Form 10-K
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


Form 10-K

     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year ended December 31, 2001
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from           to
Commission File No. 0-24004


Hollinger International Inc.

(Exact name of registrant as specified in its charter)
     
Delaware
  95-3518892
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
 
401 North Wabash Avenue,
Suite 740, Chicago, Illinois
(Address of Principal Executive Office)
  60611
(Zip Code)
Registrant’s telephone number, including area code
(312) 321-2299
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class: Name of each exchange on 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
                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 þ          No o
      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. o
      The aggregate market value of Class A Common Stock held by non-affiliates as of March 5, 2002, was approximately $888,251,000. 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 5, 2002 was as follows: 85,778,367 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 2002 Annual Meeting of Stockholders filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
    Part III  




TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
Independent Auditors’ Report
Exhibit 21.1
Exhibit 23.1


Table of Contents

HOLLINGER INTERNATIONAL INC.

2001 FORM 10-K

             
Page

PART I
Item 1.
  Business     2  
Item 2.
  Properties     12  
Item 3.
  Legal Proceedings     13  
Item 4.
  Submission of Matters to a Vote of Security Holders     14  
PART II
Item 5.
  Market for the Registrant’s Common Equity and Related Stockholder Matters     17  
Item 6.
  Selected Financial Data     18  
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
Item 7A.
  Quantitative and Qualitative Disclosure about Market Risk     40  
Item 8.
  Financial Statements and Supplementary Data     41  
Item 9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     41  
PART III
Item 10.
  Directors and Executive Officers of the Registrant     41  
Item 11.
  Executive Compensation     41  
Item 12.
  Security Ownership of Certain Beneficial Owners and Management     41  
Item 13.
  Certain Relationships and Related Transactions     41  
PART IV
Item 14.
  Exhibits, Financial Statement Schedules and Reports on Form 8-K     42  

1


Table of Contents

PART I

 
Item 1.     Business

Overview

      Hollinger International Inc. (the “Company”), through subsidiaries and affiliated companies, is a global publisher with English-language newspapers in the United States, the United Kingdom, Canada and Israel. Its assets include The Daily Telegraph, the Chicago Sun-Times, The Jerusalem Post, a large number of community newspapers in the Chicago area, and a portfolio of new media investments. The Company’s Canadian newspapers are primarily in British Columbia and are owned through Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”), in which the Company has approximately an 87% interest.

      During 2001, the Company sold most of its remaining Canadian newspapers in three separate transactions, its 50% interest in The National Post Company (“National Post”), its approximate 15.6% equity interest in CanWest Global Communications Corp. (“CanWest”) and its last remaining United States community newspaper. In addition, the Company sold participation interests in most of the debentures received from CanWest in 2000 as part of the proceeds on the sale of Canadian newspaper properties.

      The operations of the Company for the year ended December 31, 2001 consisted of the Chicago Group, Community Group, U.K. Newspaper Group, and Canadian Newspaper Group, which accounted for 39%, 2%, 42% and 17%, respectively, of the Company’s total operating revenues of $1,146.3 million.

      Unless the context requires otherwise, all references herein to the “Company” mean Hollinger International Inc., its predecessors and consolidated subsidiaries, “Publishing” refers to Hollinger International Publishing Inc. and “Hollinger Inc.” refers to Hollinger Inc.

 
      Chicago Group

      The Company’s Chicago Group consists of more than 100 titles in the greater Chicago metropolitan area including the Chicago Sun-Times, the fifth largest metropolitan daily newspaper in the United States in terms of daily readership and the ninth largest in terms of circulation, the Post Tribune in northwest Indiana and the Daily Southtown. The Chicago Sun-Times is published in a tabloid format and continues to be Chicago’s best read newspaper, attracting almost 1.7 million readers every day. The suburban papers include Pioneer Newspapers Inc. (“Pioneer Press”), which currently publishes 57 weekly newspapers in Chicago’s north and northwest suburbs, Midwest Suburban Publishing Inc. (“Midwest Suburban Publishing”) which currently publishes the Daily Southtown, 12 weekly newspapers, 23 biweekly newspapers and four free distribution papers, primarily in Chicago’s south and southwest suburbs and Fox Valley Publications Inc. (“Chicago Suburban Newspapers”) which publishes four daily newspapers, The Herald News, The Beacon News, The Courier News and The News Sun.

 
      Community Group

      During 2001, the Company sold its last remaining United States community newspaper. For accounting and management purposes, the Community Group continues to include the Company’s wholly-owned subsidiary Jerusalem Post Publications Limited (“Jerusalem Post”) which publishes The Jerusalem Post, Israel’s most important English-language daily newspaper, with a daily and weekend readership of 223,000. The paid circulation of all Jerusalem Post products, including The International Jerusalem Post and French edition worldwide, is over 110,000.

 
      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, which was launched in 1855. The Telegraph also publishes The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, 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 1,021,000, representing a 36% share of the quality daily newspaper market, a substantially greater share than that of its nearest direct competitor. The Daily Telegraph’s Saturday edition has the highest average daily circulation (approximately 1,218,000) 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 812,000.

2


Table of Contents

 
      Canadian Newspaper Group

      At December 31, 2001 the Company’s Canadian Newspaper Group primarily consisted of Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”) and an 87% interest in Hollinger L.P.. During 2001 HCPH Co. (formerly Hollinger Canadian Publishing Holdings Inc. (“HCPH”)) became the successor to the operations of XSTM Holdings (2000) Inc. (formerly Southam Inc. (“Southam”)).

      At December 31, 2001 HCPH Co. and Hollinger L.P. owned ten daily and 25 non-daily newspaper properties and the Business Information Group (formerly Southam Magazine and Information Group) which publishes Canadian business magazines and tabloids for the automotive, trucking, construction, natural resources, manufacturing and other industries.

 
      Bank Credit Facility

      During 2001, the Company entered into a new credit facility in the amount of $120 million. Amounts borrowed under this facility were repaid during 2001. At December 31, 2001, the Company’s Restated Credit Facility, of which borrowings of $972 million had been repaid in 2000, had a reduced limit of $5 million. At December 31, 2001, no amounts were owing under the Restated Credit Facility and no amounts could be borrowed pursuant to the Hollinger International Publishing Inc. Trust Indentures related to the Senior and Senior Subordinated Notes.

 
      Ownership by Hollinger Inc.

      At December 31, 2001, Hollinger Inc. directly and indirectly owned 32.1% of the combined equity interest and 71.8% 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 upon conversion of the Company’s Series E Preferred Stock). 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 E Preferred Stock of the Company, which is convertible at any time into shares of Class A Common Stock based on the conversion formula set forth in its Certificate of Designations.

      Hollinger Inc. is effectively controlled by Lord Black of Crossharbour, PC(C), OC, KCSG, Chairman of the Board of Directors and Chief Executive Officer of both Hollinger Inc. and the Company, through his direct and indirect ownership and control of Hollinger Inc.’s securities. Lord 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, Lord 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.

 
      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.

Business Strategy

      The Company’s strategy for achieving growth in its newspaper business is based on achieving improvements in the cash flow and profitability of its newspapers principally through cost reductions and revenue enhancements. 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.

      In Chicago, with the acquisition in 2000 of Chicago Suburban Newspapers, significant emphasis will continue to be placed on building revenues by taking advantage of the extensive network of combined Chicago Group publications. The Chicago Group also will continue its focus on cost reduction. The opportunities to achieve cost savings through joint distribution and sales programs are very encouraging. The full conversion to the new Chicago Sun-Times state of the art printing facility has been completed. This facility will enable the group to enhance the quality of the printed product. The group continues to put a strong emphasis on online products and has developed partnerships with other media organizations, including TV and radio, that will strengthen both the newspaper and web products.

3


Table of Contents

      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 and the Company will focus on maintaining and increasing the circulation for The Sunday Telegraph. Operationally, efficiencies in producing the newspapers are expected to continue at the West Ferry and Trafford Park printing operations.

      At the Canadian Newspaper Group, following the asset sales completed during 2000 and 2001, the Company continues to own a group of community newspapers in British Columbia and the Business Information Group, which publishes Canadian business magazines. It is expected that these remaining community newspapers and magazines will be sold during 2002.

      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, the United Kingdom and the rest of the European Community. Hollinger Inc. reserved the ability to pursue all media (including newspaper) acquisition opportunities outside these areas and all media acquisition opportunities unrelated to the newspaper business throughout the world.

      The Company has developed a comprehensive internet and technology strategy. These activities fall into three main areas: (1) websites related to the various print publications, which are 100% owned and reported within the traditional newspaper segments; (2) joint ventures between its print publications and unrelated outsiders, where each adds value and where the Company has a certain amount of control; and (3) minority venture capital investments in unrelated third parties.

      The print-related and joint venture strategies represent an opportunity to fortify the newspapers in their local markets by providing them with the necessary tools to offer a complete suite of online and print options for their clients. The Company has stayed competitive by building significant websites at all its major newspapers. The strategy is specifically designed to achieve rapid acceleration of the Web activities. The Company has built a solid foundation for expansion and growth, and for technology and services which further strengthens the print and online publications. The Company has virtually ceased making minority investments in unrelated third party Internet and technology companies.

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 2002, 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 and its preferred stock 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. As at December 31, 2001, the Company did not meet a financial test set out in the Trust indentures for Publishing’s Senior and Senior Subordinated notes. As a result, Publishing and its subsidiaries are unable to incur additional indebtedness, pay dividends, make advances to the Company or make other distributions on their capital stock. The Company currently has sufficient cash to meet its current anticipated obligations.

4


Table of Contents

  •  Growth Strategy — The Company’s strategy is to achieve growth through improvements in the cash flow and profitability of its newspapers, principally through cost reductions. The Company’s growth strategy presents risks inherent 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.
 
  •  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. 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.
 
  •  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.
 
  •  Newsprint Costs — Newsprint represents the single largest raw material expense of the Company’s newspapers and, together with employee costs, is one of the most significant operating costs. Newsprint costs vary widely from time to time and could continue to show significant variations during 2002. During the first half of 2001, newsprint prices in North America were at their highest price per tonne since 1994 and 1995. However, the recessional climate in 2001 caused a significant decline in industry consumption and this, coupled with an abundant supply of competitively priced newsprint resulted in a downward trend in prices during the second half of 2001. This downward trend has continued into the early part of 2002 and there are indications that prices will stabilize at their current levels. In the United Kingdom, newsprint prices payable by the Company in 2002, which are subject to longer-term contracts, will be less than the average prices paid in 2001. Although the Company has implemented measures in an attempt to offset a rise in newsprint prices, such as reducing page width where practical, 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 61.4% of the Company’s operating revenues and approximately 65.9% of the Company’s operating loss for the year ended December 31, 2001. 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 earnings of 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 paid daily and Sunday newspaper in the United States in terms of circulation. 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 engaged in its own price reduction or promotional initiatives. Electronic media has become an important factor in newspaper industry competition. Management holds the view that newspapers will continue to be an important business segment. Among educated and affluent people, indications are that strong newspaper readership will continue. Alternate forms of information delivery such as the Internet could impact newspapers, but recognition of the Internet’s potential combined with a strong newspaper franchise could be a platform for Internet operations. Newspaper readers can be offered a range of Internet services as varied as the content. Virtually all newspapers are now published on the Internet as well as in the traditional newsprint format. These competitive activities can and have from time to time had an adverse effect on revenues and operating costs.

5


Table of Contents

  •  General Economic Outlook — The Company’s dependence on advertising sales, which generally have a short lead-time, means that it has only a limited ability to predict results for the fiscal year. Newspaper advertising revenue has been negatively impacted by the softening and uncertain economic environment especially following the events of September 11, 2001. At this time, the Company is unable to predict whether the current advertising slowdown represents a short-term decline in demand that will be reversed in the next six months, or whether, instead, reduced demand will continue for an extended period. If the current slowdown continues, the Company expects that overall newsprint demand will remain low and the Company’s usage and costs would decline.

Chicago Group

      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,

2001 2000 1999



(dollars in thousands)
Advertising
  $ 338,521       76 %   $ 305,027       76 %   $ 294,124       75 %
Circulation
    92,716       21       80,261       20       80,551       21  
Job printing and other
    11,647       3       16,129       4       15,798       4  
     
     
     
     
     
     
 
Total
  $ 442,884       100 %   $ 401,417       100 %   $ 390,473       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 2001, retail advertising accounted for the largest share of advertising revenues (49%), followed by classified (40%) and national (11%).

      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 similar alternatives for their daily and weekly publications. The Chicago Group operates the Reach Chicago Newspaper Network, an advertising vehicle that can reach the combined readership base of all the Chicago Group publications. The Chicago Group continues to strengthen its online dominance. The www.classifiedschicago.com regional classified-advertising website, which was created through a partnership with Paddock Publications, pools classified advertisements from all Chicago Group publications, as well as Paddock Publications’ metropolitan daily to create a valuable new venue for advertisers, readers and on-line users. Additionally, www.DriveChicago.com continues to be a leader in automotive websites. During 2000, the Chicago Group joined Paddock Publications and the Chicago Automobile Trade Association to create this website that pools the automotive classified advertising of three of the Chicago metropolitan area’s biggest dailies with the automotive inventories of many of Chicago’s metropolitan car dealerships.

      Circulation. Circulation revenues are derived from single copy newspaper sales made through retailers and vending racks and home delivery newspaper sales to subscribers. Approximately 67% of the copies of the Chicago Sun-Times sold in 2001 were single copy sales. Approximately 54% of 2001 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 480,000 and 383,000, respectively. The Chicago Sun-Times has had consecutive increases over the past two years in paid daily circulation. The daily and Sunday paid circulation of the Daily Southtown is approximately 48,000 and 55,000, respectively. The daily and Sunday paid circulation of the Post-Tribune is approximately 64,000 and 69,000, respectively. The aggregate daily and Sunday paid circulation of the Chicago Suburban Newspapers is approximately 98,000 and 111,000, respectively. The aggregate free circulation and bi-weekly paid circulation of the Chicago Suburban Newspapers is approximately 472,000 and 20,000, respectively.

6


Table of Contents

      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 eight local daily newspapers of which the Company owns six.

      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 metropolitan daily newspaper in the United States based on circulation. The Chicago-Sun Times is the ninth largest metropolitan daily newspaper in the United States, based on circulation. 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 5, 2002, the Chicago Group employed approximately 3,559 employees (including approximately 725 part-time employees). Approximately 1,000 employees are represented by 24 collective bargaining units. Employee costs (including salaries, wages, fringe benefits, employment-related taxes and other direct employee costs) equaled approximately 40% of the Chicago Group’s revenues in the year ended December 31, 2001. 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. In 2001 approximately 127,000 tonnes were consumed and, newsprint costs equaled approximately 17% of the Chicago Group’s revenues in 2001. Average newsprint prices for the Chicago Group increased about 11% in 2001 from 2000. The Chicago Group is not dependent upon any single newsprint supplier. The Chicago Group’s access to Canadian, United States and offshore newsprint producers ensures an adequate supply of newsprint. The Chicago Group, like other newspaper publishers in North America, has not entered into any long-term fixed price newsprint supply contracts in the current environment of newsprint costs. The Chicago Group believes that its sources of supply for newsprint are adequate for its anticipated needs.

      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.

Community Group

      During 2001, the Community Group consisted of one United States community newspaper, which was sold in August 2001 and The Jerusalem Post in Israel.

      Sources of Revenue. The following table sets forth the sources of revenue and the percentage that such sources represented of total revenues for the Community Group, including Jerusalem Post, during the past three years.

                                                 
Year Ended December 31,

2001 2000 1999



(dollars in thousands)
Advertising
  $ 5,806       30 %   $ 38,294       57 %   $ 57,535       60 %
Circulation
    7,751       41       19,168       28       26,618       27  
Job printing and other
    5,558       29       9,874       15       12,521       13  
     
     
     
     
     
     
 
Total
  $ 19,115       100 %   $ 67,336       100 %   $ 96,674       100 %
     
     
     
     
     
     
 

      Jerusalem Post. Approximately 42.1% of Jerusalem Post’s revenues of $18.3 million in 2001 were derived from circulation, with 30.1% from job printing and other and 27.8% from advertising. Jerusalem Post derives a relatively high percentage of its revenues from job printing as a result of 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 11.1% of Jerusalem Post’s revenues in 2001. Newsprint used in producing the Golden Pages is provided by the owners of that publication.

7


Table of Contents

      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.

      Environmental. The Company, in common with other newspaper companies engaged in similar operations, is subject to a wide range of 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 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 traditionally have had substantially fewer pages although the number of pages has been increasing steadily over the past few years. The Daily Telegraph is printed in two sections on Mondays, Tuesdays, Wednesdays and Fridays, three sections on Thursdays, and nine sections plus a magazine and television guide on Saturdays. The Sunday Telegraph is published in seven 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, but there has been an increase in advertiser interest in such supplements. Third, the advertising to news ratio in British newspapers is 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, the nearest direct competitor to The Daily Telegraph, first substantially reduced its cover price on its weekday newspaper, the national newspaper market in the United Kingdom has experienced intense cover price competition.

      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,

2001 2000 1999



(in thousands of British pounds sterling)
Advertising
    £228,715       68 %     £255,945       69 %     £225,326       66 %
Circulation
    94,502       28       95,690       26       98,071       29  
Other
    14,252       4       19,020       5       16,575       5  
     
     
     
     
     
     
 
Total
    £337,469       100 %     £370,655       100 %     £339,972       100 %
     
     
     
     
     
     
 


(1)  Financial data is in accordance with U.K. GAAP.

8


Table of Contents

      Advertising. Advertising is the largest source of revenue at The Telegraph. The Telegraph’s display advertising strengths are in the financial, automobile and travel sections. The level of classified advertisements, especially recruitment advertisements, fluctuates with the economy. The Telegraph’s strategy with respect to classified advertising is to improve volume and yield in four sectors: recruitment, property, travel and automobiles. Classified advertising revenue, which represents 28% of total advertising revenue, decreased in 2001 primarily due to a 25% decrease in recruitment advertising. Recruitment advertising is the largest classified advertising category, representing about 45% of all classified advertising in terms of revenue.

      Circulation. The target audience of The Telegraph’s newspapers is generally conservative, middle and upper income readers, with a continuing 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.

      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 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 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 and continued to be reduced thereafter. The program currently has approximately 315,000 subscribers.

      Other Publications and Business Enterprises. The Telegraph is involved in several other publications and business enterprises, including The Spectator, The Weekly Telegraph and telegraph.co.uk (formerly Electronic Telegraph). telegraph.co.uk has approximately 3.2 million unique users with some 30 million page impressions per month. The Telegraph utilizes its brand in developing third party revenue opportunities being primarily Reader Offers covering travel, financial products, household products and books.

      During 1999, the Company, in cooperation with The Boots Company plc, the UK’s leading beauty and health retailer, launched a new web site focusing on the women’s on-line market, www.handbag.com. The site deals with, among other things, health, beauty and the arts.

      Competition. 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.

      Employees and Labor Relations. At March 5, 2002, The Telegraph and its subsidiaries employed approximately 1,250 persons and the joint venture printing companies employed an additional 920 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.

      At West Ferry Printers a redundancy program was approved in November 2001. Approximately 91 of the 750 positions were made redundant. This was as a result of the reduction in third party contract revenue, reduced work from the joint venture partners due to declines in advertising revenue, increases in costs and an overall review of the efficiencies of the plant.

      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 generally good.

9


Table of Contents

      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. Approximately 170,000 metric tons are consumed annually and in 2001 the total cost was approximately 19% of its newspaper revenues. Prices are fixed throughout 2002 at levels some 10% below the average price paid during 2001. Inventory held at each printing location is sufficient for three to four days production and in addition, suppliers’ stock held in the United Kingdom normally represents a further four to five weeks consumption.

      Paper Purchase and Management Limited (PPML) was formed on October 17, 2001. It is a joint venture between The Telegraph and Guardian Media Group plc and has as its main purpose the control of specifications, sourcing and the monitoring of usage of newsprint throughout the printing plants operated by the joint venture partners, and other locations where the partners’ publications are printed on a contract basis. It is expected to start trading on April 1, 2002. The setting up of this joint venture followed the members’ voluntary liquidation of Newsprint Management and Supply Services Limited (NMSS), a joint venture between The Telegraph and Express Newspapers. Under the terms of the NMSS Joint Venture Agreement, The Telegraph served one year’s notice on March 21, 2001. However, it was agreed that with effect from October 22, 2001 newsprint purchasing would revert to each of the joint venture partners.

      Printing. The majority of 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 Telegraph also prints the majority of its overseas copies under contracts with external printers in Northern Ireland, Spain and Belgium.

