership advantages of the particular newspapers. Southam intends to continue to improve profitability of its newspapers, magazines and other publications through the implementation of the previously announced labor cost reduction program, the decentralization of certain administrative and corporate functions, and enhancements to editorial and product quality. In October 1998, Southam launched the National Post, which suffered operating losses; however, increases in advertising revenue and circulation revenue are expected in 1999, which will reduce the level of operating losses. By the end of 1998 Southam had made significant progress in its staff reduction plan announced in 1995 which included the elimination of 750 positions and the write-down of redundant assets at its Pacific Press facility in Vancouver, including printing equipment and other operating assets. New printing equipment at Pacific Press, which became operational in 1997, has improved product print quality and is expected to continue to reduce labor and other operating costs. In addition, Southam's business strategy includes improvement of circulation and advertising revenues by focusing on the natural circulation or readership advantages of each newspaper and improvement in its newsprint purchase agreements by coordinating, to the extent practicable, its newsprint purchases with that of the Company. The Company also intends to explore with Southam possible regional printing arrangements between Southam's various newspapers located in different communities throughout Canada and the Canadian Newspapers. 4 7 The Company remains vigilant for the opportunity to purchase newspapers that are underperforming in terms of cash flow but have a long history of publishing within a community, possess strong readership and advertiser loyalty; and have the potential for increased gross operating profit through cost reductions, revenue enhancements and synergies with the Company's existing operations; and are available at attractive prices. The Company expects that its future acquisitions in the United States and Canada will be principally of community newspapers; however, the Company may consider the acquisition of selected larger circulation publications that meet the Company's acquisition criteria. The Company and Hollinger Inc. have historically agreed that the Company will be Hollinger Inc.'s principal vehicle for engaging in and effecting acquisitions in the newspaper business and in related media businesses in the United States, Israel and, through The Telegraph, the United Kingdom and the rest of the European Community. Hollinger Inc. reserved the ability to pursue all media (including newspaper) acquisition opportunities outside those areas, and all media acquisition opportunities unrelated to the newspaper business throughout the world. RISKS Certain statements contained in this report under various sections, including but not limited to "Business Strategy" and "Management's Discussion and Analysis", are forward-looking statements that involve risks and uncertainties. Such statements are subject to the following important factors, among others, which in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the first quarter of 1999, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company: - - International Holding Company Structure - The Company is an international holding company and its assets consist solely of investments in its subsidiaries and affiliated companies. As a result, the Company's ability to meet its future financial obligations is dependent upon the availability of cash flows from its United States and foreign subsidiaries through dividends, intercompany advances, management fees and other payments. Similarly, the Company's ability to pay dividends on its common stock, its preferred stock or its PRIDES may be limited as a result of its dependence upon the distribution of earnings of its subsidiaries and affiliated companies. The Company's subsidiaries and affiliated companies are under no obligation to pay dividends and, in the case of Publishing, and its principal United States and foreign subsidiaries, are subject to statutory restrictions and restrictions in debt agreements that limit their ability to pay dividends. Substantially all of the shares of the subsidiaries of the Company have been pledged to lenders of the Company. The Company's right to participate in the distribution of assets of any subsidiary or affiliated company upon its liquidation or reorganization will be subject to the prior claims of the creditors of such subsidiary or affiliated company, including trade creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary or affiliated company. - - Growth Strategy - The Company's strategy is to achieve growth through acquisitions and improvements in the cash flow and profitability of its newspapers, principally through cost reductions. The Company's growth strategy presents risks inherent in assessing the value, strengths and weaknesses of acquisition opportunities, in evaluating the costs of new growth opportunities at existing operations and in managing the numerous publications it has acquired and improving their operating efficiency. While the Company believes that there are significant numbers of potential acquisition candidates, the Company is unable to predict the number or timing of future acquisition opportunities or whether any such opportunities will meet the Company's acquisition criteria or, if such acquisitions occur, whether the Company will be able to achieve improved operating efficiencies or enhanced profitability. In addition, the Company's acquisition strategy is largely dependent on the Company's ability to continue to obtain financing on acceptable terms. - - Restrictions in Debt Agreements and Other Restrictive Arrangements - The Company and its subsidiaries have substantial leverage and substantial debt service obligations as well as obligations under the preferred stock of the Company and the PRIDES. The instruments governing the terms of the principal indebtedness and redeemable preferred stock of the Company, Publishing and its principal United States and foreign subsidiaries contain various covenants, events of default and other provisions that could limit the financial flexibility of the Company, including the payment of dividends with respect to outstanding common stock and preferred stock and the implementation of its growth strategy. 5 8 - - Cyclicality of Revenues - Advertising and, to a lesser extent, circulation revenues of the Company, as well as those of the newspaper industry in general, are cyclical and dependent upon general economic conditions. Historically, increases in advertising revenues have corresponded with economic recoveries while decreases, as well as changes in the mix of advertising, have corresponded with general economic downturns and regional and local economic recessions. The Company believes, however, that the geographic diversity of its global operations may mitigate, to some degree, the effects of an economic downturn in any particular market served by the Company. - - Newsprint Costs - Newsprint represents the single largest raw material expense of the Company's newspapers throughout the world and, together with employee costs, is one of the most significant operating costs. Newsprint costs vary widely from time to time. For example, newsprint cost increased approximately 40% per metric ton in 1995 on an industry-wide basis, and the average cost per metric ton of newsprint was substantially higher in the first half of 1996 than in the first half of 1995. However, newsprint costs decreased significantly in the second half of 1996, continued to decline through the second quarter of 1997 and increased slightly in the second half of 1997. Newsprint prices increased slightly through 1998; however, the Company expects newsprint prices will remain more stable for the next year than they were through 1996. Although the Company has implemented measures in an attempt to offset a rise in newsprint prices, such as reducing page width and managing its return policy, price increases have had an adverse effect on the Company's results of operations. - - Foreign Operations and Currency Exchange Rates - Operations outside of the United States accounted for approximately 73.2% of the Company's operating revenues and approximately 75.3% of the Company's operating income for the year ended December 31, 1998. Generally, the Company does not hedge against foreign currency exchange rate risks except through borrowings in those currencies. As a result, the Company may experience economic loss and a negative impact on earnings with respect to its investments and on dividends from its foreign subsidiaries, solely as a result of currency exchange rate fluctuations. - - Newspaper Industry Competition - Revenues in the newspaper industry are dependent primarily upon advertising revenues and paid circulation. Competition for advertising and circulation revenue comes from local and regional newspapers, radio, broadcast and cable television, direct mail, and other communications and advertising media that operate in the Company's markets. The extent and nature of such competition is, in large part, determined by the location and demographics of the markets and the number of media alternatives in those markets. Some of the Company's competitors are larger and have greater financial resources than the Company. For example, in the Chicago metropolitan area, the Chicago Sun-Times competes with a large established metropolitan daily and Sunday newspaper that is the fifth largest metropolitan daily and Sunday newspaper in the United States. In the United Kingdom, The Daily Telegraph competes with other national newspapers, principally The Times, which over the past several years has from time to time substantially reduced its cover price in an effort to increase its circulation. The Telegraph has met this competition and has from time to time engaged in its own price reduction or promotional initiatives. Electronic media is becoming a larger factor in newspaper industry competition. 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 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. 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. These competitive activities can and have from time to time had an adverse effect on revenues and operating costs. 6 9 UNITED STATES NEWSPAPER GROUP CHICAGO GROUP The Chicago Group consists of The Sun-Times Company which, with its subsidiaries (the "Chicago Sun-Times"), publishes the Chicago Sun-Times, presently the eighth largest metropolitan daily newspaper in the United States, two suburban daily and 78 suburban weekly and biweekly newspapers in the Chicago area and the Post Tribune in Gary, Indiana. The Chicago Sun-Times, which has an average daily paid circulation of approximately 486,400 and is published in a tabloid format, has the largest daily circulation in Cook County, Illinois, which includes the City of Chicago. The suburban papers include Pioneer Newspapers Inc. ("Pioneer Press") which currently publishes 49 weekly newspapers in Chicago's north and northwest suburbs, and Midwest Suburban Publishing Inc. ("Midwest Suburban Publishing") which currently publishes the Daily Southtown, one weekly newspaper, 20 biweekly newspapers and five free distribution papers in Chicago's south and southwest suburbs. SOURCES OF REVENUE. The following table sets forth the sources of revenue and the percentage such sources represent of total revenues for the Chicago Group during the past three years. YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 --------------------------------------------------- (DOLLARS IN THOUSANDS) Advertising........ $281,615 74% $ 243,301 71% $ 228,676 69% Circulation........ 82,534 22 79,574 23 80,693 24 Job printing and other....... 14,960 4 18,493 6 24,263 7 --------------------------------------------------- Total............. $379,109 100% $ 341,368 100% $ 333,632 100% =================================================== ADVERTISING Substantially all advertising revenues are derived from local and national retailers and classified advertisers. Advertising rates and rate structures vary among the publications and are based, among other things, on circulation, penetration and type of advertising (whether classified, national or retail). In 1998, retail advertising accounted for the largest share of advertising revenues (48%), followed by classified (38%) and national (14%). The Chicago Sun-Times offers a variety of advertising alternatives, including full-run advertisements, geographically zoned issues, special interest pull-out sections and advertising supplements in addition to regular sections of the newspaper targeted to different readers, such as arts, food, real estate, TV listings, weekend, travel and special sections. The Chicago area suburban newspapers also offer weekly both separate and special sections. Management has also developed the Sun-Times Newspaper Network, an advertising vehicle that can reach the combined readership base of the Chicago Sun-Times and the Chicago area suburban newspapers, including the Daily Southtown. CIRCULATION Circulation revenues are derived from single copy newspaper sales made through retailers and vending racks and home delivery newspaper sales to subscribers. Approximately 66% of the copies of the Chicago Sun-Times sold in 1998 were single copy sales. Approximately 72% of 1998 circulation revenues of the Chicago area suburban newspapers were derived from subscription sales. The average paid daily and Sunday circulation of the Chicago Sun-Times is approximately 486,400 and 405,800, respectively, the daily and Sunday paid circulation of the Daily Southtown is approximately 50,200 and 59,400, respectively, the daily and Sunday paid circulation of the Gary Post-Tribune is approximately 62,800 and 67,300, respectively, and the aggregate non-daily paid and free circulation of the Chicago area suburban newspapers is approximately 306,600 and 525,300, respectively. 7 10 COMPETITION. Each of the Company's Chicago area newspapers competes in varying degrees with radio, television, direct marketing and other communications and advertising media as well as with other newspapers having local, regional or national circulation. The Chicago metropolitan region is comprised of Cook County and six surrounding counties and is served by six daily newspapers of which the Company owns two. The Chicago Sun-Times competes in the Chicago region with the Chicago Tribune, a large established metropolitan daily and Sunday newspaper, which is the fifth largest newspaper in the United States. In addition, the Chicago Sun-Times and other Chicago Group newspapers face competition from other newspapers published in adjacent or nearby locations and circulated in the Chicago metropolitan area market. EMPLOYEES AND LABOR RELATIONS. As of March 22, 1999, the Chicago Group employed approximately 3,300 employees (including approximately 800 part-time employees). Approximately 1,400 employees are represented by 15 collective bargaining units. Employee costs (including salaries, wages, fringe benefits, employment-related taxes and other direct employee costs) equaled approximately 38% of the Chicago Group's revenues in the year ended December 31, 1998. There have been no strikes or general work stoppages at any of the Chicago Group's newspapers in the past five years. The Chicago Group believes that its relationships with its employees are generally good. RAW MATERIALS. The basic raw material for newspapers is newsprint. Newsprint costs equaled approximately 19% of the Chicago Group's revenues in the year ended December 31, 1998. The newspaper industry has seen the cost of newsprint increase significantly since March of 1994. Newsprint prices began decreasing in the second quarter of 1996 and continued to decline through the first quarter of 1997. Newsprint prices increased slightly though the remainder of 1997 and continued to increase slightly during 1998. The Chicago Group is not dependent upon any single newsprint supplier and currently obtains newsprint from four principal suppliers. To ensure an adequate supply of newsprint, the Chicago Group has newsprint supply contracts with certain minimum purchase requirements. The Chicago Group, like other newspaper publishers, has not entered into any long-term fixed price newsprint supply contracts in the current environment of volatile newsprint costs. The Chicago Group believes that its sources of supply for newsprint are adequate for its anticipated needs. COMMUNITY GROUP The Community Group consists of smaller newspaper publications in the United States and Israel. The Community Group's United States daily newspapers have been published on average for almost 100 years and are typically the only paid daily newspapers of general circulation in their respective communities. Circulation for community newspapers range from 2,100 to 46,500 for paid dailies and from 800 to 52,700 for paid non-dailies. Generally, the Company's community newspapers combine news, sports and features with a special emphasis on local information and provide one of the primary sources of such community information for the towns in which they are distributed. In addition to reaching the local population through paid daily and non-daily community newspapers, the Company also publishes free circulation "total market coverage" publications, including shoppers, with limited or no news or editorial content. As a group, these publications provide the Company with a stable and established circulation within the communities they serve, which it believes provides an effective medium for advertisers to reach a significant portion of the households in these communities. On January 27, 1998, the Company completed the sale of 80 community newspapers. The newspapers sold had a daily circulation of approximately 240,000. In February 1999, the Company sold 45 U.S. community properties, which had a daily circulation of approximately 296,000. 8 11 SOURCES OF REVENUE. The following table sets forth the sources of revenue and the percentage that such sources represent of total revenues for the Community Group, including Jerusalem Post, during the past three years. YEAR ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ----------------------------------------------- (DOLLARS IN THOUSANDS) Advertising...... $135,216 64% $190,215 65% $174,652 64% Circulation...... 49,449 24 69,499 24 64,575 24 Job printing and other..... 25,442 12 32,551 11 34,513 12 ----------------------------------------------- Total........... $210,107 100% $292,265 100% $273,740 100% =============================================== ADVERTISING. Substantially all of the United States community newspaper advertising revenues in 1998 were derived from local retailers and classified advertisers, which management believes are less subject to fluctuation than national advertising. Advertising rates and rate structures vary among the publications and are based, among other things, on circulation penetration and type of advertising (whether classified, display, or retail). In 1998, United States local and regional advertising accounted for the largest share of advertising revenues (54%), followed by classified (24%), preprinted inserts (18%) and national (4%). Management intends to continue to develop new advertising revenue sources such as regional and national display advertising, co-op advertising, national classified advertising and other targeted advertising. The Company believes its existing sales, editorial and distribution resources provide it with significant cost advantages in developing new shoppers, other "total market coverage" and targeted publications in these markets. CIRCULATION. Circulation revenues are derived from home delivery sales of newspapers to subscribers and single copy sales made through retailers and vending racks. Approximately 79% of the 1998 United States community newspaper circulation revenue was derived from subscription sales. When possible subscription and single copy sales rates are increased in an effort to increase circulation revenues. Single copy cover prices currently range from 35(cent) to 75(cent). JOB PRINTING. Job printing revenues are derived from utilizing available press capacity for printing customers' orders for newspapers, fliers, retail store advertisements and real estate listings. The Company currently has a substantial number of printing customers and believes that its growth potential for job printing exists mainly in low volume (less than 100,000 copies) offset printing. COMPETITION. Each of the Company's community newspapers and total market coverage publications competes in varying degrees with radio, television, direct marketing and other communications and advertising media as well as with other newspapers having local, regional or national circulation. The Company also competes with other commercial printers for job printing orders. The Company's United States community publications are located in small towns which, for the most part, are not suburbs of larger cities but are either county seats or are located on significant transportation corridors. The Company's community dailies are typically the only paid daily newspapers of general circulation published in their respective communities. The Company believes that distribution of its total market coverage publications with nearly 100% penetration levels in conjunction with community daily or non-daily newspapers strengthens its competitive position in the relevant market areas. Some of the Company's dailies face competition from dailies published by others in adjacent or nearby locations and circulated in the markets where the Company publishes a newspaper. The Company's total market coverage publications, including shoppers, compete primarily with direct mail advertising, shared mail packages and other private advertising delivery services. The Company believes that because of its significant presence in the small towns served by its community publications, which are predominantly in rural areas, not close to metropolitan areas, and its established distribution network, it has been able to compete effectively. 9 12 EMPLOYEES AND LABOR RELATIONS. As of March 22, 1999, the Community Group employed approximately 3,300 employees (including approximately 1,100 part-time employees) at its community publications in the United States. Approximately 3% of these employees are represented by unions. Total Community Group employee costs (including salaries, wages, fringe benefits, employment-related taxes and other direct employee costs) equaled approximately 34% of the Community Group's revenues in fiscal year 1998. There have been no strikes or general work stoppages at any of the Company's community newspapers in the past five years. The Company believes that its relationships with its employees are generally good. RAW MATERIALS. The basic raw material for newspapers is newsprint. Newsprint costs equaled approximately 11% of revenues for the Community Group in 1998. The newspaper industry has seen the cost of newsprint increase significantly since March of 1994. Newsprint prices began decreasing in the second quarter of 1996 and continued to decline through first quarter of 1997. Newsprint prices increased slightly through the remainder of 1997 and continued with slight increases during 1998. The Community Group is not dependent upon any single newsprint supplier and does not have long-term fixed price contracts with newsprint suppliers for its community publications. It currently obtains newsprint from a number of suppliers, foreign and domestic. The Community Group believes that its newsprint sources of supply are adequate for its anticipated needs. JERUSALEM POST. At the time of acquisition by Hollinger Inc. in 1989, Jerusalem Post was suffering operating losses. Since then, a turnaround strategy has been implemented by senior officers of the Company and Jerusalem Post to reduce operating and labor costs and upgrade printing capability and the physical plant. In the years ended December 31, 1998, 1997, and 1996, Jerusalem Post had operating margins of 7.3%, 7.4%, and 10.8%, respectively. Over 39.0% of Jerusalem Post's revenues of $20.8 million in 1998 were derived from circulation, with 35.5% from job printing and other and 25.5% from advertising. Jerusalem Post derives a greater percentage of its revenues from job printing than the Company's United States newspapers. Jerusalem Post has entered into a long-term contract to print and bind copies of the "Golden Pages", Israel's equivalent of a "Yellow Pages" telephone directory. Newsprint costs relating to publication of The Jerusalem Post equaled approximately 8.5% of Jerusalem Post's revenues in 1998. Newsprint used in producing the "Golden Pages" is provided by the owners of that publication. Newspapers in Israel are required by law to obtain a license from the country's interior minister, who is authorized to restrain publication of certain information if, among other things, it may endanger public safety. To date, Jerusalem Post has not experienced any difficulties in maintaining its license to publish or been subject to any efforts to restrain publication. In addition, all written media publications in Israel are reviewed by Israel's military censor prior to publication in order to prevent the publication of information that could threaten national security. Such censorship is considered part of the ordinary course of business in the Israeli media and has not adversely affected Jerusalem Post's business in any significant way. MANAGEMENT ORGANIZATION The senior management of the United States Newspaper Group is responsible for developing operating strategies, approving business plans and significant capital expenditures, identifying acquisition opportunities, negotiating acquisitions and overseeing the integration of acquired newspapers and other newspapers into the Company. Financial management of the Company, including the arrangement of financing to fund acquisitions and working capital needs of the Company, accounting, payroll and other financial functions and newsprint purchases, are centralized and undertaken by corporate staff at the Company's principal executive offices in Chicago and its offices in Marion, Illinois. Each of the principal newspaper operations of the United States Newspaper Group has a separate management structure and team which is responsible for operational and editorial matters affecting the publications under their supervision. 10 13 UNITED STATES REGULATION Paid circulation newspapers that are delivered by second class mail are required to obtain permits from, and to file an annual statement of ownership and circulation with, the United States Postal Service. Free circulation publications such as shoppers are delivered to subscribers and non-subscribers both by mail and without the use of the mail. Second class mail costs in 1998 for the Company's community newspapers were $1.8 million, or 0.9% of the Community Group's revenues, and third class mail costs were $2.5 million in 1998, or 1.2% of that group's revenues. Second class mail costs in 1998 for the Chicago Group were $1.8 million or 0.5% of the Chicago Group's revenues, and third class mail costs were $3.7 million or 1.0% of the Chicago Group's revenues. There is no significant regulation with respect to acquisitions of newspapers, other than filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 if certain threshold requirements under such act are satisfied. ENVIRONMENTAL The Company, in common with other newspaper companies engaged in similar operations, is subject to a wide range of federal, state and local environmental laws and regulations pertaining to air and water quality, storage tanks, and the management and disposal of wastes at its major printing facilities. These requirements are becoming increasingly more stringent. The Company believes that compliance with these laws and regulations will not have a material adverse effect on the Company. U.K. NEWSPAPER GROUP THE TELEGRAPH The Telegraph is the publisher of The Daily Telegraph, the leading quality newspaper in the United Kingdom, The Sunday Telegraph, The Weekly Telegraph, the Electronic Telegraph and The Spectator magazine. Its most important property, The Daily Telegraph, was launched in 1855 and is the largest circulation quality daily newspaper in the United Kingdom. As of December 31, 1998, The Daily Telegraph's average daily circulation of approximately 1,064,000 represents a 37% share of the quality daily national newspaper market, a substantially greater share than that of its nearest direct competitor. The Daily Telegraph's Saturday edition has the highest circulation (1,208,000 as of December 31, 1998) among quality daily newspapers in the United Kingdom. The Sunday Telegraph is the second largest circulation quality Sunday newspaper in the United Kingdom with a Sunday circulation of approximately 835,000 as of December 31, 1998. THE UNITED KINGDOM NATIONAL NEWSPAPER INDUSTRY. The newspaper market in the United Kingdom is segmented and, within each segment, highly competitive. The market segment in which The Daily Telegraph competes is generally known as the quality daily newspaper segment. This segment consists of all the broadsheets, and none of the tabloid daily newspapers. The Daily Telegraph and its competitors in this market segment appeal to the middle and upper end of the demographic scale. Newspapers in the United Kingdom differ from their counterparts in North America in several respects. First, they have substantially fewer pages. In 1998, The Daily Telegraph averaged 66 pages per issue, printed in one section on Tuesdays, Wednesdays and Fridays, two sections on Mondays and Thursdays, and eight sections plus a magazine and television guide on Saturdays. The Sunday Telegraph is published in five sections with one magazine. Second, pre-printed advertising inserts, which have been a major source of revenue growth in North America, are less common in the United Kingdom. Third, the advertising to news ratio in British newspapers is far lower. Fourth, British national newspapers more closely resemble North American magazines in that they have broad distribution and readership across the country and derive a much larger portion of their advertising revenue from national advertisers - unlike North American newspapers which, because of their relatively small geographical distribution, derive a substantial portion of their advertising from local advertisers. Finally, newspapers in the United Kingdom generally have charged higher cover prices, which in turn leads to higher circulation revenues than North American newspapers with similar circulation bases. However, since September 1993, when The Times first substantially reduced its cover price on its weekday newspaper, the national newspaper market in the United Kingdom has experienced intense cover price competition. 11 14 SOURCES OF REVENUE. The following table sets forth the sources of revenue and their percentage of total revenues for the Telegraph during the past three years.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------- (IN THOUSANDS OF BRITISH POUNDS STERLING) Advertising...... (pound) 221,167 66% (pound) 204,498 68% (pound) 177,997 62% Circulation...... 98,488 30 82,917 28 100,258 35 Other............ 12,403 4 12,232 4 9,863 3 ------------------------------------------------------------------- Total............ (pound) 332,058 100%(pound) 299,647 100%(pound) 288,118 100% ===================================================================