      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. 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 18 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, Express Newspapers, 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.

      On November 22, 2000, United News & Media plc sold their interest in Express Newspapers to Northern & Shell Media Holdings Ltd. As a result of this change of control, under the terms of the West Ferry Printers’ Joint Venture Agreement, The Telegraph had an option to purchase Express Newspapers’ interest in West Ferry Printers. The Telegraph made an offer for the shares in January 2001 which was rejected by Express Newspapers in February 2001. Express Newspapers subsequently commenced arbitration proceedings pursuant to the Joint Venture Agreement to determine the option price.

      In April 2001, Express Newspapers commenced two actions against The Telegraph, a Claim for Specific Performance, seeking an order that The Telegraph buy out Express Newspapers’ interest in West Ferry, and a Petition under Section 459, Companies Act 1985, claiming unfair prejudice. Express Newspapers lost the Specific Performance proceedings and the s459 Petition was struck out. Express Newspapers appealed both decisions.

      The appeal hearing took place in March 2002. Again, the Claim for Specific Performance was rejected by the courts. However, the court determined that the option for The Telegraph to purchase Express Newspapers’ interest had expired on January 3, 2001. Express Newspapers’ directors will now be reappointed to the West Ferry Board. Leave was given for Express Newspapers to continue with the s459 Petition. If Express Newspapers are successful with the s459 Petition, The Telegraph could be required to purchase Express Newspapers’ 50% interest in West Ferry at a price to be determined independently. It is management’s view that Express Newspapers will not be successful in their s459 Petition.

10


Table of Contents

      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 (“TNT”). 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. On May 25, 2001, a new contract was entered into by each of the major publishers at West Ferry Printers with TNT. That contract is for a minimum term of five years and six months and commenced on May 27, 2001.

      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 2001 home deliveries accounted for 43% of sales of both The Daily Telegraph and 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.

      Environmental Matters. 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.

Canadian Newspaper Group

      Sources of Revenue. On November 16, 2000, the Company completed the sale to CanWest of 50% of National Post, the Canadian Newspaper Group metropolitan newspapers, a large number of community newspapers and certain operating Internet properties. During 2001, the Company sold most of its remaining Canadian newspapers in three separate transactions and its remaining 50% interest in the National Post. Operating revenue for the years ended December 31, 2001 and 2000 for operations not sold at December 31, 2001 was Cdn. $113.7 million and Cdn. $116.8 million, respectively. The following table sets forth the sources of revenue and the revenue mix of the total Canadian Newspaper Group, including operations sold, during the past three years:

                                                   
Year Ended December 31,

2001 2000 1999



(in thousands of Canadian dollars)
Newspapers:
                                               
 
Advertising
  Cdn. $171,032       56 %   Cdn. $1,158,678       73 %   Cdn. $1,207,673       73 %
 
Circulation
    53,030       17       287,513       18       313,817       19  
 
Job printing and other
    35,249       12       70,809       5       69,380       4  
Business Communications
    45,763       15       62,193       4       56,350       4  
     
     
     
     
     
     
 
Total
  Cdn. $305,074       100 %   Cdn. $1,579,193       100 %   Cdn. $1,647,220       100 %
     
     
     
     
     
     
 

      Advertising. Newspaper advertising revenue in 2001, for operations not sold at December 31, 2001, totalled Cdn. $46.7 million. Advertisements are carried either within the body of the newspapers, and referred to as run-of-press (ROP) advertising, or as inserts and other. ROP, which represented 81% of total advertising revenue in 2001, for operations not sold, is categorized as either retail, classified or national. The three categories represented 68%, 15% and 17%, respectively, of ROP advertising revenue in 2001, for operations not sold at December 31, 2001.

11


Table of Contents

      Circulation. Virtually all newspaper circulation revenue in 2001, for operations not sold at December 31, 2001, was from subscription sales.

      Competition. The majority of revenues are from advertising. Advertising linage in the newspapers is affected by a variety of factors including competition from print, electronic 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.

      Employees and Labor Relations. As of March 5, 2002, the Canadian Newspaper Group had approximately 931 employees. The Canadian Newspaper Group has union contracts in place at approximately 11 of the 19 newspaper operating locations. The percentage of unionized employees varies widely from paper to paper. With the large number of contracts being renegotiated every year, labor disruptions are always possible, but no single disruption would have a material effect on the Company.

      Raw Materials. The basic raw material for newspapers is newsprint. Newsprint consumption in 2001, for operations not sold at December 31, 2001, was approximately 13,200 tonnes. The newspapers within the Canadian Newspaper Group have access to adequate supplies to meet anticipated production needs. They are not dependent upon any single newsprint supplier. The Canadian Newspaper Group, like other newspaper publishers in North America, has not entered into any long-term fixed price newsprint supply contracts in the current environment of newsprint costs.

      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 Newspaper Group by a non-Canadian investor would be subject to the prior review and approval by the Minister of Industry of Canada. Because no such acquisition of control of Hollinger International Inc. or Hollinger Inc. has occurred, the current ownership is acceptable.

      Relationship with Hollinger Inc. The Company and Hollinger Inc. directly own a combined 100% interest in HCPH Co.. During 2001, HCPH Co. became the successor to the operations of XSTM Holdings (2000) Inc. (formerly Southam). 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 Co. as collateral for bank financing arrangements of the Company and its subsidiaries. The Company indirectly owns an 87.0% interest in Hollinger L.P. Under the Canadian Income Tax Act, there are limits on non-Canadian ownership of Canadian Newspapers. At present, the Company does not meet those limits and, if this continues beyond a specified cure period, there could be adverse effects on advertising revenue. The Company will take the necessary steps to ensure that it is in compliance before the cure period expires.

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.

     Chicago Group

      The Chicago Sun-Times conducts its editorial, pre-press, marketing, sales and administrative activities in a 535,000 square foot, seven-story building in downtown Chicago. The Company has completed the full conversion of its Chicago Sun-Times production operations to a new 320,000 square foot state of the art printing facility, at a total construction cost of approximately $115.0 million. It is intended that new facilities will be identified to house the Chicago Sun-Times non-production activities and the downtown Chicago building will be redeveloped. Agreement in principal has been reached for a joint development of the downtown Chicago building under which, if it proceeds, the Chicago Group will receive the first $75 million of consideration and will share in future profits. Progress is being made towards finalizing the arrangements but, unless and until final binding agreements are signed, there can be no assurance that this joint development will proceed.

12


Table of Contents

      Pioneer Press utilizes and owns a building in north suburban Chicago for editorial, pre-press, sales and administrative activities. Pioneer leases several outlying satellite offices for its editorial and sales staff in surrounding suburbs. Production currently occurs at 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. The Post-Tribune editorial, pre-press, marketing, sales and administrative activities are housed in the newly completed facility in Merrillville, Indiana and production activities continue at its facility in Gary, Indiana. The headquarters for Chicago Suburban Newspapers is in Plainfield, Illinois. This 172,000 square foot owned facility houses the press and administrative activities as well as certain sales and marketing functions. The editorial and sales activities are housed at five facilities located in surrounding suburbs.

     Community Group

      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.

     U.K. Newspaper Group

      The Telegraph occupies five floors of a tower on Canary Wharf in London’s Docklands under a 25-year operating 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

      The Canadian Newspaper Group’s newspapers and magazines are published at numerous facilities throughout Canada.

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.

13


Table of Contents

Item 4.     Submission of Matters to a Vote of Security Holders

      None

Executive Officers of the Company

      The following table sets forth the names and ages (as of March 5, 2002) 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, the United Kingdom and Israel. 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



Lord Black of Crossharbour, PC(C), OC, KCSG
    57     Chairman of the Board, Chief Executive Officer and Director
 
F. David Radler
    59     Deputy Chairman, President, Chief Operating Officer and Director
 
Daniel W. Colson
    54     Vice Chairman and Director, Deputy Chairman, Chief Executive Officer and Director of The Telegraph
 
J. A. Boultbee
    58     Executive Vice President
 
Frederick A. Creasey
    51     Group Corporate Controller
 
Barbara Amiel Black
    61     Vice President, Editorial and Director
 
Paul B. Healy
    38     Vice President, Corporate Development and Investor Relations
 
Peter Y. Atkinson
    55     Vice President
 
Mark S. Kipnis
    54     Vice President, Corporate Counsel and Secretary
 
John D. Ferguson
    60     Vice President, Production
 
Robert T. Smith
    58     Treasurer
 
Jerry J. Strader
    65     President, Suburban Chicago Newspaper Division

14


Table of Contents

      Lord Black of Crossharbour, PC(C), OC, KCSG, Chairman of the Board of Directors, Chief Executive Officer and Director, Hollinger International Inc., New York, Chicago; Hollinger Inc., Toronto; Argus Corporation Ltd., Toronto. Lord Black has held these or equivalent or similar positions since 1978. He currently serves as the Chairman and a director of The Telegraph, London, United Kingdom, and as a director of the Jerusalem Post and The Spectator (London). Lord Black is also a director of Brascan Limited, the Canadian Imperial Bank of Commerce and CanWest Global Communications Corp. all of which are public reporting companies in Canada, and as a director of Sotheby’s Holdings, Inc. Lord Black is Chairman of the Advisory Board of The National Interest (Washington) and a member of the International Advisory Board of The Council on Foreign Relations (New York).

      F. David Radler, Deputy Chairman, President, Chief Operating Officer and Director. Mr. Radler has served as President and Chief Operating Officer since October 25, 1995, as Deputy Chairman since May 1998, and as a director since 1990. Mr. Radler was Chairman of the Board of Directors from 1990 to October 25, 1995. Mr. Radler currently serves as President, Chief Operating Officer and Deputy Chairman of Hollinger Inc. and as a director of The Telegraph. Mr. Radler also serves as a director of Argus, Dominion Malting Limited, West Fraser Timber Co. Ltd., and CanWest Global Communications Corp. all of which are Canadian public reporting companies. Mr. Radler also serves as a director of the Jerusalem Post.

      Daniel W. Colson, Vice Chairman and Director, Deputy Chairman, Chief Executive Officer and director of The Telegraph. Mr. Colson has served as a director of the Company since February 1995 and Vice Chairman since May 1998. He has served as Deputy Chairman of The Telegraph since 1995 and as Chief Executive Officer of The Telegraph since 1994 and was Vice Chairman of The Telegraph from 1992 to 1995. Mr. Colson also currently serves as Chairman and as a director of Hollinger Telegraph New Media Ltd. and as Vice Chairman and director of Hollinger Digital Inc. He also serves as Vice Chairman and as a director of Hollinger Inc. and as a director of Argus, Molson Inc. and Macyro Group Inc. (Canada), all of which are Canadian public reporting companies. Mr. Colson also served as Deputy Chairman and director of Interactive Investor International plc from 1998 to 2001.

      J. A. Boultbee, Executive Vice President. Mr. Boultbee has served as Executive Vice President since June 14, 1996 and as Chief Financial Officer from 1995 to 1999. Mr. Boultbee served as a Vice President of the Company from 1990 to June 13, 1996. Mr. Boultbee served as a director 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 and Executive Vice President and Chief Financial Officer of Hollinger Inc. Mr. Boultbee also serves as a director of Argus, IAMGOLD 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 since June 14, 1996. Mr. Creasey also has served for the past five years as the Controller of Hollinger Inc.

      Barbara Amiel Black (Lady Black), Vice President, Editorial and Director. Barbara Amiel Black has served as Vice President, Editorial since September 1995 and as a director since February 1996 and is the wife of Lord Black. After an extensive career in both on and off-camera television production, she was the editor of The Toronto Sun from 1983 to 1985; columnist of The Times and senior political columnist of The Sunday Times of London from 1986 to 1994; and columnist of The Telegraph from 1994 to present. She has been a columnist of Maclean’s magazine since 1977. Barbara Amiel Black also serves as a director of Hollinger Inc. and The Jerusalem Post. She is the author of two books: “By Persons Unknown” (Co-author), which won the Mystery Writers of America Edgar Award for best non-fiction in 1978, and “Confessions”, a book of political essays published in 1980, which won the Canadian periodical publishers prize.

      Paul B. Healy, Vice President, Corporate Development and Investor Relations. Mr. Healy has served as Vice President, Corporate Development and Investor Relations 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 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 since January 1998 and as a director of the Jerusalem Post since 1999. Mr. Kipnis also serves as a director of CoBiz Inc., a NASDAQ publicly traded company. Mr. Kipnis was previously a partner at the law firm of Holleb & Coff, which he joined in 1974.

15


Table of Contents

      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 from 1993 to 1996. Mr. Ferguson was previously Deputy Managing Director of Mirror Group PLC, which he joined in 1966.

      Robert T. Smith, Treasurer. Mr. Smith has served as Treasurer since May 1998. Mr. Smith was Vice President of Chase Securities, Inc. and The Chase Manhattan Bank in the Media and Telecommunications Group from 1987 to 1998 and 1976 through 1982. From 1983 to 1987, Mr. Smith served as Assistant Treasurer for AT&T Long Lines and AT&T Communications, AT&T’s long distance subsidiary.

      Jerry J. Strader, President, Suburban Chicago Newspaper Division. Mr. Strader was appointed President of the Company’s Suburban Chicago Newspaper Division in September of 2000. He served as President of the Company’s Community Group (“American Publishing Company”) from February 1996 until August 2000. 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.

16


Table of Contents

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 5, 2002 there were 85,778,367 shares of Class A Common Stock outstanding and held by approximately 250 holders of record and approximately 4,000 beneficial owners. The Class B Common Stock of the Company is not publicly traded. As of March 5, 2002, 14,990,000 shares of Class B Common Stock were outstanding and owned by Hollinger Inc. The 93,206 shares of Series E Preferred Stock, held by Hollinger Inc., are convertible into 614,289 shares of Class A Common Stock (as of March 5, 2002).

      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, 2000, and the cash dividends paid per share on the Class A Common Stock.

                         
Cash
Price Range Dividends

Paid
Calendar Period High Low Per Share




2000
                       
First Quarter
  $ 13.625     $ 10.063     $ 0.1375  
Second Quarter
    14.750       9.688       0.1375  
Third Quarter
    17.063       13.375       0.1375  
Fourth Quarter
    16.875       13.875       0.1375  
2001
                       
First Quarter
  $ 16.490     $ 14.210     $ 0.1375  
Second Quarter
    16.120       13.700       0.1375  
Third Quarter
    14.800       10.250       0.1375  
Fourth Quarter
    11.710       9.080       0.1375  
2002
                       
First Quarter (through March 5, 2002)
  $ 12.480     $ 11.000     $ 0.1375  

      On March 5, 2002, the closing price of the Class A Common Stock was $12.35 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.

      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 Series E Preferred Stock, 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.

17


Table of Contents

Item 6.     Selected Financial Data

                                           
Year Ended December 31,

2001 2000 1999 1998 1997





(In thousands, except per share amounts)
Statement of Operations Data(1):
                                       
Operating revenues:
                                       
 
Advertising
  $ 804,462     $ 1,543,882     $ 1,557,033     $ 1,565,790     $ 1,567,897  
 
Circulation
    278,321       447,050       487,002       517,629       523,591  
 
Job printing
    25,092       59,089       48,207       70,461       80,024  
 
Other
    38,446       45,998       55,160       43,880       40,018  
     
     
     
     
     
 
Total operating revenues
    1,146,321       2,096,019       2,147,402       2,197,760       2,211,530  
Operating costs and expenses
    1,092,598       1,742,169       1,787,146       1,774,661       1,783,995  
Stock-based compensation
    (1,369 )     1,518                    
Infrequent items
    21,734       7,950       22,046       26,172       25,243  
Depreciation and amortization
    73,728       122,634       125,408       114,848       114,570  
     
     
     
     
     
 
Operating income (loss)
    (40,370 )     221,748       212,802       282,079       287,722  
Interest expense
    (78,639 )     (142,713 )     (131,600 )     (105,841 )     (113,558 )
Amortization of debt issue costs
    (10,367 )     (10,469 )     (16,209 )     (5,869 )     (13,466 )
Equity in earnings (loss) of affiliates
    (15,098 )     (20,340 )     (2,106 )     (1,199 )     5,807  
Other income (expense), net(2)
    (217,146 )     500,839       349,939       337,470       77,644  
     
     
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary items
    (361,620 )     549,065       412,826       506,640       244,149  
Income taxes (recovery)
    (10,201 )     374,898       155,203       223,099       93,655  
     
     
     
     
     
 
Earnings (loss) before minority interest and extraordinary items
    (351,419 )     174,167       257,623       283,541       150,494  
Minority interest
    (13,913 )     50,760       7,088       81,562       45,973  
     
     
     
     
     
 
Earnings (loss) before extraordinary items
    (337,506 )     123,407       250,535       201,979       104,521  
Extraordinary items
          (6,332 )     (5,183 )     (5,067 )      
     
     
     
     
     
 
Net earnings (loss)
  $ (337,506 )   $ 117,075     $ 245,352     $ 196,912     $ 104,521  
     
     
     
     
     
 
Basic earnings (loss) per share
  $ (3.42 )   $ 1.10     $ 2.30     $ 1.65     $ 0.93  
     
     
     
     
     
 
Cash dividends declared per common share
  $ 0.55     $ 0.55       0.55     $ 0.475     $ 0.40  
     
     
     
     
     
 
Balance Sheet Data(1):
                                       
 
Working capital (deficit)
  $ 195,712     $ (257,506 )   $ (113,115 )   $ (141,688 )   $ 56,365  
 
Total assets(3)
    1,981,751       2,737,214       3,503,024       3,251,724       3,023,921  
 
Minority interest
    15,977       89,228       155,901       107,002       203,034  
 
Total long-term debt
    812,660       812,248       1,653,936       1,499,518       1,428,415  
 
Redeemable preferred stock
    8,582       13,088       13,591       31,562       75,891  
 
Total stockholders’ equity(4)
    325,775       857,197       902,225       817,921       687,602  

(Footnotes following tables)

18


Table of Contents

                                           
Year Ended December 31,

2001 2000 1999 1998 1997





(In thousands)
Segment Data(1):
                                       
Operating Revenues:
                                       
 
Chicago Group
  $ 442,884     $ 401,417     $ 390,473     $ 379,109     $ 341,368  
 
Community Group
    19,115       67,336       96,674       210,107       292,265  
 
U.K. Newspaper Group
    486,374       562,068       550,474       550,525       492,270  
 
Canadian Newspaper Group
    197,948       1,065,198       1,109,781       1,058,019       1,085,627  
     
     
     
     
     
 
Total Operating Revenues
  $ 1,146,321     $ 2,096,019     $ 2,147,402     $ 2,197,760     $ 2,211,530  
     
     
     
     
     
 
Operating Income (Loss)(6):
                                       
 
Chicago Group
  $ 9,759     $ 36,018     $ 47,840     $ 35,966     $ 39,376  
 
Community Group
    (3,617 )     3,456       10,194       39,392       54,750  
 
U.K. Newspaper Group
    30,913       89,542       73,526       69,177       51,408  
 
Canadian Newspaper Group
    (37,337 )     116,766       117,758       174,615       177,243  
 
Investment and Corporate Group
    (19,723 )     (14,566 )     (14,470 )     (10,899 )     (9,812 )
     
     
     
     
     
 
Total Operating Income (Loss)
  $ (20,005 )   $ 231,216     $ 234,848     $ 308,251     $ 312,965  
     
     
     
     
     
 
EBITDA (Loss)(5)(6):
                                       
 
Chicago Group
  $ 47,647     $ 59,757     $ 67,490     $ 56,030     $ 54,414  
 
Community Group
    (1,476 )     9,647       19,210       58,479       81,011  
 
U.K. Newspaper Group
    50,747       106,659       92,044       88,231       69,204  
 
Canadian Newspaper Group
    (25,509 )     190,542       194,293       229,781       231,462  
 
Investment and Corporate Group
    (17,686 )     (12,755 )     (12,781 )     (9,422 )     (8,556 )
     
     
     
     
     
 
Total EBITDA
  $ 53,723     $ 353,850     $ 360,256     $ 423,099     $ 427,535  
     
     
     
     
     
 


(1)  The financial data presented is derived from the Consolidated Financial Statements of the Company and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
(2)  Other income (expense), net, primarily includes gains and losses on sales of publishing interests, gains and losses on sales of assets, a gain related to the dilution of interest in Hollinger L.P., the write-down of investments, equity in earnings or losses of affiliates, the effect of the Total Return Equity Swap, foreign currency gains and losses and interest and dividend income.
 
(3)  Includes intangible assets, net of accumulated amortization, which amounted to $674,645,000 at December 31, 2001 and $938,314,000 at December 31, 2000. Such intangible assets consist of the value of goodwill, acquired subscriber and advertiser lists, noncompetition agreements and archives. The amortization periods for intangible assets do not exceed 40 years.
 
(4)  See Consolidated Statements of Stockholders’ Equity.
 
(5)  EBITDA represents earnings before interest expense, interest and dividend income, income taxes, depreciation and amortization, minority interest, equity in earnings of affiliates, amortization of debt issue costs, foreign currency gains and losses, extraordinary items, other income (expense), net, infrequent items and stock-based compensation. 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.
 
(6)  Excludes infrequent items and stock-based compensation.

19


Table of Contents

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

      The Company’s business is concentrated in the publication of newspapers in the United States, Canada, United Kingdom, and Israel. Revenues are derived principally from advertising, paid circulation and, to a lesser extent, job printing. Of the Company’s total operating revenues in 2001, approximately 39% were attributable to the Chicago Group, 2% to the Community Group, 42% to the U.K. Newspaper Group, and 17% to the Canadian Newspaper Group. The Company’s Chicago Group is comprised of the Chicago Sun-Times and other daily and weekly newspapers in the greater Chicago metropolitan area. The Company’s Community Group included The Jerusalem Post and one United States community newspaper, until it was sold in August 2001. The Company’s U.K. Newspaper Group consists of the operations of The Telegraph, its subsidiaries and joint ventures. The Canadian Newspaper Group consists of the operations of HCPH Co. and the Company’s 87% investment in Hollinger L.P..

      During 2001, the Company sold most of its remaining Canadian newspapers and its 50% interest in the National Post, its approximate 15.6% equity interest in CanWest and its last remaining United States community newspaper. In addition, the Company sold participation interests in most of the debentures received from CanWest in 2000 as part of the proceeds on the sale of Canadian newspaper properties.

      Over the past few years, the Company has developed a comprehensive Internet strategy. Internet activities fall into three main areas: (1) websites related to the various print publications, which are 100% owned and reported within the traditional newspaper segments; (2) joint ventures between the Company’s print publications and unrelated outsiders, where each adds value and over which the Company has a certain amount of control; and (3) minority venture capital investments in unrelated third parties. The print-related and joint venture strategies represent an opportunity to fortify the newspapers in their local markets by providing them with the necessary tools to offer a complete suite of online and print options for their clients. The Company has remained competitive by building significant websites at all its major divisions. During 2001, the Company substantially reduced its activity in making new minority investments in unrelated third party Internet and technology companies.

      The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries and other controlled entities. The Company’s interest in Hollinger L.P. was 87.0%, 87.0% and 85.0% at December 31, 2001, 2000 and 1999, respectively. The Company’s interest in National Post was 50.0% and 100.0% at December 31, 2000 and 1999, respectively. All significant intercompany balances and transactions have been eliminated on consolidation.

      The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, investments, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

      The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

      The Company holds minority interests in both publicly traded and not publicly traded internet-related companies. Some of the publicly traded companies have highly volatile share prices. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments may not be reflected in an investment’s current carrying value, thereby requiring an impairment charge in the future.

20


Table of Contents

      The Company has significant intangible assets recorded in its accounts. Certain of the Company’s newspapers operate in highly competitive markets. The Company has estimated the useful lives of its goodwill and identifiable intangible assets for these newspapers and its other newspapers, based on industry trends and existing competitive pressures. Future adverse changes in long-term readership patterns in its newspapers could result in a material impairment of its intangible assets in the future.

Significant Transactions

      In January 2001, Hollinger L.P. completed the sale of UniMédia Company to Gesca Limited, a subsidiary of Power Corporation of Canada. The publications sold represented the French language newspapers of Hollinger L.P. including three paid circulation dailies and 15 weeklies published in Quebec and Ontario. A pre-tax gain of approximately $47.5 million was recognized on this sale.

      On June 1, 2001, the Company converted all the Series C Preferred Stock at the conversion ratio of 8.503 shares of Class A Common Stock per share of Series C Preferred Stock into 7,052,464 shares of Class A Common Stock. The Series C Preferred Stock was held by Hollinger Inc. On September 6, 2001, the Company purchased for cancellation, from Hollinger Inc., the 7,052,464 shares of Class A Common Stock for a total cost of $92.2 million.

      In two separate transactions in July and November 2001, the Company and Hollinger L.P. completed the sale of most of its remaining Canadian newspapers to Osprey Media Group Inc. (“Osprey”) for total sale proceeds of approximately Cdn. $255.0 million ($166.0 million) plus closing adjustments primarily for working capital. Included in these sales were community newspapers in Ontario such as The Kingston Whig-Standard, The Sault Star, the Peterborough Examiner, the Chatham Daily News and The Observer (Sarnia). Pre-tax gains of approximately $0.8 million were recognized on these sales.

      In August 2001, the Company entered into an agreement to sell to CanWest its 50% interest in the National Post. In accordance with the agreement, the Company’s representatives resigned from their executive positions at the National Post effective September 1, 2001. Accordingly, from September 1, 2001, the Company had no influence over the operations of the National Post and the Company no longer consolidates or records on an equity basis its share of earnings or losses. The results of operations of the National Post are included in the consolidated results to August 31, 2001. A pre-tax loss of approximately $78.2 million was recognized on the sale.

      In August and December 2001, the Company sold participation interests (“Participations”) in Cdn. $540.0 million ($350.0 million) and Cdn. $216.8 million ($140.5 million) principal amounts of CanWest debentures to a special purpose trust (“Participation Trust”). Units of the Participation Trust were sold by the Participation Trust to arm’s length third parties. These transactions resulted in net proceeds to the Company of $401.2 million and have been accounted for as sales in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. The net loss on these transactions, including realized holding losses on the underlying debentures, amounted to $62.1 million and has been recognized in other income.

      The Company had arrangements with four banks pursuant to which the banks had purchased shares of the Company’s Class A Common Stock and the Company had the option to buy the shares from the banks at the same cost or have the banks resell those shares in the open market. In August 2001, the Company purchased for cancellation from one of the banks 3,602,305 shares of Class A Common Stock for $50.0 million or $13.88 per share. The market value of these shares on the date of purchase was $47.0 million or $13.05 per share. In November 2001, one of the banks sold in the open market 3,556,513 shares of Class A Common Stock for $34.2 million or an average price of $9.62 per share. This resulted in a loss by the bank of $15.8 million which, in accordance with the arrangement, was paid in cash by the Company. The losses relating to these transactions have been included in income during the year.

      On September 27, 2001, the Company redeemed 40,920 shares of Series E Preferred Stock at the redemption price of Cdn. $146.63 per share for a total cash payment of $3.8 million. The Series E shares were held by Hollinger Inc.

      On November 28, 2001, the Company sold 2,700,000 multiple voting preferred shares and 27,000,000 non-voting shares in CanWest for total cash proceeds of approximately Cdn. $271.3 million ($172.4 million). The sale resulted in a realized pre-tax loss of $99.2 million which is included in income.

      In January 2000, 706,469 shares of the Company’s Preferred Redeemable Increased Dividend Equity Securities (“PRIDES”), the last remaining PRIDES not held by related parties, were converted into 596,189 shares of Class A Common Stock of the Company.

21


Table of Contents

      On February 17, 2000, Interactive Investor International (“III”), in which the Company owned 51.7 million shares or a 47.0% equity interest acquired at a cost of approximately $15.0 million, had its initial public offering (“IPO”), issuing 52 million shares and raising £78.0 million ($125.8 million). The IPO reduced the Company’s equity ownership interest to 33% and resulted in the recognition of a dilution gain of $17.0 million. Subsequently, the Company sold five million shares of its holding, reducing its equity interest to 28.5%, and resulting in a pre-tax gain of $1.6 million. In 2001, the remaining interest in III was sold for cash proceeds of $21.4 million and the sale resulted in a pre-tax gain of $14.2 million.

      On November 16, 2000, the Company and its affiliates, Southam and Hollinger L.P. (“Hollinger Group”) completed the sale of most of its Canadian newspapers and related assets to CanWest. Included in the sale were the following assets of the Hollinger Group:

  •  a 50% interest in National Post, with the Company continuing as managing partner;
 
  •  the metropolitan and a large number of community newspapers in Canada (including the Ottawa Citizen, The Vancouver Sun, The Province (Vancouver), the Calgary Herald, the Edmonton Journal, The Gazette (Montreal), The Windsor Star, the Regina Leader Post, the Star Phoenix and the Times-Colonist (Victoria); and
 
  •  the operating Canadian Internet properties, including canada.com.

      The sale resulted in the Hollinger Group receiving approximately Cdn. $1.7 billion ($1.1 billion) cash, approximately Cdn. $425 million ($277 million) in voting and non-voting shares of CanWest at fair value (representing an approximate 15.6% equity interest and 5.7% voting interest) and subordinated non-convertible debentures of a holding company in the CanWest group at fair value of approximately Cdn. $697 million ($456 million). The aggregate sale price of these properties at fair value was approximately Cdn. $2.8 billion ($1.8 billion), plus closing adjustments for working capital at August 31, 2000 and cash flow and interest for the period September 1 to November 16, 2000 which, in total, approximated an additional $40.7 million at December 31, 2000. $972 million of the cash proceeds from this sale were used to pay down the Company’s Bank Credit Facility.

      During 2000, the Company sold most of its remaining U.S. community newspaper properties including 11 paid dailies, three paid non-dailies and 31 free distribution publications for total proceeds of approximately $215.0 million. Pre-tax gains totaling $91.2 million were recognized on these sales.

      In December 2000, the Company acquired four paid daily newspapers, one paid non-daily and 12 free distribution publications in the Chicago suburbs, for total consideration of $111.0 million.

      In November 2000, Southam converted a promissory note from Hollinger L.P. in the principal amount of Cdn. $225.8 million ($147.9 million) into 22,575,324 limited partnership units of Hollinger L.P., thereby increasing its interest in Hollinger L.P. to 87.0%.

      In January 1999, Hollinger Canadian Publishing Holdings Inc. (“HCPH”) acquired 19,845,118 outstanding Southam common shares which had been tendered pursuant to HCPH’s offer to all Southam shareholders to acquire the shares for Cdn. $25.25 cash per share after payment by Southam of a special dividend of Cdn. $7.00 per share. The aggregate consideration paid was $327.5 million and this purchase of shares brought the Company’s ownership interest in Southam to approximately 97%. The purchase price was funded through HCPH’s portion of the 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 for aggregate consideration of $36.5 million.

      During 1999, the Company solicited consents from the registered holders of the 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 Senior Notes and Senior Subordinated Notes were so amended.

      In February 1999, the Company completed the sale of 45 U.S. community newspaper properties for approximately $460.0 million, of which approximately $441.0 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 $249.2 million was recognized on this transaction.

22


Table of Contents

      During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43.7 million resulting in a pre-tax gain of approximately $20.7 million. Horizon Publications Inc. is managed by former Community Group executives and owned by current and former Hollinger International Inc. executives. Throughout 1999, the Company acquired five community newspapers in the U.S. for total consideration of $24.5 million.

      In April 1999, the Company formed Hollinger L.P.. Hollinger L.P. acquired 48 daily newspapers, 180 non-daily newspapers and shopping guides and 106 magazines and specialty publications located across Canada from Southam, UniMédia Inc. and Sterling Newspapers Company in exchange for convertible promissory notes due April 29, 2020 of $309.5 million (Cdn. $451.2 million) and 135,945,972 units in Hollinger L.P.. The transfer of properties to Hollinger L.P. was accounted for at historical carrying values and no gain was recognized on the transfer.

      On April 30, 1999, Hollinger L.P. completed a Cdn. $200.0 million ($137.2 million) private placement and investors subsequently received 20 million partnership units of Hollinger L.P.. During July 1999 Hollinger L.P. completed its initial public offering issuing four million units at Cdn. $10 per unit for total proceeds of Cdn. $40.0 million ($27.0 million). All partnership units, including the 20 million units issued through the April 30, 1999 private placement, are listed on The Toronto Stock Exchange. After the initial public offering the Company continued to hold indirectly approximately 85% of the equity of Hollinger L.P.. The net proceeds of the offerings were applied to reduce bank debt of the Hollinger Group. The reduction in the Company’s indirect ownership interest in Hollinger L.P. due to the sales of partnership units resulted in the recognition of dilution gains of $77.3 million.

      On April 30, 1999, Hollinger International Publishing Inc. (“Publishing”), HCPH, Telegraph, Southam, HIF Corp. (“HIF”) and a group of financial institutions entered into a Fourth Amended and Restated Credit Facility (“Restated Credit Facility”) for a total of $725.0 million consisting of a $475.0 million revolving credit line maturing on September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004. This facility replaced the previous Bank Credit Facility. The loans under the Restated Credit Facility bore interest, at the option of the respective borrower, at a rate per annum tied to specified floating rates or a reserve adjusted Eurocurrency rate, in each case plus a specified margin determined based on leverage ratios. On June 4, 1999, the revolving credit line was increased by $50.0 million. On September 30, 1999, the Restated Credit Facility was increased to $875.0 million when the revolving credit line and the term loan were each increased by $50.0 million. As noted elsewhere, this facility was substantially repaid in November 2000 with the facility being reduced to $5.0 million. The Restated Credit Facility is secured by the collateralization of $5.0 million of the Company’s positive cash which is included in prepaids and other current assets at December 31, 2001. At December 31, 2001 and 2000, no amounts were owing under the Restated Credit Facility.

23


Table of Contents

      The following tables set forth, for the periods indicated, certain items and related percentage relationships included in the Company’s Consolidated Statements of Operations.

                                                   
Years Ended December 31,

2001 2000 1999 2001 2000 1999






(dollars in thousands)
Operating revenues:
                                               
 
Chicago Group
  $ 442,884     $ 401,417     $ 390,473       38.6 %     19.2 %     18.2 %
 
Community Group
    19,115       67,336       96,674       1.7       3.2       4.5  
 
U.K. Newspaper Group
    486,374       562,068       550,474       42.4       26.8       25.6  
 
Canadian Newspaper Group
    197,948       1,065,198       1,109,781       17.3       50.8       51.7  
     
     
     
     
     
     
 
Total operating revenues
  $ 1,146,321     $ 2,096,019     $ 2,147,402       100.0 %     100.0 %     100.0 %
     
     
     
     
     
     
 
Operating income (loss)(4):
                                               
 
Chicago Group
  $ 9,759     $ 36,018     $ 47,840       (48.8 )%     15.6 %     20.4 %
 
Community Group
    (3,617 )     3,456       10,194       18.1       1.5       4.3  
 
U.K. Newspaper Group
    30,913       89,542       73,526       (154.5 )     38.7       31.3  
 
Canadian Newspaper Group
    (37,337 )     116,766       117,758       186.6       50.5       50.1  
 
Investment and Corporate Group
    (19,723 )     (14,566 )     (14,470 )     98.6       (6.3 )     (6.1 )
     
     
     
     
     
     
 
Total operating income (loss)
  $ (20,005 )   $ 231,216     $ 234,848       100.0 %     100.0 %     100.0 %
     
     
     
     
     
     
 
EBITDA (loss)(2)(4):
                                               
 
Chicago Group
  $ 47,647     $ 59,757     $ 67,490       88.7 %     16.9 %     18.7 %
 
Community Group
    (1,476 )     9,647       19,210       (2.7 )     2.7       5.3  
 
U.K. Newspaper Group
    50,747       106,659       92,044       94.5       30.1       25.5  
 
Canadian Newspaper Group
    (25,509 )     190,542       194,293       (47.5 )     53.8       53.9  
 
Investment and Corporate Group
    (17,686 )     (12,755 )     (12,781 )     (33.0 )     (3.5 )     (3.4 )
     
     
     
     
     
     
 
Total EBITDA
  $ 53,723     $ 353,850     $ 360,256       100.0 %     100.0 %     100.0 %
     
     
     
     
     
     
 
EBITDA Margin(3):
                                               
 
Chicago Group
                            10.8 %     14.9 %     17.3 %
 
Community Group
                            Neg.       14.3 %     19.9 %
 
U.K. Newspaper Group
                            10.4 %     19.0 %     16.7 %
 
Canadian Newspaper Group
                            Neg.       17.9 %     17.5 %
 
Investment and Corporate Group
                            N/A       N/A       N/A  
Total EBITDA
                            4.7 %     16.9 %     16.8 %
                             
     
     
 


(Footnotes following tables)

24


Table of Contents

      The following tables set forth, for the periods indicated, certain items and related percentage relationships included in the Company’s Consolidated Statements of Operations.

                                                     
Years Ended December 31,

2001 2000 1999 2001 2000 1999






(dollars in thousands)
Chicago Group
                                               
 
Operating revenues:
                                               
   
Advertising
  $ 338,521     $ 305,027     $ 294,124       76.4 %     76.0 %     75.4 %
   
Circulation
    92,716       80,261       80,551       20.9       20.0       20.6  
   
Job printing and other
    11,647       16,129       15,798       2.7       4.0       4.0  
     
     
     
     
     
     
 
 
Total operating revenues
    442,884       401,417       390,473       100.0       100.0       100.0  
     
     
     
     
     
     
 
 
Operating costs(1)(4)
                                               
   
Newsprint
    76,399       69,238       64,408       17.3       17.2       16.5  
   
Compensation costs
    178,672       150,874       147,258       40.3       37.6       37.7  
   
Other operating costs
    140,166       121,548       111,317       31.6       30.3       28.5  
   
Depreciation
    17,955       10,907       8,766       4.1       2.7       2.2  
   
Amortization
    19,933       12,832       10,884       4.5       3.2       2.8  
     
     
     
     
     
     
 
 
Total operating costs
    433,125       365,399       342,633       97.8       91.0       87.7  
     
     
     
     
     
     
 
 
Operating income(1)(4)
  $ 9,759     $ 36,018     $ 47,840       2.2 %     9.0 %     12.3 %
     
     
     
     
     
     
 
Community Group
                                               
   
Operating revenues:
                                               
   
Advertising
  $ 5,806     $ 38,294     $ 57,535       30.4 %     56.9 %     59.5 %
   
Circulation
    7,751       19,168       26,618       40.5       28.4       27.5  
 
Job printing and other
    5,558       9,874       12,521       29.1       14.7       13.0  
     
     
     
     
     
     
 
 
Total operating revenues
    19,115       67,336       96,674       100.0       100.0       100.0  
     
     
     
     
     
     
 
 
Operating costs(1)(4)
                                               
   
Newsprint
    2,031       6,027       9,355       10.6       9.0       9.7  
   
Compensation costs
    9,817       24,934       35,473       51.4       37.0       36.7  
   
Other operating costs
    8,743       26,728       32,636       45.7       39.7       33.8  
   
Depreciation
    1,268       2,836       3,911       6.6       4.2       4.0  
   
Amortization
    873       3,355       5,105       4.6       5.0       5.3  
     
     
     
     
     
     
 
 
Total operating costs
    22,732       63,880       86,480       118.9       94.9       89.5  
     
     
     
     
     
     
 
 
Operating income (loss)(1)(4)
  $ (3,617 )   $ 3,456     $ 10,194       (18.9 )%     5.1 %     10.5 %
     
     
     
     
     
     
 


(Footnotes following tables)

25


Table of Contents

      The following tables set forth, for the periods indicated, certain items and related percentage relationships included in the Company’s Consolidated Statements of Operations.