- --------------------------- (1) Financial data is in accordance with U.K. GAAP. ADVERTISING. Advertising is the largest source of revenue at The Telegraph, representing approximately 66% of newspaper revenue in 1998. The Telegraph's display advertising strengths are in the automobile and travel sections. Display advertising revenue increased to (pound)107.3 million in 1998 from (pound)99.4 million in 1997. Financial advertising markets increased by 13% in 1998 and The Daily Telegraph is holding its market leadership position in terms of volume. Financial advertising revenue at the Telegraph increased to (pound)24.5 million in 1998, compared with (pound)21.4 million in 1997. Advertising in The Daily Telegraph's Saturday Magazine was (pound)26.1 million in 1998 compared to (pound)23.6 million in 1997, an increase of 11%. Advertising in The Sunday Telegraph Magazine was (pound)9.8 million in 1998 compared to (pound)7.5 million in 1997. The level of classified advertisements, especially recruitment advertisements, fluctuates with the economy. The Telegraph's revenue from this source increased to (pound)67.7 million in 1998 compared with (pound)67.3 million in 1997. The Telegraph's strategy with respect to classified advertising is to improve volume and yield in four sectors: recruitment, property, travel and automobiles. Recruitment advertising is the largest classified advertising category, representing about 60% of all classified advertising in terms of revenue. The rates charged by the Telegraph for display and classified advertising are determined largely by the total number of people in the various demographic groupings who read each publication. Readership is measured by a continuous independent survey conducted for National Readership Surveys Limited ("NRS"). According to NRS, The Daily Telegraph's readers are primarily in the top three of the six socio-economic groups, collectively described as ABC1. The Daily Telegraph has a readership of almost 2.0 million ABC1 adults, the highest of any quality daily newspaper and 457,000 more than its nearest competitor for the six-month period ended December 31, 1998. Management believes The Daily Telegraph readership position is highly advantageous in attracting advertisers, thereby permitting it to charge higher advertising rates per page than its direct competitors. The Sunday Telegraph has an ABC1 readership of almost 1.8 million as of December 31, 1998. In common with other national newspapers in the United Kingdom, The Telegraph's newspapers compete for advertising revenue with other forms of media, particularly television, magazine, direct mail, posters and radio. In addition, total gross advertising expenditures, including financial, display and recruitment classified advertising, are affected by economic conditions in the United Kingdom. 12 15 CIRCULATION. The target audience of The Telegraph's newspapers is generally conservative, middle and upper income readers, with an increased emphasis on gaining new younger readers. The editorial strengths of The Telegraph's newspapers provide national and international news, financial news and features and comprehensive sports coverage. Net circulation revenue for The Daily Telegraph and The Sunday Telegraph for the three years ended December 31, 1998 is set forth below: NET NEWSPAPER CIRCULATION REVENUE (1)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------- (IN MILLIONS OF BRITISH POUNDS STERLING) The Daily Telegraph (pound)83.0 88% (pound)70.6 90% (pound)84.2 87% The Sunday Telegraph...... 11.2 12 7.8 10 12.1 13 --------------------------------------------------------- Total..................... (pound)94.2 100% (pound)78.4 100% (pound)96.3 100% ========================================================= Proportion of the Telegraph's newspaper revenue................. 28% 28% 35%
- ------------------------- (1) Financial data is in accordance with U. K. GAAP. Between 1986 and 1993, The Daily Telegraph's cover price was increased from 25p to 48p for the weekday edition and to 70p for the Saturday edition. Over the same period, the cover price of The Sunday Telegraph was increased from 40p to 70p. Aggregate newspaper circulation revenue for all of The Telegraph's publications increased during that period by 53% from (pound)74 million in 1988 to (pound)113.5 million in 1993. In September 1993, The Times, the principal competitor of The Daily Telegraph, reduced the cover price of its weekday edition and its Saturday edition. The Telegraph did not respond initially, but pursued a strategy of increasing its promotional activities, which proved successful in maintaining the Telegraph's circulation levels. However, the strategy failed to stem the growth in circulation of The Times. In order to protect The Daily Telegraph's market leadership and to secure its premium advertising position in the longer term, management of the Telegraph decided in June 1994 to reduce the cover price of its weekday edition 30p and The Times responded by further reducing its cover price to 20p. Since June 1995, The Times has increased its cover price in three steps to 35p and The Daily Telegraph has increased its cover price to 45p. In May 1996 the Telegraph introduced the first United Kingdom national advance purchase subscription program. In the past, newspaper subscribers in the U.K. dealt directly with independent newsagents for the purchase of newspapers. A significant portion of the newspaper readers did not take the paper every day and this was especially true for Sunday. This program has proven successful in driving circulation increases although there has been some inevitable cannibalization of circulation revenues. By the end of 1996, the plan had added about 13 16 100,000 new weekday and 200,000 new Sunday average sales and the average prepaid subscription was for a period of about 40 weeks. In order to gain broad acceptance of this revolutionary plan, the subscriptions were offered at a significant discount. The amount of that discount was reduced throughout 1997. By obtaining long term subscribers, The Telegraph expects to reduce its traditional promotional spending. OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Telegraph is involved in several other publications and business enterprises, including The Spectator, The Weekly Telegraph, and the Electronic Telegraph. The Telegraph utilizes its brand in developing third party revenue opportunities including Reader Offers and Books Direct. EMPLOYEES AND LABOR RELATIONS. At March 22, 1999, The Telegraph and its subsidiaries employed approximately 1,100 persons and the joint venture printing companies employed an additional 1,100 persons. Collective agreements between The Telegraph and the trade unions representing certain portions of The Telegraph's workforce expired on June 30, 1990 and have not been renewed or replaced. The absence of such collective agreements has had no adverse effect on The Telegraph's operations and, in management's view, is unlikely to do so in the foreseeable future. The Telegraph's joint venture printing companies, West Ferry Printers and Trafford Park Printers, each have "in-house" collective agreements with the unions representing their employees and certain provisions of these collective agreements are incorporated into the employees' individual employment contracts. In contrast to the union agreements that prevailed on Fleet Street when Hollinger Inc. acquired control of The Telegraph, these collective agreements provide that there shall be flexibility in the duties carried out by union members and that staffing levels and the deployment of staff are the sole responsibility of management. Binding arbitration and joint labor-management standing committees are key features of each of the collective agreements. These collective agreements may be terminated by either party by six months' prior written notice. There have been no strikes or general work stoppages involving employees of the Telegraph or the joint venture printing companies in the past five years. Management of the Telegraph believes that its relationships with its employees and the relationships of the joint venture printing companies with their employees are good. RAW MATERIALS. Newsprint represents the single largest raw material expense of the Telegraph's newspapers and, next to employee costs, is the most significant operating cost. Up to 168,000 metric tons are consumed annually and in 1998 the total cost was approximately (pound)61.7 million, or 19% of its newspaper revenues. In the last quarter of 1997, the Telegraph formed a new joint venture with Express Newspapers to manage the newsprint resource. This was a further extension of the successful joint printing activity at West Ferry Printers that Telegraph and Express have benefited from for the last eight years. The new joint venture company, Newsprint Management & Supply Services Ltd. ("NMSS"), has as its main purpose the control of specifications, sourcing and the monitoring of usage through the printing plants operated by the joint venture partners, and other locations where the partners' publications are printed on a contract basis. NMSS commenced operations on January 1, 1998. Through close liaison with printing management, the benefits of common newsprint specifications and better control over inventory levels, reductions in operating waste are becoming evident. NMSS is responsible for about 410,000 tonnes per annum of newsprint consumption. During 1998 the activities of NMSS were extended to cover up to 65,000 tonnes of magazine paper used by Telegraph and Express. The newsprint supply agreements entered into by NMSS for 1999 provide for tonnages from individual suppliers of between 30,000 and 65,000 tonnes. In the main, prices are fixed throughout 1999 at levels some 3% below the average price paid during the last year. Inventory held at each printing location is sufficient for three 14 17 to four days production and in addition, suppliers' stock held in the United Kingdom on behalf of NMSS represents a further four to five weeks consumption by the joint ventures. PRINTING. All copies of The Daily Telegraph and The Sunday Telegraph are printed by The Telegraph's two 50% owned joint venture printing companies, West Ferry Printers and Trafford Park Printers. The Telegraph has a very close involvement in the management of the joint venture companies and regards them as being important to The Telegraph's day-to-day operations. The magazine sections of the Saturday edition of The Daily Telegraph and of The Sunday Telegraph are printed under contract by external magazine printers. The managements of both joint venture printing companies continually seek to improve production performance. Major capital expenditures require the approval of the boards of directors of the joint venture partners. The presses used to print The Telegraph's newspapers were upgraded in 1992 by the addition of two color satellites for each press, enabling color to be printed on up to 12 pages of a 48 page newspaper on each print run. A further capital expenditure of around (pound)1 million was incurred with the addition of "balloon formers" to the presses. These permit The Telegraph's weekend newspapers to be printed in multiple sections. There is high utilization of the plants at West Ferry and Trafford Park Printers, with little spare capacity. At Trafford Park Printers, revenue earned from contract printing for third parties has a marginal effect on The Telegraph's printing costs. West Ferry Printers also undertakes some contract printing for third parties, which results in increased profitability. West Ferry Printers has eighteen presses, six of which are configured for The Telegraph's newspapers, eight are used for the newspapers published by The Telegraph's joint venture partner, United News & Media plc, and the remaining four for contract printing customers. Trafford Park Printers has four presses, two of which are used primarily for The Telegraph's newspapers. DISTRIBUTION. Since 1988, The Telegraph's newspapers have been distributed to wholesalers by truck under a contract with a subsidiary of TNT Express (UK) Limited. During 1996, the Express titles and The Daily Telegraph and The Sunday Telegraph, which are all printed at West Ferry Printers in London, began distribution to wholesalers on the same trucks. At Trafford Park Printers in Manchester, where The Daily Telegraph, The Sunday Telegraph and The Guardian are printed, a joint distribution service was arranged. Previously, the Express titles and the Guardian were distributed separately from the Telegraph titles. The Telegraph's arrangements with wholesalers contain performance provisions to ensure minimum standards of copy availability while controlling the number of unsold copies. Wholesalers distribute newspapers to retail news outlets. The number of retail news outlets throughout the United Kingdom has increased as a result of a 1994 ruling by the British Department of Trade and Industry that prohibits wholesalers from limiting the number of outlets in a particular area. More outlets do not necessarily mean more sales and The Telegraph's circulation department has continued to develop its control of wastage while taking steps to ensure that copies remain in those outlets with high single copy sales. In addition to single copy sales, many retail news outlets offer home delivery services. In 1998 home deliveries accounted for 45% of sales of The Daily Telegraph and 42% of sales of The Sunday Telegraph. Historically, wholesalers and retailers have been paid commissions based on a percentage of the cover price. Prior to June 1994 when competitive pressures caused The Telegraph to reduce its cover price, wholesaler and retailer commissions amounted to approximately 34% of the then cover price. Notwithstanding the reduction of the cover price, the commissions paid were not reduced. In line with other national newspapers, The Telegraph has recently moved away from a commission paid on a percentage of cover price to a fixed price in pence per copy and has reduced the amount paid to wholesalers and retailers in terms of pence per copy. 15 18 REGULATORY AND ENVIRONMENTAL MATTERS. United Kingdom companies are subject to various competition laws, including the Restrictive Trade Practices Act 1956-1976 (the "RTPA"), which requires the registration of certain restrictive or information-sharing agreements with the Office of Fair Trading and, under certain circumstances, prohibits such agreements. In common with other major newspaper publishers, The Telegraph has given undertakings in proceedings under the RTPA to the Restrictive Practices Court in respect of, among other things, both daily and Sunday papers. These undertakings include a general undertaking not to enter into any kind of agreement registrable under the RTPA of which particulars are not furnished to the Office of Fair Trading within the prescribed period. The Telegraph has also given a number of specific undertakings (concerning pricing, wholesaler discounts and other conditions upon which newspapers may be supplied) which prohibit the entering of agreements containing the restrictions specified in the undertakings or any agreements to the like effect. A breach of any of the undertakings may result in The Telegraph (and potentially any individuals involved) being held in contempt of court. The Telegraph has instituted procedures designed to ensure that all personnel in relevant managerial positions are required to acknowledge quarterly that they have been reminded of the requirements of the RTPA, the meaning and scope of the undertakings given, the necessity of obtaining legal advice in case of doubt and the consequences and seriousness of any breach. A code of conduct, which contains this information, has been circulated among relevant personnel. The Telegraph and its joint venture printing companies, West Ferry Printers and Trafford Park Printers, in common with other newspaper publishers and printers, are subject to a wide range of environmental laws and regulations promulgated by United Kingdom and European authorities. These laws are becoming increasingly more stringent. Management of The Telegraph believes that compliance with these laws and regulations will not have a material adverse effect on The Telegraph. 16 19 CANADIAN NEWSPAPER GROUP At December 31, 1998, the Company's Canadian Newspaper Group consisted of its 71% equity interest in Southam and the Canadian Newspapers. SOUTHAM Southam is Canada's largest publisher of daily newspapers with 34 daily newspapers having a paid daily circulation of approximately 1,900,000. In addition Southam published 14 paid non-daily community newspapers and 58 free distribution publications with a combined circulation of approximately 2,400,000. During 1998, Southam acquired the Financial Post Company, which published the Financial Post. In October 1998, Southam launched the National Post, a new national daily newspaper in Canada, incorporating the Financial Post as the business section of the National Post. In 1998, The National Post achieved daily readership in excess of 750,000 with average paid circulation of 273,000 In July 1998, Southam acquired the Victoria Times Colonist and the Nanaimo Daily News and certain community newspapers on Vancouver Island in British Columbia, Canada with paid daily circulation of approximately 84,000. In addition, in September 1998, Southam sold the Hamilton Spectator and The Record (Kitchener-Waterloo), which had paid daily circulation of approximately 178,000. The following table sets forth the revenue mix for Southam for the three years ended December 31, 1998:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------------- (IN THOUSANDS OF CANADIAN DOLLARS) Newspapers: Advertising Cdn.$ 917,470 73% Cdn.$ 855,315 72% Cdn.$ 706,185 65% Circulation 231,140 18 229,747 19 195,455 18 Job printing and Other 49,598 4 33,872 3 27,205 2 Business Communications 64,368 5 75,852 6 166,805 15 ------------------------------------------------------------------------- Total Cdn.$ 1,262,576 100% Cdn.$ 1,194,786 100% Cdn.$ 1,095,650 100% =========================================================================
ADVERTISING. Advertising revenues represented 73% of Southam's total newspaper revenues in 1998. Advertisements are carried either within the body of the newspapers, and referred to as run-of-press (ROP) advertising, or as inserts. ROP, which represented 88% of total advertising revenues in 1998 is categorized as either retail, classified or national. The three categories represented 38%, 29% and 33%, respectively, of ROP advertising revenues in 1998. ROP advertising volume at Southam's daily newspapers in 1998 was 454.7 million lines, an increase of 2% over 1997. CIRCULATION. Circulation of Southam's daily newspapers at December 31, 1998 was 1.9 million copies. On a same-paper basis, circulation revenues increased by 1% in 1998. 17 20 COMPETITION. The majority of Southam's revenues are from advertising. Advertising linage in the company's newspapers is affected by a variety of factors including competition from print and other media as well as general economic performance and the level of consumer confidence. Specific advertising segments such as real estate, automotive and help wanted will be significantly affected by local factors. Each one percent change in annual ROP linage in Southam's newspaper operations has a pre-tax earnings impact of approximately Cdn.$5 million. EMPLOYEES AND LABOR RELATIONS. As of March 22, 1999, Southam had approximately 6,400 full-time employees. Southam has approximately 100 union contracts in its newspaper operations. The percentage of unionized employees varies widely from paper to paper. For Southam's nine largest newspapers, which represent 70% of the total number of employees in the daily newspaper operations, approximately 63% of the workforce is unionized. During 1998, Southam successfully negotiated 17 labor contracts and an additional 30 contracts will be negotiated in 1999. With the large number of contracts being renegotiated every year, labor disruptions are always possible. RAW MATERIALS. The basic raw materials for newspapers is newsprint. Newsprint consumption in 1998 was 223,700 tons and newsprint costs represented approximately 14% of total revenues. Newsprint consumption at the newspapers owned in both years increased by 8%. The average price per tonne was up marginally in 1998 compared to 1997. Southam has access to adequate supplies to meet anticipated production needs. SOUTHAM RESTRUCTURING PLANS. In the last quarter of 1995, Southam took a pretax charge against its 1995 earnings of Cdn.$120.0 million ($88.1 million). Approximately Cdn.$40.0 million of the charge related to the writedown of redundant assets at its Pacific Press facility and other non-recurring costs, with the remaining Cdn.$80 million relating to employee termination costs in respect of the elimination of 750 positions. By the end of 1998 Southam had made significant progress in its staff reduction plan announced in 1995. REGULATORY MATTERS. The publication, distribution and sale of newspapers and magazines in Canada is regarded as a "cultural business" under the Investment Canada Act and consequently, any acquisition of control of Southam by a non-Canadian investor would be subject to the prior review and approval by the Minister of Industry of Canada. Because Hollinger International Inc. is controlled by Hollinger Inc. that in turn is controlled by Canadians, the current ownership is acceptable. PRICE RANGE OF COMMON SHARES AND DIVIDENDS. Until early 1999, the ordinary shares of Southam were listed on the Toronto and Montreal stock exchanges. The twelve month high and low closing sales prices for the ordinary shares of Southam on the Toronto Stock Exchange as of January 22, 1999 were Cdn.$30.50 ($20.23) and Cdn.$22.60 18 21 ($14.99), respectively. As result of the Company's acquisition of the remaining common shares of Southam it did not own Southam was delisted on the Toronto and Montreal Stock Exchanges on January 22, 1999. RELATIONSHIP WITH THE COMPANY. The Company and Hollinger Inc. now directly own a combined 100% interest in Southam through Hollinger Canadian Publishing Holdings Inc. ("HCPH"), a New Brunswick holding company. The Company's majority interest in Southam, is held by HCPH in which Publishing and Hollinger Inc. own, directly or indirectly, the following interests; (i) Publishing and its subsidiaries own 100% of the non-voting equity shares and non-voting preference shares and (ii) each of Publishing and Hollinger Inc. (through its wholly-owned subsidiary) own 50% of the voting preference shares which have only nominal equity value. It is anticipated that Hollinger Inc. will pledge its interest in HCPH as collateral for bank financing arrangements of the Company and its subsidiaries. CANADIAN NEWSPAPERS The Company acquired its interest in the Canadian Newspapers from Hollinger Inc. in 1997. The Canadian Newspapers have been accounted for using the "as-if" pooling of interests method. BUSINESS OF THE CANADIAN NEWSPAPERS. The Canadian Newspapers consist of eight daily, six non-daily and 34 free distribution newspapers located in Ontario, four daily, two non-daily and 11 free distribution newspapers located in Saskatchewan, eight daily, five non-daily and 17 free distribution newspapers located in British Columbia, one daily and two free distribution newspapers located on Prince Edward Island and three daily, one non-daily and 12 free distribution newspapers in Quebec. These newspapers are operated by Sterling Newspaper Company ("Sterling")and UniMedia Inc., wholly owned subsidiaries of the company. In September 1998, Sterling sold the Cambridge Record and the Guelph Mercury, which had paid daily circulation of approximately 20,000. Total paid daily circulation for the Canadian Newspapers is approximately 426,000. The following table sets forth the revenue mix for the Canadian Newspapers for the three years ended December 31, 1998:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------------------------------- (IN THOUSANDS OF CANADIAN DOLLARS) Advertising Cdn.$ 200,778 63% Cdn.$ 195,977 63% Cdn.$ 170,677 59% Circulation 84,606 27 85,251 28 91,679 32 Job printing and other 30,595 10 27,521 9 25,783 9 --------------------------------------------------------------------------------- Total Cdn.$ 315,979 100% Cdn.$ 308,749 100% Cdn.$ 288,139 100% =================================================================================