                                                     
Years Ended December 31,

2001 2000 1999 2001 2000 1999






(dollars in thousands)
U.K. Newspaper Group
                                               
 
Operating revenues:
                                               
   
Advertising
  $ 329,758     $ 388,283     $ 365,005       67.8 %     69.1 %     66.3 %
   
Circulation
    136,093       145,099       158,683       28.0       25.8       28.8  
   
Job printing and other
    20,523       28,686       26,786       4.2       5.1       4.9  
     
     
     
     
     
     
 
 
Total operating revenues
    486,374       562,068       550,474       100.0       100.0       100.0  
     
     
     
     
     
     
 
 
Operating costs(1)(4)
                                               
   
Newsprint
    93,225       91,836       97,045       19.2       16.3       17.6  
   
Compensation costs
    88,314       96,492       90,870       18.1       17.2       16.5  
   
Other operating costs
    254,088       267,081       270,515       52.2       47.5       49.1  
   
Depreciation
    10,728       7,532       8,287       2.2       1.3       1.5  
   
Amortization
    9,106       9,585       10,231       1.9       1.8       1.9  
     
     
     
     
     
     
 
 
Total operating costs
    455,461       472,526       476,948       93.6       84.1       86.6  
     
     
     
     
     
     
 
 
Operating income(1)(4)
  $ 30,913     $ 89,542     $ 73,526       6.4 %     15.9 %     13.4 %
     
     
     
     
     
     
 
Canadian Newspaper Group
                                               
 
Operating revenues:
                                               
   
Advertising
  $ 130,377     $ 812,278     $ 840,369       65.9 %     76.3 %     75.8 %
   
Circulation
    41,761       202,522       221,150       21.1       19.0       19.9  
   
Job printing and other
    25,810       50,398       48,262       13.0       4.7       4.3  
     
     
     
     
     
     
 
 
Total operating revenues
    197,948       1,065,198       1,109,781       100.0       100.0       100.0  
     
     
     
     
     
     
 
 
Operating costs(1)(4)
                                               
   
Newsprint
    32,769       137,076       140,042       16.6       12.9       12.6  
   
Compensation costs
    81,392       385,977       406,917       41.1       36.2       36.7  
   
Other operating costs
    109,296       351,603       368,529       55.2       33.0       33.2  
   
Depreciation
    6,661       42,038       42,286       3.4       3.9       3.8  
   
Amortization
    5,167       31,738       34,249       2.6       3.0       3.1  
     
     
     
     
     
     
 
 
Total operating costs
    235,285       948,432       992,023       118.9       89.0       89.4  
     
     
     
     
     
     
 
 
Operating income (loss)(1)(4)
  $ (37,337 )   $ 116,766     $ 117,758       (18.9 )%     11.0 %     10.6 %
     
     
     
     
     
     
 


(Footnotes following tables)

26


Table of Contents

     The following table sets forth, for the periods indicated, certain items and related percentage relationships included in the Company's Consolidated Statements of Operations.

                             
Years Ended December 31,

(dollars in thousands) 2001 2000 1999



Investment and Corporate Group
                       
 
Operating revenues:
                       
   
Advertising
  $     $     $  
   
Circulation
                 
   
Job printing and other
                 
     
     
     
 
 
Total operating revenues
                 
     
     
     
 
 
Operating costs(4)
                       
   
Newsprint
                 
   
Compensation costs
    4,142       4,074       3,847  
   
Other operating costs
    13,544       8,681       8,934  
   
Depreciation
    1,356       1,233       903  
   
Amortization
    681       578       786  
     
     
     
 
 
Total operating costs
    19,723       14,566       14,470  
     
     
     
 
 
Operating loss(4)
  $ (19,723 )   $ (14,566 )   $ (14,470 )
     
     
     
 


(1)  Percentage relationships are expressed as a percentage of total operating revenue.
 
(2)  EBITDA represents earnings before interest expense, interest and dividend income, income taxes, depreciation and amortization, minority interest, equity in earnings or losses of affiliates, amortization of debt issue costs, foreign currency gains and losses, extraordinary items, other income (expense), net, infrequent items and stock- based compensation. 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.
 
(3)  EBITDA Margin represents EBITDA divided by related operating revenue.
 
(4)  Excludes infrequent items and stock-based compensation.

Results of Operations

     2001 Compared with 2000

      Net Earnings. The Company had a net loss of $337.5 million or a loss of $3.42 per share in 2001 compared with net earnings of $117.1 million or earnings of $1.10 per share in 2000. The net loss in 2001 and the net earnings in 2000 included a large number of infrequent, unusual and non-recurring items. Excluding infrequent, unusual and non-recurring items, and the effect of changes in accounting in 2000 with respect to repriced options, the net loss for the year ended December 31, 2001 was $33.7 million or a loss of $0.33 per diluted share compared with net earnings of $52.7 million or earnings of $0.47 per diluted share in 2000. Infrequent items are disclosed separately in the Statements of Operations, and unusual and non-recurring items are primarily included in other income (expense), net.

      Operating Income (Loss). Operating loss in 2001 was $40.4 million compared with income of $221.7 million in 2000, a decrease of $262.1 million. The decrease in operating income was primarily due to the sales of newspaper properties in the Canadian Newspaper Group in both 2000 and 2001 and in the Community Group in 2000. In addition, lower operating results across all the Company’s remaining operations contributed to the decrease in operating income. In 2001, infrequent items included a one-time expense related to a pension and post-retirement plan liability adjustment of $12.4 million.

      Operating Revenues. Operating revenues were $1,146.3 million in 2001 compared with $2,096.0 million in 2000, a decrease of $949.7 million. The overall decrease in revenue is primarily due to the sale of Canadian newspaper properties in both 2000 and 2001 and the 2000 sale of Community newspaper properties. In addition, lower operating revenues at the U.K. Newspaper Group and the Chicago Group, on a same store basis, contributed to the decrease. The acquisition of Fox Valley Publications Inc. (formerly Copley Group) in December 2000 has, however, increased Chicago Group operating revenues in total.

27


Table of Contents

      Operating Expenses. Total operating costs and expenses were $1,186.7 million in 2001 compared with $1,874.3 million in 2000, a decrease of $687.6 million. Newsprint expense was $204.4 million in 2001 compared with $304.2 million in 2000, a decrease of $99.8 million or 32.8%. The decrease was primarily due to lower consumption at the U.K. Newspaper Group and the Chicago Group and due to the sales of Canadian newspaper properties in both 2000 and 2001 and the sale of Community newspaper properties in 2000. Average newsprint prices at both the U.K. Newspaper Group and Chicago Group year over year were higher. Compensation costs decreased year over year by $294.9 million or 44.5%, and other operating costs decreased year over year by $254.9 million or 32.9%. These reductions are mainly due to the sales of properties. Depreciation in 2001 was $38.0 million compared with $64.5 million in 2000. Lower depreciation resulting from the sales of properties in both the Community Group and Canadian Newspaper Group was in part offset by increased depreciation at the Chicago Group related to the new printing facility and the Fox Valley Publication Inc. acquisition in December 2000. Amortization in 2001 was $35.8 million compared with $58.1 million in 2000. The decrease results from the sales of properties offset in part by amortization related to the December 2000 acquisition of Fox Valley Publications Inc. Infrequent items in 2001 amounted to $21.7 million compared with $8.0 million in 2000. Infrequent items in both years included duplicated costs resulting from operating two plants during start-up of the new plant in Chicago. In addition, infrequent items in 2001 included a one-time expense related to a pension and post-retirement plan liability adjustment of $12.4 million in respect of retired former Southam employees.

      Interest Expense. Interest expense was $78.6 million in 2001 compared with $142.7 million in 2000, a decrease of $64.1 million. This decrease results from the significantly lower debt levels during 2001 compared with 2000. In November 2000, the Company repaid $972.0 million of its Bank Credit Facility with the proceeds from the sale of properties to CanWest.

      Interest and Dividend Income. Interest and dividend income in 2001 was $64.9 million compared with $18.5 million in 2000, an increase of $46.4 million. Interest and dividend income in 2001 included interest on the CanWest debentures until the sale of Participations in August and December, interest on the remaining CanWest debentures, dividends on CanWest shares and bank interest on the significant cash balance primarily accumulated from the proceeds of the sale in 2001 of Canadian newspaper properties and the sales of CanWest shares and debentures. In 2000, interest and dividend income on CanWest investments was received only for the period November 17 to December 31.

      Foreign Currency Gains (Losses). Foreign currency losses in 2001 were $1.3 million compared with $16.0 million in 2000. The 2000 loss resulted entirely from the translation of amounts borrowed under the Bank Credit Facility in U.S dollars by a Canadian subsidiary and which were repaid in November 2000.

      Other Income (Expense), Net. Other expense in 2001 amounted to $295.9 million and included a net loss on the sale of assets of $145.9 million being primarily the loss on sale of Participations in CanWest debentures and a loss on sale of CanWest shares, a net loss of $1.2 million on sale of publishing interests including the $78.2 million loss on sale of National Post offset primarily by gains on sales of Canadian properties, a $48.0 million write-down of investments, a $73.9 million loss in respect of the Total Return Equity Swap and $15.1 million losses from equity accounted companies. Net other income in 2000 totalled $478.0 million and included $493.2 million gains on sales of publishing interests, $32.6 million gains on sales of investments, a $17.0 million dilution gain in respect of the investment in Interactive Investor International, a $16.3 million loss in respect of the Total Return Equity Swap, a $20.6 million write-down of investments and $20.3 million losses from equity accounted companies.

      Minority Interest. Minority interest in 2001 was a recovery of $13.9 million compared with an expense in 2000 of $50.8 million. The recovery in 2001 results primarily from the minority’s share of National Post losses to August 31, 2001 offset by the minority’s share of earnings of Hollinger L.P. Minority interest in 2000 included the minority’s share of Hollinger L.P., including the gain on sale of newspaper properties to CanWest, $10.9 million related to the amount paid on mandatory retirement of HCPH Special shares in excess of the recorded book amounts and the minority’s share of the National Post loss subsequent to November 16, 2000.

     Chicago Group

      Operating revenues for the year ended December 31, 2001, were $442.9 million compared with $401.4 million in 2000, an increase of $41.5 million. Chicago Group results are based on standard accounting periods, which for 2000 resulted in a 53-week year for the reported results of the Chicago Group only. The effect of the 53rd week in 2000 was to add $6.0 million to operating revenue and $6.2 million to operating costs and expenses. On December 15, 2000, the acquisition of Chicago Suburban Newspapers from Copley Group was completed and operating results of this group have been included since that time. Revenues for operations owned in both years, excluding Chicago Suburban Newspapers (“same store”) and based on a 52-week year in 2000, were $363.6 million for 2001,

28


Table of Contents

compared with $392.0 million in 2000. Advertising revenue for the year ended December 31, 2001, on a same store 52-week basis, was $20.0 million or 6.7% lower than in 2000. Circulation revenue on a same store 52-week basis, for the year ended December 31, 2001, was $2.7 million or 3.5% lower than in 2000. Chicago Sun-Times average daily circulation in 2001 was higher than in 2000; however, circulation revenue for 2001 was lower than in 2000 as a result of price discounting to build and maintain market share in response to competitive activity. Printing and other revenue, on a same store 52-week basis was $10.1 million in 2000 compared with $15.8 million in 2000, a decrease of $5.7 million.

      Total operating costs and expenses, excluding infrequent items, were $433.1 million in 2001 compared with $365.4 million in 2000. On a same store 52-week basis, operating costs and expenses, excluding infrequent items, were $350.0 million compared with $356.3 million in 2000, a decrease of $6.3 million or 1.8%. Same store newsprint expense in 2001 was $67.5 million, compared to $67.6 million in 2000. Average newsprint prices in 2001 were approximately 11% higher than in 2000. In 2001, newsprint consumption was significantly less than in 2000 as a result of lower page counts due to reduced advertising revenue, a reduction in commercial printing, and general cost controls. On a same store 52-week basis, compensation and other costs decreased $10.9 million or 4.1% year over year. The lower compensation costs result from staff reductions across the Chicago Group offset in part by increased medical costs and workers compensation costs. Other operating costs are lower as a result of reduced commercial printing production costs and general cost reductions across all areas. On a same store basis depreciation and amortization increased $4.7 million mainly as a result of higher depreciation charges related to the new Chicago printing facility.

      On a same store 52-week basis, operating income was $13.6 million in 2001 compared with $35.7 million in 2000, a decrease of $22.1 million. The decrease results primarily from lower operating revenues, increased depreciation and amortization offset in part by lower compensation and other operating costs. The acquisition of Chicago Suburban Newspapers added $79.3 million to operating revenues and an operating loss of $3.8 million in 2001.

     U.K. Newspaper Group

      Operating revenues for the U.K. Newspaper Group were $486.4 million in 2001 compared with $562.1 million in 2000, a decrease of $75.7 million or 13.5%. In pounds sterling, operating revenues in 2001 were £337.5 million compared with £370.7 million in 2000, a decrease of 9.0%. The decrease in revenue was almost entirely the result of lower advertising revenue, which, in local currency, was lower by 10.6% compared with 2000. Circulation revenue, in local currency, for the year ended December 31, 2001, was £94.5 million compared with £95.7 million in 2000, a decrease of £1.2 million or 1.2%. On September 5, 2001, the price of The Daily Telegraph on Monday to Friday increased from 45p to 50p and on September 8, 2001, the price of The Daily Telegraph on Saturday increased from 75p to 85p. These price increases improved circulation revenue in the last quarter of 2001.

      Total operating costs and expenses, excluding infrequent items, were $455.5 million in 2001 compared with $472.5 million in 2000, a decrease of $17.0 million or 3.6%. Newsprint expense in local currency was £64.7 million in 2001 compared with £60.6 million in 2000, an increase of £4.1 million or 6.8%. This increase results from the significant increase in newsprint prices in 2001 compared to 2000, offset in part by 4% lower consumption in 2001 compared to 2000. In pounds sterling, compensation and other costs were 1% lower in 2001 than in 2000.

      Operating income, excluding infrequent items, was $30.9 million in 2001 compared with $89.5 million in 2000, a decrease of $58.6 million. The decrease results from lower operating revenue, primarily advertising revenue and increased newsprint costs offset in part by lower compensation costs and other operating costs. In addition, the decrease in operating income was made greater by the change in exchange rates. In 2001 the average exchange rate for the pound sterling into U.S. dollars was 1.45 compared with 1.52 in 2000.

     Canadian Newspaper Group

      Operating revenues in the Canadian Newspaper Group were $197.9 million in 2001 compared with $1,065.2 million in 2000 and in 2001 there was an operating loss, excluding infrequent items, of $37.3 million compared with operating income of $116.8 million in 2000. The significant decrease in both operating revenues and operating income results primarily from the sale of newspaper assets in 2000 to CanWest, the sale of UniMédia Company completed in January 2001, the July and November 2001 sales of operations to Osprey, and the September 1, 2001 sale of the National Post.

29


Table of Contents

      On a same store basis, operating revenues and operating income, excluding infrequent items, of the remaining operations were Cdn. $113.7 million and a loss of Cdn. $12.5 million in 2001 compared with Cdn. $116.8 million and a loss of Cdn. $9.4 million in 2000. Included in the Cdn. $12.5 million operating loss for the year ended December 31, 2001, are overhead costs of approximately Cdn. $3.8 million that are not expected to be incurred in 2002. Also included is a Cdn. $8.3 million expense in respect of employee benefit costs of retired former Southam employees.

     Community Group

      Operating revenues and operating income, excluding infrequent items, were $19.1 million and a loss of $3.6 million in 2001, compared to $67.3 million and operating income of $3.5 million in 2000. The significant decrease in both operating revenue and operating income results almost entirely from the sales of Community Group properties that occurred primarily during 2000. During the third quarter of 2001, the last remaining U.S. Community Group property was sold. At December 31, 2001, The Jerusalem Post was the only Community Group property still owned by the Company.

     Investment and Corporate Group

      Operating costs, excluding stock-based compensation, of the Investment and Corporate Group were $19.7 million, compared with $14.6 million in 2000, an increase of $5.1 million. The increase is due mainly to management fees charged to this division in 2001 that were charged to other operating divisions in 2000.

     2000 Compared with 1999

      Net Earnings. The Company had net earnings of $117.1 million, or $1.10 per share in 2000, compared with net earnings of $245.4 million, or $2.30 per share in 1999. Earnings in 2000 and 1999 included a number of infrequent and non-recurring items and the results for 2000 have been affected by changes in accounting standards with respect to repriced options and the Company’s Total Return Equity Swap. Excluding infrequent and non-recurring items, and the effects of changes in accounting standards, earnings for the year ended December 31, 2000 were $52.7 million compared with $62.1 million in 1999 and diluted earnings per share were $0.47 in 2000 compared with $0.53 in 1999.

      Operating Income. Operating income in 2000 was $221.7 million compared with $212.8 million in 1999, an increase of $8.9 million. The increase in operating income was due to several factors. Improved operating results at the U.K. Newspaper Group and National Post were partly offset by a decrease in operating income at the Chicago Group and sales of newspaper properties in the Community Group in both 1999 and 2000, and in the Canadian Newspaper Group in 2000, reduced operating income in 2000 compared with 1999. In addition, in 1999 infrequent items included a one-time expense related to a pension and post-retirement plan liability adjustment of $11.9 million.

      Operating Revenues. Operating revenues were $2,096.0 million in 2000 compared to $2,147.4 million in 1999, a decrease of $51.4 million. The overall decrease in revenue was primarily due to the 1999 and 2000 sales of Community Group newspapers and the November 16, 2000 sale to CanWest of certain Canadian newspaper properties. The effects of these sales more than offset increased operating revenues at the U.K. Newspaper Group and the National Post.

      Operating Expenses. Total operating costs and expenses were $1,874.3 million in 2000 compared to $1,934.6 million in 1999. Newsprint expense decreased year over year by 2.1%. This decrease was primarily due to lower consumption of newsprint resulting from the sale of Community newspaper properties during both 1999 and 2000 and the November 16, 2000 sale of Canadian properties to CanWest. In addition average newsprint prices in pounds sterling at the U.K. Newspaper Group in 2000 were approximately 4% lower than in 1999. These decreases were partly offset by increased consumption at the U.K. Newspaper Group and an increase of 7% in the 2000 average newsprint price compared with 1999 at the Chicago Group. Compensation costs decreased year over year by $22.0 million or 3.2% and other operating costs decreased year over year by $16.3 million or 2.1%. These reductions were mainly due to the sales of properties. Depreciation in 2000 was $64.5 million compared with $64.2 million in 1999. Lower depreciation resulting from the sales of properties in both the Community Group and Canadian Newspaper Group was offset by increased depreciation at the Chicago Group related to the new printing facility. Amortization in 2000 was $58.1 million compared with $61.3 million in 1999, a decrease of $3.2 million. This decrease resulted from the sales of properties. Operating expenses included infrequent items of $8.0 million in 2000, which primarily consisted of duplicated costs resulting from operating two plants during the start-up of the new plant in Chicago. The

30


Table of Contents

production facility was expected to be fully completed during 2001. In 1999, infrequent items totaled $22.0 million and consisted primarily of costs related to the start-up of the new plant in Chicago and accounting adjustments related to pension liabilities. In addition, stock-based compensation expense in 2000 totaled $1.5 million and related to a change in the interpretation of accounting principles in 2000 in respect of stock options that were repriced in 1999. There was no similar expense in 1999.

      Interest Expense. Interest expense was $142.7 million in 2000 compared with $131.6 million in 1999, an increase of $11.1 million or 8.4%. This increase resulted from higher debt levels until November 16, 2000 when the Bank Credit Facility was repaid, increased interest rates throughout 2000 and the impact of expensing rather than capitalizing pre-production interest costs related to the new Chicago printing plant.

      Amortization of Debt Issue Costs. Amortization of debt issue costs in 2000 amounted to $10.5 million and represented debt issue costs on the Senior Notes, Senior Subordinated Notes and on the Bank Credit Facility until November 16, 2000. Amortization of debt issue costs in 1999 totaled $16.2 million and included both regular amortization of these costs and a one-time write-off of issue costs related to debt incurred to buyout the Southam minority in January 1999.

      Interest and Dividend Income. Interest and dividend income in 2000 amounted to $18.5 million compared with $7.7 million in 1999, an increase of $10.8 million. This increase primarily resulted from interest on the CanWest debentures from November 17 to December 31, 2000.

      Foreign Currency Gains and Losses. Foreign currency losses in 2000 totaled $16.0 million and in 1999 foreign currency gains totaled $13.8 million. The 2000 loss resulted entirely from the translation of amounts borrowed under the Bank Credit Facility in U.S. dollars by a Canadian subsidiary and which were repaid in November 2000. In 1999, $8.8 million of the gain resulted from translation of the same U.S. dollar borrowings under the Bank Credit Facility.

      Other Income (Expense), net. Net other income in 2000 totaled $478.0 million and included $493.2 million gains on sales of publishing interests, $32.6 million gains on sales of assets, a $17.0 million dilution gain in respect of the investment in Interactive Investor International, a $16.3 million loss in respect of the Total Return Equity Swap, a $20.6 million write-down of investments and $20.3 million losses from equity accounted companies. Net other income of $326.3 million in 1999 consisted primarily of gains on sales of publishing interests at the Community Group of $270.0 million and a $77.3 million gain on the dilution of the Company’s interest in Hollinger L.P.

      Minority Interest. Minority interest in 2000 amounted to $50.8 million compared with $7.1 million in 1999. Minority interest in 2000 included the minority’s share of Hollinger L.P., including the gain on sale of newspaper properties to CanWest, $10.9 million related to the amount paid on mandatory retirement of HCPH Special shares in excess of the recorded book amounts and the minority’s share of the National Post loss subsequent to November 16, 2000.

      Minority interest in 1999 represented the minority’s share of Hollinger L.P. for May to December and the minority’s share of net earnings of Southam prior to the Company acquiring the remaining minority share of Southam in January and February 1999.

     Chicago Group

      Operating revenues for the Chicago Group were $401.4 million in 2000 compared with $390.5 million in 1999. Chicago Group results are based on standard accounting periods which for 2000 resulted in a 53 week year for the Chicago Group only. The effect of the 53rd week was to add $6.0 million to operating revenues and $6.2 million to operating costs and expenses. Operating revenues for operations owned in both years based on a 52 week year were $389.2 million in 2000 compared with $390.5 million in 1999. Advertising revenue was up 0.4% while circulation revenue decreased 3.0% from 1999, primarily at the Chicago Sun-Times. The Audit Bureau of Circulation reported average daily circulation for the Chicago Sun-Times for the fourth quarter of 2000 reflected an increase of approximately 6,000 compared with the fourth quarter of 1999. However, circulation revenue was lower resulting from price discounting to build and maintain market share.

      Total operating costs and expenses, excluding infrequent items, were $365.4 million compared with $342.6 million in 1999. On a same store basis operating costs and expenses were $359.3 million in 2000 compared with $342.6 million in 1999. This increase results from the impact of the 53rd week, newsprint price increases, increased Internet costs and higher depreciation charges related to the new printing facility.

31


Table of Contents

      On a same store basis, excluding the 53rd week and Internet results, operating income was $39.2 million in 2000 compared with $49.0 million in 1999. The effect of the 53rd week on same store operating income was negligible. Increases in newsprint expense and a decline in revenue on a 52-week basis resulted in a $5.2 million decline in operating income with the balance of the decline coming primarily from depreciation and amortization.

     Community Group

      Operating revenue and operating income in 2000 for the Community Group was $67.3 million and $3.5 million, respectively, compared with $96.7 million and $10.2 million, respectively, in 1999. The significant decrease in both operating revenue and operating income resulted entirely from the sales in both 1999 and 2000 of Community Group newspaper properties. At December 31, 2000 only one U.S. Community Group newspaper and The Jerusalem Post were still owned by the Company.

     U.K. Newspaper Group

      Operating revenues for the U.K. Newspaper Group were $562.1 million in 2000 compared with $550.5 million in 1999, an increase of 2.1%. However, in British pounds sterling, total operating revenue increased 9.0% and advertising revenue increased by 13.6%. Display advertising at the Telegraph increased by 16% year on year and this included a 29% increase in financial advertising. Recruitment revenue increased by almost 15% year on year. Other classified advertising performed well. The launch of a new travel section in the Sunday Telegraph assisted in the increase in travel revenues of 11.5%. Property, Automobile and Gardening advertising increased by 34%, 11.8% and 20.8% year on year, respectively, reflecting the continued strength of the economy in the U.K.

      In British pounds sterling, circulation revenue was down 2.4% year over year primarily as a result of an increase in sales to subscribers and a decline in weekday newsstand sales.

      Total operating costs, excluding infrequent items, were $472.5 million in 2000 compared with $476.9 million in 1999. Newsprint expense was $91.8 million in 2000 compared with $97.0 million in 1999. This reflected a year over year newsprint price decrease offset in part by increased consumption resulting from the increase in advertising. The newsprint price decrease reflected the longer-term purchasing methodology in the U.K. which usually causes a delay in realizing the effect of newsprint price changes. Compensation and other costs increased in pounds sterling compared with 1999, primarily from higher production and editorial costs, higher marketing and promotion costs and an increase in Internet costs. EBITDA, excluding infrequent items in 2000, was $106.7 million compared with $92.0 million in 1999, an increase of 16.0%. In pounds sterling EBITDA, excluding infrequent items, in 2000 was £70.0 million compared with £56.7 million in 1999, an increase of 23.5%. In 2000 the average exchange rate for the pound sterling into U.S. dollars was 1.52 compared with 1.62 in 1999.

     Canadian Newspaper Group

      Operating revenues in the Canadian Newspaper Group were $1,065.2 million in 2000 compared with $1,109.8 million in 1999 and operating income was $116.8 million in 2000 compared with $117.8 million in 1999. The reported results included the results of operations sold to CanWest for the period January 1 to November 16, 2000 and for all of 1999. The National Post, which is included throughout both years, had revenue and EBITDA losses of $90.9 million and $28.9 million, respectively, in 2000 compared with $70.3 million and $44.3 million, respectively, in 1999.

      Operating revenues and EBITDA for Canadian operations not sold at December 31, 2000, excluding National Post, and reported in the year ended December 31, 2000 were Cdn. $390.9 million and Cdn. $67.9 million as compared to Cdn. $384.1 million and Cdn. $67.8 million in 1999.

      These amounts included operating revenues and EBITDA of Canadian operations sold subsequent to December 31, 2000 of Cdn. $127.5 million and Cdn. $20.2 million for 2000 and Cdn. $126.5 million and Cdn. $19.5 million for 1999. Included in Canadian operations not sold were costs for Internet operations retained of Cdn. $2.6 million in 2000 and Cdn. $2.4 million in 1999.

     Investment and Corporate Group

      The operating loss, excluding stock-based compensation, of the Investment and Corporate Group was $14.6 million in 2000 compared with $14.5 million in 1999.

32


Table of Contents

Liquidity and Capital Resources

      Working Capital. Working capital consists of current assets less current liabilities. Current assets were $762.3 million and $472.5 million at December 31, 2001 and 2000, respectively. Current liabilities, excluding debt obligations, were $563.6 million and $725.3 million, respectively, at December 31, 2001 and 2000. The Company’s consolidated working capital, excluding debt obligations, at December 31, 2001 was $198.7 million and at December 31, 2000 was a deficit of $252.8 million. The increase in working capital is primarily due to increased cash and cash equivalents resulting from the sales of properties and CanWest investments and a reduction in current taxes payable. Included in current liabilities are income taxes that have been provided on gains on sales of assets computed on tax bases that result in higher gains for tax purposes than for accounting purposes. Strategies have been and may be implemented that may also defer and/or reduce these taxes but the effects of these strategies have not been reflected in the accounts.

      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 and its preferred stock 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. As at December 31, 2001, the Company did not meet a financial test set out in the Trust indentures for Publishing’s Senior and Senior Subordinated Notes. As a result, until and unless the test is met in the future, Publishing and its subsidiaries will be unable to borrow, make restricted investments, make advances, pay dividends or make other distributions to the Company. Meeting the test will depend on improvements in future income. The Company currently has sufficient cash to meet its current anticipated obligations.

      EBITDA. EBITDA, which represents the Company’s earnings before interest expense, interest and dividend income, foreign currency gains and losses, income taxes, depreciation and amortization, minority interest, equity in earnings of affiliates, amortization of debt issue costs, other income (expense), net, and extraordinary items was $33.4 million in 2001, $344.4 million in 2000 and $338.2 million in 1999, respectively. The Company believes that EBITDA largely determines its ability to fund current operations and to service debt. EBITDA excluding infrequent items and stock-based compensation was $53.7 million, $353.9 million and $360.3 million in 2001, 2000 and 1999, respectively.

      Cash Flows. Cash flows used in operating activities were $146.7 million in 2001, and cash flows provided by operating activities were $59.8 million and $106.2 million in 2000 and 1999, respectively. The cash flows used in operating activities in 2001 largely resulted from lower operating results and the non-cash interest income received on CanWest debentures.

      Cash flows provided by investing activities were $756.7 million in 2001 principally reflecting the proceeds on disposal of CanWest investments and on sale of properties, reduced in part by capital expenditures on fixed assets and additions to investments. Cash flows provided by investing activities in 2000 were $1,080.8 million principally reflecting the proceeds on disposal of investments, the proceeds on disposal of newspaper properties at the Community Group and to CanWest, offset in part, by the acquisition cost of newspapers in the Chicago suburbs, by capital expenditures on fixed assets and by additions to investments. Cash flows used in investing activities were $59.6 million in 1999 principally reflecting the capital expenditures at the Chicago Group for the new production facility, acquisition of the remaining minority of Southam and Internet related spending offset, in part, by proceeds from the disposition of certain U.S. community newspapers.

      Cash flows used in financing activities in 2001 were $258.7 million primarily reflecting dividend payments and the purchase for cancellation of Class A Common Stock from Hollinger Inc. and from a bank pursuant to the Total Return Equity Swap. Cash flows used in financing activities in 2000 were $1,040.2 million primarily reflecting the repayment of debt, the redemption of HCPH Special shares and dividend payments. Cash flows used in financing activities in 1999 were $91.0 million, principally reflecting the payment by Southam of a special dividend, the repurchase of Class A Common Stock by the Company offset, in part, by the issuance of partnership units by Hollinger L.P..

33


Table of Contents

      Based on current economic conditions, the Company expects cash flows from existing operations to improve as a result of cost reductions that have been implemented and declining newsprint prices. Full recovery of earnings levels would require a significant improvement in advertising activity and it is impossible to forecast when and to what extent, such a recovery will occur. Management believes that the cash flow provided by operating subsidiaries, under current economic conditions, will be sufficient to meet future cash requirements including capital expenditures. However, there is no assurance that any excess cash flow could be distributed by Publishing and its subsidiaries to the Company. However, as at March 5, 2002, the Company has sufficient cash on hand to meet its current anticipated obligations.

      Capital Expenditures and Acquisition Financing. In the past three years the Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group have funded their capital expenditures and acquisition and investment activities out of cash provided by their respective operating activities and, in 1999 and 2000, through borrowings under their bank credit facilities.

      Capital expenditures at the Chicago Group amounted to $12.1 million, $25.7 million and $40.9 million in 2001, 2000 and 1999, respectively. The Company began construction of a new printing facility in Chicago during 1998 which became partially operational in 2000 and fully operational in 2001. The capital expenditures in 1999, 2000 and 2001 are primarily related to the construction of this production facility.

      Capital expenditures at the Community Group amounted to $3.3 million and $4.9 million in 2000 and 1999, respectively.

      Capital expenditures at the Telegraph were $17.1 million, $14.5 million and $5.6 million in 2001, 2000 and 1999, respectively.

      Capital expenditures at the Canadian Newspaper Group were $2.8 million, $28.8 million and $72.4 million in 2001, 2000 and 1999, respectively. The capital expenditures in 1999 included new presses at Montreal, Saskatoon, Regina and new equipment at the Vancouver press facility.

      Capital expenditures at the Investment and Corporate Group were $12.2 million, $1.6 million and $1.4 million in 2001, 2000 and 1999, respectively. Expenditures in 2001 were primarily in respect of a new airplane to replace an older airplane that was sold in 2002.

      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, 2001, the indebtedness of the Company was $812.7 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 the 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.

      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 and First DT Holdings Limited and for general working capital.

34


Table of Contents

      On February 14, 2002, Publishing commenced a cash tender offer for any and all of its outstanding 8.625% Senior Notes due 2005. The tender offer was made upon the terms and conditions set forth in the Offer to Purchase and Consent Solicitation Statement dated February 14, 2002. Under the terms of the offer, the Company offered to purchase the outstanding notes at a price to be determined three business days prior to the expiration date of the tender offer by reference to a fixed spread of 87.5 basis points over the yield to maturity of the 7.50% U.S. Treasury Notes due February 15, 2005, plus accrued and unpaid interest up to but not including the day of payment for the notes. The purchase price totalled $1,101.34 for each $1,000 principal amount of notes. Included in the purchase price was a consent payment equal to $40 per $1,000 principal amount of the notes, payable to those holders who validly consented to the proposed amendments to the indenture governing the notes. In connection with the tender offer, the Company solicited consents from the holders of the notes to amend the indenture governing the notes by eliminating most of the restrictive provisions. On March 15, 2002, $248.9 million in the aggregate principal amount had been validly tendered pursuant to the offer and on March 18, 2002, these noteholders were paid out in full.

      1996 Note Offering. Publishing sold $250 million aggregate principal amount of Notes (the “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 semi-annually on February 1 and August 1 of each year, which commenced 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 their capital stock, subject in each case to certain exceptions.

      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. 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.

      During 1999, the Company solicited consents from the registered holders of the 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 Notes, Senior Notes and Senior Subordinated Notes were so amended.

      Bank Credit Facility. On April 30, 1999, Publishing, HCPH, Telegraph, Southam, HIF Corp. (“HIF”) and a group of financial institutions entered into a Fourth Amended and Restated Credit Facility (“Restated Credit Facility”) for a total of $725.0 million consisting of a $475.0 million revolving credit line maturing on September 30, 2004 and a $250.0 million term loan maturing on December 31, 2004. This facility replaced the previous Bank Credit Facility. The loans under the Restated Credit Facility bear interest, at the option of the respective borrower, at a rate per annum tied to specified floating rates or a reserve adjusted Eurocurrency rate, in each case plus a specified margin determined based on leverage ratios. On June 4, 1999, the revolving credit line was increased by $50.0 million. On September 30, 1999, the Restated Credit Facility was increased to $875.0 million when the revolving credit line and the term loan were each increased by $50.0 million.

      In June 2000, Publishing, HCPH, Telegraph, Southam, HIF and a group of financial institutions increased the term loan component of the Restated Credit Facility by $100.0 million to $975.0 million. On November 16, 2000, using the proceeds from the CanWest transaction, $972.0 million of borrowings were repaid and the Restated Credit Facility was reduced to $5.0 million. The Restated Credit Facility is secured by the collateralization of $5.0 million of the Company’s positive cash which is included in prepaids and other assets at December 31, 2001. At December 31, 2001, no amounts were owing under the Restated Credit Facility.

      During 2001, the Company entered into a new credit facility in the amount of $120.0 million. Amounts borrowed under this facility were repaid during 2001.

35


Table of Contents

Off Balance Sheet Arrangements

      Hollinger Participation Trust. As part of its agreement with CanWest, the Company was prohibited from selling the CanWest debentures prior to May 15, 2003. In order to monetize this investment, during August and December 2001, the Company sold participations in Cdn. $540.0 million (U.S. $350.0 million) and Cdn $216.8 million ($140.5 million) principal amounts of CanWest debentures to a special purpose trust (“Participation Trust”). Units of the Participation Trust were sold by the Participation Trust to arms’ length third parties. These transactions resulted in net proceeds to the Company of $401.2 million and have been accounted for as sales in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. The net loss on the transactions, including realized holding losses on the underlying debentures, amounted to $62.1 million and has been included in Other income (expense), net.

      The Company has not retained an interest in the participation Trust nor does it have any ongoing involvement in the Participation Trust. The Participation Trust and its investors have no recourse to the Company’s other assets in the event that CanWest defaults on its debentures. Under the terms of the Participation Trust, the interest payments received by the Company in respect of the underlying CanWest debentures will be paid to the Participation Trust. However, after May 15, 2003, the Company may be required to deliver to the Participation Trust, CanWest debentures with a face value equivalent to $490.5 million. Given that the CanWest debentures are denominated in Canadian dollars, the Company has entered into a forward exchange contract to mitigate part of its currency exposure. The foreign currency contract requires the Company to sell Cdn. $666.6 million on May 15, 2003 at a forward rate of 0.6423. The mark-to-market gain on the forward contract and the foreign exchange loss on the residual obligation have resulted in a net foreign currency loss at December 31, 2001 of $0.4 million. This amount has been charged to earnings and the net liability is included in other liabilities. In March 2002, the Company realized on Cdn. $199 million of the foreign currency contract and has since entered into another Cdn. $50 million foreign currency contract to replace part of the contract realized.

      In addition, in accordance with the terms of the participation agreement, the Company cannot transfer to an unaffiliated third party, until November 4, 2005, the equivalent of $50 million (Cdn. $79.6 million at December 31, 2001) principal amount of CanWest debentures.

      Total Return Equity Swap. During 1998 and 1999, the Company had arrangements with four banks, pursuant to which the banks purchased a total of 14,109,905 shares of the Company’s Class A Common Stock at an average price of $14.17. The Company had the option, quarterly, up to and including September 30, 2000 to buy the shares from the banks at the same cost or to have the banks resell those shares in the open market. The arrangement was extended until June 30, 2001. In the event the banks resold the shares, any gain or loss realized by the banks would be for the Company’s account. Until the Company purchases the shares, dividends paid on the shares belonged to the Company and the Company paid interest to the banks at the rate of LIBOR plus a spread.

      On November 16, 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-19 which clarified the accounting for derivative financial instruments indexed to, and potentially settled in a company’s own stock, that require a cash payment by the issuer upon the occurrence of future events outside the control of the issuer. The EITF applies to new contracts entered into after September 30, 2000. Consequently the extension of the contracts on October 1, 2000 is accounted for under EITF Issue No. 00-19. Accordingly, effective October 1, 2000, the above contracts have been accounted for using the asset and liability method. Since the contracts can require cash settlement, in the event of bankruptcy, the contracts must be accounted for on an income basis rather than as equity. Regardless, the amount of cash required for settlement does not change, but any change in value of the Company’s own shares that could be used to settle the obligation gives rise to a gain or loss that is recorded in income. The derivative forward contract has been marked to market after October 1, 2000. The $35.3 million gain inherent in the old contracts at October 1, 2000, based on the September 30, 2000 market value of Class A Common Stock of $16.75, net of previously deferred costs associated with the old contracts, has been recorded as an adjustment to additional paid in capital. The loss resulting from marking the contracts to market during the period October 1 to December 31, 2000, together with the interest paid to the banks, totalled $16.3 million and was reported in earnings as Other income (expense), net.

      In August 2001, the Company purchased for cancellation from one of the banks 3,602,305 shares of Class A Common Stock for $50.0 million or $13.88 per share. The market value of these shares on the date of purchase was $47.0 million or $13.05 per share.

36


Table of Contents

      In November 2001, one of the banks sold in the open market 3,556,513 shares of Class A Common Stock for $34.2 million or an average price of $9.62 per share. This resulted in a loss to the bank of $15.8 million which, in accordance with the arrangement, was paid in cash by the Company.

      The losses resulting from marking these arrangements to market during the year ended December 31, 2001, including the realized losses above, together with the interest paid to the banks, totalled $73.9 million, and was reported in earnings as Other income (expense), net. Dividends, in respect of the shares purchased by the banks, after September 30, 2000, have not been included in cash dividends as a deduction from retained earnings.

      At December 31, 2001, the Company had two arrangements remaining with banks each of which had been extended from July 1, 2001. One arrangement in respect of 3,348,782 shares at an average price of $14.93 was extended until June 30, 2003 on the same terms and conditions that applied previously. The other arrangement in respect of 3,602,305 shares at an average price of $13.88, was extended until December 31, 2001. The Company retained the option to buy the shares from the bank at the original cost or have the bank resell the shares in the open market, for which the Company could settle the net amount due with either cash or by issuing additional shares. In addition, the bank had the option if the market price of the shares dropped by 20% or more, to sell the shares on the open market and reduce the notional amount of the swap. Under the terms of the agreement as at December 31, 2001, 3,602,305 shares and $7.5 million of cash have been deposited with the escrow agent. The $7.5 million of restricted cash is included in prepaids and other current assets at December 31, 2001.

      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. During 2001, 2000 and 1999, the Company issued 4,882,590, 5,160,577 and 4,063,359 shares of Class A Common Stock as additional security, of which 5,011,628 shares were required to be deposited in the escrow account at December 31, 2001. The balance of shares issued as additional security have been returned to the Company and are included in treasury until cancelled. The shares held in escrow are shown as a deduction from stockholders’ equity. Until September 30, 2000, when the original contacts expired, the total interest paid to the banks, net of dividends paid on the shares, was shown as a reduction to additional paid in capital.

      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 ($47.6 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.

      On June 12, 2000, the Company exercised its option to pay cash on the mandatory exchange of HCPH Special shares. Pursuant to the terms of the indenture governing the Special shares, each Special share was exchanged for $8.88 cash resulting in a payment in July 2000 to holders of Special shares of $58.2 million. This payment was $10.9 million in excess of the recorded amount and this excess is presented as minority interest in the Statement of Operations.

      Commercial Commitments and Contractual Obligations. The Telegraph has guaranteed the printing joint venture partners’ share of leasing obligations to third parties, which amounted to $1.2 million (£0.8 million) at December 31, 2001. These obligations are also guaranteed jointly and severally by each joint venture partner.

      In connection with the Company’s insurance program, letters of credits are required to support certain projected workers’ compensation obligations. At December 31, 2001, letters of credit in the amount of $0.6 million were outstanding.