ADVERTISING. Advertising revenue represents advertisements that are carried within the body of the newspapers or as inserts. Advertisements carried in the body of the newspaper, ROP advertising, which represented 92% of total advertising revenue in 1998, are categorized as national, classified, retail and local. These four categories represented 22%, 21%, 21% and 36%, respectively, of ROP advertising revenue. CIRCULATION. Circulation revenue accounted for approximately 27% of total revenue in 1998. In Quebec, home delivery represented approximately 75% of daily newspapers sold while single copy sales accounted for 25%. COMPETITION. The majority of the Canadian Newspaper revenues are from advertising. The amount of advertising in the newspapers is affected by a variety of factors including competition from print and other media as well as general and local economic conditions and the level of consumer confidence. 19 22 EMPLOYEES AND LABOR RELATIONS. As of March 22, 1999, the Canadian Newspapers had approximately 2,300 full-time employees. Approximately half of the work force is unionized, but the percentage of unionized employees varies widely from paper to paper. The Company does not expect any undue difficulties in renewing any collective agreements that have expired or will expire in the future. RAW MATERIALS. The basic raw material for newspapers is newsprint. Newsprint consumption in 1998 was 48,700 tons and newsprint costs represented approximately 12% of total revenues. Average newsprint prices increased slightly during 1998. The Canadian Newspapers have access to adequate supplies of newsprint in order to meet production needs. REGULATORY MATTERS. The publication, distribution and sale of newspapers and magazines in Canada is regarded as a "cultural business" under the Investment Canada Act and consequently, any acquisition of control of the Canadian Newspapers by a non-Canadian investor would be subject to the prior review and approval by the Minister of Industry of Canada. In August 1988, Hollinger Inc. and UniMedia Group Inc. entered into an agreement with Sodec (Societe de developpement des enterprieses culturelles), an agency of the Quebec government, pursuant to which Sodec was granted an assignable right of first refusal in the event of the proposed acquisition by a person not resident in Quebec of the assets of LeSoleil and Le Quotidien or of the proposed direct or indirect acquisition by a person not resident in Quebec of control on UniMedia Group Inc., a wholly-owned subsidiary of UniMedia Inc. 20 23 ITEM 2. PROPERTIES The Company's management believes that its properties and equipment are in generally good condition, well-maintained, and adequate for current operations. UNITED STATES NEWSPAPER GROUP CHICAGO GROUP. The Chicago Group has eight operating and production facilities. All editorial, pre-press, press, marketing, sales, and administrative activities for the Chicago Sun-Times are conducted in a 535,000 square foot, seven-story building owned by the Chicago Sun-Times. The circulation fleet is garaged and maintained in a three-story building. Mechanized insertion and pre-print storage occurs in a complex of seven single story buildings. The Company is in the process of replacing these facilities with a new press facility, at an expected total cost of approximately $115 million. It is anticipated that the new press facility will be operational in the latter part of 1999. Pioneer Press utilizes and owns a building in north suburban Chicago for editorial, pre-press, sales and administrative activities. Production activities occur in a 65,000 square foot leased building in a neighboring suburb. Midwest Suburban Publishing utilizes one building for editorial, pre-press, marketing sales and administrative activities. Production activities occur at a separate facility. Both facilities are located in Chicago's south suburbs. COMMUNITY GROUP. Prior to the sale in February 1999, the Community Group had 85 operating and production facilities for its community publications in the United States. The group uses modern data processing equipment in its business management operations and in its typesetting. The group believes that all of its properties are in generally good condition, well maintained and adequate for their current operations. The group's operating and production facilities for its community publications are owned or leased by its subsidiaries, with approximately 68 being owned and the remaining 17 being leased for terms ranging from two to five years. The Jerusalem Post is produced and distributed in Israel from a three-story building in Jerusalem owned by Jerusalem Post. The Jerusalem Post also leases a sales office in Tel Aviv and a sales and distribution office in New York. The Jerusalem Post also owns certain properties held for investment in Jerusalem. U.K. NEWSPAPER GROUP THE TELEGRAPH. The Telegraph occupies five floors of a tower on Canary Wharf in London's Docklands under a 25 year lease expiring in 2017. Printing of The Telegraph's newspaper titles is carried out at fifty percent owned joint venture printing plants in London's Docklands and in Trafford Park, Manchester. CANADIAN NEWSPAPER GROUP SOUTHAM. Southam's newspapers and magazines are published at numerous facilities throughout Canada. Southam publishes predominantly all of its newspapers and performs all pre-press work on its magazines in facilities owned by Southam. Southam's magazines are printed at facilities owned by third parties. Southam has constructed a new production facilities in Vancouver and Windsor, Ontario, which began production in late 1997. Southam has commissioned a new printing plant in Montreal. Subject to the completion of the conversion of a few remaining letterpress operations to web offset, such facilities meet Southam's current needs and have ample capacity to meet anticipated future demands. 21 24 ITEM 3. LEGAL PROCEEDINGS The Company becomes involved from time to time in various claims and lawsuits incidental to the ordinary course of its business, including such matters as libel, defamation and invasion of privacy actions. In addition, the Company is involved from time to time in various governmental and administrative proceedings with respect to employee terminations and other labor matters, environmental compliance, tax and other matters. Management believes that the outcome of any pending claims or proceedings will not have a material adverse effect on the Company taken as a whole. See Note 16 to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 22 25 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages (as of March 22, 1999) of each of the Company's current executive officers, followed by a description of their principal occupations during the past five years and current directorships of public reporting companies and investment companies in the United States, Canada and the United Kingdom. Unless otherwise indicated, each of the executive officers has held his or her position with the Company, or a similar position with the Company, for at least the past five years. Name Age Position with the Company The Hon. Conrad M. Black, P.C., O.C. 54 Chairman of the Board, Chief Executive Officer and Director F. David Radler 56 Deputy Chairman, President, Chief Operating Officer and Director Daniel W. Colson 51 Vice Chairman and Director and Deputy Chairman and Chief Executive Officer of The Telegraph J. A. Boultbee 55 Executive Vice President and Chief Financial Officer Fredrick A. Creasey 48 Group Corporate Controller J. David Dodd 55 Vice President of Publishing and Chief Financial Officer of Southam Barbara Amiel Black 58 Vice President, Editorial and Director Paul B. Healy 35 Vice President, Corporate Development and Investor Relations Peter Y. Atkinson 53 Vice President Mark S. Kipnis 51 Vice President, Law and Secretary John D. Ferguson 57 Vice President Production Frederic Lebolt 45 Vice President, New Media Jerry J. Strader 62 President, American Publishing Company THE HON CONRAD M. BLACK, P.C., O.C., Chairman of the Board of Directors, Chief Executive Officer and Director. Mr. Black has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since October 25, 1995, and has served as a Director of the Company since 1990. Mr. Black served as Deputy Chairman of the Board of Directors of the Company from 1991 to October 25, 1995. Mr. Black has served for the past five years as the Chairman of the Board and Chief Executive Officer of Hollinger Inc. He currently serves as the Chairman and as a Director of The Telegraph, as the Chairman and as a Director of Southam and the Jerusalem Post, and as Chairman of the Board, Chief Executive Officer and as a Director of Argus, as a Director of EdperBrascan Limited and the Canadian Imperial Bank of Commerce, both of which are public reporting companies in Canada, as a Director of Livent Inc. and Sotheby's Holding Inc. and as a Member of the Advisory Board of Gulfstream Aerospace Corporation. Mr. Black served as a Director of John Fairfax Holdings Inc. from 1992 to 1997. F. DAVID RADLER, Deputy Chairman, President, Chief Operating Officer and Director. Mr. Radler has served as President and Chief Operating Officer of the Company since October 25, 1995, as Deputy Chairman since May 1998, and a Director of the Company since 1990. Mr. Radler was Chairman of the Board of Directors of the Company from 1990 to October 25, 1995. Mr. Radler has served for the past five years as President and Chief Operating Officer and a Director of Hollinger Inc. He currently serves as a director of The Telegraph, and as Deputy Chairman, Associate Chief Executive Officer of Southam and as Director of Argus, Dominion Malting Limited, and West Fraser Timber Co. Ltd., all of which are Canadian public reporting companies. Mr. Radler is also a Director of the Jerusalem Post. DANIEL W. COLSON, Vice Chairman and Director of the Company, Deputy Chairman, Chief Executive Officer and a Director of The Telegraph. Mr. Colson has served as a Director of the Company since February 1995 and a Vice Chairman since May 1998. He has served as Deputy Chairman of the Telegraph since 1995 and as and Chief Executive Officer of the Telegraph since 1994 and was Vice Chairman of the Telegraph from 1992 to 1995. Mr. Colson currently serves as Vice Chairman and as a Director of Hollinger Inc., Southam, Hollinger Canadian 23 26 Publishing Holdings Inc., and as Director of Argus and The Molson Companies Limited, both of which are Canadian public reporting companies, and as a Director of John Fairfax Holdings Limited from 1991 to 1997. J. A. BOULTBEE, Executive Vice President and Chief Financial Officer. Mr. Boultbee has served as Executive Vice President and Chief Financial Officer of the Company since June 14, 1996. Mr. Boultbee has served as a Vice President of the Company from 1990 to June 13, 1996. Mr. Boultbee served as a Director of the Company from 1990 to October 25, 1995. Mr. Boultbee has served for the past five years as a Director and as the Vice-President, Finance and Treasury or Executive Vice President and Chief Financial Officer of Hollinger Inc. Mr. Boultbee also serves as a Director of Argus, Southam, Iamgold International African Mining Gold Corporation and Consolidated Enfield Corporation, all of which are Canadian public reporting companies. FREDERICK A. CREASEY, Group Corporate Controller. Mr. Creasey has served as Group Corporate Controller of the Company since June 14, 1996. Mr. Creasey also has served for the past five years as the Controller of Hollinger Inc. J. DAVID DODD, Vice President of Publishing and Vice President and Chief Financial Officer of Southam. Mr. Dodd has served as Vice President of Publishing since October 25, 1995 and as Vice President and Chief Financial Officer of Southam since January 1997. He previously served as Executive Vice President and a Director of the Company from 1991 to October 25, 1995 and as Chief Financial Officer of the Company from 1994 to October 25, 1995. Mr. Dodd served as a Vice President of the Company from 1990 to 1991. BARBARA AMIEL BLACK, Vice President, Editorial and Director. Mrs. Black has served as Vice President, Editorial of the Company since September 1995 and as a director of the Company since February 1996. Mrs. Black is the wife of Mr. Black. Mrs. Black is currently a columnist for The Daily Telegraph. After an extensive career in both on and off air television production, Mrs. Black was the editor of The Toronto Sun from 1982 to 1984, a columnist of The Times and The Sunday Times of London from 1986 to 1994 and a columnist of MacLean's magazine since 1976. Mrs. Black also serves as Vice President, Editorial and as a Director of Hollinger Inc. and as a Director of Southam and the Jerusalem Post. PAUL B. HEALY, Vice President, Corporate Development and Investor Relations. Mr. Healy has served as Vice President, Corporate Development and Investor Relations of the Company since October 25, 1995. Mr. Healy was a Vice President of The Chase Manhattan Bank, N.A. for more than five years prior to October 1995, serving as a corporate finance specialist in the media and communications sector. PETER Y. ATKINSON, Vice President. Mr. Atkinson has served as Vice President of the Company since 1997. Mr. Atkinson has served as Vice President and Corporate Counsel of Hollinger Inc. since 1996. Mr. Atkinson was previously a partner at the law firm of Aird & Berlis, which he joined in 1976. MARK S. KIPNIS, Vice President and Secretary. Mr. Kipnis has served as Vice President and Secretary of the Company since January 1998. Mr. Kipnis was previously a partner at the law firm of Holleb & Coff, which he joined in 1974. JOHN D. FERGUSON, Vice President, Production. Mr. Ferguson has served as Vice President, Production since 1996. Mr. Ferguson served as Vice President, Production at Southam, Inc. from 1993 to 1996. Mr. Ferguson was previously Deputy Managing Director of Mirror Group PLC which he joined in 1966. FREDERIC LEBOLT, Vice President New Media. Mr. Lebolt has served as Vice President New Media since February 1999. He has served as Publisher of Digital Chicago Magazine since 1998 and as Vice President of Hollinger Digital Inc. since 1997. Mr. Lebolt was previously Director of Online Publications of the Chicago Sun-Times which he joined in 1994. JERRY J. STRADER, President, American Publishing Company. Mr. Strader was appointed President of the Company's Community Group (American Publishing Company) in February of 1996. He served as Senior Vice President of American Publishing Company from 1994 to 1996 and as a Regional Manager of American Publishing Company and as publisher of The Meridian Star, one of the Company's daily newspapers from 1990 to 1994. 24 27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Class A Common Stock is listed on the New York Stock Exchange under the trading symbol "HLR." At March 22, 1999 there were 94,538,723 shares of Class A Common Stock outstanding and held by approximately 238 holders of record and approximately 8,000 beneficial owners. The Class A Common Stock is listed on the New York Stock Exchange. The Class B Common Stock of the Company is not publicly traded. As of March 22, 1999, 14,990,000 shares of Class B Common Stock were outstanding and owned by Hollinger Inc. In addition, the Company issued 739,500 shares of its Series A Preferred Stock owned by Hollinger Inc. until August of 1997 when the Series A Preferred Stock was exchanged for Series D Preferred Stock. In 1998, 408,551 shares of Series D Preferred Stock were converted into 2,795,165 shares of Class A Common Stock. In February 1999, 196,823 shares of Series D Preferred Stock were redeemed for cash. The remaining 134,126 shares Series D Preferred Stock are convertible into 931,642 shares of Class A Common Stock (as of March 22, 1999). In 1996, the Company issued 20,700,000 Preferred Redeemable Increased Dividend Equity Securities ("PRIDES"), each of which represents one-half share of the Company's Series B Preferred Stock, par value $.01 per share. The PRIDES are listed on the New York Stock Exchange and are held by one holder of record and approximately 100 beneficial owners. In 1998, 19,993,531 PRIDES were exchanged for 18,394,048 shares of Class A Common Stock. The Company has issued 829,409 shares of Series C Convertible Preferred Stock, par value $0.1 per share ("Series C Preferred Stock") to Hollinger Inc. The Series C Preferred Stock was issued at $108.50 each and pays a dividend of 9.5% per annum. The Series C Preferred Stock is convertible into 8,181,788 shares of Class A Common Stock (as of March 22, 1999). The following table sets forth for the periods indicated the high and low sales prices for the Class A Common Stock, as reported by the New York Stock Exchange Composite Transactions Tape for the period since January 1, 1997, and the cash dividends declared per share on the Class A Common Stock. CASH DIVIDENDS PRICE RANGE DECLARED CALENDAR PERIOD HIGH LOW PER SHARE - --------------- ---- --- --------- 1997 First Quarter $12.000 $ 9.125 $ 0.10 Second Quarter 12.000 9.000 0.10 Third Quarter 13.438 11.125 0.10 Fourth Quarter 14.125 12.375 0.10 1998 First Quarter $17.188 $ 13.625 $ 0.10 Second Quarter 17.125 14.875 0.10 Third Quarter 18.313 13.438 0.1375 Fourth Quarter 14.375 12.125 0.1375 1999 First Quarter (through March 22, 1999) $14.938 $ 11.125 $0.1375 On March 22, 1999 the closing price of the Class A Common Stock was $13.1875 per share. Each share of Class A Common Stock and Class B Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company. Dividends must be paid equally, share for share, on both the Class A Common Stock and the Class B Common Stock at any time that dividends are paid. Up until the first quarter of 1996, the Company paid a quarterly dividend of $0.025 per share of common stock. As a result of the 1995 Reorganization, the Company had greater financial capacity to support substantially higher level of dividends with respect to its common stock. From the first quarter 1996 through the second quarter of 1998, the Company has paid a quarterly dividend of $0.10 per share of common stock. Since the third quarter of 1998, the Company has paid a quarterly dividend of $0.1375 per share of common stock. 25 28 As an international holding company, the Company's ability to declare and pay dividends in the future with respect to its Common Stock will be dependent, among other factors, upon its results of operations, financial condition and cash requirements, the ability of its United States and foreign subsidiaries to pay dividends and make payments to the Company under applicable law and subject to restrictions contained in existing and future loan agreements, the prior payments of dividends to holders of PRIDES and Series D Preferred Stock, the preference share and other financing obligations to third parties relating to such United States or foreign subsidiaries of the Company, as well as foreign and United States tax liabilities with respect to dividends and payments from those entities. 26 29 ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 --------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: (1) (2) Operating revenues: Advertising $ 1,565,790 $1,567,897 $1,364,527 $ 699,434 $577,092 Circulation 517,629 523,591 562,122 301,724 278,280 Job printing 70,461 80,024 80,132 58,750 36,207 Other 43,880 40,018 67,241 18,606 14,329 --------------------------------------------------------------------- Total operating revenues 2,197,760 2,211,530 2,074,022 1,078,514 905,908 Operating costs and expenses 1,774,661 1,783,995 1,782,053 951,187 781,750 Infrequent items 26,172 25,243 41,567 8,000 - Depreciation and amortization 114,848 114,570 102,435 57,463 48,984 --------------------------------------------------------------------- Operating income 282,079 287,722 147,967 61,864 75,174 Interest expense (105,841) (113,558) (84,356) (44,727) (33,192) Amortization of debt issue costs (5,869) (13,466) (16,640) (168) - Equity in earnings of affiliates (1,199) 5,807 12,050 14,356 35,896 Other income, net (3) 337,470 77,644 70,917 18,199 92,181 --------------------------------------------------------------------- Earnings before income taxes, minority interest and extraordinary item 506,640 244,149 129,938 49,524 170,059 Income taxes 223,099 93,655 51,865 20,564 45,050 --------------------------------------------------------------------- Earnings before minority interest and extraordinary item 283,541 150,494 78,073 28,960 125,009 Minority interest 81,562 45,973 33,138 22,637 21,409 --------------------------------------------------------------------- Earnings before extraordinary item 201,979 104,521 44,935 6,323 103,600 Extraordinary item (5,067) - (2,150) - - --------------------------------------------------------------------- Net earnings $ 196,912 $ 104,521 $ 42,785 $ 6,323 $103,600 ===================================================================== Basic earnings per share $ 1.65 $ 0.93 $ 0.41 $ 0.09 $ 1.81 ===================================================================== Cash dividends declared per common share $ 0.475 $ 0.40 $ 0.40 $ 0.10 $ 0.05 ===================================================================== BALANCE SHEET DATA: (4) Working capital (deficit) $ (141,688) $ 56,365 $ (695,760) $ (390,673) $ (275,265) Total assets (5) 3,251,724 3,023,921 3,425,544 1,737,980 1,551,172 Minority interest 107,002 203,034 109,943 97,298 109,518 Total long-term debt 1,499,518 1,428,415 711,348 475,048 475,429 Redeemable preferred stock 31,562 75,891 605,579 306,452 204,101 Total stockholders' equity (6) 817,921 687,602 686,326 159,973 91,143
27 30
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 --------------------------------------------------------------------- SEGMENT DATA: Operating Revenues: United States Newspaper Group $ 589,216 $ 633,633 $ 607,372 $ 559,213 $ 422,067 U.K. Newspaper Group 550,525 492,270 451,902 405,038 386,243 Canadian Newspaper Group 1,058,019 1,085,627 1,014,748 114,263 97,598 --------------------------------------------------------------------- Total Operating Revenues $ 2,197,760 $2,211,530 $2,074,022 $1,078,514 $ 905,908 ===================================================================== Operating Income: United States Newspaper Group $ 69,580 $ 89,461 $ 63,881 $ 32,125 $ 39,039 U.K. Newspaper Group 60,208 26,657 1,601 27,000 33,953 Canadian Newspaper Group 152,291 171,604 82,485 2,739 2,182 --------------------------------------------------------------------- Total Operating Income $ 282,079 $ 287,722 $ 147,967 $ 61,864 $ 75,174 ===================================================================== EBITDA (7) United States Newspaper Group $ 109,158 $ 131,119 $ 106,707 $ 74,139 $ 74,885 U.K. Newspaper Group 79,621 44,733 15,918 37,374 43,307 Canadian Newspaper Group 208,148 226,440 127,777 7,814 5,966 --------------------------------------------------------------------- Total EBITDA $ 396,927 $ 402,292 $ 250,402 $ 119,327 $ 124,158 =====================================================================
- ----------------------------------- (1) The financial data presented above is derived from the Consolidated Financial Statements of the Company. Such financial statements include the accounts of The Telegraph and the Canadian Newspapers on an "as-if" pooling-of-interests basis. (2) Results of Southam are included in the statement of operations data as equity earnings for 1995 and 1994 and consolidated for 1998, 1997 and 1996. (3) Other income, net includes the gain on the sale of Fairfax, gain on the sale of the Telegraph shares, gain on dilution of Fairfax interest, gain on the sale of marketable securities, gain on sale of newspaper operations, foreign currency gains (losses) and interest and dividend income. (4) Long-term debt does not include intercompany indebtedness owed to Hollinger Inc. (5) Includes intangible assets, net of accumulated amortization, which amounted to $1,858,750,000 at December 31, 1998 and $1,671,210,000 at December 31, 1997. Such intangible assets consist of the value of acquired subscriber and advertiser lists, noncompetition agreements, archives and goodwill. The amortization periods for intangible assets do not exceed 40 years. (6) See Consolidated Statements of Stockholders' Equity. (7) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, minority interest, equity in earnings of affiliates, amortization of debt issue costs, foreign currency gains and losses and certain other income items. EBITDA is not intended to represent an alternative to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. The Company believes that EBITDA largely determines its ability to fund current operations and to service debt, due to the significant number of acquisitions made by the Company which have resulted in non-cash charges for depreciation and amortization. These non-cash charges have adversely affected net earnings, but have not affected EBITDA. 28 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OVERVIEW The Company's business is concentrated in the publication of newspapers in the United States, Canada, United Kingdom, and Israel. Its revenues are derived principally from advertising, paid circulation and, to a lesser extent, job printing. Approximately 27% of the Company's total operating revenues in 1998 were attributable to the United States Newspaper Group, approximately 25% were attributable to its U.K. Newspaper Group, and 48% from its Canadian Newspaper Group. The Company's United States Newspaper Group consists of the Chicago Group (comprised of the Chicago Sun-Times and suburban newspapers in the Chicago metropolitan area) and the Community Group, which includes Jerusalem Post. The Company's U.K. Newspaper Group consists of the operations of the Telegraph Group Ltd. ("Telegraph"), its subsidiaries and two joint venture printing companies. The Canadian Newspaper Group consists of the Company's majority investment in Southam Inc. ("Southam") and the operation of the Canadian Newspapers. The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. At December 31, 1998, 1997, and 1996, the Company's interest in Southam was 71.0%, 58.6%, and 50.7%, respectively. Investments in less than majority-owned affiliated companies are accounted for using the equity method of accounting. All intercompany balances and transactions have been eliminated on consolidation. SIGNIFICANT TRANSACTIONS On January 27, 1998, the Company completed a sale of approximately 80 community newspapers for aggregate cash consideration of approximately $310.0 million. The proceeds from the sale were used to pay off notes at the Community Group and pay down $175.0 million of outstanding debt on the Bank Credit Facility. A pre-tax gain of $201.2 million was recognized on this transaction. In addition, its Canadian subsidiaries, in three separate transactions in 1998, sold a magazine and four newspaper properties for total proceeds of $267.4 million resulting in pre-tax gains of $161.8 million. In three separate transactions in 1998, the Company and its subsidiaries acquired five daily and certain community newspapers for a total cash consideration of $250.3 million. Included in these transactions was the acquisition by Southam of the Financial Post Company, which published the Financial Post. In October 1998, Southam launched the National Post, a new national daily newspaper in Canada, incorporating the Financial Post as the business section of the National Post. During 1998 the Company issued an exchange offer to convert the Preferred Redeemable Increased Dividend Equity Securities ("PRIDES') into Class A Common Stock. 19,993,531 PRIDES were exchanged for 18,394,048 shares of Class A Common Stock. At December 31, 1998, there were 706,469 PRIDES outstanding. In 1997 the Company and Hollinger Inc. announced that they had reached an agreement for the transfer by Hollinger Inc. of its Canadian publishing interests to Hollinger Canadian Publishing Holdings Inc. ("HCPH"), a subsidiary of the Company, for an aggregate consideration of approximately $382.0 million (Cdn.$523.0 million). The purchase price was satisfied by payment of cash in the amount of $250.0 million, by the issuance of a new series of preferred stock of the Company, which was converted into 829,409 shares of Series C Preferred Stock, a new series of mandatorily convertible preferred stock of the Company similar to the PRIDES issued by the Company in August 1996 having a face value of $90.0 million, and 3,207,245 shares of Class A Common Stock of the Company having a nominal agreed value of $42.0 million. The mandatorily convertible preferred stock was issued for a price of $108.50 each and pays quarterly dividends of 9.5% per annum. In March 1997, Hollinger International Publishing Inc. ("Publishing") issued offerings of $260 million of Senior Notes due 2005 (the "Senior Notes") and $290 million of Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). Both the Senior Notes and the Senior Subordinated Notes are guaranteed by the Company. The Indentures relating to the Senior Notes and the Senior Subordinated Notes contain financial covenants and negative covenants that limit Publishing's ability to, among other things, incur indebtedness, pay dividends or make other distributions on its capital stock. Publishing and its restricted subsidiaries utilized the proceeds of these offerings to repay bank indebtedness, to repay the redeemable preference shares of DT Holdings Limited ("DTH") and First DT Holdings Limited ("FDTH") and for general working capital. 29 32 During 1997, HCPH, a subsidiary of the Company, acquired 6,552,425 additional shares of Southam, increasing its ownership interest to 58.6% from 50.7%. During 1998, HCPH acquired 8,268,900 additional shares of Southam increasing its ownership interest to 69.1%. Subsequently, Southam repurchased some its own common shares increasing the Company's ownership interest to 71.0%. On December 16, 1996, the Company agreed to sell its 24.7% interest in John Fairfax Holdings Limited ("Fairfax") in three tranches. The first tranche consisted of a 12.0% interest and was completed in December 1996. The second tranche consisted of a 7.9% interest and was completed in January 1997. The third tranche consisted of a 4.8% interest and was completed in March 1997. Total gross proceeds from the entire sale were approximately $441.3 million. The sale of the first tranche gave rise to a $53.5 million pre-tax gain that is recorded in the 1996 accounts. The sales pursuant to the second and third tranches gave rise to a $66.1 million pre-tax gain that is recorded in the 1997 accounts. SUBSEQUENT EVENTS On December 16, 1998, HCPH made an offer to shareholders of Southam to acquire all of the common shares of Southam not presently controlled by the Company for Cdn.$22.00 cash per share after payment by Southam of a special dividend of Cdn.$7.00 per share. The offer originally expired on January 13, 1999. On January 6, 1999, HCPH increased its offer to Cdn. $25.25 cash per share and extended the time for acceptance to January 18, 1999. HCPH purchased 19,845,118 common shares of Southam, which had been tendered under this offer for an aggregate consideration of $327.5 million. This purchase of shares brings the Company's ownership interest in Southam to approximately 97%. The purchase price was funded through HCPH's portion of a Southam special dividend together with borrowings by HCPH under the Bank Credit Facility. In February 1999, HCPH purchased the remaining Southam common shares pursuant to applicable Canadian law. On January 14, 1999, Publishing, HCPH and the Telegraph and a group of financial institutions entered into a Third Amendment Agreement to the Restated Bank Credit Facility ("Third Restated Amendment). The Third Restated Amendment increased the amount available under the Facility to provide additional funding for the purchase of Southam shares, described above. On February 25, 1999, the Company received commitments to increase the Bank Credit Facility to $830.0 million, comprised of a $580.0 million revolving credit line maturing on September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004. On January 28, 1999, the Company solicited consents from the registered holders of the Subordinated Notes, Senior Notes and Senior Subordinated Notes to amend the indentures covering said notes to (i) make the limitation on restricted payments covenant less restrictive, (ii) make the consolidated cash flow ratio under the limitation on indebtedness covenant more restrictive, and (iii) make the limitation on sale of assets covenant less restrictive. The requisite consents were obtained in March 1999 and the indentures governing the Subordinated Notes, Senior Notes and Senior Subordinated Notes were so amended. On February 1, 1999, the Company completed the sale of 45 U.S. community newspaper properties for approximately $472.0 million, of which approximately $456.0 million was cash. The proceeds from the sale were used to pay down outstanding debt on the Bank Credit Facility. A pre-tax gain resulting from this transaction of approximately $241.0 million will be accounted for in 1999. 30 33 The following table sets forth, for the periods indicated, certain items included in the Company's Consolidated Statements of Operations.