37


Table of Contents

      Set out below is a summary of the amounts due and committed under contractual cash obligations at December 31, 2001:

                                         
Due in Due between Due between
1 year or 1 and 4 and Due over
Total less 3 years 5 years 5 years





(in thousands)
Long-term debt
  $ 807,993     $ 1,481     $ 3,052     $ 511,912     $ 291,548  
Capital lease obligations
    4,667       1,527       3,140              
Operating leases
    148,574       12,313       21,627       20,441       94,193  
     
     
     
     
     
 
Total contractual cash obligations
  $ 961,234     $ 15,321     $ 27,819     $ 532,353     $ 385,741  
     
     
     
     
     
 

Related Party Transactions

      Net amounts due from related companies at December 31, 2001 totalled $32.2 million and included a $36.8 million loan to a subsidiary of Hollinger Inc., net of amounts payable in respect 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 expense amounting to $34.3 million, $41.0 million and $38.2 million for 2001, 2000 and 1999, respectively (principally including management fees that were approved by the audit committee). On July 11, 2000, the Company loaned $36.8 million to a subsidiary of Hollinger Inc. in connection with the cash purchase by Hollinger Inc. of HCPH Special shares. The loan is payable on demand and to December 31, 2001, interest was payable at the rate of 13% per annum. Effective January 1, 2002, the interest rate was adjusted to LIBOR plus 3% per annum.

      Lord Black indirectly has voting control of the Company. During each of 2001, 2000 and 1999 remuneration paid directly by the Company and its subsidiaries to Lord Black was $817,000, $2,477,000 and $640,000, respectively.

      In two separate transactions in July and November, 2001, the Company and Hollinger L.P. completed the sale of most of its remaining Canadian newspapers to Osprey for total sale proceeds of approximately Cdn. $255 million ($166 million) plus closing adjustments primarily for working capital. The former Chief Executive Officer of Hollinger L.P. is a minority shareholder of Osprey. The Company’s independent directors have approved the terms of these transactions.

      In connection with the two above sales of Canadian newspaper properties to Osprey, to satisfy a closing condition, the Company, Hollinger Inc., and Lord Black and three senior executives entered into non-competition agreements with Osprey pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to Osprey for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn. $7.9 million ($5.1 million). Such consideration was paid to Lord Black and the three senior executives and has been approved by the Company’s independent directors.

      On November 16, 2000, the Company and its affiliates, Southam and Hollinger L.P. (“Hollinger Group”) completed the sale of most of its Canadian newspapers and related assets to CanWest. The aggregate sale price of these properties at fair value was approximately Cdn. $2.8 billion ($1.8 billion), plus closing adjustments for working capital at August 31, 2000 and cash flow and interest for the period September 1 to November 16, 2000 which in total at December 31, 2000 approximated an additional $40.7 million.

      In connection with the sale to CanWest, Ravelston, a holding company controlled by Lord Black through which most of his interest in the company is ultimately controlled, entered into a management services agreement with CanWest and National Post pursuant to which it agreed to continue to provide management services to the Canadian businesses sold to CanWest in consideration for an annual fee of Cdn. $6 million ($4 million) payable by CanWest. In addition, CanWest will be obligated to pay Ravelston a termination fee of Cdn. $45 million, in the event that CanWest chooses to terminate the management services agreement or Cdn. $22.5 million, in the event that Ravelston chooses to terminate the agreement (which cannot occur before December 31, 2002). Also, as required by CanWest as a condition to the transaction, the Company, Ravelston, Hollinger Inc., Lord Black and three senior executives entered into non-competition agreements with CanWest pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian business sold to CanWest for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn. $80 million ($53 million) paid by CanWest in addition to the purchase price referred to above of which Cdn. $38 million ($25.2 million) was paid to Ravelston and Cdn. $42 million ($27.8 million) was paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

38


Table of Contents

      During 2000, the Company sold most of its remaining U.S. community newspaper properties, for total proceeds of approximately $215 million. In connection with the sales of United States newspaper properties in 2000, to satisfy a closing condition, the Company, Lord Black and three senior executives entered into non-competition agreements with the purchasers to which each agreed not to compete directly or indirectly in the United States with the United States businesses sold to purchasers for a fixed period, subject to certain limited exceptions, for aggregate consideration paid in 2001 of $0.6 million. These amounts were in addition to the aggregate consideration paid in respect of these non-competition agreements in 2000 of $15 million. Such amounts were paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

      Included in the above sale, the Company sold four U.S. Community Newspapers for an aggregate consideration of $38 million to Bradford Publishing Company, a company formed by a former U.S. Community Group executive and in which some of the Company’s directors are shareholders. The terms of this transaction were approved by the independent directors of the Company.

      During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43.7 million. During 2001, the Company transferred two publications to Horizon Publications Inc. in exchange for net working capital. Horizon Publications Inc. is managed by former Community Group executives and controlled by certain members of the Board of Directors of the Company. The terms of these transactions were approved by the independent directors of the Company.

      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. During 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 of $19.4 million. In May 1999, the remaining 134,126 shares of Series D Preferred Stock were converted into 134,126 shares of Series E Preferred Stock. In September 2001, 40,920 shares of Series E Preferred Stock were redeemed for cash of $3.8 million. The shares of Series E 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.

      Pursuant to a January 1997 transaction wherein the Company acquired Canadian publishing assets from Hollinger Inc., the Company issued 829,409 shares of Series C Preferred Stock. The stated value of each share was $108.51. On June 1, 2001, the Company converted all the Series C Preferred Stock at the conversion ratio of 8.503 shares of Class A Common Stock per share of Series C Preferred Stock into 7,052,464 shares of Class A Common Stock. On September 5, 2001, the Company purchased for cancellation, from Hollinger Inc., the 7,052,464 shares of Class A Common Stock for a total cost of $92.2 million or $13.07 per share which represented 98% of the September 5, 2001 closing price.

Recent Accounting Pronouncements

      Business combinations, goodwill and other intangible assets. In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets”. SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 141 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually by comparing carrying value to the respective fair value in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment by assessing the recoverability of the carrying value.

      The Company adopted the provisions of SFAS 141 as of July 1, 2001 and SFAS 142 is effective January 1, 2002. As of the date of adoption of SFAS 142, the Company expects to have unamortized goodwill and unamortized identifiable intangible assets in the amount of $674.6 million, which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill and intangibles was $35.8 million and $58.1 million for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adopting SFAS 142, it is not practicable to reasonably estimate the impact of adopting SFAS 142 on the Company’s financial statements at the date of this report, including whether there will be any transitional impairment losses recognized as a cumulative effect of a change in accounting principles.

39


Table of Contents

      Accounting for the impairment or disposal of long-lived assets. SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” was issued in October 2001. The statement supersedes SFAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of “ and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale. It also provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). SFAS 144 is effective January 1, 2002. The Company has not determined the impact of adopting SFAS 144 in the Company’s financial statements.

Item 7A.     Quantitative and Qualitative Disclosure about Market Risk

      Newsprint. Newsprint prices continued to fluctuate throughout 2001 and on a consolidated basis newsprint expense amounted to $204.4 million ($304.2 million in 2000 and $310.9 million in 1999). Management believes that newsprint prices may vary widely from time to time and could continue to show significant price variations in the future. During the first half of 2001, newsprint prices in North America were at their highest price per tonne since 1994 and 1995. However, the recessional climate in 2001 caused a significant decline in industry consumption and this, coupled with an abundant supply of competitively priced newsprint resulted in a downward trend in prices during the second half of 2001. This downward trend has continued into the early part of 2002 and there are indications that prices will stabilize at their current levels. In the United Kingdom, newsprint prices payable by the Company in 2002, which are subject to longer-term contracts, will be less than the average prices paid in 2001. 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, total newsprint usage in 2001, for operations still owned at December 31, 2001, was about 314,000 tonnes. At those levels of usage, a change in the price of newsprint of $50 per tonne would increase or decrease net income by about $9.8 million.

      Total Return Equity Swap. Under the terms of the Total Return Equity Swap, a decline in the value of the Company’s share price could result in the Company having to issue additional shares or pay a cash settlement of any loss suffered by the counterparties to the swap contracts. A decrease in the Company’s share price of $1.00 per share would result in an amount due to the counterparties of approximately $7 million.

      Inflation. During the past three years, inflation has not had a material effect on the Company’s newspaper business in the United States, United Kingdom and Canada.

      Interest Rates. At December 31, 2001, the Company had no debt on which interest is calculated at floating rates. Interest paid to the banks under the Total Return Equity Swap is at floating rates. A 1% change in the interest rate would result in a change in interest cost, in respect of the Total Return Equity Swap of $1.0 million per year.

      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 2001 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 2001
Average Rate Increase/ Decrease


United Kingdom
  $ 1.45/£     $ 476,000  
Canada
  $ 0.65/Cdn.$     $ 10,450,000  
     
     
 

      As a result of the sale of Canadian properties in 2000 and 2001, the Company is significantly less vulnerable to changes in the value of the Canadian dollar compared with the United States dollar.

40


Table of Contents

      In 2001, the Company sold Participations in Cdn. $756.8 million principal amount of CanWest debentures to a special purpose trust (“Participation Trust”). In respect of these debentures, the Company will eventually be required to deliver to the Participation Trust $490.5 million which equates to a fixed rate of exchange of 0.6482 United States dollars to each Canadian dollar. Given that the CanWest debentures are denominated in Canadian dollars, the Company has entered into a forward foreign exchange contract to mitigate part of the currency exposure. The foreign currency contract requires the Company to sell Cdn. $666.6 million on May 15, 2003 at a forward rate of 0.6423. A $0.05 change in the U.S. dollar to Canadian dollar exchange rate applied to the unhedged portion of the obligation in the amount of Cdn. $90.2 million ($56.6 million) at December 31, 2001 would result in a $4.5 million change in the amount available for delivery to the Participation Trust. In March 2002, the Company sold Cdn. $199 million of its foreign currency contract at a time when the exchange rate was 0.6308. The Company has entered into another Cdn. $50 million foreign currency contract at the exchange rate of 0.6338 to replace part of the contract sold.

      Electronic Media. Management continues to hold the view that newspapers will continue to be an important business segment. Among educated and affluent people, indications are that strong newspaper readership will continue. Alternate forms of information delivery such as the Internet could impact newspapers, but recognition of the Internet’s potential combined with a strong newspaper franchise could be a platform for Internet operations. Newspaper readers can be offered a range of Internet services as varied as the content. Virtually all newspapers are now published on the Internet as well as in the traditional newsprint format.

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.

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 2002 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 2002 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 2002 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 2002 Annual Meeting of Stockholders.

41


Table of Contents

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



  2.4     Purchase Agreement relating to the Senior Notes, dated March 12, 1997   Incorporated by reference to Exhibit 1.01 to Current Report on Form 8-K dated March 18, 1997.
 
  2.5     Purchase Agreement relating to the Senior Subordinated Notes, dated March 12, 1997   Incorporated by reference 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 Preferred Stock   Incorporated by reference to Exhibit 3.01 to Current Report on Form 8-K dated August 7, 1996.
 
  4.1     Fourth Amended and Restated Credit Agreement dated April 30, 1999 among Hollinger International Publishing Inc., Telegraph Group Limited, Hollinger Canadian Publishing Holdings Inc., Southam Inc., HIF Corp., various financial institutions, The Toronto Dominion Bank, as Issuing Bank, the Bank of Nova Scotia, as Syndication Agent, Canadian Imperial Bank of Commerce, as Documentation Agent, and Toronto Dominion (Texas), Inc., as Administrative Agent.   Pursuant to S-K 601(b)(4)(iii), the Registrant has not filed a copy of this exhibit but will furnish a copy upon the Commission’s request.
 
  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 Canadian Publishing Holdings Inc., Hollinger International Inc. and Montreal Trust Company of Canada.   Incorporated by reference to Exhibit 4.01 to Registration Statement on Form S-3 (No. 333-35619).

42


Table of Contents

             
Prior Filing or
Exhibit No. Description of Exhibit Sequential Page Number



  4.5     Indenture dated as of February 7, 1996 among Hollinger International Publishing Inc., Hollinger International Inc. and Fleet National Bank of Connecticut as Trustee.   Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K Dated February 7, 1996.
 
  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.
 
  10.12     Hollinger International Inc. 1999 Stock Incentive Plan.   Incorporated by reference to Annex A to Report on Form DEF 14A dated March 24, 1999.
 
  10.15     CanWest Transaction Agreement dated July 30, 2000 and Amending Agreement thereto dated November 15, 2000.   Incorporated by reference to Exhibit 2.1 and 2.2 to Current Report on Form 8-K Dated December 1, 2000.
 
  21.1     Significant Subsidiaries of Hollinger International Inc.    
 
  23.1     Consent of KPMG LLP.    

      (b) Reports on Form 8-K.

      The Company did not file any report on Form 8-K in 2001.

43


Table of Contents

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.

  HOLLINGER INTERNATIONAL INC.
  (Registrant)

  By:  /s/ CONRAD M. BLACK
 
  Lord Black of Crossharbour, PC(C), OC, KCSG,
  Chairman and Chief Executive Officer

Date: March 28, 2002

      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

Conrad M. Black
  Chairman, Chief Executive Officer and Director (Principal Executive Officer)   March 28, 2002
 
/s/ JOHN A BOULTBEE

John A Boultbee
  Executive Vice President
(Principal Financial Officer)
  March 28, 2002
 
/s/ FREDERICK A. CREASEY

Frederick A. Creasey
  Group Corporate Controller
(Principal Accounting Officer)
  March 28, 2002
 
/s/ F. DAVID RADLER

F. David Radler
  Deputy Chairman, President,
Chief Operating Officer and Director
  March 28, 2002
 
/s/ DANIEL W. COLSON

Daniel W. Colson
  Vice Chairman and Director   March 28, 2002
 
/s/ BARBARA AMIEL BLACK

Barbara Amiel Black
  Vice President — Editorial and Director   March 28, 2002
 
/s/ DWAYNE O. ANDREAS

Dwayne O. Andreas
  Director   March 28, 2002
 
/s/ RICHARD R. BURT

Richard R. Burt
  Director   March 28, 2002
 
/s/                                   

Raymond G. Chambers
  Director   March 28, 2002
 
/s/ HENRY A. KISSINGER

Henry A. Kissinger
  Director   March 28, 2002
 
/s/ MARIE-JOSEE KRAVIS

Marie-Josee Kravis
  Director   March 28, 2002

44


Table of Contents

             
Signature Title Date



 
/s/                                   

Shmuel Meitar
  Director   March 28, 2002
 
/s/ RICHARD N. PERLE

Richard N. Perle
  Director   March 28, 2002
 
/s/ ROBERT S. STRAUSS

Robert S. Strauss
  Director   March 28, 2002
 
/s/                                   

A. Alfred Taubman
  Director   March 28, 2002
 
/s/ JAMES R. THOMPSON

James R. Thompson
  Director   March 28, 2002
 
/s/                                   

Lord Weidenfeld
  Director   March 28, 2002
 
/s/ LESLIE H. WEXNER

Leslie H. Wexner
  Director   March 28, 2002

45


Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of

Hollinger International Inc.:

     We have audited the accompanying consolidated balance sheets of Hollinger International Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ KPMG LLP

 

February 21, 2002

Chicago, Illinois

F-1


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

For the Years Ended December 31, 2001, 2000 and 1999

1.   Principles of Presentation and Consolidation

      Hollinger International Inc. (the “Company”) is a subsidiary of Hollinger Inc., a Canadian corporation. At December 31, 2001, Hollinger Inc. owned 32.1% of the combined equity and 71.8% of the combined voting power of the outstanding Common Stock of the Company, without giving effect to conversion of the Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”).

      The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and other controlled entities. The Company’s interest in Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”) was 87.0%, 87.0% and 85.0% at December 31, 2001, 2000 and 1999, respectively (see Note 1(j) of Notes to Consolidated Financial Statements for discussion of partnership formation). The Company’s interest in The National Post Company (“National Post”) was 50.0% and 100.0% at December 31, 2000 and 1999, respectively (see Note 1(c) of Notes to Consolidated Financial Statements for discussion of sale of National Post). All significant intercompany balances and transactions have been eliminated on consolidation.

2.   Description of Business

      The Company is principally engaged in the publishing, printing and distribution of newspapers and magazines through subsidiaries and affiliates primarily in the United States, the United Kingdom, Canada and Israel. In addition, the Company has developed a strategic online new media presence. 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.

3.   Critical Accounting Policies and Estimates

      The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, investments, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

      The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

      The Company holds minority interests in both publicly traded and not publicly traded internet-related companies. Some of the publicly traded companies have highly volatile share prices. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

F-2


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

      The Company has significant intangible assets recorded in its accounts. Certain of the Company’s newspapers operate in highly competitive markets. The Company has estimated the useful lives of its goodwill and identifiable intangible assets for these newspapers and its other newspapers, based on industry trends and existing competitive pressures. Future adverse changes in long-term readership patterns in its newspapers could result in a material impairment of its intangible assets in the future.

4.   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 market. Cost is determined using the first-in, first-out (FIFO) method.

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 consolidated statements of operations, if such a difference arose. The Company has determined that no material permanent impairments had occurred at December 31, 2001.

7.   Derivatives

      The Company is a limited user of derivative financial instruments to manage risks generally associated with interest rate and foreign currency exchange rate market volatility. The Company does not hold or issue derivative financial instruments for trading purposes. In 1999 and 2000 amounts receivable under interest rate cap agreements were accrued as a reduction of interest expense and amounts payable were accrued as interest expense. Interest rate differentials on all other swap arrangements were accrued as interest rates changed over the contract periods. Amounts receivable under foreign currency forward purchase or sale agreements were accrued as foreign exchange gains and amounts payable were accrued as foreign exchange losses. In 2001, all derivatives are recorded at their fair value with changes in fair value reflected in the consolidated statement of operations.

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 the facilities are in use.

9.   Investments

      Investments consist of corporate debt and equity securities. Debt and marketable equity securities which are classified as available-for-sale are recorded at fair value. Unrealized holding gains and losses, net of the related tax and minority interest effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. All other corporate debt and equity securities are recorded at cost.

F-3


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

      A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.

10.  Investments in Affiliated Companies

      Investments in the common stock of affiliated companies are accounted for by the equity method. The excess of cost of the investment over the Company’s share of net assets at the acquisition date is being amortized on a straight-line basis over five years.

11.  Intangible Assets

      Intangible assets consist of the excess of acquisition costs over estimated fair value of net assets acquired (goodwill), non-competition agreements with former owners of acquired newspapers and circulation related assets. Amortization is calculated using the straight-line method over the respective estimated useful lives to a maximum of 40 years.

12.  Deferred Financing Costs

      Deferred financing costs consist of costs incurred in connection with debt financings. Such costs are amortized on a straight-line basis over the remaining term of the related debt, up to 10 years.

13.  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.

14.  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.

15.  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. Translation adjustments are included in the accumulated other comprehensive income component of stockholders’ equity. Translation adjustments are not included in earnings unless they are actually realized through a sale or upon complete or substantially complete liquidation 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.

16.  Earnings Per Share

      Earnings per share is computed in accordance with Statement of Financial Accounting Standards No. 128. See note 10 for a reconciliation of the numerator and denominator for the calculation of basic and diluted earnings per share.

F-4


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

17.  Stock-Based Compensation

      The Company utilizes the intrinsic value based method of accounting for its stock-based compensation arrangements. Stock options granted to employees of The Ravelston Corporation Limited (“Ravelston”), the parent company of Hollinger Inc., are recorded using the fair value based method and are reflected in the consolidated statements of stockholders’ equity as a dividend in kind.

18.  Reclassifications

      Certain 2000 and 1999 amounts in the consolidated financial statements have been reclassified to conform to the 2001 presentation.

F-5


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000
                   
2001 2000


(in thousands)
Assets
Current assets:
               
    
Cash and cash equivalents
  $ 479,514     $ 137,671  
 
Accounts receivable, net of allowance for doubtful accounts of $16,366 in 2001 and $16,925 in 2000
    203,442       275,806  
 
Amounts due from related companies, net
    32,228       25,929  
 
Inventories
    21,209       21,834  
 
Prepaid expenses and other current assets (notes 4(b) and 11)
    25,910       11,289  
     
     
 
Total current assets
    762,303       472,529  
Investments (note 2)
    200,906       899,078  
Property, plant and equipment, net of accumulated depreciation (note 3)
    309,272       360,596  
Intangible assets, net of accumulated amortization of $163,200 in 2001 and $159,224 in 2000
    674,645       938,314  
Deferred financing costs and other assets
    34,625       66,697  
     
     
 
    $ 1,981,751     $ 2,737,214  
     
     
 
(continued)

F-6


Table of Contents

                     
2001 2000


(in thousands)
Liabilities and Stockholders’ Equity
Current liabilities:
               
 
Current installments of long-term debt (note 4)
  $ 3,008     $ 4,753  
 
Accounts payable
    97,097       133,496  
 
Accrued expenses
    134,691       145,102  
 
Income taxes payable
    290,587       386,678  
 
Deferred revenue
    41,208       60,006  
     
     
 
Total current liabilities
    566,591       730,035  
Long-term debt, less current installments (note 4)
    809,652       807,495  
Deferred income taxes (note 18)
    163,050       185,846  
Other liabilities
    92,124       54,325  
     
     
 
Total liabilities
    1,631,417       1,777,701  
     
     
 
Minority interest (note 6)
    15,977       89,228  
     
     
 
Redeemable preferred stock (note 7)
    8,582       13,088  
     
     
 
Stockholders’ equity (note 8):
               
 
Convertible preferred stock
           
 
Class A common stock, $0.01 par value. Authorized 250,000,000 shares; issued and outstanding 96,837,179 and 105,987,298 shares in 2001 and 2000, respectively
    968       1,060  
 
Class B common stock, $0.01 par value. Authorized 50,000,000 shares; issued and outstanding 14,990,000 shares in 2001 and 2000
    150       150  
 
Additional paid-in capital
    554,891       748,503  
 
Accumulated other comprehensive income:
               
   
Cumulative foreign currency translation adjustment
    (147,958 )     (111,970 )
   
Unrealized loss on marketable equity securities
    (6,446 )     (49,580 )
   
Minimum pension liability adjustment
    (16,972 )     (2,094 )
 
Retained earnings
    132,693       531,156  
     
     
 
      517,326       1,117,225  
 
Class A common stock in treasury, at cost — 10,785,811 shares in 2001 and 21,840,371 shares in 2000
    (132,896 )     (258,604 )
 
Class A common stock in escrow — 5,011,628 shares in 2001 and 129,038 shares in 2000 (note 11)
    (58,655 )     (1,424 )
     
     
 
Total stockholders’ equity
    325,775       857,197  
     
     
 
Commitments and contingencies (notes 5 and 16)
               
    $ 1,981,751     $ 2,737,214  
     
     
 

See statement of significant accounting policies and accompanying notes to consolidated financial statements.

F-7


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2001, 2000 and 1999
                           
2001 2000 1999



(in thousands, except per share data)
Operating revenues:
                       
    
Advertising
  $ 804,462     $ 1,543,882     $ 1,557,033  
 
Circulation
    278,321       447,050       487,002  
 
Job printing
    25,092       59,089       48,207  
 
Other
    38,446       45,998       55,160  
     
     
     
 
Total operating revenues
    1,146,321       2,096,019       2,147,402  
     
     
     
 
Operating costs and expenses:
                       
 
Newsprint
    204,424       304,177       310,850  
 
Compensation costs
    367,432       662,351       684,365  
 
Stock-based compensation
    (1,369 )     1,518        
 
Other operating costs
    520,742       775,641       791,931  
 
Infrequent items (note 12)
    21,734       7,950       22,046  
 
Depreciation
    37,968       64,546       64,153  
 
Amortization
    35,760       58,088       61,255  
     
     
     
 
Total operating costs and expenses
    1,186,691       1,874,271       1,934,600  
     
     
     
 
Operating income (loss)
    (40,370 )     221,748       212,802  
     
     
     
 
Other income (expense):
                       
 
Interest expense
    (78,639 )     (142,713 )     (131,600 )
 
Amortization of debt issue costs
    (10,367 )     (10,469 )     (16,209 )
 
Interest and dividend income
    64,893       18,536       7,716  
 
Foreign currency gains (losses), net
    (1,259 )     (16,048 )     13,774  
 
Other income (expense), net (note 13)
    (295,878 )     478,011       326,343  
     
     
     
 
Total other income (expense)
    (321,250 )     327,317       200,024  
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary items
    (361,620 )     549,065       412,826  
Income taxes (recovery) (note 18)
    (10,201 )     374,898       155,203  
     
     
     
 
Earnings (loss) before minority interest and extraordinary items
    (351,419 )     174,167       257,623  
Minority interest
    (13,913 )     50,760       7,088  
     
     
     
 
Earnings (loss) before extraordinary items
    (337,506 )     123,407       250,535  
Extraordinary loss on debt extinguishments (note 4(f))
          (6,332 )     (5,183 )
     
     
     
 
Net earnings (loss)
  $ (337,506 )   $ 117,075     $ 245,352  
     
     
     
 
Basic earnings (loss) per share before extraordinary items
  $ (3.42 )   $ 1.16     $ 2.35  
     
     
     
 
Diluted earnings (loss) per share before extraordinary items
  $ (3.42 )   $ 1.11     $ 2.13  
     
     
     
 
Basic earnings (loss) per share
  $ (3.42 )   $ 1.10     $ 2.30  
     
     
     
 
Diluted earnings (loss) per share
  $ (3.42 )   $ 1.05     $ 2.09  
     
     
     
 

See statement of significant accounting policies and accompanying notes to consolidated financial statements.

F-8


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2001, 2000 and 1999
                           
2001 2000 1999



(in thousands)
Net earnings (loss)
  $ (337,506 )   $ 117,075     $ 245,352  
     
     
     
 
Other comprehensive income (loss):
                       
 
Unrealized loss on marketable equity securities arising during the year, net of a related tax recovery of $18,730 and minority interest of $4,411 (2000 — net of a related tax recovery of $13,729 and minority interest of $2,522; 1999 — nil)
    (80,586 )     (47,008 )     (2,572 )
 
Reclassification adjustment for realized losses reclassified out of accumulated comprehensive income, net of a related tax recovery of $30,420 and minority interest of $6,122
    123,720              
     
     
     
 
      43,134       (47,008 )     (2,572 )
 
Foreign currency translation adjustments
    (35,988 )     (90,050 )     43,879  
 
Minimum pension liability adjustment, net of a related tax recovery of $7,573 (2000 — nil)
    (14,878 )     (2,094 )      
     
     
     
 
      (7,732 )     (139,152 )     41,307  
     
     
     
 
Comprehensive income (loss)
  $ (345,238 )   $ (22,077 )   $ 286,659  
     
     
     
 

See statement of significant accounting policies and accompanying notes to consolidated financial statements.

F-9


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2001, 2000 and 1999
                                                                 
Accumulated
Convertible Common Additional other Issued
preferred stock paid-in comprehensive Retained Treasury shares
stock Class A & B capital income (loss) earnings stock in escrow Total








(in thousands)
Balance at December 31, 1998
  $ 6,377     $ 1,106     $ 610,440     $ (65,799 )   $ 301,133     $ (16,744 )   $ (18,592 )   $ 817,921  
Stock option exercise
          1       1,303                               1,304  
Share issue
                92                               92  
Cash dividends — Class A and
Class B, $0.55 per share
                            (55,360 )                 (55,360 )
Dividends on redeemable preferred stock
                            (262 )                 (262 )
Dividends on convertible preferred stock
                            (9,221 )                 (9,221 )
Deemed dividend
                            (6,327 )                 (6,327 )
Translation adjustments
                (1,420 )     43,879                         42,459  
Change in unrealized loss on securities, net
                      (2,572 )                       (2,572 )
Net earnings
                            245,352                   245,352  
Interest on forward share purchase
                (6,042 )                             (6,042 )
Common shares repurchased
                                  (123,497 )           (123,497 )
Escrow shares on total return equity swap
          41       48,332                         (49,995 )     (1,622 )
Escrow shares returned
                                  (7,714 )     7,714        
     
     
     
     
     
     
     
     
 
Balance at December 31, 1999
    6,377       1,148       652,705       (24,492 )     475,315       (147,955 )     (60,873 )     902,225  
Stock option exercise
          5       5,492                               5,497  
Preferred stock conversion to
Class A common stock
    (6,377 )     6       6,346                               (25 )
Stock-based compensation
                1,518                               1,518  
Cash dividends — Class A and
Class B, $0.55 per share
                            (52,284 )                 (52,284 )
Dividends on redeemable preferred stock
                            (519 )                 (519 )
Dividends on convertible preferred stock
                            (8,431 )                 (8,431 )
Minimum pension liability adjustment
                      (2,094 )                       (2,094 )
Translation adjustments
                503       (90,050 )                       (89,547 )
Change in unrealized loss on securities, net
                      (47,008 )                       (47,008 )
Net earnings
                            117,075                   117,075  
Interest on forward share purchase
                (6,323 )                             (6,323 )
Gain on total return equity swap (note 11)
                35,314                               35,314  
Escrow shares on total return equity swap
          51       52,948                         (51,200 )     1,799  
Escrow shares returned
                                  (110,649 )     110,649        
     
     
     
     
     
     
     
     
 
Balance at December 31, 2000
          1,210       748,503       (163,644 )     531,156       (258,604 )     (1,424 )     857,197  
Stock option exercise
          6       6,857                               6,863  
Preferred stock conversion to
Class A common stock
          65       (7,410 )                 7,345              
Class A common stock purchased for cancellation
          (107 )     (139,148 )                             (139,255 )
Stock-based compensation
                (1,369 )                             (1,369 )
Cash dividends — Class A and
Class B, $0.55 per share
                            (48,440 )                 (48,440 )
Dividends on redeemable preferred stock
                            (442 )                 (442 )
Dividends on convertible preferred stock
                            (4,275 )                 (4,275 )
Minimum pension liability adjustment
                      (14,878 )                       (14,878 )
In kind dividends (note 9)
                7,800             (7,800 )                  
Translation adjustments
                713       (35,988 )                       (35,275 )
Change in unrealized gain (loss) on securities, net
                      43,134                         43,134  
Net loss
                            (337,506 )                 (337,506 )
Escrow shares on total return equity swap
          49       57,203                         (57,231 )     21  
Treasury shares cancelled
          (105 )     (118,258 )                 118,363              
     
     
     
     
     
     
     
     
 
Balance at December 31, 2001
  $     $ 1,118     $ 554,891     $ (171,376 )   $ 132,693     $ (132,896 )   $ (58,655 )   $ 325,775  
     
     
     
     
     
     
     
     
 

See statement of significant accounting policies and accompanying notes to consolidated financial statements.

F-10


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2001, 2000 and 1999
                               
2001 2000 1999



(in thousands)
Cash flows from operating activities:
                       
 
Net earnings (loss)
  $ (337,506 )   $ 117,075     $ 245,352  
 
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
                       
     
Depreciation and amortization
    73,728       122,634       125,408  
     
Deferred income taxes
    (48,822 )     (27,907 )     6,086  
     
Amortization of debt issue costs
    10,367       10,469       16,209  
     
Minority interest
    (13,913 )     50,760       7,088  
     
Equity in loss of affiliates, net of dividends received
    15,098       20,340       1,734  
     
Loss (gain) on sales of investments
    147,214       (49,577 )      
     
Gain on sales of assets
    (72 )     (492,459 )     (336,708 )
     
Amortization of deferred gain
    (1,348 )     (1,417 )     (1,616 )
     
Write-down of investments
    48,037       20,621        
     
Total return equity swap
    42,845       12,276        
     
Non-cash interest income
    (43,821 )            
     
Other
    13,196       7,153       (1,541 )
 
Changes in assets and liabilities, net of acquisitions and dispositions:
                       
   
Accounts receivable
    7,755       (51,383 )     (17,922 )
   
Inventories
    (4,516 )     (9,679 )     3,224  
   
Prepaid expenses and other current assets
    (16,424 )     892       6,817  
   
Accounts payable
    11,081       10,279       (44,016 )
   
Accrued expenses
    8,234       (53,370 )     48,259  
   
Income taxes payable
    (49,299 )     368,328       55,716  
   
Deferred revenue and other
    (8,573 )     4,737       (7,865 )
     
     
     
 
Cash provided by (used in) operating activities
    (146,739 )     59,772       106,225  
     
     
     
 
Cash flows from investing activities:
                       
 
Purchase of property, plant and equipment
    (44,451 )     (74,024 )     (125,283 )
 
Proceeds from sale of property, plant and equipment
    84       8,514       12,087  
 
Purchase of subsidiaries’ stock and other investments
    (45,194 )     (79,600 )     (441,689 )
 
Acquisitions, net of cash acquired
          (117,134 )     (28,659 )
 
Proceeds on disposal of investments and other assets
    840,315       1,341,773       520,040  
 
Other
    5,982       1,293       3,950  
     
     
     
 
Cash provided by (used in) investing activities
    756,736       1,080,822       (59,554 )
     
     
     
 
(continued)

F-11


Table of Contents

                           
2001 2000 1999



(in thousands)
Cash flows from financing activities:
                       
    
Repayment of debt
    (93,469 )     (1,266,189 )     (1,363,351 )
 
Proceeds from bank debt
    91,574       450,539       1,476,323  
 
Payment of debt issue costs
    (3,013 )     (2,474 )     (37,964 )
 
Change in borrowings with affiliates
    (9,489 )     (41,146 )     12,334  
 
Net proceeds from issuance of equity
    6,863       5,497       1,396  
 
Issuance of common shares by a subsidiary
    4             154,463  
 
Repurchase of common shares
    (139,255 )           (123,497 )
 
Redemption of preference shares
    (3,800 )           (19,362 )
 
Redemption of Special shares
          (58,164 )      
 
Dividends paid
    (53,157 )     (61,234 )     (64,843 )
 
Deemed dividend
                (6,327 )
 
Dividends and distributions paid by subsidiaries to minority stockholders
    (53,673 )     (63,083 )     (112,539 )
 
Other
    (1,301 )     (3,977 )     (7,664 )
     
     
     
 
Cash used in financing activities
    (258,716 )     (1,040,231 )     (91,031 )
     
     
     
 
Effect of exchange rate changes on cash and cash equivalents
    (9,438 )     (2,595 )     26,475  
     
     
     
 
Net increase (decrease) in cash and cash equivalents
    341,843       97,768       (17,885 )
Cash and cash equivalents at beginning of year
    137,671       39,903       57,788  
     
     
     
 
Cash and cash equivalents at end of year
  $ 479,514     $ 137,671     $ 39,903  
     
     
     
 

See statement of significant accounting policies and accompanying notes to consolidated financial statements.

F-12


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(1) Acquisitions and Dispositions

      (a) In January 2001, Hollinger L.P. completed the sale of UniMédia Company to Gesca Limited, a subsidiary of Power Corporation of Canada. The publications sold represented the French language newspapers of Hollinger L.P. including three paid circulation dailies and 15 weeklies published in Quebec and Ontario. A pre-tax gain of approximately $47,500,000 was recognized on this sale.

      (b) In two separate transactions in July and November 2001, the Company and Hollinger L.P. completed the sale of most of its remaining Canadian newspapers to Osprey Media Group Inc. (“Osprey”) for total sale proceeds of approximately Cdn. $255,000,000 ($166,000,000) plus closing adjustments primarily for working capital. Included in these sales were community newspapers in Ontario such as The Kingston Whig-Standard, The Sault Star, the Peterborough Examiner, the Chatham Daily News and The Observer (Sarnia). Pre-tax gains of approximately $800,000 were recognized on these sales. The former Chief Executive Officer of Hollinger L.P. is a minority shareholder of Osprey. The Company’s independent directors have approved the terms of these transactions.

      In connection with the two sales of Canadian newspaper properties to Osprey in 2001, to satisfy a closing condition, the Company, Hollinger Inc., Lord Black of Crossharbour PC(C), OC, KCSG and three senior executives entered into non-competition agreements with Osprey pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to Osprey for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn. $7,900,000 ($5,100,000). Such consideration was paid to Lord Black and the three senior executives and has been approved by the Company’s independent directors.

      (c) In August 2001, the Company entered into an agreement to sell to CanWest Global Communications Corp. (“CanWest”) its 50% interest in the National Post. In accordance with the agreement, the Company’s representatives resigned from their executive positions at the National Post effective September 1, 2001. Accordingly, from September 1, 2001, the Company had no influence over the operations of the National Post and the Company no longer consolidates or records on an equity basis its share of earnings or losses. The results of operations of the National Post are included in the consolidated results to August 31, 2001. A pre-tax loss of approximately $78,200,000 was recognized on the sale and is recorded in other income (expense), net.

      (d) On November 16, 2000, the Company and its affiliates, Southam and Hollinger L.P. (“Hollinger Group”) completed the sale of most of its Canadian newspapers and related assets to CanWest. Included in the sale were the following assets of the Hollinger Group:

  •  a 50% interest in National Post, with the Company continuing as managing partner;
 
  •  the metropolitan and a large number of community newspapers in Canada (including the Ottawa Citizen, The Vancouver Sun, The Province (Vancouver), the Calgary Herald, the Edmonton Journal, The Gazette (Montreal), The Windsor Star, the Regina Leader Post, the Star Phoenix and the Times-Colonist (Victoria)); and
 
  •  the operating Canadian Internet properties, including canada.com.

      The sale resulted in the Hollinger Group receiving approximately Cdn. $1.7 billion ($1.1 billion) cash, approximately Cdn. $425,000,000 ($277,000,000) in voting and non-voting shares of CanWest at fair value (representing an approximate 15.6% equity interest and 5.7% voting interest) and subordinated non-convertible debentures of a holding company in the CanWest group at fair value of approximately Cdn. $697,000,000 ($456,000,000). The aggregate sale price of these properties at fair value was approximately Cdn. $2.8 billion ($1.8 billion), plus closing adjustments for working capital at August 31, 2000 and cash flow and interest for the period September 1 to November 16, 2000 which in total was estimated as an additional $40,700,000 at December 31, 2000. The sale resulted in a pre-tax gain of approximately $378,500,000 in 2000.

      In 2001, certain of the closing adjustments were finalized, resulting in an additional pre-tax gain in 2001 of approximately $18,300,000. At December 31, 2001, approximately $36,000,000 in respect of closing adjustments remained due to the Company. Certain closing adjustments have not yet been finalized. Management expects such adjustments to be finalized in 2002.

F-13


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In connection with the sale to CanWest, Ravelston, a holding company controlled by Lord Black through which most of his interest in the Company is ultimately controlled, entered into a management services agreement with CanWest and National Post pursuant to which it agreed to continue to provide management services to the Canadian businesses sold to CanWest in consideration for an annual fee of Cdn. $6,000,000 ($4,000,000) payable by CanWest. In addition, CanWest will be obligated to pay Ravelston a termination fee of Cdn. $45,000,000, in the event that CanWest chooses to terminate the management services agreement or Cdn. $22,500,000, in the event that Ravelston chooses to terminate the agreement (which cannot occur before December 31, 2002). Also, as required by CanWest as a condition to the transaction, the Company, Ravelston, Hollinger Inc., Lord Black and three senior executives entered into non-competition agreements with CanWest pursuant to which each agreed not to compete directly or indirectly in Canada with the Canadian businesses sold to CanWest for a five-year period, subject to certain limited exceptions, for aggregate consideration of Cdn. $80,000,000 ($53,000,000) paid by CanWest in addition to the purchase price referred to above, of which Cdn. $38,000,000 ($25,200,000) was paid to Ravelston and Cdn. $42,000,000 ($27,800,000) was paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

      (e) On November 1, 2000, Southam converted the convertible promissory note in Hollinger L.P. in the principal amount of Cdn. $225,800,000 ($147,900,000) into 22,575,324 limited partnership units of Hollinger L.P., thereby increasing its interest in Hollinger L.P. to 87.0%.

      (f) During 2000, the Company sold most of its remaining U.S. community newspaper properties, including 11 paid dailies, three paid non-dailies and 31 free distribution publications for total proceeds of approximately $215,000,000. Pre-tax gains totaling $91,200,000 were recognized on these sales in 2000.

      In connection with the sales of United States newspaper properties in 2000, to satisfy a closing condition, the Company, Lord Black and three senior executives entered into non-competition agreements with the purchasers pursuant to which each agreed not to compete directly or indirectly in the United States with the United States businesses sold to the purchasers for a fixed period, subject to certain limited exceptions, for aggregate consideration paid in 2001 of $600,000. These amounts were in addition to the aggregate consideration paid in respect of these non-competition agreements in 2000 of $15,000,000. Such amounts were paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments.

      (g) Included in the disposition described in note 1(f), during 2000 the Company sold four U.S. community newspapers for an aggregate consideration of $38,000,000 to Bradford Publishing Company, a company formed by a former U.S. Community Group executive and in which some of the Company’s directors are shareholders. The terms of this transaction were approved by the independent directors of the Company.

      (h) In December 2000, the Company acquired four paid daily newspapers, one paid non-daily and 12 free distribution publications in the Chicago suburbs for total purchase consideration of $111,000,000. The excess purchase price of $84,700,000 over the estimated fair value of tangible assets acquired was ascribed to intangible assets.