Year Ended December 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ----------- (dollar amounts in thousands) Operating revenues United States Newspaper Group $ 589,216 $ 633,633 $ 607,372 U.K. Newspaper Group 550,525 492,270 451,902 Canadian Newspaper Group 1,058,019 1,085,627 1,014,748 ---------- ---------- ---------- Total operating revenue $2,197,760 $2,211,530 $2,074,022 ========== ========== ========== Operating income (4) United States Newspaper Group $ 69,580 $ 89,461 $ 63,881 U.K. Newspaper Group 60,208 26,657 1,601 Canadian Newspaper Group 152,291 171,604 82,485 ---------- ---------- ---------- Total operating income $ 282,079 $ 287,722 $ 147,967 ========== ========== ========== EBITDA (2) United States Newspaper Group $ 109,158 $ 131,119 $ 106,707 U.K. Newspaper Group 79,621 44,733 15,918 Canadian Newspaper Group 208,148 226,440 127,777 ---------- ---------- ---------- Total EBITDA $ 396,927 $ 402,292 $ 250,402 ========== ========== ==========
PERCENTAGE RELATIONSHIPS Year Ended December 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Operating revenues United States Newspaper Group 26.81% 28.65% 29.28% U.K. Newspaper Group 25.05% 22.26% 21.79% Canadian Newspaper Group 48.14% 49.09% 48.93% ------- ------- ------- Total operating revenue 100.00% 100.00% 100.00% ======= ======= ======= Operating income United States Newspaper Group 24.67% 31.10% 43.17% U.K. Newspaper Group 21.34% 9.26% 1.08% Canadian Newspaper Group 53.99% 59.64% 55.75% ------- ------- ------- Total operating income 100.00% 100.00% 100.00% ======= ======= ======= EBITDA Margin (3) United States Newspaper Group 18.53% 20.69% 17.57% U.K. Newspaper Group 14.46% 9.09% 3.52% Canadian Newspaper Group 19.67% 20.86% 12.59% Total EBITDA 18.06% 18.19% 12.07% EBITDA United States Newspaper Group 27.50% 32.59% 42.61% U.K. Newspaper Group 20.06% 11.12% 6.36% Canadian Newspaper Group 52.44% 56.29% 51.03% ------- ------- ------- Total EBITDA 100.00% 100.00% 100.00% ======= ======= =======
(Footnotes following tables) 31 34 The following table sets forth, for the periods indicated, certain items included in the Company's Consolidated Statements of Operations.
Year Ended December 31, ------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (dollar amounts in thousands) United States Newspaper Group Operating revenues Advertising $ 416,831 $ 433,516 $ 403,328 Circulation 131,983 149,073 145,268 Job printing and other 40,402 51,044 58,776 ---------- ---------- ---------- Total operating revenues 589,216 633,633 607,372 ---------- ---------- ---------- Operating costs Newsprint 94,274 89,302 109,045 Compensation costs 216,131 229,994 218,832 Other operating costs 166,828 181,364 172,788 Infrequent items 2,825 1,854 -- Depreciation and amortization 39,578 41,658 42,826 ---------- ---------- ---------- Total operating costs 519,636 544,172 543,491 ---------- ---------- ---------- Operating income $ 69,580 $ 89,461 $ 63,881 ========== ========== ========== U.K. Newspaper Group Operating revenues Advertising $ 366,742 $ 335,115 $ 278,156 Circulation 163,206 137,073 158,220 Job printing and other 20,577 20,082 15,526 ---------- ---------- ---------- Total operating revenues 550,525 492,270 451,902 ---------- ---------- ---------- Operating costs Newsprint 101,750 89,851 101,259 Compensation costs 88,604 86,887 76,892 Other operating costs 274,300 248,232 225,506 Infrequent items 6,250 22,567 32,327 Depreciation and amortization 19,413 18,076 14,317 ---------- ---------- ---------- Total operating costs 490,317 465,613 450,301 ---------- ---------- ---------- Operating income $ 60,208 $ 26,657 $ 1,601 ========== ========== ========== Canadian Newspaper Group Operating revenues Advertising $ 782,217 $ 799,266 $ 683,043 Circulation 222,440 237,445 258,634 Job printing and other 53,362 48,916 73,071 ---------- ---------- ---------- Total operating revenues 1,058,019 1,085,627 1,014,748 ---------- ---------- ---------- Operating costs Newsprint 147,785 132,857 136,142 Compensation costs 394,391 419,272 435,949 Other operating costs 290,598 306,236 305,640 Infrequent items 17,097 822 9,240 Depreciation and amortization 55,857 54,836 45,292 ---------- ---------- ---------- Total operating costs 905,728 914,023 932,263 ---------- ---------- ---------- Operating income $ 152,291 $ 171,604 $ 82,485 ========== ========== ==========
(Footnotes following tables) 32 35 The following table sets forth, for the periods indicated, the percentage relationships for certain items included in the Company's Consolidated Statements of Operations.
PERCENTAGE RELATIONSHIPS Year Ended December 31, -------------------------- 1998 1997 1996 ------ ------ ------ United States Newspaper Group Operating revenues Advertising 70.74% 68.41% 66.40% Circulation 22.40 23.53 23.92 Job printing and other 6.86 8.06 9.68 ------ ------ ------ Total operating revenues 100.00% 100.00% 100.00% ------ ------ ------ Operating costs (1) Newsprint 16.00% 14.09% 17.95% Compensation costs 36.68 36.30 36.03 Other operating costs 28.31 28.62 28.45 Infrequent items 0.48 0.30 -- Depreciation and amortization 6.72 6.57 7.05 ------ ------ ------ Total operating costs 88.19 85.88 89.48 ------ ------ ------ Operating income (1) 11.81% 14.12% 10.52% ====== ====== ====== U.K. Newspaper Group Operating revenues Advertising 66.62% 68.07% 61.55% Circulation 29.64 27.85 35.01 Job printing and other 3.74 4.08 3.44 ------ ------ ------ Total operating revenues 100.00% 100.00% 100.00% ------ ------ ------ Operating costs (1) Newsprint 18.48% 18.25% 22.41% Compensation costs 16.09 17.65 17.02 Other operating costs 49.83 50.43 49.90 Infrequent items 1.14 4.58 7.15 Depreciation and amortization 3.53 3.67 3.17 ------ ------ ------ Total operating costs 89.07 94.58 99.65 ------ ------ ------ Operating income (1) 10.93% 5.42% 0.35% ====== ====== ====== Canadian Newspaper Group Operating revenues Advertising 73.94% 73.62% 67.31% Circulation 21.02 21.87 25.49 Job printing and other 5.04 4.51 7.20 ------ ------ ------ Total operating revenues 100.00% 100.00% 100.00% ------ ------ ------ Operating costs (1) Newsprint 13.97% 12.24% 13.41% Compensation costs 37.28 38.62 42.96 Other operating costs 27.47 28.21 30.13 Infrequent items 1.62 0.07 0.91 Depreciation and amortization 5.28 5.05 4.46 ------ ------ ------ Total operating costs 85.62 84.19 91.87 ------ ------ ------ Operating income (1) 14.38% 15.81% 8.13% ====== ====== ======
(1) Expressed as a percentage of related revenues. (2) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization, minority interest, equity in earnings of affiliates, amortization of debt issue costs, foreign currency gains and losses and certain other income items. EBITDA is not intended to represent an alternative to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. The Company believes that EBITDA largely determines its ability to fund current operations and to service debt due to the significant number of acquisitions made by the Company which have resulted in non-cash charges for depreciation and amortization. These non-cash charges have adversely affected net income, but have not affected EBITDA. (3) EBITDA Margin represents EBITDA divided by related operating revenues. (4) Includes allocation of corporate expenses. 33 36 RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 NET EARNINGS The Company had net earnings of $196.9 million, or $1.65 per share in 1998, compared with net earnings of $104.5 million, or $0.93 per share in 1997. Earnings in 1998 and 1997 include a number of non-recurring items. For the year ended December 31, 1998, earnings excluding non-recurring items were $95.8 million compared to $72.6 million in 1997. On a fully diluted basis, earnings per share excluding non-recurring items were 78 cents per share in 1998 compared to 61 cents per share in 1997. OPERATING INCOME Operating income in 1998 was $282.1 million compared to $287.7 million in 1997. The operating income at the U.K. Newspaper Group increased $33.5 million to $60.2 million in 1998 from $26.7 million in 1997, principally as a result of increased advertising revenue and increased circulation revenue due in part to higher subscription prices under the direct subscription campaign. The decrease in operating income at both the United States Newspaper Group and the Canadian Newspaper Group was primarily due to sales of newspaper operations. On a "same store" basis operating income at the U.S. Newspaper Group was $76.3 million in 1998 compared to $77.7 million in 1997. Operating income on a "same store" basis for the Canadian Newspaper Group was $184.9 million in 1998 compared to $176.8 million in 1997. OPERATING REVENUES Operating revenues were $2,197.8 million in 1998 compared to $2,211.5 million in 1997. The overall decrease in revenue is primarily due to sales of newspaper operations at the Community Group and the Canadian Newspaper Group. Operations sold during 1998 contributed $218.7 million to operating revenues in 1997. The decreases in operating revenues resulting from these sales were offset, in part, by increases in advertising and circulation revenues at the U.K. Newspaper Group of 9.4% and 19.1%, respectively and operating revenues from 1998 acquisitions at the Chicago Group, Community Group and Southam totaling $103.6 million. OPERATING EXPENSES Total operating costs and expenses were $1,915.7 million in 1998 compared to $1,923.8 million in 1997. As a percentage of total operating revenues, operating costs remained fairly consistent at 87.2% in 1998 compared to 87.0% in 1997. Newsprint expense increased over the prior year by 5.6% for the United States Newspaper Group, decreased by 0.5% for the U.K. Newspaper Group (including $12.4 million of newsprint in 1997 related to the prepaid subscription campaign) and increased by 11.2% for the Canadian Newspaper Group. The increase in newsprint expense is due to both increased newsprint prices and increased consumption. Newsprint prices, which after declining in 1996 and early part of 1997, started to increase through the latter part of 1997 and continued to increase slightly throughout 1998. Operating expenses included infrequent items of $26.2 million in 1998, which included $13.1 million of start-up costs relating to the National Post and other one-time charges. Operating expenses in 1997 included infrequent items of $25.2 million that consisted primarily of $22.2 million for costs related to the direct prepaid subscription campaign at the Telegraph. OTHER INCOME Other income of $331.4 million in 1998 consisted primarily of the gains on sales of newspaper operations at the Community Group and Canadian Newspaper Group. Other income of $73.1 million in 1997 consisted mostly of the gain on sale of Fairfax interest of $66.1 million and the gain on sale of several U.S. community newspapers of $2.3 million. INTEREST EXPENSE Interest expense decreased by $7.7 million. The decrease in interest expense resulted from a decrease in long-term debt resulting from the paydown of the AP-91 Senior Notes in January 1998 and lower interest rates on the Bank Credit Facility. AMORTIZATION OF DEBT ISSUE COSTS Amortization of debt issue costs represents debt issue costs on the Senior Subordinated Notes issued in February 1996, the Senior Notes and Senior Subordinated Notes issued in February 1997 and the Bank Credit Facility. Amortization of debt issue costs in 1997 included regular amortization of these costs and a one-time write-off of balances in the amount of $4.6 million. 34 37 INCOME TAXES Income tax expense for 1998 was $223.1 million compared with $93.7 million in 1997. Income tax expense for 1998 included tax on the gain on sale of newspaper operations and other non-recurring items and in 1997 included tax on the gain on sale of Fairfax. MINORITY INTEREST Minority interest represents the minority interest in earnings of Southam and dividends paid on redeemable preferred stock of two subsidiary companies until they were redeemed in 1997. The amount attributable to minority interest in earnings of Southam increased to $81.6 million in 1998 from $41.1 million in 1997, primarily as a result of the increase in earnings of Southam from the gains on sales of certain newspaper properties, offset, in part, by an increase in the Company's ownership in Southam. UNITED STATES NEWSPAPER GROUP Operating revenues in the United States Newspaper Group were $589.2 million in 1998 (or 26.8% of total operating revenues), a decrease of $44.4 million over the same period in 1997. The decrease in operating revenues was primarily the result of dispositions at the Community Group in January 1998. Operating revenues for operations owned in both years were $513.4 million in 1998 compared to $506.4 million in 1997. For newspapers owned in both years, advertising revenues at the Chicago Group and Community Group increased 4.1% and 4.5%, respectively. Circulation revenues in the United States Newspaper Group for newspapers owned in both years were $113.1 million in 1998 compared to $116.9 million in 1997. Community Group "same store" circulation revenues remained flat while Chicago Group circulation revenues decreased 4.4%. The decrease at the Chicago Group was due to both price competition in the Chicago market and lower circulation volume. Total operating costs and expenses, excluding infrequent items, were $516.8 million, a decrease of $25.5 million from 1997. The decrease in operating costs and expenses was primarily due to the disposition of operations at the Community Group, offset in part by increased newsprint expense and compensation costs at newspapers owned in both years. As a percentage of total United States Newspaper Group revenues, operating costs and expenses, excluding infrequent items, were 87.7% in 1998 compared to 85.6% in 1997. Compensation costs as a percentage of revenues remained relatively flat at 36.7% in 1998 compared to 36.3% in 1997. Increases in compensation costs, on a "same store" basis, were due to annual wage increases. Newsprint costs in total, as a percentage of revenues, were 16.0% in 1998 and 14.1% in 1997. The increase in newsprint expense resulted from both price and consumption increases. Other operating costs, excluding infrequent items, as a percentage of sales remained fairly consistent at 28.3% in 1998 and 28.6% in 1997. Operating income in the United States Newspaper Group was $69.6 million in 1998 compared to $89.5 million in 1997. As a percentage of total United States Newspaper Group revenues, operating income was 11.8% in 1998 compared to 14.1% in 1997. For properties owned in both years, operating income was $76.0 million in 1998 compared to $77.7 million in 1997. U.K. NEWSPAPER GROUP Operating revenues in the U.K. Newspaper Group were $550.5 million in 1998 (or 25.1% of total operating revenues), an increase of 11.8% from 1997. When expressed in British pounds sterling, revenues increased by 10.6%. Advertising revenues for 1998 increased $31.6 million to $366.7 million, or 9.4% over 1997. When expressed in British pounds sterling, advertising revenues increased 8.2%. Circulation revenues for 1997 were $163.2 million, an increase of $26.1 million, or 19.1% from 1997. When expressed in British pounds sterling, circulation revenues increased by 17.7%. Total operating costs and expenses, excluding infrequent items were $484.1 million in 1998, an increase of 9.3%, over 1997. Total operating costs and expenses, excluding infrequent items, as a percentage of Telegraph revenues, were 87.9% in 1998, compared with 90.0% in 1997. Newsprint expense decreased 0.5% from 1997 (including $12.4 million of newsprint in 1997 related to the prepaid subscription campaign). The decrease is due to lower newsprint prices in the U.K. offset, in part, by increase consumption as a result of increased advertising. 35 38 Operating income, including the infrequent items, increased $33.6 million from 1997. As a percentage of revenues, operating income increased to 10.9% from 5.4%. The increase in operating income was primarily due to participants in the direct subscription campaign renewing at higher prices and increases in advertising revenues. During 1996 the Telegraph began a program to solicit direct prepaid subscriptions. In the past, newspaper subscribers in the U.K. dealt directly with independent newsagents for the purchase of newspapers. A significant portion of the Telegraph's newspaper readers did not take the paper every day and this was especially true for Sunday. In the summer of 1996 the Telegraph began a direct mail campaign to solicit prepaid seven-day-a-week subscriptions. In order to gain broad acceptance of this revolutionary plan, the subscriptions were offered at a significant discount. The amount of that discount was reduced throughout 1997 and continued to decrease during 1998. During the first three quarters of 1997 the net costs associated with the campaign amounted to $22.2 million and were grouped together and deducted separately in arriving at operating income. In the fourth quarter of 1997, the net costs associated with the campaign had declined and advertising revenue had increased, sufficient that no separate charge was necessary. CANADIAN NEWSPAPER GROUP Operating revenues in the Canadian Newspaper Group were $1,058.0 million in 1998 (or 48.1% of total operating revenues), a decrease of 2.5% from 1997. The decrease in revenue is primarily due to the sale of certain newspaper properties in the second and third quarter of 1998. For properties owned in both years, total revenues in Canadian dollars increased 5.7%. Total operating costs and expenses, excluding infrequent items, were $888.6 million in 1998, a decrease of 2.7%, from 1997. Total operating costs and expenses, excluding infrequent items, as a percentage of revenues remained relatively flat at 84.0% in 1998 compared to 84.1% in 1997. Depreciation and amortization increased $1.1 million to $55.9 million. This increase was due to amortization of circulation and goodwill on the purchase of additional interests in Southam in September 1998 and July 1997, partly offset by lower depreciation due to sales of newspaper operations. Operating income in 1998 was $152.3 million compared to $171.6 million in 1997. As a percentage of revenues, operating income was 14.4% in 1998 compared to 15.8% in 1997. The decrease in operating income was due to the sale of newspaper operations during 1998 and the special charge of $13.1 million for start-up costs for the National Post. On a "same store" basis, operating income for the Canadian Newspaper Group increased 4.6%; however, the results were affected by foreign currency rates. When expressed in Canadian dollars, operating income on a "same store" basis increased 12.1%. 1997 COMPARED WITH 1996 NET EARNINGS The Company had net earnings of $104.5 million, or 93 cents per share in 1997, compared with net earnings of $42.8 million, or 41 cents per share in 1996. Earnings in 1997 and 1996 included a number of non-recurring items. For the year ended December 31, 1997, earnings excluding non-recurring items were $72.6 million compared to $12.0 million in 1996. On a fully diluted basis, earnings per share excluding non-recurring items were 61 cents per share in 1997 compared with 3 cents per shares in 1996. Earnings excluding non-recurring items on a fully diluted basis and after giving effect to the PRIDES as common share equivalents were 61 cents per shares in 1997 compared with 12 cents per share in 1996. The method for computing per share numbers was changed in 1997. On the basis that was used prior to 1997 earnings excluding non-recurring items were 63 cents per share in 1997 compared to 12 cents per share in 1996. OPERATING INCOME Operating income increased $139.7 million to $287.7 million in 1997 from $148.0 million in 1996. Operating income at the Canadian Newspaper Group more than doubled primarily due to strong results at Southam. The operating income of The Telegraph increased by $25.1 million to $26.7 million in 1997, from $1.6 million in 1996, principally as a result of increased advertising revenues due in part to increased circulation from the direct subscription campaign. The United States Newspaper Group's operating income 36 39 increased $25.6 million to $89.5 million from $63.9 million, due to increased advertising revenues, decreased newsprint expense, and income contributed by newspapers acquired at the Community Group. OPERATING REVENUES Operating revenues increased $137.5 million from $2,074.0 million in 1996 to $2,211.5 million in 1997. Due to a strong advertising market for all groups, advertising revenues increased 15.0% to $1,567.9 million. Total circulation revenues decreased $38.5 million from $562.1 million in 1996 to $523.6 million primarily due to $21.1 million lower circulation revenue at the Telegraph resulting from the direct prepaid subscription campaign and a $11.1 million decrease in total circulation revenue at Southam. 1996 circulation revenue at Southam included $46.0 million related to its information technology group which was disposed of in 1996. OPERATING EXPENSES Total operating costs and expenses decreased $2.3 million to $1,923.8 million in 1997 from $1,926.1 million in 1996. The decrease is primarily due to a decrease in newsprint expense offset in part by increased compensation costs, other costs and depreciation and amortization and the separate reporting of costs associated with the direct prepaid subscription campaign. Newsprint expense for the United States Newspaper Group decreased by 18.1%, the U.K. Newspaper Group decreased by 11.3%, and the Canadian Newspaper Group decreased by 2.4% from the prior year. Newsprint prices began declining in 1996, continued to decline in the early part of 1997 and started to increase through the latter part of 1997. Compensation costs increased $4.5 million from $731.7 million in 1996 to $736.2 million in 1997. Increases in compensation at the United States Newspaper Group and the U.K. Newspaper Group were offset, in part, by a decrease at Southam. Other operating expenses, excluding special charges, increased by $31.9 million from $703.9 million in 1996 to $735.8 million in 1997. Depreciation and amortization increased $12.2 million from $102.4 million in 1996 to $114.6 million in 1997. Increased depreciation and amortization resulted from the acquisitions by Southam and the Community Group and increased ownership of Southam acquired in December 1996 and July 1997 and the August 1996 buyout of the Telegraph minority. OTHER INCOME Other income of $73.1 million in 1997 consisted mostly of the gain on sale of Fairfax interest of $66.1 million and the gain on sale of several U.S. community newspapers of $2.3 million. Other income of $70.3 million in 1996 consisted mostly of the gain on sale of Fairfax interest of $53.5 million, the gain on sale of some U.S. community newspapers of $17.9 million. INTEREST EXPENSE Interest expense increased by $29.2 million. The increase in interest expense resulted from increased borrowings that related to the purchase of the additional Southam interest in December 1996 and July 1997, the August 1996 buyout of the Telegraph minority and the acquisition of the Canadian Newspapers in 1997. These increases in borrowings were offset, in part, by the proceeds from the sale of Fairfax. AMORTIZATION OF DEBT ISSUE COSTS Amortization of debt issue costs represents debt issue costs on the Senior Subordinated Notes issued in February 1996 and the Senior Notes and Senior Subordinated Notes issued in February 1997 and the Bank Credit Facility. Amortization of debt issue costs includes regular amortization of these costs and a one-time write-off of balances in the amount of $4.6 million in 1997 and $12.7 million in 1996. INCOME TAXES Income tax expense for 1997 was $93.7 million, compared with $51.9 million in 1996. Income tax expense for 1997 and 1996 included tax on the gain on sale of Fairfax of $22.5 million and $13.5 million, respectively. MINORITY INTEREST Minority interest reflects the interest of the minority holders of ordinary shares of The Telegraph in the earnings of The Telegraph its affiliated companies until the minority buyout in August 1996, the minority interest in earnings of Southam and dividends paid on redeemable preferred stock of two subsidiary companies until they were redeemed in 1997. The amount attributable to minority interests increased to $46.0 million in 1997, compared with $33.1 million in 1996, primarily as a result of the increase in earnings of Southam. 37 40 UNITED STATES NEWSPAPER GROUP Operating revenues in the United States Newspaper Group were $633.6 million in 1997 (or 28.7% of total operating revenues), an increase of $26.3 million over the same period in 1996. Chicago Group operating revenues increased 2.3% primarily due to strong advertising revenues. The Community Group's revenues increased 6.8%. For newspapers in the Community Group operated throughout both years, revenues increased $2.7 million or 1.3%. Advertising revenues in the United States Newspaper Group were $433.5 million in 1997, an increase of $30.2 million over 1996. Advertising revenues at the Chicago Group increased 6.4% and the Community Group increased 8.9%. For newspapers in the Community Group operated throughout both years, advertising revenues increased 2.6%. Circulation revenues in the United States Newspaper Group were $149.1 million in 1997, an increase of 2.6% over 1996. Circulation revenues for the Chicago Group decreased 1.4% from 1996, while circulation revenues at the Community Group increased $4.9 million, primarily due to acquisitions. For newspapers in the Community Group operated throughout both years, circulation revenues for 1997 remained consistent with 1996. Job printing revenues decreased $7.7 million, partially due to a decrease in newsprint prices, but also affected by a loss of printing contracts at the Chicago Group. Total operating costs and expenses, excluding the special charge for the cost of terminated employees, were $542.3 million, a decrease of $1.2 million from 1996. A decrease in newsprint expense was offset in part by increased compensation costs and other costs. However, as a percentage of total United States Newspaper Group revenues, operating costs and expenses, excluding the special charge, decreased to 85.6% from 89.5%. Newsprint expense decreased $19.7 million, or 18.1% to $89.3 million in 1997. Newsprint as a percentage of operating revenues also decreased to 14.1% in 1997 from 18.0% in 1996. The decrease in newsprint expense is the result of lower newsprint prices throughout 1997. Even though newsprint prices increased during the second half of 1997, the prices still remained lower then the prices that were in effect during most of 1996. Compensation costs increased $11.2 million from $218.8 million in 1996 to $230.0 million in 1997; however, as a percentage of revenues compensation costs remained relatively flat at 36.3% in 1997and 36.0% in 1996. Increases in compensation costs were due to standard wage increases and increases in the minimum wage. Other operating costs, excluding the special charge, increased $8.6 million to $181.4 million in 1997 from $172.8 million in 1996; however, as a percentage of sales they remained fairly consistent at 28.6% in 1997 and 28.5% in 1996. Depreciation and amortization costs at $41.7 million in 1997 compared with $42.8 million in 1996 were relatively flat. Operating income in the United States Newspaper Group was $89.5 million in 1997, an increase of $25.6 million from 1996. The increase in operating income was primarily due to the growth in advertising revenues and the reduction of newsprint expense. As a percentage of total United States Newspaper Group revenues, operating income increased to 14.1% in 1997 from 10.5% in 1996. U.K. NEWSPAPER GROUP Operating revenues in the U.K. Newspaper Group were $492.3 million in 1997 (or 22.3% of total operating revenues), an increase of $40.4 million, or 8.9%, from 1996. When expressed in British pounds sterling, revenues increased by 3.8%. Advertising revenues for 1997 increased $57.0 million to $335.1 million, or 20.5% over 1996. When expressed in British pounds sterling, advertising revenues increased 14.9%. Circulation revenues for 1997 were $137.1 million, a decrease of $21.1 million, or 13.4% from 1996. When expressed in British pounds sterling, circulation revenues decreased by 17.6%. Total operating costs and expenses, excluding the special charge, at The Telegraph were $443.0 million in 1997, an increase of $25.0 million, or 6.0%, over 1996. Total operating costs and expenses, excluding the special charge, as a percentage of Telegraph revenues, were 90.0% in 1997, compared with 92.5% in 1996. As a percentage of Telegraph revenues, newsprint costs, excluding the special charge, were 18.3% in 1997 and 22.4% in 1996. Newsprint prices in the U.K. started to decline in the fourth quarter of 1996. 38 41 Operating income, including the $22.6 million special charge, was $26.7 million in 1997. Operating income, including the $32.3 million special charge, was $1.6 million in 1996. As a percentage of revenues, operating income increased to 5.5% from 0.4%. Without the special charges for the direct subscription campaign and the cost of terminated employees, operating income would have been $49.2 million in 1997 compared to $33.9 million in 1996. The increase in operating income was primarily due to a decrease in newsprint expense and increases in advertising revenues resulting in part from the growth in circulation from the direct subscription campaign. During 1996 the Telegraph began a program to solicit direct prepaid subscriptions. In the past, newspaper subscribers in the U.K. dealt directly with independent news agents for the purchase of newspapers. A significant portion of the Telegraph's newspaper readers did not take the paper every day and this was especially true for Sunday. In the summer of 1996 the Telegraph began a direct mail campaign to solicit prepaid seven-day-a-week subscriptions. By the end of 1996, the plan had added about 100,000 new weekday and 200,000 new Sunday average sales and the average prepaid subscription was for a period of about 40 weeks. In order to gain broad acceptance of this revolutionary plan, the subscriptions were offered at a significant discount. The amount of that discount was reduced throughout 1997. The Company grouped all the net costs associated with the program including an estimate in 1996 of costs that would be incurred in 1997 for subscribers that were signed up at December 31, 1996. This amounted to $32.3 million and was deducted as a separately identifiable operating expense in arriving at earnings for the year ended December 31, 1996. During the first three quarters of 1997 the net costs associated with the campaign amounted to $22.2 million net and were also grouped together and deducted separately in arriving at operating income. In the fourth quarter the net costs associated with the campaign had declined and advertising revenue had increased, sufficient that no separate charge was necessary. CANADIAN NEWSPAPER GROUP Operating revenues in the Canadian Newspaper Group were $1,085.6 million in 1997 (or 49.1% of total operating revenues), an increase of $70.9 million, or 7.0%, from 1996. Advertising revenues for 1997 increased $116.3 million to $799.3 million, or 17.0% over 1996. The majority of the increase was at Southam. Circulation revenues for 1997 were $237.4 million, a decrease of $21.2 million, or 8.2% from the 1996. The decrease was primarily due to the disposition by Southam of its information technology group, which in 1996 had circulation revenue of $46.0 million. Total operating costs and expenses, excluding the special charge for the cost of terminated employees, were $913.2 million in 1997, a decrease of $9.8 million, or 1.1%, from 1996. Newsprint expense decreased 2.4% and compensation costs decreased 3.8%. The decrease in compensation costs is primarily due to staff reductions at Southam. Total operating costs and expenses, excluding the special charge, as a percentage of revenues were 84.1% in 1997 compared with 91.0% in 1996. Depreciation and amortization increased $9.5 million to $54.8 million. The increase is primarily due to additional amortization resulting from the purchase of additional interests in Southam in December 1996 and July 1997. Operating income in 1997 increased by $89.1 million or 108.0% to $171.6 million. Operating income in 1996 included a charge of $9.2 million for the cost of terminated employees. As a percentage of revenues, operating income increased to 15.8% from 8.1%. The increase in operating income was primarily due to an increase in advertising revenues and decreases in compensation and newsprint expenses. 39 42 LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL Working capital consists of current assets less current liabilities. Current assets were $469.9 million and $505.3 million at December 31, 1998 and 1997, respectively. Current liabilities, excluding debt obligations, were $509.9 million and $413.3 million, respectively, at December 31, 1998 and 1997. The Company's consolidated working capital at December 31, 1998, excluding debt obligations, was a deficit of $40.0 million compared to positive working capital of $92.0 million in 1997. The decrease in working capital is primarily due to an increase in accrued expenses resulting from the accrual of the special dividend at Southam to be paid to the minority interest. EBITDA EBITDA, which represents the Company's earnings before interest expense, income taxes, depreciation and amortization, minority interest, equity in earnings of affiliates, amortization of debt issue costs, foreign currency gains or losses and certain other income items was $396.9 million in 1998, $402.3 million in 1997, and $250.4 million in 1996, respectively. The Company believes that EBITDA largely determines its ability to fund current operations and to service debt. EBITDA excluding non-recurring items was $423.1 million, $415.7 million and $261.2 million in 1998, 1997 and 1996, respectively. CASH FLOW Cash flows on a consolidated basis from operating activities were $53.7 million, $242.8 million, and $198.4 million in 1998, 1997, and 1996, respectively. Excluding changes in working capital (other than cash), cash provided by operating activities was $104.1 million, $265.1 million and $146.0 million for 1998, 1997 and 1996, respectively. Working capital changes required cash of $50.4 million and $22.3 million in 1998 and 1997, respectively and provided cash of $52.4 million in 1996. Changes reflect normal variations from year to year in inventory, accounts receivable, short-term liabilities and other working capital items. Cash flows used in investing activities were $92.3 million in 1998 principally reflecting the acquisitions of the additional interest in Southam, capital expenditures at the Chicago Group for the new production facility, offset, in part, by net proceeds from dispositions of certain newspapers at the Community Group and the Canadian Newspaper Group. Cash flows provided by investing activities were $8.5 million in 1997 principally reflecting proceeds from the disposal of Fairfax offset by capital expenditures and acquisitions at the Community Group and Southam and the purchase of the additional interest in Southam. Cash flows used in investing activities were $895.3 million in 1996 principally reflecting the acquisitions of the Telegraph minority, and additional interest in Southam and acquisitions at the Community Group. Cash flows used in financing activities in 1998 were $15.8 million primarily reflecting changes in borrowings, dividend payments and repurchase of its own shares by Southam. Cash flows used in financing activities in 1997 were $276.9 million reflecting changes in borrowings offset by the redemption of preference shares at DTH and FDTH, payment of dividends and payments made to Hollinger Inc. for the Canadian Newspapers. Cash flows provided by financing activities were $814.7 million in 1996 reflecting changes in borrowings and proceeds from the sale of Class A Common Stock and PRIDES offset by dividend payments. CAPITAL EXPENDITURES AND ACQUISITION FINANCING In the past three years the United States Newspaper Group, the U.K. Newspaper Group, and the Canadian Newspaper Group have funded their capital expenditures and acquisition and investment activities out of cash provided by their respective operating activities, borrowings under their bank credit facilities and, in the case of the United States Newspaper Group, borrowings from institutional lenders, advances from Hollinger Inc. and proceeds from one debt offering, two equity offerings and one PRIDES offering in 1996 and two debt offerings in 1997. 40 43 UNITED STATES NEWSPAPER GROUP Capital expenditures at the United States Newspaper Group amounted to $84.5 million, $26.7 million, and $16.1 million in 1998, 1997 and 1996 respectively. The Company began construction of a new printing facility in Chicago during 1998 at an estimated cost of approximately $115.0 million, to be operational in 1999. Other capital expenditures were for purchases of computerized pre-press and other production equipment and improvements to its properties in the United States and Israel. The Group acquired newspapers and other publications in the United States in 1998, 1997 and 1996, for aggregate cash consideration of $127.7 million funded primarily through bank borrowings. Such amount does not include notes payable to former owners and amounts due under noncompetition agreements with former owners. In 1998, the Community Group acquired two daily newspapers for $41.8 million. Also, in 1998, the Community Group sold 80 community newspapers for gross proceeds of $310.0 million. In 1997, the Community Group purchased four paid daily newspapers, four paid non-daily newspapers and six free distribution newspapers for $22.1 million. In addition, the Community Group acquired two paid daily newspapers and one paid non-daily newspaper in exchange for one daily newspaper, three non-daily newspapers and one free distribution newspaper. In 1996, the Community Group acquired seven paid daily, 12 paid non-daily and sixteen free non-daily newspapers for total consideration of $63.8 million. U.K. NEWSPAPER GROUP Capital expenditures at the Telegraph were $7.1 million, $5.6 million, and $4.6 million in 1998, 1997, and 1996, respectively. Not included in the capital expenditures of the Telegraph are capital expenditures of the two joint venture printing companies, which aggregated $61.5 million in the three years ended December 31, 1998. The capital expenditures and depreciation charges of the joint venture printing companies are not consolidated in the accounts of the Telegraph, but are reflected through the normal equity accounting procedures applied to affiliated companies. CANADIAN NEWSPAPER GROUP Capital expenditures at the Canadian Newspaper Group were $69.2 million, $84.3 million, and $102.8 million in 1998, 1997, and 1996, respectively. These amounts include $79.3 million and $98.0 million in 1997 and 1996, respectively for Southam, relating to the construction of a new press facility in Vancouver, which was put into service in 1997. DEBT OBLIGATIONS The Company, Publishing and its principal subsidiaries are parties to various debt agreements that have been entered into to fund acquisitions, working capital requirements and other corporate purposes. At December 31, 1998, the indebtedness of the Company was $1,500.0 million. 1997 NOTE OFFERING On March 4, 1997, Publishing filed both a Prospectus and a Prospectus Supplement offering $200 million of Senior Notes due 2005 (the "Senior Notes") and $200 million of Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). On March 12, 1997, Publishing increased the size of the offerings to $550.0 million, closing on March 18, 1997. Both the Senior Notes and the Senior Subordinated Notes are guaranteed by the Company. The Senior Notes are unsecured and senior obligations of Publishing and rank pari-passu with all other senior unsecured indebtedness of Publishing including Publishing's bank credit facilities, mature on March 15, 2005 and bear interest at 8.625% per annum. The Senior Subordinated Notes are unsecured senior subordinated obligations of Publishing and rank pari-passu with all other senior subordinated indebtedness of Publishing including its existing 9.25% Senior Subordinated Notes due 2006. The Senior Subordinated Notes mature on March 15, 2007 and bear interest payable semi-annually at a rate of 9.25% per annum. The Indentures relating to the Senior Notes and the Senior Subordinated Notes contain financial covenants and negative covenants that limit Publishing's ability to, among other things, incur indebtedness, pay dividends or make other distributions on its capital stock. The Company is in compliance with its covenants. 41 44 Publishing and its restricted subsidiaries utilized the proceeds of these offerings to repay bank indebtedness, to repay the redeemable preference shares of DTH and FDTH and for general working capital. SENIOR SECURED NOTES American Publishing (1991) Inc. ("AP-91"), a wholly owned subsidiary of Publishing, issued $150 million in senior secured notes (collectively, the "AP-91 Senior Notes"). The AP-91 Senior Notes were issued in five series bearing interest at rates ranging from 10.44% to 10.53%. The Notes were repaid together with a makewhole premium of $8.4 million in January 1998 in conjunction with the 1998 sale of the Community Group newspapers as previously discussed. 1996 NOTE OFFERING Publishing sold $250 million aggregate principal amount of Notes on February 7, 1996. The Notes mature on February 1, 2006, and are unsecured senior subordinated obligations of Publishing. Each Note bears interest at the rate of 9.25% per annum payable semiannually on February 1 and August 1 of each year, commencing on August 1, 1996. The Notes may be redeemed at any time on or after February 1, 2001, at the option of Publishing, in whole or in part, at a price of 104.625% of the principal amount thereof, declining ratably to par on or after February 1, 2004, together with accrued and unpaid interest to the redemption date. Payment of the principal, premium, and interest on the Notes is guaranteed by the Company on a senior subordinated basis (the "Guarantee"). The Notes and the Guarantee are expressly subordinated to all senior indebtedness of Publishing and the Company, including all indebtedness and other obligations under the Publishing Credit Facility and the Company's guarantee thereof. The indenture relating to the Notes (the "Indenture") contains covenants that, among other things, limit the ability of Publishing and the Restricted Subsidiaries (defined to include the United States subsidiaries of Publishing, the Telegraph, the Canadian Newspapers and Jerusalem Post) to, incur indebtedness, pay dividends or make other distributions on its capital stock, subject in each case to certain exceptions. The Company and the Restricted subsidiaries are in compliance with the covenants. CONSENT SOLICITATION On February 19, 1997, Publishing completed a solicitation of consents from the holders of the 9.25% Notes with respect to certain amendments (the "Amendments") to the Indenture governing the 9.25% Notes dated as of February 1, 1996 between Publishing and Fleet National Bank, as trustee (the "Trustee"). The primary purpose of the Amendments was to facilitate the inclusion of certain international subsidiaries of the Company as Restricted Subsidiaries of Publishing and to enhance its corporate and financing flexibility. See discussion in Subsequent Events section regarding amendments to indentures governing the Subordinated Notes, Senior Notes and Senior Subordinated Notes. BANK CREDIT FACILITY On April 7, 1997, Publishing, HCPH, the Telegraph, a subsidiary of the Company and a group of financial institutions entered into a long-term bank credit facility (the "Bank Credit Facility"). At December 31, 1998, after a number of amendments and restatements, the Bank Credit Facility was for a total of $625.0 million. On February 2, 1999, the Bank Credit Facility was reduced by $200.0 million with the proceeds from the sale of 45 U.S. community newspapers. The Bank Credit Facility was due to mature on November 30, 1999. On February 25, 1999, the Company received commitments to increase the Bank Credit Facility to $830.0 million comprised of a $580.0 million revolving credit line maturing on September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004. Loans under the Bank 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. The Bank Credit Facility was first entered into on April 7, 1997 by Publishing, HCPH, he Telegraph and a group of financial institutions. This facility replaced the Amended Publishing Credit Facility. The purchase price of the Canadian Newspapers was financed in part through a $175.0 million borrowing by HCPH under the Bank Credit Facility. The Bank Credit Facility originally provided up to $900.0 million in total credit availability under 42 45 four tranches. In July 1997, the Company reduced its total available commitments to $515.0 million and reduced the HCPH tranche to $315.0 million. The parties to the Bank Credit Facility entered into a First Amendment Agreement to the Bank Credit Facility (the "First Amendment") dated May 12, 1997. The First Amendment amended certain terms and conditions of the Bank Credit Facility to permit HCPH to bid for the remaining shares of Southam not currently owned by it. The First Amendment allows for the Southam offer as an "Approved Acquisition" and modified certain definitions, representations and covenants to account for, among other things, the issuance of the HCPH Special Shares, the operation of the Exchange Indenture, approval by the lenders of the bid circular and related documentation, and the provision and timing of additional security under the Bank Credit Facility. The parties to the Bank Credit Facility have entered into a Second Amendment Agreement to the Bank Credit Facility (the "Second Amendment") dated June 23, 1997. The Second Amendment amended certain terms and conditions of the Bank Credit Facility primarily to allow HCPH to take up less than all of the outstanding Southam shares and allow Publishing to pay up to $20.0 million in dividends to the Company for Class A Common Stock repurchases. The parties to the Bank Credit Facility entered into a Third Amended and Restated Credit Agreement ("Restated Facility") dated March 31, 1998. Among other things, the Restated Facility extended the maturity date, adjusted certain financial and reporting covenants, decreased interest rates, expanded the capital expenditures limitations and increased the amount of dividends Publishing can pay to the Company for Class A Common Stock repurchases to $30.0 million. The parties to the Bank Credit Facility entered into a First Amendment Agreement to the Restated Facility ("First Restated Amendment") dated August 26, 1998. The First Restated Amendment permitted HCPH to acquire additional Southam common shares and increased the permitted regular quarterly dividend from Publishing to the Company to $0.1375 per common share from $0.10. The parties to the Bank Credit Facility entered into a Second Amendment Agreement to the Restated Facility ("Second Restated Amendment") dated December 11, 1998. The Second Restated Amendment permitted HCPH to acquire additional Southam common shares and permitted the sale of 45 U.S. community newspapers and increased the Bank Credit Facility to $625.0 million. The parties to the Bank Credit Facility entered into a Third Amendment Agreement to the Restated Facility ("Third Restated Amendment") dated January 14, 1999. The Third Restated Amendment increased the amount available under the Facility to provide additional funding for the purchase of Southam shares. The Bank Credit Facility contains both affirmative and negative covenants, and various financial covenants. The Company was in compliance with all covenants at December 31, 1998. REDEEMABLE PREFERRED STOCK The Company's interest in the Telegraph is held through intermediate English holding companies, DTH and FDTH, whose only significant long-term assets are their direct or indirect interests in the Telegraph. In May and June 1997, DTH and FDTH paid approximately $123.3 million in respect of the redemption of their outstanding redeemable preferred stock. In addition, the Company issued to Hollinger Inc. in connection with the 1995 Reorganization in which the Company acquired Hollinger Inc.'s interest in The Telegraph and Southam, 739,500 shares of Series A Preferred Stock. The Series A Preferred Stock was subsequently exchanged for Series D Preferred Stock. The shares of Series D Preferred Stock are redeemable in whole or in part, at any time and from time to time, subject to restrictions in the Company's credit facilities, by the Company or by a holder of such shares. During 1998, 408,551 shares of Series D Preferred Stock were converted into 2,795,165 shares of Class A Common Stock. At December 31, 1998, there were 330,949 shares of Series D Preferred Stock outstanding. The redemption price of the Series D 43 46 Preferred Stock was $31.6 million at December 31, 1998. In February 1999, 196,823 shares of Series D Preferred Stock were redeemed for cash. HCPH SPECIAL SHARES HCPH issued 6,552,425 Cdn.$10 Non-Voting Special Shares in July 1997 for a total issue price of Cdn.$65.5 million. On July 18, 1997 HCPH, the Company and Montreal Trust Company of Canada as trustee, entered into an Exchange Indenture providing for the exchange of the HCPH special shares at the option of the holder ("Optional Exchange") at any time after December 23, 1997 but prior to June 26, 2000, into Class A Common Stock of the Company based on an exchange ratio set out in the Exchange Indenture. Each HCPH special share will be automatically exchanged ("Mandatory Exchange") on June 26, 2000 into a number of Class A Common Shares of the Company equal to a) US$8.88 divided by b) 95% of the current market price of the Class A Common Stock. Upon either an Optional Exchange or a Mandatory Exchange, the Company will have the option in lieu of delivering all or any of the Class A Common Stock issuable on exchange, to make a cash payment. 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 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 will not 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 newspapers. 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 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 $13.5 million, of which the Company estimates $8.0 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK NEWSPRINT Newsprint prices continued to fluctuate throughout 1998 and on a consolidated basis newsprint expense amounted to $343.8 million ($312.0 million in 1997 and $346.4 million in 1996). 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 at the end of 1998, total newsprint usage was about 600,000 tons per annum. At those levels of usage and based on properties and ownership levels at December 31, 1998, a change in the price of newsprint of $50 per ton would increase or decrease net income by about $16.5 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. However, operations of Jerusalem Post, in local currency terms, have been affected by inflation amounting to 8.7%, 7.0%, and 10.0%, annually in 1998, 1997, and 44 47 1996, respectively, which to a certain extent have been offset by the devaluation of the NIS in relation to the United States dollar in each of these years by 17.7%, 8.8%, and 3.7%, respectively. 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 December 31, 1998 which is subject to floating interest rates and December 31, 1998 ownership levels and foreign exchanges rates, a 1% change in the floating interest rates would increase or decrease the Company's net earnings by approximately $3.3 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 1998 earnings and ownership levels, a $0.05 change in the important foreign currencies would have the following effect on the Company's reported earnings:
Actual Average 1998 Rate Increase/Decrease - ------------------------------------------------------------------------------ United Kingdom $1.66/(pound) $1,150,000 Canada $0.67/Cdn.$ $4,350,000 - ------------------------------------------------------------------------------
ELECTRONIC MEDIA Management continues to hold 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. 45 48 . ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears beginning at page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 46 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders. 47 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT. (1) FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES. The consolidated financial statements filed as part of this report appear beginning at page F-1. (2) EXHIBITS.
PRIOR FILING OR EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER - ----------- ---------------------- ---------------------- 2.1 UniMedia Class A Stock Purchase Agreement dated as of April Incorporated by reference 18, 1997 among Hollinger Inc., UniMedia Holding Company and to Exhibit 2.01 to Current Hollinger International Inc. Report on Form 8-K dated April 18, 1997. 2.2 UniMedia Class B Stock Purchase Agreement dated as of April Incorporated by reference 18, 1997 among Hollinger Inc. UniMedia Holding Company to Exhibit 2.02 to Current and to Hollinger International Inc. Report on Form 8-K dated April 18, 1997. 2.3 Sterling Purchase Agreement dated as of April 18, 1997 Incorporated by reference among Hollinger Inc. and Hollinger Canadian Publishing to Exhibit 2.03 to Current Holdings Inc. Report on Form 8-K dated April 18, 1997. 2.4 Purchase Agreement relating to the Senior Notes, dated Incorporated by reference March 12, 1997 to Exhibit 1.01 to Current Report on Form 8-K dated March 18, 1997. 2.5 Purchase Agreement relating to the Senior Subordinated Incorporated by reference Notes, dated March 12, 1997 to Exhibit 1.02 to Current Report on Form 8-K dated March 18, 1997. 3.1 Restated Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K dated October 13, 1995 3.2 Bylaws, as amended and restated. Incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (No. 33-74980) 3.3 Certificate of Designations for Series B Convertible Incorporated by reference Preferred Stock to Exhibit 3.01 to Current Report on Form 8-K dated August 7, 1996.
48 51
PRIOR FILING OR EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER - ----------- ---------------------- ---------------------- 3.4 Certificate of Designations for Series C Convertible Incorporated by reference Preferred Stock to Exhibit 1.1.3.2 to Current Report on Form 8-K dated May 5, 1997. 4.1 Third Amended and Restated Credit Agreement dated March Pursuant to S-K 31, 1998 among Hollinger International Publishing Inc., 601(b)(4)(iii), the Telegraph Group Limited, Hollinger Canadian Publishing Registrant has not filed a Holdings Inc., various financial institutions, copy of this exhibit but The Toronto Dominion Bank, as Issuing Bank, the Bank of Nova will furnish a copy upon Scotia, as Syndication Agent, Canadian Imperial Bank Commission's request. of Commerce, as Documentation Agent, and Toronto Dominion (Texas), Inc., as Administrative Agent. 4.2 Senior Indenture, dated as of March 18, 1997 Incorporated by reference to Exhibit 4.01 to Current Report on Form 8-K dated March 18, 1997 4.3 Senior Subordinated Indenture, dated as of March 18, 1997 Incorporated by reference to Exhibit 4.03 to Current Report on Form 8-K dated March 18, 1997 4.4 Exchange Indenture, dated July 17, 1997, among Hollinger Incorporated by reference Canadian Publishing Holdings Inc., Hollinger International to Exhibit 4.01 to Inc. and Montreal Trust Company of Canada Registration Statement on Form S-3 (No. 333-35619) 4.5 Indenture dated as of February 7, 1996 among Hollinger Incorporated by reference International Publishing Inc., Hollinger International Inc. to Exhibit 10.4 to Current and Fleet National Bank of Connecticut as Trustee. Report on Form 8-K Dated February 7, 1996 10.1 Services Agreement between the Company and Hollinger Inc., Incorporated by reference as Amended and Restated as of February 7, 1996. to Exhibit 10.4 to Report on Form 10-K for the year ended December 31, 1995
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PRIOR FILING OR EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER - ----------- ---------------------- ---------------------- 10.2 Business Opportunities Agreement between the Company and Incorporated by reference Hollinger Inc., as Amended and Restated as of February 7, to Exhibit 10.5 to Report 1996. on Form 10-K for the year ended December 31, 1995 10.3 Employment and Noncompetition Letter Agreements with Incorporated by reference executive officers. to Exhibit 10.9 to Registration Statement on Form S-1 (No. 33-74980) 10.4 American Publishing Company 1994 Stock Option Plan. Incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1 (No. 33-74980) 10.5 Hollinger International Inc. 1997 Stock Incentive Plan. Incorporated by reference to Annex A to Report on Form DEF 14A dated March 28, 1997 10.6 American Publishing Management Services, Inc. Executive Incorporated by reference Benefit Plan. to Exhibit 10.11 to Registration Statement on Form S-1 (No. 33-74980) 10.7 Share Exchange Agreement dated as of July 19, 1995 between Incorporated by reference Hollinger Inc. and American Publishing Company. to Exhibit 2.1 to Current Report on Form 8-K Dated July 18, 1995 10.8 HTH/FDTH Share Exchange Agreement dated as of July 19, 1995 Incorporated by reference between Hollinger Inc. and First DT Holdings Limited. to Exhibit 2.1 to Current Report on Form 8-K Dated July 18, 1995 10.9 Deposit Agreement dated August 1, 1996 Incorporated by reference to Exhibit 10.01 to Current Report on Form 8-K dated August 7, 1996 10.10 Exchange Agreement dated as of April 18, 1997 among Incorporated by reference Hollinger International Inc., Hollinger Inc. and UniMedia to Exhibit 10.1 to Current Holding Company. Report on Form 8-K dated April 18, 1997. 10.11 Amendment, dated as of March 18, 1997, to the Share Incorporated by reference Exchange Agreement to Exhibit 10.1 to Current Report on Form 8-K dated March 18, 1997.