      (i) On February 17, 2000, Interactive Investor International, in which the Company owned 51.7 million shares or a 47% equity interest, had its initial public offering (“IPO”) issuing 52 million shares and raising £78,000,000 ($125,800,000). The IPO reduced the Company’s equity ownership to 33% and resulted in a dilution gain of $17,000,000 for accounting purposes. Subsequently, the Company sold five million shares of its holding, reducing its equity interest to 28.5% and resulting in a pre-tax gain in 2000 of $1,600,000. The balance of the investment was sold in 2001 resulting in an additional pre-tax gain in 2001 of $14,200,000.

F-14


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      (j) In April 1999, the Company formed Hollinger L.P. Hollinger L.P. acquired 48 daily newspapers, 180 non-daily newspapers and shopping guides and 106 magazines and specialty publications located across Canada from Southam, UniMédia Inc. and Sterling Newspapers Company in exchange for promissory notes due April 29, 2020 of $309,500,000 (Cdn. $451,200,000) and 135,945,972 units in Hollinger L.P. The transfer of properties to Hollinger L.P. was accounted for at historical carrying values and no gain was recognized on the transfer. A Cdn. $200,000,000 ($137,200,000) private placement was completed April 30, 1999 and private placement investors subsequently received 20,000,000 partnership units of Hollinger L.P. During July 1999, Hollinger L.P. completed its initial public offering issuing 4,000,000 units at Cdn. $10 per unit for total proceeds of Cdn. $40,000,000 ($27,000,000). All partnership units, including the 20,000,000 units issued through the April 30, 1999 private placement, are listed on The Toronto Stock Exchange. As a result of these investments by others in Hollinger L.P., the Company recognized in 1999 dilution gains of $77,300,000 recorded in other income (expense), net (note 13).

      (k) In January 1999, Hollinger Canada Publishing Holdings Inc. (“HCPH”) acquired 19,845,118 outstanding Southam common shares which had been tendered pursuant to HCPH’s offer to all Southam shareholders to acquire the shares for Cdn. $25.25 cash per share after payment by Southam of a special dividend of Cdn. $7.00 per share. The aggregate consideration paid was $327,500,000 and this purchase of shares brought HCPH’s ownership interest in Southam to approximately 97%. The remaining Southam common shares were purchased by HCPH in February 1999 pursuant to applicable Canadian law for an aggregate consideration of $36,500,000. Of the aggregate purchase price of these 1999 acquisitions, $329,700,000 was ascribed to intangible assets.

      (l) In February 1999, the Company completed the sale of 45 U.S. community newspapers for proceeds of approximately $460,000,000 of which approximately $441,000,000 was cash. The proceeds from the sale were used to pay down outstanding debt of the Bank Credit Facility. The pre-tax gain of approximately $249,200,000 resulting from this transaction was recorded in other income (expense), net.

      (m) During 1999, the Company sold to Horizon Publications Inc. 33 U.S. community newspapers for $43,700,000 resulting in a pre-tax gain of approximately $20,700,000. During 2001, the Company transferred two publications to Horizon Publications Inc. in exchange for net working capital. Horizon Publications Inc. is managed by former Community Group executives and controlled by certain members of the Board of Directors of the Company. The terms of these transactions were approved by the independent directors of the Company.

      (n) Throughout 1999, the Company acquired five community newspapers in the U.S. for total consideration of $24,500,000. The excess purchase price of $16,900,000 over the estimated fair value of tangible assets acquired was ascribed to intangible assets.

F-15


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2) Investments

                   
2001 2000


(in thousands)
Available-for-sale securities, at fair value
               
 
CanWest shares (a)
  $     $ 219,314  
 
Internet related equity securities
    2,217       12,215  
 
CanWest debentures (b)
    39,139       475,720  
     
     
 
      41,356       707,249  
     
     
 
Other non-marketable investments, at cost
               
 
Internet related companies
    49,055       64,866  
 
Notes receivable from joint ventures
    8,508       11,533  
 
Advances under printing contracts with joint ventures
    43,528       48,189  
 
Other
    23,673       24,154  
     
     
 
      124,764       148,742  
     
     
 
Equity accounted companies, at equity
               
 
Printing joint ventures
    25,860       28,067  
 
Internet related companies
    5,406       14,198  
 
Other
    3,520       822  
     
     
 
      34,786       43,087  
     
     
 
    $ 200,906     $ 899,078  
     
     
 
 
2001 2000


(in thousands)
Gross unrealized holding losses on available-for-sale securities
               
 
CanWest shares
  $     $ (64,150 )
 
CanWest debentures
    (6,236 )      
 
Internet related equity securities
    (3,060 )     (1,681 )
     
     
 
    $ (9,296 )   $ (65,831 )
     
     
 

      (a) CanWest shares at December 31, 2000 consisted of 2,700,000 multiple voting preferred shares and 27,000,000 non-voting shares each of CanWest. The non-voting shares were publicly-traded and the multiple voting shares were not publicly-traded but convertible into non-voting shares at the rate of 0.15 non-voting share for each voting preferred share or a total additional 405,000 non-voting shares. The non-voting shares and voting preferred shares represented an approximate 15.6% equity interest and 5.7% voting interest in CanWest. On November 28, 2001, the Company sold the 2,700,000 multiple voting preferred shares and 27,000,000 non-voting shares in CanWest for total cash proceeds of approximately Cdn. $271,300,000 ($172,400,000). The sale resulted in a realized pre-tax loss of $99,200,000 which is included in other income (expense), net.

      (b) The CanWest debentures at December 31, 2000 had a principal amount of Cdn. $767,000,000 ($493,000,000) and represented part of the proceeds for the sale of properties to CanWest of Cdn. $750,000,000 ($482,000,000) and interest accrued from August 31, 2000 to November 16, 2000 of Cdn. $17,000,000 ($11,000,000). Interest is calculated, compounded and payable semi-annually in arrears at a rate of 12.125% per annum. At any time prior to November 5, 2005 CanWest may elect to pay interest on the debentures by way of non-voting shares of CanWest, debentures in substantially the same form as CanWest debentures, or cash. Subsequent to November 5, 2005 interest shall be paid in cash. The debentures are due November 15, 2010.

      During 2001, the Company received additional CanWest debentures in the amount of Cdn $67,100,000 ($43,800,000) in payment of the interest due on existing debentures. These debentures have been recorded at their fair value.

F-16


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      As part of its agreement with CanWest, the Company is prohibited from selling the CanWest debentures prior to May 15, 2003. In order to monetize this investment, in August and December 2001, the Company sold participation interests in Cdn. $540,000,000 ($350,000,000) and Cdn. $216,800,000 ($140,500,000) principal amounts of CanWest debentures to a special purpose trust (“Participation Trust”). Units of the Participation Trust were sold by the Participation Trust to arm’s length third parties. These transactions resulted in net proceeds to the Company of $401,200,000 and have been accounted for as sales in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. The net loss on these transactions, including realized holding losses on the underlying debentures, amounted to $62,100,000 and has been included in other income (expense), net.

      The Company has not retained an interest in the Participation Trust nor does it have any ongoing involvement in the Participation Trust. The Participation Trust and its investors have no recourse to the Company’s other assets in the event that CanWest defaults on its debentures. Under the terms of the Participation Trust, the interest payments received by the Company in respect of the underlying CanWest debentures will be paid to the Participation Trust. However, after May 15, 2003, the Company may be required to deliver to the Participation Trust CanWest debentures with a face value equivalent to $490,500,000. Given that the CanWest debentures are denominated in Canadian dollars, the Company has entered into a forward foreign exchange contract to mitigate part of its currency exposure. The foreign currency contract requires the Company to sell Cdn. $666,600,000 on May 15, 2003 at a forward rate of 0.6423. The mark to market gain on the forward contract and the foreign exchange loss on the residual obligation have resulted in a net foreign currency loss at December 31, 2001 of $400,000. This amount has been charged to earnings and the net liability is included in other liabilities.

      In addition, in accordance with the terms of the participation agreement, the Company cannot transfer to an unaffiliated third party, until at least November 4, 2005, the equivalent of $50,000,000 (Cdn. $79,600,000 at December 31, 2001) principal amount of CanWest debentures.

(3) Property, Plant and Equipment

                 
2001 2000


(in thousands)
Land
  $ 29,165     $ 34,861  
Building and leasehold interests
    143,076       161,800  
Machinery and equipment
    319,676       368,752  
Construction in progress
    8,204       22,030  
     
     
 
      500,121       587,443  
Less accumulated depreciation and amortization
    190,849       226,847  
     
     
 
    $ 309,272     $ 360,596  
     
     
 

      Depreciation and amortization of property, plant and equipment totaled $37,968,000, $64,546,000 and $64,153,000 in 2001, 2000 and 1999, respectively. The Company capitalized interest in 2001, 2000 and 1999 amounting to $81,000, $3,103,000 and $5,739,000, respectively, related to the construction and equipping of production facilities for its newspaper in Chicago.

F-17


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(4) Long-Term Debt

                   
2001 2000


(in thousands)
Hollinger International Publishing Inc. (“Publishing”):
               
 
Senior Notes due 2005
  $ 260,000     $ 260,000  
 
Senior Subordinated Notes due 2006
    250,000       250,000  
 
Senior Subordinated Notes due 2007
    290,000       290,000  
United States Newspaper Group:
               
 
Amounts due under non-interest bearing non-competition agreements
due 2002-2007
    3,124       4,584  
 
Other due 2002-2009 (at varying interest rates up to 9%)
    2,024       3,139  
Telegraph Group Ltd. (“Telegraph”):
               
 
Obligations under capital leases (note 5)
    4,667       2,663  
Other:
               
 
Other debt
    2,845       1,328  
 
Other capital leases
          534  
     
     
 
      812,660       812,248  
Less current portion included in current liabilities
    3,008       4,753  
     
     
 
    $ 809,652     $ 807,495  
     
     
 

      (a) The following table summarizes the terms of the Publishing notes:

                             
Early Early
Interest Redemption Redemption
Principal Rate Issue Date Status Maturity Date Price







$260,000,000
    8.625%     March 18, 1997   Senior   March 15, 2005   None  







$250,000,000
    9.25%     February 1, 1996   Senior Subordinated   February 1, 2006   February 1, 2001   2001 - 104.625%
                        or after   2002 - 103.085%
                            2003 - 101.545%
                            Thereafter - 100%







$290,000,000
    9. 25%     March 18, 1997   Senior Subordinated   March 15, 2007   March 15, 2002   2002 - 104.625%
                        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 Senior Notes and 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 related companies, 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.

      As at December 31, 2001, the Company does not meet a financial test set out in the Trust indentures for Publishing’s Senior and Senior Subordinated Notes. As a result, Publishing and its subsidiaries are unable to incur additional indebtedness, make restricted investments, make advances, pay dividends or make other distributions on their capital stock.

F-18


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      (b) In June 2000, Publishing, HCPH, Telegraph, Southam, HIF Corp., a wholly owned subsidiary of Publishing, and a group of financial institutions increased the term loan component of the Fourth Amended and Restated Credit Facility (“Restated Credit Facility”) by $100,000,000 to $975,000,000. On November 16, 2000, using the proceeds from the CanWest transaction (note 1(d)) $972,000,000 of borrowings were repaid and the Restated Credit Facility was reduced to $5,000,000. The Restated Credit Facility is secured by the collateralization of $5,000,000 of the Company’s positive cash which is included in prepaids and other current assets at December 31, 2001. At December 31, 2001 and 2000 no amounts were owing under the Restated Credit Facility. As noted in (a) above, no amounts could be borrowed under this facility.

      In 2001, the Company entered into a new short-term credit facility in the amount of $120,000,000. Amounts borrowed under this facility were repaid during 2001.

      (c) A subsidiary company had converted a portion of its variable rate interest exposure to fixed rate by entering into a 10 year Cdn. $25,000,000 fixed rate interest swap at 8.7%, maturing May 2004. During 2000, Cdn. $12,500,000 of this fixed rate interest swap was repaid. Interest is paid at the fixed rate and received based on the three-month banker’s acceptance rate, which is reset quarterly, on the notional principal.

      (d) Principal amounts payable on long-term debt, excluding obligations under capital leases, are: 2002 — $1,481,000, 2003 — $1,855,000, 2004 — $1,197,000, 2005 — $261,016,000 and 2006 — $250,896,000.

      (e) Interest paid for 2001, 2000 and 1999 was $84,223,000, $145,902,000, and $132,534,000, respectively.

      (f) Extraordinary losses arising on debt extinguishments are net of a related tax recovery of $4,222,000 in 2000 and $3,455,000 in 1999.

(5) Leases

      The Company leases various facilities and equipment under non-cancelable operating lease arrangements. Rental expense under all operating leases was approximately $12,067,000, $16,465,000 and $14,936,000 in 2001, 2000 and 1999, respectively.

      Minimum lease commitments together with the present value of obligations at December 31, 2001 are as follows:

                 
Capital Operating
leases leases


(in thousands)
2002
  $ 1,595     $ 12,313  
2003
    1,595       11,122  
2004
    1,595       10,505  
2005
          10,263  
2006
          10,178  
Later years
          94,193  
     
     
 
      4,785     $ 148,574  
             
 
Less imputed interest and executory costs
    118          
     
         
Present value of net minimum payments
    4,667          
Less current portion included in current liabilities
    1,527          
     
         
Long-term obligations
  $ 3,140          
     
         

F-19


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6) Minority Interest

                 
2001 2000


(in thousands)
Common shares of subsidiary
  $ 1,866     $ 24,714  
Partnership units
    13,111       63,514  
Other
    1,000       1,000  
     
     
 
    $ 15,977     $ 89,228  
     
     
 

      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 were exchangeable, at the option of the holder, at any time before June 26, 2000 into newly issued Class A Common Stock of the Company and were previously disclosed as minority interest. On June 12, 2000, the Company exercised its option to pay cash on the mandatory exchange of HCPH Special shares. Pursuant to the terms of the indenture governing the Special shares, each Special share was exchanged for $8.88 cash resulting in a payment to Special shareholders of $58,200,000. This payment was $10,900,000 in excess of the recorded book amount and this excess amount is presented as minority interest in the consolidated statement of operations in 2000.

      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 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 obligation to issue Class A Common Stock was, however, offset by an obligation of Hollinger Inc., through a subsidiary, to deliver those shares of the Company’s Class A Common Stock from its holdings. These Special shares were exchanged for cash by Hollinger Inc. in 2000.

(7) Redeemable Preferred Stock

      Shares of Series E Preferred Stock, all of which are owned by Hollinger Inc., are redeemable at the option of either the holder or the Company at a price of Cdn. $146.63 ($92.08 based on December 31, 2001 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 E 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 product of (a) the redemption price of Cdn. $146.63 divided by the Canadian dollar equivalent of the conversion price and (b) the per share amount of the regularly scheduled dividend on Class A Common Stock. On September 27, 2001, the Company redeemed 40,920 shares of Series E Preferred Stock at the redemption price of Cdn. $146.63 per share for a total cash payment of $3,800,000. At December 31, 2001, 93,206 shares of Series E Preferred Stock were outstanding and based on exchange rates in effect on that day were exchangeable into 613,000 shares of Class A Common Stock of the Company. In 2001, the dividend on the Series E Preferred Stock amounted to $3.68 per share. At December 31, 2000, 134,126 shares of Series E Preferred Stock were outstanding and based on exchange rates in effect on that day were exchangeable into 937,000 shares of Class A Common Stock of the Company.

(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 E 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 of the PRIDES has a stated value of $9.75 and is entitled to cumulative dividends at a rate of 9.75% per annum payable quarterly. In January 2000, 706,469 PRIDES were converted to 596,189 shares of Class A Common Stock. At December 31, 2000, all issued Series B Preferred Stock had been converted to Class A Common Stock.

F-20


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Series C

      Pursuant to a January 1997 transaction wherein the Company 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. On June 1, 2001, the Company converted all the Series C Preferred Stock at the conversion ratio of 8.503 shares of Class A Common Stock per share of Series C Preferred Stock into 7,052,464 shares of Class A Common Stock. On September 5, 2001, the Company purchased for cancellation, from Hollinger Inc., the 7,052,464 shares of Class A Common Stock for a total cost of $92,200,000.

     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 10 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.

     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”). The Incentive Plan provided for awards of up to 5,156,915 shares of Class A Common Stock. 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. In 1999, the Company adopted the 1999 Stock Incentive Plan (“1999 Stock Plan”) which superseded the previous two plans.

      The 1999 Stock Plan provides for awards of up to 8,500,000 shares of Class A Common Stock. The 1999 Stock 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.

      The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for its plans. On March 31, 2000, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 44 “Accounting for Certain Transactions involving Stock Compensation” (“FIN 44”), which provided guidance on several implementation issues related to APB Opinion No. 25. The most relevant to the Company was the clarification of the accounting for stock options that have been repriced and the measurement of options granted to employees of Ravelston, the parent company of Hollinger Inc. The Company adopted FIN 44 effective July 1, 2000.

F-21


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In 1999, the Company repriced a series of stock options which had originally been issued in 1998. Under FIN 44 these repriced options effectively change to a variable stock option award and are subject to compensation expense. Accordingly, the stock based compensation determined for this repriced series for 2001 amounted to income of $1,369,000 and for the period July 1 to December 31, 2000 amounted to an expense of $1,518,000.

      Under FIN 44, stock options granted to employees of the parent company must be measured at fair value and recorded as a dividend “in kind.” On April 2, 2001, the Company granted 1,402,500 stock options to employees of Ravelston with an exercise price of $14.37 per share. The aggregate fair value of these options was $7,800,000 and this has been recorded as a dividend. There were no such options granted in 2000 subsequent to July 1, being the effective date of FIN 44.

      For all other series of stock options, no compensation cost has been recognized. Had the Company determined compensation costs based on the fair value at the grant date of its stock options under Statement of Financial Accounting Standards No. 123 (“FAS 123”) “Accounting for Stock-Based Compensation”, the Company’s net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated in the following table:

                         
2001 2000 1999



(in thousands except per share amounts)
Net earnings (loss) as reported
  $ (337,506 )   $ 117,075     $ 245,352  
Pro forma net earnings (loss)
    (342,773 )     110,732       242,704  
Basic earnings (loss) per share as reported
    (3.42 )     1.10       2.30  
Diluted earnings (loss) per share as reported
    (3.42 )     1.05       2.09  
Pro forma basic earnings (loss) per share
    (3.47 )     1.03       2.27  
Pro forma diluted earnings (loss) per share
    (3.47 )     0.99       2.07  
   
   
     
 

      Pro forma net earnings reflect only options granted in 1998 through 2001. Therefore, the full impact of calculating compensation cost for stock options under FAS 123 is not reflected in the pro forma net earnings (loss) amounts presented above because compensation cost is reflected over the options’ vesting period of four years and the compensation cost for options granted prior to January 1, 1998 is not considered.

      Calculating the compensation cost consistent with FAS 123, the fair value of each stock option granted during 2001, 2000 and 1999 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 2001, 2000 and 1999, respectively: dividend yield of 4.6%, 3.4% and 4.5%; expected volatility of 55.2%, 43.3% and 32.7%; risk-free interest rates of 5.0%, 5.1% and 6.4%; expected lives of 10 years. Weighted average fair value of options granted by the Company during 2001, 2000 and 1999 was $5.67, $4.12 and $3.81, respectively.

F-22


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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, 1998
    3,147,625     $ 12.74  
Options granted
    3,475,000       12.27  
Options exercised
    (116,000 )     11.24  
Options canceled
    (1,357,125 )     14.93  
     
     
 
Options outstanding at December 31, 1999
    5,149,500       11.88  
Options granted
    2,559,250       10.57  
Options exercised
    (471,063 )     11.67  
Options canceled
    (536,374 )     12.11  
     
     
 
Options outstanding at December 31, 2000
    6,701,313       11.38  
Options granted
    2,418,000       14.40  
Options exercised
    (624,162 )     11.01  
Options canceled
    (82,750 )     12.33  
     
     
 
Options outstanding at December 31, 2001
    8,412,401     $ 12.26  
     
     
 
Options exercisable at December 31, 1999
    1,190,625     $ 11.36  
Options exercisable at December 31, 2000
    1,989,548     $ 11.51  
Options exercisable at December 31, 2001
    3,032,682     $ 11.48  
     
     
 

(10) Earnings (Loss) per Share

      The following table reconciles the numerator and denominator for the calculation of basic and diluted earnings (loss) per share for the years ended December 31, 2001, 2000 and 1999:

                           
Year Ended December 31, 2001

Income Shares Per-Share
(Numerator) (Denominator) Amount



(in thousands, except per share data)
Net loss
  $ (337,506 )                
Deduct dividends