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PRIOR FILING OR EXHIBIT NO. DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER - ----------- ---------------------- ---------------------- 10.12 Amendment, dated as of March 18, 1997, to the HTH/FDTH Incorporated by reference Share Exchange Agreement to Exhibit 10.2 to Current Report on Form 8-K dated March 18, 1997. 21.1 Significant Subsidiaries of Hollinger International Inc. Incorporated by reference to Exhibit 21.1 to Report on Form 10-K for the year ended December 31, 1995 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule
(b) Reports on Form 8-K. The Company filed a 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. 51 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1999 HOLLINGER INTERNATIONAL INC. (Registrant) By: /s/ Conrad M. Black ---------------------------- Conrad M. Black, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Conrad M. Black Chairman, Chief Executive March 31, 1999 ------------------------ Officer and Director (Principal Conrad M. Black Executive Officer) /s/ J. A. Boultbee Executive Vice President and March 31, 1999 ------------------------ Chief Financial Officer J. A. Boultbee (Principal Financial Officer) /s/ Fredrick A. Creasey Group Corporate Controller March 31, 1999 ------------------------ (Principal Accounting Officer) Frederick A. Creasey /s/ F. David Radler Deputy Chairman, President, March 31, 1999 ------------------------ Chief Operating Officer and F. David Radler Director /s/ Daniel W. Colson Vice Chairman and Director March 31, 1999 ------------------------ Daniel W. Colson /s/ Barbara Amiel Black Vice President - Editorial and March 31, 1999 ------------------------ Director Barbara Amiel Black 52 55 SIGNATURE TITLE DATE --------- ----- ---- /s/ Dwayne O. Andreas Director March 31, 1999 ------------------------ Dwayne O. Andreas Director March __, 1999 ------------------------ Richard R. Burt Director March __, 1999 ------------------------ Raymond G. Chambers /s/ Henry A. Kissinger Director March 31, 1999 ------------------------ Henry A. Kissinger /s/ Marie-Josee Kravis Director March 31, 1999 ------------------------ Marie-Josee Kravis Director March __, 1999 ------------------------ Shmuel Meitar /s/ Richard N. Perle Director March 31, 1999 ------------------------ Richard N. Perle /s/ Robert S. Strauss Director March 31, 1999 ------------------------ Robert S. Strauss Director March __, 1999 ------------------------ A. Alfred Taubman /s/ James R. Thompson Director March 31, 1999 ------------------------ James R. Thompson Director March __, 1999 ------------------------ Lord Weidenfeld Director March __, 1999 ------------------------ Leslie H. Wexner 56 INDEPENDENT AUDITORS' REPORT To the Board of Directors Hollinger International Inc.: We have audited the accompanying consolidated balance sheets of Hollinger International Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hollinger International Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP February 25, 1999 Chicago, Illinois F-1 57 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Statement of Significant Accounting Policies December 31, 1998 and 1997 - -------------------------------------------------------------------------------- 1. PRINCIPLES OF PRESENTATION AND CONSOLIDATION Hollinger International Inc. (the "Company") is a subsidiary of Hollinger Inc., a Canadian corporation. Hollinger Inc. owns 41.3% of the combined equity and 73.9% of the combined voting power of the outstanding Common Stock of the Company, without giving effect to conversion of the Company's remaining Series B Convertible Preferred Stock ("Series B Preferred Stock"), Series C Convertible Preferred Stock ("Series C Preferred Stock") or remaining Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock"). In 1997, the Company and Hollinger Inc. announced that they had reached an agreement for the transfer by Hollinger Inc. of certain of its direct or indirect owned Canadian publishing interests to Hollinger Canadian Publishing Holdings Inc. ("HCPH"), a subsidiary of the Company, for an aggregate consideration of $382,000,000 (Cdn.$523,000,000), (the "Hollinger Inc. Transaction"). The purchase price was satisfied in cash in the amount of $250,000,000, and by the issuance of preferred stock of the Company, which was converted into (i) 829,409 shares of Series C Preferred Stock having a face value of $90,000,000, and (ii) 3,207,045 shares of Class A Common Stock having a nominal agreed value of $42,000,000. The Hollinger Inc. Transaction represents a combination of entities under common control and has been accounted for on an "as-if" pooling-of-interests basis, with the accompanying financial statements restated for all periods presented. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The Company's interest in Southam Inc. ("Southam") was 71.0%, 58.6% and 50.7% at December 31, 1998, 1997 and 1996, respectively. Investments in less than majority-owned affiliated companies are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated on consolidation. 2. DESCRIPTION OF BUSINESS The Company is engaged in the publishing, printing and distribution of newspapers and magazines primarily in the United States, the United Kingdom, Canada and Israel through subsidiaries and affiliates. The Company's raw materials, mainly newsprint and ink, are not dependent on a single or limited number of suppliers. Customers range from individual subscribers to local and national advertisers. F-2 58 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Statement of Significant Accounting Policies, Continued December 31, 1998 and 1997 - -------------------------------------------------------------------------------- 3. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. CASH AND CASH EQUIVALENTS Cash equivalents consist of certain highly liquid investments with original maturities of three months or less. 5. INVENTORIES Inventories consist principally of newsprint that is valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method, except for newsprint inventories of certain subsidiaries which are accounted for using the last-in, first-out method (LIFO). At December 31, 1998 and December 31, 1997, approximately 16% and 11%, respectively, of the Company's newsprint inventories were valued using LIFO. If the FIFO method had been used, such newsprint inventories would have been increased by $1,573,000 and $1,198,000, respectively. 6. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the recoverability of its long-lived assets, such as property, plant and equipment and intangible assets, whenever events or changes in business circumstances indicate the carrying amount of the assets, or related group of assets, may not be fully recoverable. The assessment of recoverability is based on management's estimate of undiscounted future operating cash flows of its long-lived assets. If the assessment indicates that the undiscounted operating cash flows do not exceed the net book value of the long-lived assets, then a permanent impairment has occurred. The Company would record the difference between the net book value of the long-lived asset and the fair value of such asset as a charge against income in the statement of operations if such a difference arose. The Company determined that no material permanent impairments had occurred at December 31, 1998. F-3 59 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Statement of Significant Accounting Policies, Continued December 31, 1998 and 1997 - -------------------------------------------------------------------------------- 7. DERIVATIVES The Company is a limited user of derivative financial instruments to manage risks generally associated with interest rate and foreign exchange rate market volatility. The Company does not hold or issue derivative financial instruments for trading purposes. Amounts receivable under interest rate cap agreements are accrued as a reduction of interest expense and amounts payable are accrued as interest expense. The interest rate differential on swap arrangements related to preferred stock of subsidiaries were treated as an adjustment to the underlying dividends which were disclosed as minority interest. Interest rate differentials on all other swap arrangements are accrued as interest rates change over the contract periods. 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Routine maintenance and repairs are expensed as incurred. Depreciation is calculated under the straight-line method over the estimated useful lives of the assets, principally 25 to 40 years for buildings and improvements and 3 to 10 years for machinery and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset and the lease term. Construction in progress for production facilities is not depreciated until facilities are in use. 9. INTANGIBLE ASSETS Intangible assets consist principally of circulation related assets, non-competition agreements with former owners of acquired newspapers and the excess of acquisition costs over estimated fair value of net assets acquired (goodwill). The fair market value of intangible assets purchased is determined primarily through the use of independent appraisals. Amortization is calculated using the straight-line method over the respective estimated useful lives to a maximum of 40 years. 10. DEFERRED FINANCING COSTS Deferred financing costs consist of certain costs incurred in connection with debt financing. Such costs are amortized on a straight-line basis over the remaining term of the related debt, up to ten years. 11. DEFERRED REVENUE Deferred revenue represents subscription payments that have not been earned and are recognized on a straight-line basis over the term of the related subscription. F-4 60 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Statement of Significant Accounting Policies, Continued December 31, 1998 and 1997 - ------------------------------------------------------------------------------- 12. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 13. FOREIGN CURRENCY TRANSLATION Foreign operations of the Company have been translated into U.S. dollars in accordance with the principles prescribed in Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". All assets, liabilities and minority interests are translated at year-end exchange rates, stockholders' equity is translated at historical rates, and revenues and expenses are translated at the average rates of exchange prevailing throughout the year. These exchange gains or losses are not included in earnings unless they are actually realized through a reduction of the Company's net investment in the foreign subsidiary. Gains and losses arising from the Company's foreign currency transactions are reflected in net earnings. 14. EARNINGS PER SHARE For the years ended December 31, 1998, 1997 and 1996, earnings per share was computed in accordance with Statement of Financial Accounting Standards No. 128, which the Company adopted during the fourth quarter of 1997. See note 10 for a reconciliation of the numerator and denominator for the calculation of basic and diluted earnings per share. 15. STOCK-BASED COMPENSATION The Company utilizes the intrinsic value based method of accounting for its stock-based compensation arrangements. 16. RECLASSIFICATIONS Certain 1997 and 1996 amounts in the consolidated financial statements have been reclassified to conform to the 1998 presentation. F-5 61 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------- ASSETS 1998 1997 - ------------------------------------------------------------------------------------------------- (in thousands) Current assets: Cash and cash equivalents $ 57,788 $ 107,384 Accounts receivable, net of allowance for doubtful accounts of $14,784 in 1998 and $24,966 in 1997 333,706 327,438 Due from affiliates 27,246 18,411 Inventories 32,312 32,454 Prepaid expenses and other current assets 18,872 19,566 - ------------------------------------------------------------------------------------------------- Total current assets 469,924 505,253 Investments (note 2) 143,338 125,731 Property, plant and equipment, net of accumulated depreciation (note 3) 661,611 615,579 Intangible assets, net of accumulated amortization of $236,908 in 1998 and $257,702 in 1997 1,858,750 1,671,210 Deferred financing costs and other assets 118,101 106,148 - ------------------------------------------------------------------------------------------------- $3,251,724 $3,023,921 =================================================================================================
(Continued) F-6 62 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 - -------------------------------------------------------------------------------------------------------------------- (in thousands) Current liabilities: Current installments of long-term debt (note 4) $ 101,691 $ 35,560 Accounts payable 137,691 101,925 Accrued expenses 285,859 195,109 Income taxes payable 13,890 30,407 Deferred revenue 72,481 85,887 - -------------------------------------------------------------------------------------------------------------------- Total current liabilities 611,612 448,888 Long-term debt, less current installments (note 4) 1,397,827 1,392,855 Deferred income taxes (note 18) 207,667 132,137 Other liabilities 78,133 83,514 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 2,295,239 2,057,394 - -------------------------------------------------------------------------------------------------------------------- Minority interest (note 6) 107,002 203,034 - -------------------------------------------------------------------------------------------------------------------- Redeemable preferred stock (note 7) 31,562 75,891 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity (note 8): Convertible preferred stock 6,377 195,104 Class A common stock, $0.01 par value. Authorized 250,000,000 shares; issued and outstanding 95,572,430 and 72,852,799 shares in 1998 and 1997, respectively 956 726 Class B common stock, $0.01 par value. Authorized 50,000,000 shares; issued and outstanding 14,990,000 shares in 1998 and 1997 150 150 Additional paid-in capital 610,440 358,871 Accumulated other comprehensive income - cumulative foreign (65,799) (27,978) currency translation adjustment Retained earnings 301,133 175,802 - -------------------------------------------------------------------------------------------------------------------- 853,257 702,675 Class A common stock in treasury, at cost-1,403,400 shares in 1998 and 1,295,900 shares in 1997 (16,744) (15,073) Issued shares in escrow-1,363,293 in 1998 (note 11) (18,592) -- - -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 817,921 687,602 - -------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (note 16) $ 3,251,724 $ 3,023,921 ====================================================================================================================
See statement of significant accounting policies and accompanying notes to consolidated financial statements. F-7 63 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- (in thousands, except per share data) Operating revenues: Advertising $ 1,565,790 $ 1,567,897 $ 1,364,527 Circulation 517,629 523,591 562,122 Job printing 70,461 80,024 80,132 Other 43,880 40,018 67,241 - ------------------------------------------------------------------------------------------- Total operating revenues 2,197,760 2,211,530 2,074,022 - ------------------------------------------------------------------------------------------- Operating costs and expenses: Newsprint 343,809 312,010 346,446 Compensation costs 699,126 736,153 731,673 Other operating costs 731,726 735,832 703,934 Infrequent items (note 12) 26,172 25,243 41,567 Depreciation and amortization 114,848 114,570 102,435 - ------------------------------------------------------------------------------------------- Total operating costs and expenses 1,915,681 1,923,808 1,926,055 - ------------------------------------------------------------------------------------------- Operating income 282,079 287,722 147,967 - ------------------------------------------------------------------------------------------- Other income (expense): Interest expense (105,841) (113,558) (84,356) Amortization of debt issue costs (5,869) (13,466) (16,640) Interest and dividend income 8,231 9,924 12,460 Foreign currency gains (losses), net (3,336) 459 198 Other income, net (note 13) 331,376 73,068 70,309 - ------------------------------------------------------------------------------------------- Total other income (expense) 224,561 (43,573) (18,029) - ------------------------------------------------------------------------------------------- Earnings before income taxes, minority interest and extraordinary item 506,640 244,149 129,938 Income taxes (note 18) 223,099 93,655 51,865 - ------------------------------------------------------------------------------------------- Earnings before minority interest and extraordinary item 283,541 150,494 78,073 Minority interest 81,562 45,973 33,138 - ------------------------------------------------------------------------------------------- Earnings before extraordinary item 201,979 104,521 44,935 Extraordinary loss on debt extinguishments (5,067) -- (2,150) - ------------------------------------------------------------------------------------------- Net earnings $ 196,912 $ 104,521 $ 42,785 =========================================================================================== Basic earnings per share before extraordinary item $ 1.70 $ 0.93 $ 0.43 - ------------------------------------------------------------------------------------------- Diluted earnings per share before extraordinary items $ 1.47 $ 0.87 $ 0.42 =========================================================================================== Basic earnings per share $ 1.65 $ 0.93 $ 0.41 - ------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.43 $ 0.87 $ 0.39 ===========================================================================================
See statement of significant accounting policies and accompanying notes to consolidated financial statements. F-8 64 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Years Ended December 31, 1998, 1997 and 1996
- ------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------- (in thousands) Net earnings $ 196,912 $ 104,521 $ 42,785 Other comprehensive income: Foreign currency translation adjustments (37,821) (50,973) 28,345 - ------------------------------------------------------------------------------------------- Comprehensive income $ 159,091 $ 53,548 $ 71,130 ===========================================================================================
See statement of significant accounting policies and accompanying notes to consolidated financial statements. F-9 65 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1998, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------------------- Common Accumulated Convertible stock Additional other Issued preferred Class paid-in comprehensive Retained Treasury shares stock A & B capital income earnings stock in escrow Total - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1995 $ -- $ 600 $ 34,537 $ (5,350) $ 130,186 $ -- $ -- $ 159,973 Issuance of 20,700,000 Convertible Preferred Shares 195,104 -- -- -- -- -- -- 195,104 Issuance of 27,600,000 Class A Common Shares -- 276 245,537 -- -- -- -- 245,813 Cash dividends - Class A and Class B, $0.40 per share -- -- -- -- (31,522) -- -- (31,522) Dividends on redeemable preferred stock -- -- -- -- (1,087) -- -- (1,087) Dividends on convertible preferred stock -- -- -- -- (9,620) -- -- (9,620) Contribution by Hollinger Inc. -- -- 56,535 -- -- -- -- 56,535 Translation adjustments -- -- -- 28,345 -- -- -- 28,345 Net earnings -- -- -- -- 42,785 -- -- 42,785 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 195,104 876 336,609 22,995 130,742 -- -- 686,326 Shares issued for acquisition -- -- 1,000 -- -- -- -- 1,000 Cash dividends - Class A and Class B, $0.40 per share -- -- -- -- (34,150) -- -- (34,150) Dividends on redeemable preferred stock -- -- -- -- (1,060) -- -- (1,060) Dividends on convertible preferred stock -- -- -- -- (22,408) -- -- (22,408) Contribution by Hollinger Inc. -- -- 17,986 -- (1,843) -- -- 16,143 Translation adjustments -- -- 3,276 (50,973) -- -- -- (47,697) Net earnings -- -- -- -- 104,521 -- -- 104,521 Common shares repurchased -- -- -- -- -- (15,073) -- (15,073) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 195,104 876 358,871 (27,978) 175,802 (15,073) -- 687,602 Stock option exercise -- 2 1,966 -- -- -- -- 1,968 Preferred stock conversion to Class A (188,727) 186 188,541 -- -- -- -- -- Series D conversion to Class A -- 28 39,222 -- -- -- -- 39,250 Cash dividends - Class A and Class B, $0.475 per share -- -- -- -- (46,985) -- -- (46,985) Dividends on redeemable preferred stock -- -- -- -- (736) -- -- (736) Dividends on convertible preferred stock -- -- -- -- (18,726) -- -- (18,726) Deemed dividend -- -- -- -- (5,134) -- -- (5,134) Translation adjustments -- -- 5,079 (37,821) -- -- -- (32,742) Net earnings -- -- -- -- 196,912 -- -- 196,912 Interest on forward share purchase -- -- (1,619) -- -- -- -- (1,619) Common shares repurchased -- -- -- -- -- (1,671) -- (1,671) Escrow shares on total return equity swap -- 14 18,380 -- -- -- -- 18,394 Shares issued in escrow -- -- -- -- -- -- (18,592) (18,592) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 6,377 $ 1,106 $ 610,440 $ (65,799) $ 301,133 $ (16,744) $ (18,592) $ 817,921 ===================================================================================================================================
See statement of significant accounting policies and accompanying notes to consolidated financial statements. F-10 66 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net earnings $ 196,912 $ 104,521 $ 42,785 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 114,848 114,570 102,435 Deferred income taxes 75,530 62,016 31,226 Amortization of debt issue costs 5,869 13,466 20,097 Minority interest 81,562 45,973 33,138 Equity in earnings of affiliates, net of dividends received (3,674) (5,851) (1,104) Gain on sale of investments -- (66,128) (53,518) Gain on sale of assets (363,074) (3,286) (14,264) Amortization of deferred gain (1,616) (1,616) (1,616) Unrealized foreign exchange gain on redeemable preferred stock -- (464) (481) Other (2,228) 1,872 (12,704) Changes in assets and liabilities, net of acquisitions: Accounts receivable (8,566) (4,556) (20,022) Inventories (662) (3,064) 20,158 Prepaid expenses and other current assets (12,072) (10,405) (1,300) Accounts payable 38,809 (14,614) (3,598) Accrued expenses (38,064) 16,701 56,174 Income taxes payable (21,232) (7,209) 27,131 Deferred revenue and other (8,604) 854 (26,115) - --------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 53,738 242,780 198,422 - --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property, plant and equipment (163,997) (118,291) (124,625) Proceeds from sale of property, plant and equipment 22,098 5,613 197,698 Purchase of subsidiaries' stock and other investments (223,967) (67,344) (780,167) Acquisitions, net of cash acquired (332,507) (58,839) (400,125) Proceeds on disposal of investments and assets 601,980 247,418 191,878 Other 4,068 (104) 20,026 - --------------------------------------------------------------------------------------------------------------- Cash provided by (used in) investing activities $ (92,325) $ 8,453 $(895,315) ===============================================================================================================
(Continued) F-11 67 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
- ---------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from financing activities: Repayment of debt $(246,140) $(141,623) $(330,757) Proceeds from issuance of bank debt 349,513 877,942 413,039 Repayment of bank loans -- (495,835) (395,752) Proceeds from bank loans -- -- 734,335 Payment of debt issue costs (12,343) (38,988) (27,016) Change in borrowings from affiliates 5,247 (302,587) (34,582) Net proceeds from issuance of equity 1,968 -- 440,917 Issuance of common shares by a subsidiary 758 8,119 21,816 Repurchase of common shares (1,671) (15,073) -- Repurchase of common shares by a subsidiary (36,124) -- -- Redemption of preference shares -- (116,863) -- Dividends paid (66,447) (57,618) (42,502) Contributions by Hollinger Inc. -- 16,143 -- Acquisitions paid for by Hollinger Inc. -- -- 68,600 Deemed dividend (5,134) -- -- Dividends paid by subsidiaries to minority stockholders, net of related swap income (3,735) (10,443) (33,399) Other (1,667) (98) -- - ---------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities (15,775) (276,924) 814,699 - ---------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 4,766 (15,475) 6,934 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (49,596) (41,166) 124,740 Cash and cash equivalents at beginning of year 107,384 148,550 23,810 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 57,788 $ 107,384 $ 148,550 ==========================================================================================================
See statement of significant accounting policies and accompanying notes to consolidated financial statements. F-12 68 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998 and 1997 - -------------------------------------------------------------------------------- (1) ACQUISITIONS AND DISPOSITIONS (a) In January 1998, the Company sold 80 community newspapers for total proceeds of $310,000,000 resulting in a pre-tax gain of approximately $201,245,000. (b) In May 1998, Southam sold American Trucker magazine and related publications and a paid daily circulation newspaper in Western Canada for total proceeds of $93,672,000 resulting in a pre-tax gain of $56,058,000. (c) In July 1998, the Company acquired two community newspapers for a total cash price of $41,800,000. The excess purchase price of $39,350,000 over the estimated fair value of tangible assets acquired was recorded as identifiable intangibles and goodwill. (d) In August 1998, HCPH acquired 8,268,900 additional shares of Southam for $168,620,000, increasing its ownership interest at that time to 69.1% from 58.6%. Subsequent to August 1998, Southam repurchased some of its own common shares, increasing the Company's ownership interest to 71.0%. (e) In September 1998, in two separate transactions Southam acquired 100% of The Financial Post Company, which published The Financial Post, a daily newspaper in Canada. In addition, in July 1998, Southam acquired the Victoria Times Colonist and the Nanaimo Daily News and certain community newspapers on Vancouver Island in British Columbia, Canada. The total cost of these acquisitions was $208,535,000. The excess purchase price of $197,728,000 over the estimated fair value of tangible assets acquired was recorded as identifiable intangibles and goodwill. In a related transaction, in September 1998, Southam sold the Hamilton Spectator and The Record (Kitchener-Waterloo) and HCPH sold the Cambridge Record and the Guelph Mercury for total proceeds of $173,765,000 resulting in a pre-tax gain of $105,771,000. (f) In three separate transactions throughout 1997, the Company acquired four paid daily newspapers, four paid non-daily newspapers and six free distribution newspapers. In addition, the Company acquired two paid daily newspapers and one paid non-daily newspaper in exchange for one daily newspaper, three non-daily newspapers and one free distribution newspaper. Total cash consideration paid for these transactions was $22,138,000. The excess purchase price of $19,645,000 over the estimated fair value of tangible assets acquired was recorded as identifiable intangibles and goodwill. F-13 69 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (g) In July 1997, HCPH acquired 6,552,425 additional shares of Southam for $113,400,000, increasing its ownership interest at that time to 58.6%. (h) In two separate transactions during 1997, Southam acquired one paid daily newspaper, one paid non-daily newspaper and 13 free distribution newspapers. Total cash consideration for these transactions was $16,800,000. The excess purchase price of $14,400,000 over the estimated fair value of tangible assets acquired was recorded as identifiable intangibles and goodwill. (i) In 1997, the Canadian Newspapers sold two weekly newspapers and one free distribution publication for total proceeds of $1,500,000 resulting in a pre-tax loss of $937,000. All of the above acquisitions are accounted for using the purchase method of accounting. Based on estimated fair values of the acquired assets and liabilities, the purchase price including direct costs is allocated to working capital, property, plant and equipment, and intangible assets. The results of the newspapers acquired are included in the consolidated results of operations from the date of acquisition. The pro forma effect of the above acquisitions is immaterial. In 1997, the Company and Hollinger Inc. agreed to the transfer of Hollinger Inc.'s Canadian publishing interests to HCPH for consideration of Cdn.$523,000,000 ($382,000,000). The purchase price was paid by cash of $250,000,000; by 829,409 shares of Series C Preferred Stock with a face value of $90,000,000; and by 3,207,045 shares of Class A Common Stock valued at $42,000,000. This represents a combination of entities under common control and has been accounted for on an "as-if" pooling-of-interests basis, with the financial statements restated on this basis for all years that the properties were owned by Hollinger Inc. F-14 70 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (2) INVESTMENTS
- ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- (in thousands) 3396754 Canada Limited (note 6) $ 26,966 29,018 Joint ventures 24,768 20,993 Notes receivable from joint ventures 10,542 24,238 Advances under printing contracts with joint ventures 51,623 45,012 Hollinger Digital investments 21,737 3,062 Other 7,702 3,408 - ----------------------------------------------------------------------------- $143,338 125,731 =============================================================================
F-15 71 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (3) PROPERTY, PLANT AND EQUIPMENT
- -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- (in thousands) Land $ 55,333 58,636 Building and leasehold interests 242,941 286,933 Machinery and equipment 668,168 712,890 Construction in progress 94,867 24,737 - -------------------------------------------------------------------------------- 1,061,309 1,083,196 Less accumulated depreciation and amortization 399,698 467,617 - -------------------------------------------------------------------------------- $ 661,611 615,579 ================================================================================
Depreciation and amortization of property, plant and equipment totaled $59,842,000, $61,635,000 and $60,640,000 in 1998, 1997 and 1996, respectively. The Company capitalized interest in 1998 amounting to $2,999,000 related to the construction and equipping of production facilities for its newspaper in Chicago. In 1997 and 1996, Southam capitalized interest amounting to $6,039,000 and $4,731,000, respectively, related to the construction of a production facility. F-16 72 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (4) LONG-TERM DEBT
- -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- (in thousands) Hollinger International Publishing Inc. ("Publishing"): Subordinated Notes due 2006 $ 250,000 250,000 Senior Notes due 2005 260,000 260,000 Senior Subordinated Notes due 2007 290,000 290,000 Bank Credit Facility due 2004 198,528 85,000 United States Newspaper Group: Senior Secured Notes -- 105,000 Amounts due under non-interest bearing non-competition agreements due 1999-2006 4,277 5,889 Other due 1999-2006 (at varying interest rates up to 9%) 2,413 4,516 Telegraph Group Ltd. ("Telegraph") Obligations under capital leases (note 5) 10,877 12,699 Other -- 5,967 Hollinger Canadian Publishing Holdings: Bank Credit Facility due 2004 291,965 233,840 Southam: Promissory notes (at varying interest rates up to 6.0%) 91,084 72,090 Notes due 1999-2005 (at varying interest rates up to 8.5%) 95,742 102,851 Other: Other debt 4,632 481 Other capital leases -- 82 - -------------------------------------------------------------------------------- 1,499,518 1,428,415 Less current portion included in current liabilities 101,691 35,560 - -------------------------------------------------------------------------------- $1,397,827 1,392,855 ================================================================================
F-17 73 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (a) The following table summarizes the terms of the Publishing notes:
----------------------------------------------------------------------------------------------------- Early Early Interest Issue Redemption Redemption Principal Rate Date Status Maturity Date Price ----------------------------------------------------------------------------------------------------- $ 250,000,000 9.25% February 1,1996 Senior February 1, February 1, 2001-104.625% Subordinated 2006 2001 or after 2002-103.085% 2003-101.545% Thereafter-100% --------------------------------------------------------------------------------------------------- $ 260,000,000 8.625% March 18, 1997 Senior March 15, 2005 None - --------------------------------------------------------------------------------------------------- $ 290,000,000 9. 25% March 18, 1997 Senior March 15, 2007 March 15, 2002-104.625% Subordinated 2002 or after 2003-103.083% 2004-101.541% Thereafter-100% ---------------------------------------------------------------------------------------------------
Interest on these notes is payable semi-annually and the notes are guaranteed by the Company. The Indentures relating to the Subordinated Notes, the Senior Notes and the Senior Subordinated Notes contain similar financial covenants and negative covenants that limit Publishing's ability to, among other things, incur indebtedness, pay dividends or make other distributions on its capital stock, enter into transactions with affiliates, and sell assets, including stock of a restricted subsidiary. The Indentures provide that upon a Change of Control (as defined in the Indentures), each noteholder has the right to require Publishing to purchase all or any portion of such noteholder's notes at a cash purchase price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest. (b) On April 7, 1997, Publishing, HCPH, the Telegraph, a subsidiary of the Company and a group of financial institutions entered into a long-term bank credit facility (the "Bank Credit Facility"). At December 31, 1998, after a number of amendments and restatements, the Bank Credit Facility was for a total of $625,000,000. At December 31, 1998 and 1997 Publishing had borrowings under the Bank Credit Facility of $198,528,000 and $85,000,000, respectively, and HCPH had borrowings of $291,965,000 and $233,840,000, respectively. At December 31, 1998, the interest rate on the Bank Credit Facility was 6.7%. On February 2, 1999, the Bank Credit Facility was reduced by $200,000,000 with the proceeds from the sale of the 45 U.S. community newspapers. The Bank Credit Facility is due to mature on November 30, 1999. F-18 74 HOLLINGER INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- On February 25, 1999, the Company received commitments to increase the Bank Credit Facility to $830,000,000 comprised of a $580,000,000 revolving credit line maturing on September 30, 2004 and a $250,000,000 term loan maturing on December 31, 2004. Loans under the Bank 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. The Bank Credit Facility was first entered into on April 7, 1997 by Publishing, HCPH, the Telegraph and a group of financial institutions. The Bank Credit Facility originally provided for up to $900,000,000 in total credit availability under four tranches. In July 1997, the Company reduced its total available commitments to $515,000,000 and reduced the HCPH tranche to $315,000,000. The parties to the Bank Credit Facility entered into a First Amendment Agreement (the "First Amendment") dated May 12, 1997. The First Amendment amended certain terms and conditions of the Bank Credit Facility to permit HCPH to bid for the remaining shares of Southam not then currently owned by it. The First Amendment allowed for the Southam offer as an "Approved Acquisition" and modified certain definitions, representations and covenants to account for, among other things, the issuance of the HCPH Special Shares, the operation of the Exchange Indenture, approval by the lenders of the bid circular and related documentation, and the provision and timing of additional security under the Bank Credit Facility. The parties to the Bank Credit Facility entered into a Second Amendment Agreement (the "Second Amendment") dated June 23, 1997. The Second Amendment amended certain terms and conditions of the Bank Credit Facility primarily to allow HCPH to take up less than all of the outstanding Southam shares and allowed Publishing to pay up to $20,000,000 in dividends to the Company for Class A Common Stock repurchases. The parties to the Bank Credit Facility entered into a Third Amended and Restated Credit Agreement ("Restated Facility") dated March 31, 1998. Among other things, the Restated Facility extended the maturity date, adjusted certain financial and reporting covenants, decreased interest rates, expanded the capital expenditures limitations and increased the amount of dividends Publishing can pay to the Company for Class A Common Stock repurchases to $30,000,000. The parties to the Bank Credit Facility entered into a First Amendment Agreement to the Restated Facility ("First Restated Amendment") dated August 26, 1998. The First Restated Amendment permitted HCPH to acquire additional Southam common shares (see note 1(d)) F-19 75 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- and increased the permitted regular quarterly dividend from Publishing to the Company to $0.1375 per common share from $0.10. The parties to the Bank Credit Facility entered into a Second Amendment Agreement to the Restated Facility ("Second Restated Amendment") dated December 11, 1998. The Second Restated Amendment permitted HCPH to acquire additional Southam common shares (see note 22(a)) and permitted the sale of 45 U.S. community newspapers (see note 22(d)) and increased the Bank Credit Facility to $625,000,000. (c) U.S. Newspaper Group Senior Secured Notes ("AP-91 Notes") were repayable in annual installments from September 1, 1998 through September 1, 2000 and bore interest at rates ranging from 10.44% to 10.53%. These notes were repaid in January 1998 in conjunction with the sale of approximately 80 community newspapers (see note 1(a)). (d) (i) During December 1998, Southam entered into a six-month, unsecured Cdn.$700,000,000 bank credit facility to facilitate payment of an extraordinary dividend, to repay borrowings under the previous Cdn.$310,000,000 credit facility and for general corporate purposes. The new Bank Credit Facility, described in (b) above, will replace the six-month, unsecured Cdn.$700,000,000 facility. The amount borrowed at December 31, 1998 and December 31, 1997 was $91,084,000 and $72,090,000, respectively. (ii) Southam has converted a portion of its variable rate interest exposure to fixed rate by entering into a ten year Cdn.$25,000,000 fixed rate interest swap at 8.7%, maturing May 2004. Southam pays interest at the fixed rate and it receives interest based on the three-month banker's acceptance rate, which is reset quarterly, on the nominal principal. (e) The Company's agreements with banks and other debtors contain various restrictive provisions relating to maintenance of certain financial ratios, restrictions on additional indebtedness, occurrence of certain corporate transactions and limitations on the amount of capital expenditures and restricted payments (which generally include dividends and management fees). At December 31, 1998, the Company was in compliance with the aforementioned restrictive provisions. (f) Principal amounts payable on long-term debt, excluding obligations under capital leases, are: 1999 - $97,369,000; 2000 - $37,778,000; 2001 - $129,278,000; 2002 - $124,380,000 and 2003 - $124,540,000. (g) Interest paid for 1998, 1997 and 1996 was $118,563,000, $89,661,000 and $72,616,000, respectively. F-20 76 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (5) LEASES The Company leases various facilities and equipment under noncancelable operating lease arrangements. Rental expense under all operating leases was approximately $16,724,000, $15,422,000 and $17,809,000 in 1998, 1997 and 1996, respectively. Minimum lease commitments together with the present value of obligations at December 31, 1998 are as follows:
- ----------------------------------------------------------------------------------------------------- Capital Operating leases leases - ----------------------------------------------------------------------------------------------------- (in thousands) 1999 $ 4,322 $ 14,627 2000 3,889 13,078 2001 4,105 12,304 2002 -- 11,628 2003 -- 11,018 Later years -- 98,543 - --------------------------------------------------------------------------------------------------- 12,316 $ 161,198 =========== Less imputed interest and executory costs 1,439 - ---------------------------------------------------------------------------------- Present value of net minimum payments 10,877 Less current portion included in current liabilities 4,322 - ---------------------------------------------------------------------------------- Long-term obligations $ 6,555 ==================================================================================
Minimum lease payments have been reduced for rental income from noncancelable subleases by approximately $187,000 in 1998 and lesser amounts thereafter (total reductions $280,000). F-21 77 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (6) MINORITY INTEREST
- ------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------ (in thousands) Common shares of subsidiary $ 36,421 128,156 Special shares of HCPH 69,581 74,878 Special shares of subsidiary 1,000 -- - ------------------------------------------------------------ $107,002 203,034 ============================================================
In July 1997, HCPH issued 6,552,425 Cdn.$10 Non-Voting Special Shares for a total issue price of Cdn.$65,524,000 ($47,564,000). These shares are exchangeable, at the option of the holder, at any time after December 23, 1997 and before June 26, 2000 into newly issued Class A Common Stock of the Company. During that period the number of shares that will be issued on exchange was 0.510 for the first six months, increasing by 0.020 for each six-month period thereafter until June 8, 2000. For the period from June 9, 2000 through June 25, 2000, the exchange ratio will be 0.602 shares of Class A Common Stock per special share. On June 26, 2000 any special shares not previously exchanged will be exchanged for that number of shares of Class A Common Stock equal to US$8.88 divided by 95% of the then current market price of the Class A Common Stock. Upon either an optional exchange or a mandatory exchange, the Company has the option of paying cash in lieu of issuing Class A Common Stock. In September 1997, an additional 4,146,107 Special Shares of HCPH were issued for a total issue price of Cdn.$41,500,000 ($29,000,000). in exchange for 4,146,107 special shares in 3396754 Canada Limited ("3396754"), a subsidiary of Hollinger Inc. These shares have the same terms and conditions as the special shares described in the previous paragraph. The Company's obligations to issue Class A Common Stock is however, offset by an obligation of Hollinger Inc., through a subsidiary, to deliver those shares of Class A Common Stock from its holdings. As a result, these shares do not represent an obligation of the Company and will not ultimately lead to any increase in the number of issued shares or to any dilution of earnings. F-22 78 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (7) REDEEMABLE PREFERRED STOCK In 1995, the Company issued 739,500 shares of Series A Preferred Stock to Hollinger Inc. and these were subsequently converted into 739,500 shares of Series D Preferred Stock. These shares are redeemable at the option of either the holder or the Company at a price of Cdn.$146.63 ($95.37 based on December 31, 1998 exchange rates) plus accrued dividends. The holder of these shares may, at any time, convert such shares into shares of Class A Common Stock of the Company at a conversion price of $14.00 per share of Class A Common Stock. The Series D Preferred Stock ranks senior to the Series B Preferred Stock and the Series C Preferred Stock as to dividends and upon liquidation. The Series D Preferred Stock is non-voting and is entitled to receive cumulative cash dividends, payable quarterly. The amount of each quarterly dividend per share is equal to the aggregate amount of ordinary course cash dividends paid during the preceding calendar quarter on 7,395,000 of the Southam shares held by HCPH divided by 739,500. In 1998, the dividend on the Series D Preferred Stock amounted to $1.36 per share. On September 30, 1998, 408,551 shares of Series D Preferred Stock were converted into 2,795,165 shares of Class A Common Stock and these shares were purchased by a group of banks pursuant to the Total Return Equity Swap described in note 11. At December 31, 1998, 330,949 shares of Series D Preferred Stock were outstanding and based on exchange rates in effect on that day these were exchangeable into 2,254,000 shares of Class A Common Stock of the Company. In February 1999, 196,823 shares of Series D Preferred Stock were redeemed for cash leaving 134,126 shares outstanding. (8) STOCKHOLDERS' EQUITY The Company is authorized to issue 20,000,000 shares of preferred stock in one or more series and to designate the rights, preferences, limitations and restrictions of and upon shares of each series, including voting, redemption and conversion rights. In addition to the Series D Preferred Stock referred to in note 7 above, the Company has issued Series B and Series C Preferred Stock. The terms and conditions of these shares are described below: SERIES B These shares underlie an issue of Preferred Redeemable Increased Dividend Equity Securities ("PRIDES"). The PRIDES are depository shares and each one, in effect, represents one-half of a share of Series B Preferred Stock. Each PRIDES has a stated value of $9.75 and is entitled to cumulative dividends at a rate of 9.75% per annum payable quarterly. At any time between August 1, 1999 and August 1, 2000, the Company may redeem any or all of the outstanding shares of the PRIDES for shares of Class A Common Stock based on a defined conversion ratio. That ratio is $9.988 at the start of the period declining to $9.75 at the end plus any accrued and unpaid dividends divided by the current market price of the Class A Common Stock. In no case F-23 79 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- can the conversion ratio be less than 0.8439 of a share of Class A Common Stock per PRIDES. Each PRIDES entitles the holder to 4/5ths of a vote for the election of Directors and other matters coming before meetings of shareholders. The Series B Preferred Stock ranks on par with the Series C Preferred Stock and junior to the Series D Preferred Stock as to dividends and upon liquidation. In July 1998, pursuant to an exchange offer, 19,993,531 PRIDES were exchanged for 18,394,048 shares of Class A Common Stock. At December 31, 1998, 706,469 PRIDES were outstanding and, at a conversion rate of 0.8439 these would convert into 596,189 shares of Class A Common Stock. This conversion ratio will be in effect as long as the market value of the Class A Common Stock is $11.55 or more. SERIES C Pursuant to the January 1997 transaction wherein HCPH acquired Canadian publishing assets from Hollinger Inc., the Company issued 829,409 shares of Series C Preferred Stock. These shares are similar to the PRIDES described above. The stated value of each share is $108.51 and cumulative dividends are payable quarterly at 9.5% per annum of this amount. Between June 1, 2000 and June 1, 2001, the Company can redeem the Series C Preferred Stock based on the market value of the shares of Class A Common Stock for no less than 8.503 shares of Class A Common Stock per share of Series C Preferred Stock. If not previously redeemed, the stock will mandatorily convert into 9.8646 shares of Class A Common Stock on June 1, 2001. The Series C Preferred Stock ranks on par with the Series B Preferred Stock and junior to the Series D Preferred Stock as to dividends and upon liquidation. The holders of Series C Preferred Stock have the right to vote together as a single class with the holders of Class A and Class B Common Stock and Series B Preferred Stock in the election of Directors and upon each other matter coming before the stockholders of the Company on the basis of ten votes per share of Series C Preferred Stock. At the 8.503 conversion ratio, these shares will convert into 7,052,464 shares of Class A Common Stock. This conversion ratio will be in effect at any time that the market value of the Class A Common Stock is $12.76 or higher. F-24 80 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- CLASS A AND CLASS B COMMON STOCK Class A Common Stock and Class B Common Stock have identical rights with respect to cash dividends and in any sale or liquidation, but different voting rights. Each share of Class A Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to ten votes per share, on all matters, including the election of directors, where the two classes vote together as a single class. Class B Common Stock is convertible at any time at the option of Hollinger Inc. into Class A Common Stock on a share-for-share basis and is transferable by Hollinger Inc. under certain conditions. The contributions by Hollinger Inc. in 1997 and 1996 represent amounts paid for by Hollinger Inc. and net distributions prior to the Hollinger Inc. Transaction. GENERAL A significant portion of the Company's operating income and net earnings is derived from foreign subsidiaries and affiliated companies. As an international holding company, the Company's ability to meet its financial obligations is dependent upon the availability of cash flows from foreign subsidiaries and affiliated companies (subject to applicable withholding taxes) through dividends, intercompany advances, management fees and other payments. The Company's subsidiaries and affiliated companies are under no obligation to pay dividends. (9) STOCK OPTION PLAN During May 1994, the Company adopted the Hollinger International Inc. 1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan was amended in September 1996 to increase the number of shares authorized for issuance up to 1,471,140 shares. In 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive Plan") which replaces the 1994 Plan. The Incentive Plan is administered by an independent committee ("Committee") of the Board of Directors. The Committee has the authority to determine the employees to whom awards will be made, the amount and type of awards, and the other terms and conditions of the awards. The Incentive Plan provides for awards of up to 5,156,915 shares of Class A Common Stock. The Incentive Plan authorizes the grant of incentive stock options and nonqualified stock options. The exercise price for stock options must be at least equal to 100% of the fair market value of the Class A Common Stock on the date of grant of such option. Southam has a stock option plan under which options have been granted to executives and employees. At December 31, 1998, all options granted had been exercised. At December 31, 1997, options for 10,000 shares had been granted with 5,000 options exercisable at that date. F-25 81 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had the Company determined compensation costs based on the fair value at the grant date of its stock options under FASB Statement of Financial Accounting Standards No. 123 (FAS 123), the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following table. The pro forma effect includes compensation expense related to stock options at Southam.
- ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- (in thousands except per share amounts) Net earnings as reported $ 196,912 104,521 42,785 Pro forma net earnings 194,017 102,469 41,924 Basic earnings per share as reported $ 1.65 0.93 0.41 Diluted earnings per share as reported 1.43 0.87 0.39 Pro forma basic earnings per share $ 1.62 0.90 0.39 Pro forma diluted earnings per share 1.41 0.85 0.38 ===============================================================================
Pro forma net earnings reflect only options granted in 1998, 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under FAS 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of 4 years and the compensation cost for options granted prior to January 1, 1996 is not considered. Calculating the compensation cost consistent with FAS 123, the fair value of each stock option granted during 1998, 1997 and 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998, 1997 and 1996, respectively: dividend yield of 3.41% 2.9% and 4.0%; expected volatility of 43.3%, 25.7% and 47.5%; risk-free interest rates of 5.1%, 5.4% and 6.6%, and expected lives of ten years. Weighted average fair value of options granted by the Company during 1998, 1997 and 1996 was $5.12, $5.80 and $4.11, respectively. For Southam, the fair value of each stock option granted during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used in grants in fiscal 1996: dividend yield of 1.3%; expected volatility of 30.4%; F-26 82 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- risk-free interest rates of 6.1%; and expected lives of six years. The weighted average fair value of options granted by Southam during 1996 was $4.24. There were no stock options granted by Southam in 1998 and 1997. Stock option activity with respect to the Company's stock options was as follows:
- ----------------------------------------------------------------------------------- Number of Weighted Average Shares Exercise Price - ----------------------------------------------------------------------------------- Options outstanding at December 31, 1995 831,500 $12.74 Options granted 492,000 9.93 Options canceled (42,000) 13.00 - ----------------------------------------------------------------------------- Options outstanding at December 31, 1996 1,281,500 11.65 Options granted 832,000 10.06 Options canceled (14,000) 9.71 - ----------------------------------------------------------------------------- Options outstanding at December 31, 1997 2,099,500 11.01 Options granted 1,383,000 15.09 Options exercised (167,125) 11.78 Options canceled (167,750) 11.43 - ----------------------------------------------------------------------------- Options outstanding at December 31, 1998 3,147,625 $12.74 ============================================================================= Options exercisable at December 31, 1996 306,000 $12.82 Options exercisable at December 31, 1997 601,875 $12.22 Options exercisable at December 31, 1998 915,375 $11.65 =============================================================================
F-27 83 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (10) EARNINGS PER SHARE The following table reconciles the numerator and denominator for the calculation of basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996:
- ------------------------------------------------------------------------------------------ Year ended December 31, 1998 Income Shares Per-Share (Numerator) (Denominator) Amount ------------------------------------------------------------------------------------------ (in thousands) Basic EPS Net income available to common stockholders $156,541 94,839 1.65 Effect of dilutive securities Convertible preferred stock 18,726 18,763 Series D Preferred Stock 736 4,350 HCPH Special Shares -- 4,661 Stock options -- 521 Diluted EPS Net income available to common stockholders and assumed conversions $176,003 123,134 1.43 - ------------------------------------------------------------------------------------------
For 1998, net earnings available to common shareholders has been reduced by $20,909,000, which represents the conversion premium on the PRIDES exchange. F-28 84 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 Income Shares Per-Share (Numerator) (Denominator) Amount - ----------------------------------------------------------------------------------------------------------- (in thousands) Basic EPS Net income available to common stockholders $ 81,053 87,130 $0.93 Effect of dilutive securities Convertible preferred stock 22,408 24,521 Series D Preferred Stock 1,060 5,421 HCPH Special Shares -- 2,237 Stock options -- 177 Diluted EPS Net income available to common stockholders and assumed conversions $ 104,521 119,486 $0.87 - -----------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- Year ended December 31, 1996 Income Shares Per-Share (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------------- (in thousands) Basic EPS Net income available to common stockholders $ 32,078 79,081 $0.41 Effect of dilutive securities Convertible preferred stock 1,087 5,655 Stock options -- 48 Diluted EPS Net income available to common stockholders and assumed conversions $ 33,165 84,784 $0.39 - ----------------------------------------------------------------------------------------------------
In 1996, net income available to common stockholders was reduced by dividends on convertible preferred stock of $9,620,000 because they were antidilutive. F-29 85 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (11) TOTAL RETURN EQUITY SWAP In August and September 1998, the Company entered into an arrangement with four banks, pursuant to which the banks purchased 12,640,305 shares of Class A Common Stock. 2,522,600 of these shares were purchased on the open market at an average price of $15.24 and 10,117,705 were purchased from affiliates of the Company at an average price of $13.88. The Company has the option during the second year following these purchases to buy the shares from the banks at the same cost or to have the banks resell those shares in the open market. In the latter case, any gain or loss realized by the banks will be for the Company's account. Until the Company purchases the shares, dividends paid on the shares belong to the Company and the Company pays interest to the banks at the rate of LIBOR plus 1.25%. If the Company's stock price falls below the average purchase price of these shares, the Company is required to deposit cash or shares into an escrow account as additional security. At December 31, 1998, the Company had issued 1,363,293 shares of Class A Common Stock to the banks as additional security and such escrow shares are shown as a deduction from stockholders' equity. The total interest paid to the banks, net of dividends paid on the shares, is shown as a reduction to additional paid in capital on the balance sheet. (12) INFREQUENT ITEMS
- ------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------ (in thousands) Costs related to direct subscription campaign $ -- 22,191 32,327 National Post launch costs 13,112 -- -- Other 13,060 3,052 9,240 - ------------------------------------------------------------------------------------------ $26,172 25,243 41,567 ==========================================================================================
F-30 86 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (13) OTHER INCOME
- ---------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- (in thousands) Gain on sale of Fairfax investment $ -- 66,128 53,518 Gain on sale of publishing interests (note 1) 363,074 -- -- Gain on sales of assets (note 1) -- 2,768 17,899 Equity in earnings (loss) of affiliates (1,199) 5,807 12,050 Other (30,499) (1,635) (13,158) - ---------------------------------------------------------------------------------------------------- $ 331,376 73,068 70,309 ====================================================================================================
In 1996, the Company agreed to sell its 24.7% interest in Fairfax in three tranches. The first tranche consisted of a 12.0% interest and was completed in December 1996. The second tranche consisted of a 7.9% interest and was completed in January 1997. The third tranche consisted of a 4.8% interest and was completed in March 1997. Total gross proceeds from the entire sale were approximately $441,300,000. F-31 87 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (14) 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. The Chicago Group and Community Group make up the United States Newspaper Group. Southam and the Canadian Newspapers make up the Canadian Newspaper Group. The following is a summary of the segments of the Company: - --------------------------------------------------------------------------------
Year ended December 31, 1998 ---------------------------------------------------------------------------------- U.K. Chicago Community Newspaper Canadian Group Group Group Southam Newspapers Total - ------------------------------------------------------------------------------------------------------------------------ (in thousands) Revenues $ 379,109 210,107 550,525 844,830 213,189 $ 2,197,760 - ------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization $ 20,311 19,267 19,413 46,257 9,600 $ 114,848 - ------------------------------------------------------------------------------------------------------------------------ Infrequent items $ 825 2,000 6,250 16,112 985 $ 26,172 - ------------------------------------------------------------------------------------------------------------------------ Operating income $ 33,268 36,312 60,208 122,627 29,664 $ 282,079 - ------------------------------------------------------------------------------------------------------------------------ Equity in earnings (loss) of affiliates $ (1,199) -- -- -- -- $ (1,199) - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 429,882 409,604 619,637 1,465,893 220,067 $ 3,145,083 - ------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 75,647 8,825 7,114 57,641 11,570 $ 160,797 - ------------------------------------------------------------------------------------------------------------------------
F-32 88 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 --------------------------------------------------------------------------- U.K. Chicago Community Newspaper Canadian Group Group Group Southam Newspapers Total - ------------------------------------------------------------------------------------------------------------------- (in thousands) Revenues $ 341,368 292,265 492,270 861,765 223,862 $2,211,530 - ------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 15,231 26,427 18,076 44,573 10,263 $ 114,570 - ------------------------------------------------------------------------------------------------------------------- Infrequent items $ 1,662 192 22,567 822 -- $ 25,243 - ------------------------------------------------------------------------------------------------------------------- Operating income $ 36,200 53,261 26,657 140,672 30,932 $ 287,722 - ------------------------------------------------------------------------------------------------------------------- Equity in earnings of affiliates $ 5,807 -- -- -- -- $ 5,807 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 313,170 489,595 642,563 1,217,210 240,177 $2,902,715 - ------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 17,894 8,763 5,627 79,267 5,046 $ 116,597 - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996 ---------------------------------------------------------------------------- U.K. Chicago Community Newspaper Canadian Group Group Group Southam Newspapers Total - ------------------------------------------------------------------------------------------------------------------- (in thousands) Revenues $ 333,632 273,740 451,902 803,440 211,308 $2,074,022 - ------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 17,545 25,281 14,317 35,710 9,582 $ 102,435 - ------------------------------------------------------------------------------------------------------------------- Infrequent items -- -- 32,327 9,240 -- $ 41,567 - ------------------------------------------------------------------------------------------------------------------- Operating income $ 16,723 47,158 1,601 62,351 20,134 $ 147,967 - ------------------------------------------------------------------------------------------------------------------- Equity in earnings of affiliates $ 924 -- 11,126 -- -- $ 12,050 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 278,123 482,139 1,263,234 1,096,588 236,456 $3,356,540 - ------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 9,350 6,749 4,632 97,969 4,786 $ 123,486 - -------------------------------------------------------------------------------------------------------------------
Capital expenditures for the corporate entities were $3,200,000, $1,694,000 and $1,139,000 in 1998, 1997, and 1996, respectively. F-33 89 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Reconciliation of segment assets to total assets:
Year ended December 31, ------------------------------------ 1998 1997 1996 - ------------------------------------------------------------ (in thousands) Segment assets $3,145,083 $2,902,715 $3,356,540 Corporate assets 106,641 121,206 69,004 - ------------------------------------------------------------ Total assets $3,251,724 $3,023,921 $3,425,544 ============================================================
(15) FINANCIAL INSTRUMENTS The Company has entered into various types of financial instruments in the normal course of business. In addition, on September 30, 1998, the Company entered into forward purchase contracts to purchase 12,640,305 shares of its Class A Common Stock (see note 11). For certain of these instruments, fair value estimates are made at a specific point in time, based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk and the country of origin. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, may not represent actual values of the financial instruments that could be realized in the future. At December 31, 1998 and 1997, the comparison of the carrying value and the estimated fair value of the Company's financial instruments was as follows: - --------------------------------------------------------------------------------
1998 1997 ---------------------- ---------------------- Carrying Fair Carrying Fair value value value value - ----------------------------------------------------------------------------------------- (in thousands) Long-term debt $1,488,641 $1,403,588 $1,415,634 $ 928,348 Interest rate swaps -- 2,784 -- 2,890 Forward purchase contracts -- 3,216 -- -- - -----------------------------------------------------------------------------------------
F-34 90 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The fair value of the interest rate swaps and forward purchase contracts is the estimated amount that the Company would pay to terminate the agreements. It is not practical to determine the fair value of redeemable preferred stock held by related parties. The carrying value of all other financial instruments at December 31, 1998 and 1997 approximate their estimated fair values. (16) COMMITMENTS AND CONTINGENCIES (a) The Telegraph has guaranteed the printing joint venture partners' share of leasing obligations to third parties, which amounted to $16,384,000 ((pound)9,853,000) at December 31, 1998. These obligations are also guaranteed jointly and severally by each joint venture partner. (b) In connection with the Company's insurance program, letters of credit are required to support certain projected workers' compensation obligations. At December 31, 1998, letters of credit in the amount of $5,569,624 were outstanding. (17) RELATED-PARTY TRANSACTIONS (a) Amounts due from affiliates represent cash advances, net of management and administrative expenses billed by Hollinger Inc. and corporate affiliates of Hollinger Inc. Hollinger Inc. and its affiliates billed the Company for allocable expenses amounting to $31,954,000, $26,506,000 and $8,485,000 for 1998, 1997 and 1996, respectively. (b) On September 30, 1998, Hollinger Inc. sold 10,117,705 shares of Class A Common Stock to various banks. As part of the transaction, a subsidiary of Hollinger Inc. sold 408,551 shares of Series D Preferred Stock to such banks and the banks then tendered such shares to the Company for conversion into 2,795,165 shares of Class A Common Stock. In an independent transaction, the Company entered into forward purchase contracts with such banks to purchase 10,117,705 shares of Class A Common Stock for a price of $13.88 per share. The terms of this transaction were reviewed and approved by a special committee comprised of independent outside directors of the Company's Board of Directors. Credit Suisse First Boston acted as financial advisor for the special committee. F-35 91 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (18) INCOME TAXES U.S. and foreign components of earnings before income taxes, minority interest and extraordinary items are presented below:
- ---------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------- (in thousands) U.S $192,191 12,148 35,708 Foreign 314,449 232,001 94,230 - --------------------------------------------------------------------- $506,640 244,149 129,938 =====================================================================
Income tax expense for the periods shown below consists of:
- ------------------------------------------------------------------------- Current Deferred Total - ------------------------------------------------------------------------- (in thousands) Year ended December 31, 1998: U.S. Federal $ 58,635 13,528 72,163 Foreign 76,492 60,069 136,561 State and local 12,442 1,933 14,375 - ------------------------------------------------------------------------- $147,569 75,530 223,099 ========================================================================= Year ended December 31, 1997: U.S. Federal $ 3,019 6,713 9,732 Foreign 27,856 54,344 82,200 State and local 764 959 1,723 - ------------------------------------------------------------------------- $ 31,639 62,016 93,655 ========================================================================= Year ended December 31, 1996: U.S. Federal $ 810 13,192 14,002 Foreign 19,829 14,928 34,757 State and local -- 3,106 3,106 - ------------------------------------------------------------------------- $ 20,639 31,226 51,865 =========================================================================
F-36 92 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- Income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35% for 1998, 1997 and 1996 as a result of the following:
- ------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ (in thousands) Computed "expected" tax expense $ 177,324 85,452 45,478 Increase (reduction) in income taxes resulting from: Nondeductible expenses for income tax purposes 9,676 11,083 7,412 Tax gain in excess of book gain 22,869 -- -- U.S. state and local income taxes, net of federal benefit 10,041 1,409 1,889 Impact of taxation at different foreign rates, repatriation and other 3,626 (2,639) (1,034) Advance corporation tax recovery -- -- (1,880) Other (437) (1,650) -- - ----------------------------------------------------------------------------------------------------------------- $ 223,099 93,655 51,865 =================================================================================================================
F-37 93 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
- ------------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------------ (in thousands) Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 1,934 2,040 Accrued compensation including vacation, bonus, severance and deferred compensation 8,965 14,473 Excess of tax over book basis 5,370 4,593 Net operating loss carryforwards 13,476 25,660 Accrued medical and workers' compensation claims 1,727 1,629 Advance corporation tax receivable -- 2,472 - ------------------------------------------------------------------------------------------------------ Gross deferred tax assets 31,472 50,867 Less valuation allowance (1,107) (11,423) - ------------------------------------------------------------------------------------------------------ Net deferred tax assets 30,365 39,444 - ------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation 47,665 37,609 Intangible assets, principally due to differences in basis and amortization 84,714 38,828 Foreign exchange basis differences 8,998 16,126 Long term advances under printing contract 15,487 13,953 Deferred gain on swap of assets 21,128 9,634 Unremitted earnings of a foreign equity investment 20,186 19,942 Accrued pension 5,521 4,341 Other 34,333 31,148 - ------------------------------------------------------------------------------------------------------ Gross deferred tax liabilities 238,032 171,581 - ------------------------------------------------------------------------------------------------------ Net deferred taxes $ 207,667 132,137 ======================================================================================================
F-38 94 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- At December 31, 1998, the Company had approximately $36,400,000 of Canadian net operating loss carryforwards. The Canadian net operating loss carryforwards will expire in varying amounts through December 31, 2005. Total income taxes paid in 1998, 1997 and 1996 amounted to $160,182,000, $31,181,000 and $22,775,000, respectively. (19) EMPLOYEE BENEFIT PLANS DEFINED CONTRIBUTION PLANS The Company sponsors six domestic defined contribution plans, two of which have provisions for Company matching contributions. Under the Company's matching program for the two plans, $501,000, $471,000 and $246,000 was contributed for the years ended December 31, 1998, 1997 and 1996, respectively. Southam sponsors nine defined contribution plans and contributed $1,827,000 and $2,022,000 to the plans in 1998 and 1997, respectively. The Telegraph sponsors a defined contribution plan, The Telegraph Staff Pension Plan, for the majority of its employees, as well as a defined contribution plan to provide pension benefits for senior executives. Contributions to each of the plans were as follows:
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- (in thousands) The Telegraph Staff Pension Plan $ 6,120 5,780 5,176 The Telegraph Executive Pension Scheme $ 550 724 1,005 - -----------------------------------------------------------------------------------
The Telegraph plans' assets consist principally of U.K. and overseas equities, unit trusts and bonds. F-39 95 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- DEFINED BENEFIT PLANS The Company and subsidiaries have nine domestic and seven foreign single-employer defined benefit plans and contribute to various union-sponsored, collectively bargained domestic multi-employer pension plans. The Company's contributions to these plans for the years ended December 31, 1998, 1997 and 1996 were:
- ----------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------- (in thousands) Single-employer plans $9,263 5,146 5,440 Multi-employer plans $4,959 2,185 2,052 - -----------------------------------------------------------------------
The Telegraph has a defined benefit plan that was closed on July 1, 1991 and provides only benefits accrued up to that date. The liabilities of the plan have been actuarially valued as at December 31, 1998. At that date the market value of the plan assets was $25,742,000, representing 98% of the estimated cost of purchasing the plan's benefits from an insurance company. The actuary assumed a discount rate of 4.5%. Increases to pension payments are discretionary and are awarded by the trustees, with the Telegraph's consent, from surpluses arising in the fund from time to time. There were no contributions made in 1998 and 1996. Contributions to the trust were $1,896,000 for 1997. Pursuant to the West Ferry joint venture agreement, the Telegraph has a commitment to fund 50% of the obligation under West Ferry's defined benefit plan. SINGLE-EMPLOYER PENSION PLANS The benefits under the subsidiary companies' single-employer pension plans are based primarily on years of service and compensation levels. The Company funds the annual provision deductible for income tax purposes. The plans' assets consist principally of marketable equity securities and corporate and government debt securities. F-40 96 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The components of net period benefit cost for the years ended December 31, 1998, 1997 and 1996 are as follows:
- ------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- (in thousands) Service cost $ 9,064 8,444 2,339 Interest cost 30,372 34,554 8,962 Expected return on plan assets (43,615) (45,481) (10,949) Amortization of prior service costs 859 631 1,862 - ------------------------------------------------------------------------------------- Net periodic (benefit) cost $ (3,320) (1,852) 2,214 =====================================================================================
The table below sets forth the reconciliation of the benefit obligation as of December 31, 1998 and 1997:
- -------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------- (in thousands) Benefit obligation at the beginning of the year $ 483,972 443,221 Service cost 9,064 8,444 Interest cost 30,372 34,554 Participant contributions 3,227 3,917 Exchange rate differences (24,310) (884) Changes in assumptions 10,394 -- Actuarial loss 8,508 32,354 Benefits paid (30,281) (37,634) - ------------------------------------------------------------------------------------- Benefit obligation at the end of the year $ 490,946 483,972 =====================================================================================
F-41 97 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The table below sets forth the change in plan assets for the years ended December 31, 1998 and 1997:
- ---------------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------- (in thousands) Fair value of plan assets at the beginning of the year $ 527,047 492,278 Actual return on plan assets 21,908 64,136 Exchange rate differences (26,443) (796) Employer contributions 9,263 5,146 Participant contributions 3,227 3,917 Benefits paid (30,281) (37,634) - --------------------------------------------------------------------------------------------------------- Fair value of plan assets at the end of the year $ 504,721 527,047 =========================================================================================================
- ---------------------------------------------------------------------- Year ended December 31, 1998 1997 - ---------------------------------------------------------------------- (in thousands) Funded status $13,775 43,075 Unrecognized net actuarial loss 46,003 11,716 Unrecognized prior service cost 578 640 - ---------------------------------------------------------------------- Prepaid (accrued) benefit cost $60,356 55,431 ======================================================================
The ranges of assumptions were as follows:
- -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.0% - 7.5% 7.0 - 7.5% 7.0% Expected return on plan assets 7.0% - 9.0% 7.0 - 9.0% 9.0% Compensation increase 3.0% - 4.0% 3.0 - 4.0% 3.0% - --------------------------------------------------------------------------------
F-42 98 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The ranges of assumptions used for the Company's foreign plans were as follows:
- ----------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------- Discount rate 4.50% - 7.50% 6.25 - 7.50% 7.62% Long-term rate of return on plan asset 4.50% - 10.00% 3.50 - 6.29% 7.62% Compensation increase 3.50% - 4.75% 3.50 - 4.75% -- - -----------------------------------------------------------------------------------------
MULTI-EMPLOYER PENSION PLANS Certain U.S. employees are covered by union-sponsored multi-employer pension plans, all of which are defined benefit plans. Contributions are determined in accordance with the provisions of negotiated labor contracts and are generally based on the number of man hours worked. Pension expense for these plans was $2,325,000, $2,185,000 and $2,052,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The passage of the Multi-employer Pension Plan Amendments Act of 1980 (the Act) may, under certain circumstances, cause the Company to become subject to liabilities in excess of the amounts provided for in the collective bargaining agreements. Generally, liabilities are contingent upon withdrawal or partial withdrawal from the plans. The Company has not undertaken to withdraw or partially withdraw from any of the plans as of December 31, 1998. Under the Act, withdrawal liabilities would be based upon the Company's proportional share of each plan's unfunded vested benefits. As of the date of the latest actuarial valuations, the Company's share of the unfunded vested liabilities of each plan was zero. F-43 99 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- POST RETIREMENT BENEFITS Southam sponsors a defined post retirement plan that provides post retirement benefits to certain employees. The components of net period post retirement benefit cost for the years ended December 31, 1998 and December 31, 1997 are as follows:
- ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- (in thousands) Service cost $ 794 1,103 Interest cost 2,372 2,692 - ----------------------------------------------------------------------------- Net periodic post retirement benefit cost $3,166 3,795 =============================================================================
The table below sets forth the reconciliation of the accumulated post retirement benefit obligation as of December 31, 1998 and 1997:
- --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (in thousands) Accumulated post retirement benefit obligation at the beginning of the year $ 43,361 42,642 Service cost 794 1,103 Interest cost 2,372 2,692 Actuarial gains and losses (4,296) (2,943) Benefits paid (1,223) (1,220) Other (3,021) 1,087 - -------------------------------------------------------------------------- Accumulated post retirement benefit obligation at the end of the year $ 37,987 43,361 ==========================================================================
F-44 100 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- The table below sets forth the plan's funded status reconciled to the amounts recognized in the Company's financial statements:
- ---------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------- (in thousands) Unfunded status $(37,987) (43,361) Unrecognized net gain (loss) (1,530) 2,852 - --------------------------------------------------------------------------- Accrued post retirement benefit cost $(39,517) (40,509) ===========================================================================
The weighted average discount rate used in determining the accumulated post retirement benefit obligation was 6.25% and 6.5% for 1998 and 1997, respectively. All benefits under the plan are paid for by Southam's contribution to the Plan. For measuring the expected post retirement benefit obligation, a 10% annual rate of increase in the per capita claims was assumed for 1997 and a 9% annual rate of increase in the per capita claims was assumed for 1998. This rate was assumed to decrease 1% per year to 5% in 2002 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. If the health care cost trend rate were increased 1%, the accumulated post retirement benefit obligation as of December 31, 1998 would have increased $2,502,000 and the effect of this change on the aggregate of service and interest cost for 1998 would have been an increase of $203,000. If the health care cost trend rate were decreased 1%, the accumulated post retirement benefit obligation as of December 31, 1998 would have decreased by $2,193,000 and the effect of this change on the aggregate of service and interest cost for 1998 would have been a decrease of $173,000. Southam provides post employment benefits to former or inactive employees. The benefits are accrued in accordance with Statement of Financial Accounting Standards No. 112 "Employers Accounting for Postemployment Benefits." F-45 101 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (20) SUMMARIZED FINANCIAL INFORMATION Summarized balance sheet and income statement data for Hollinger International Publishing Inc. is as follows:
- ------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------ (in thousands) Balance Sheet Data: Current assets $ 73,596 500,914 261,193 Total assets 2,823,034 3,019,473 2,143,519 Current liabilities 503,027 797,392 665,221 Total liabilities 2,186,654 2,405,899 1,145,514 Minority interest 107,002 203,034 -- Redeemable preferred stock -- -- 526,412 Stockholder's equity 529,378 410,540 471,593 Income Statement Data: Operating revenues 2,197,760 2,211,530 1,059,274 Operating income 285,268 297,904 76,715 Net earnings 244,057 107,982 55,574 ================================================================================================
F-46 102 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (21) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended December 31, 1998 and 1997 are as follows: - --------------------------------------------------------------------------------
1998 ------------------------------------------ First Second Third Fourth quarter quarter quarter quarter - ------------------------------------------------------------------------------ (in thousands, except per share data) Total operating revenues $537,969 569,171 512,303 578,317 Total operating income $ 61,844 94,914 49,998 75,323 Net earnings $128,003 31,181 17,529 20,199 Basic earnings per share 1.39 0.28 (0.06) 0.16 Diluted earnings per share 1.05 0.25 (0.06) 0.16 ==============================================================================
- -------------------------------------------------------------------------------
1997 ------------------------------------------ First Second Third Fourth quarter quarter quarter quarter - -------------------------------------------------------------------------------- (in thousands, except per share data) Total operating revenues $514,243 562,021 523,658 611,608 Total operating income $ 55,128 86,460 45,692 100,442 Net earnings $ 55,426 28,125 5,609 15,361 Basic earnings per share 0.57 0.26 0.00 0.09 Diluted earnings per share 0.47 0.24 0.00 0.09 ================================================================================
F-47 103 HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued - -------------------------------------------------------------------------------- (22) SUBSEQUENT EVENTS (UNAUDITED) (a) On December 16, 1998, HCPH made an offer to shareholders of Southam to acquire all of the common shares of Southam not presently controlled by the Company for Cdn.$22.00 cash per share after payment by Southam of a special dividend of Cdn.$7.00 per share. The offer originally expired on January 13, 1999. On January 6, 1999, HCPH increased its offer to Cdn. $25.25 cash per share and extended the time for acceptance to January 18, 1999. HCPH purchased 19,845,118 common shares of Southam which had been tendered under this offer for an aggregate consideration of $327,500,000. This purchase of shares brings the Company's ownership interest in Southam to approximately 97%. The purchase price was funded through HCPH's portion of a Southam special dividend together with borrowings by HCPH under the Bank Credit Facility described in note 4. In February 1999, HCPH purchased the remaining Southam common shares pursuant to applicable Canadian law. (b) The parties to the Bank Credit Facility entered into a Third Amendment Agreement to the Restated Facility ("Third Restated Amendment") dated January 14, 1999. The Third Restated Amendment increased the amount available under the Facility to provide additional funding for the purchase of Southam shares (see note 22(a)). (c) On January 28, 1999, the Company solicited consents from the registered holders of the Subordinated Notes, Senior Notes and Senior Subordinated Notes (see note 4(a)) to amend the indentures covering said notes to (i) make the limitation on restricted payments covenant less restrictive, (ii) make the consolidated cash flow ratio under the limitation on indebtedness covenant more restrictive, and (iii) make the limitation on sale of assets covenant less restrictive The requisite consents were obtained in March 1999 and the indentures governing the Subordinated Notes, Senior Notes and Senior Subordinated Notes were so amended. (d) On February 1, 1999, the Company completed the sale of 45 U.S. community newspaper properties for approximately $472,000,000, of which approximately $456,000,000 was cash. The proceeds from the sale were used to pay down outstanding debt on the Bank Credit Facility. A pre-tax gain resulting from this transaction of approximately $241,000,000 will be accounted for in 1999. F-48 EX-23.1 2 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Hollinger International Inc.: We consent to incorporation by reference in the registration statements No. 333-17111 on Form S-3 and No. 33-88810 on Form S-8 of Hollinger International Inc. of our report dated February 25, 1999 relating to the consolidated balance sheets of Hollinger International Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Hollinger International Inc. /s/ KPMG LLP /s/ Chicago, Illinois March 31, 1999 EX-27.1 3 FDS
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 57,788 0 348,990 14,784 32,312 469,924 1,061,309 399,698 3,251,724 611,612 1,397,827 31,562 6,377 1,106 810,438 3,251,724 2,197,760 2,197,760 0 1,915,681 0 0 105,841 506,640 223,099 201,979 0 (5,067) 0 196,912 1.65 1.43
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