e10vq
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _____________

Commission File No. 0-24004

HOLLINGER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

     
Delaware   95-3518892
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
401 North Wabash Avenue, Suite 740, Chicago, Illinois   60611
(Address of Principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (312) 321-2299

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     
Yes  þ    No  o

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

     
Class   Outstanding at August 6, 2002

 
Class A Common Stock par value $.01 per share   85,840,617 shares
Class B Common Stock par value $.01 per share   14,990,000 shares

 


 

INDEX

HOLLINGER INTERNATIONAL INC.

         
        PAGE
       
PART I   FINANCIAL INFORMATION    
 
Item 1.   Condensed Financial Statements    1
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   15
 
Item 3   Quantitative and Qualitative Analysis about Market Risk   28
 
Item 5   Other Information   29
 
PART II   OTHER INFORMATION    
 
Item 6.   Exhibits and reports on Form 8-K   32
 
    Signatures   33

 


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2002 and June 30, 2001
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                                   
      Three Months Ended June 30 Six Months Ended June 30
     
      2002   2001   2002   2001
     
 
 
 
              (Restated note 3(b))           (Restated note 3(b))
             
 
Operating revenues:
                               
 
Advertising
  $ 173,994     $ 209,770     $ 344,915     $ 440,054  
 
Circulation
    56,525       70,943       115,896       143,392  
 
Job printing
    5,019       6,525       8,809       13,841  
 
Other
    7,333       10,803       14,053       20,045  
 
   
     
     
     
 
 
Total operating revenues
    242,871       298,041       483,673       617,332  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
    37,074       55,850       75,770       113,529  
 
Compensation costs
    73,457       93,819       146,903       192,495  
 
Stock-based compensation
    95       (195 )     95       (878 )
 
Other operating costs
    103,819       138,282       201,894       279,831  
 
Infrequent items
    94       1,672       271       3,855  
 
Depreciation
    8,746       9,655       17,530       18,756  
 
Amortization (note 3(a))
    2,504       9,182       5,494       18,369  
 
   
     
     
     
 
 
Total operating costs and expenses
    225,789       308,265       447,957       625,957  
 
   
     
     
     
 
 
Operating income (loss)
    17,082       (10,224 )     35,716       (8,625 )
Other income (expense):
                               
 
Interest expense
    (12,799 )     (20,741 )     (30,039 )     (39,846 )
 
Amortization of debt issue costs
    (1,232 )     (2,537 )     (3,118 )     (4,696 )
 
Interest and dividend income
    3,943       21,176       9,750       45,544  
 
Other income (expense), net (note 6)
    (4,871 )     (14,897 )     (76,482 )     (5,084 )
 
   
     
     
     
 
 
Total other income (expense)
    (14,959 )     (16,999 )     (99,889 )     (4,082 )
 
   
     
     
     
 
Earnings (loss) before income taxes, minority interest, discontinued operation and extraordinary item
    2,123       (27,223 )     (64,173 )     (12,707 )
Provision for income taxes (recovery)
    3,453       (2,940 )     (551 )     6,991  
 
   
     
     
     
 
Loss before minority interest, discontinued operation and extraordinary item
    (1,330 )     (24,283 )     (63,622 )     (19,698 )
Minority interest (recovery)
    1,332       (7,872 )     1,672       (4,265 )
 
   
     
     
     
 
Loss before discontinued operation and extraordinary item
    (2,662 )     (16,411 )     (65,294 )     (15,433 )
Discontinued operation, net of tax (note 3(b))
    791       876       1,002       1,284  
 
   
     
     
     
 
Loss before extraordinary item
    (1,871 )     (15,535 )     (64,292 )     (14,149 )
Extraordinary loss on debt extinguishments, net of tax
    (435 )           (21,276 )      
 
   
     
     
     
 
Net loss
  $ (2,306 )   $ (15,535 )   $ (85,568 )   $ (14,149 )
 
   
     
     
     
 
Basic loss per share before discontinued operation and extraordinary item
  $ (0.03 )   $ (0.18 )   $ (0.68 )   $ (0.20 )
 
   
     
     
     
 
Diluted loss per share before discontinued operation and extraordinary item
  $ (0.03 )   $ (0.18 )   $ (0.68 )   $ (0.20 )
 
   
     
     
     
 
Basic loss per share before extraordinary item
  $ (0.02 )   $ (0.17 )   $ (0.67 )   $ (0.19 )
 
   
     
     
     
 
Diluted loss per share before extraordinary item
  $ (0.02 )   $ (0.17 )   $ (0.67 )   $ (0.19 )
 
   
     
     
     
 
Basic net loss per share
  $ (0.02 )   $ (0.17 )   $ (0.89 )   $ (0.19 )
 
   
     
     
     
 
Diluted net loss per share
  $ (0.02 )   $ (0.17 )   $ (0.89 )   $ (0.19 )
 
   
     
     
     
 
Weighted average shares outstanding-basic
    96,070       101,830       96,059       100,346  
 
   
     
     
     
 
Weighted average shares outstanding-diluted
    96,070       101,830       96,059       100,346  
 
   
     
     
     
 

     See accompanying notes to condensed consolidated financial statements.

1


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months and Six Months Ended June 30, 2002 and June 30, 2001
(Amounts in Thousands)
(Unaudited)

                                   
      Three Months Ended June 30     Six Months Ended June 30
     
 
      2002   2001   2002   2001
     
 
 
 
Net loss
  $ (2,306 )   $ (15,535 )   $ (85,568 )   $ (14,149 )
Other comprehensive income (loss):
                               
 
Unrealized gain on securities available for sale, net of taxes
    16       56,649       258       38,841  
 
Foreign currency translation adjustment
    16,309       10,271       88,541       (35,447 )
 
   
     
     
     
 
Comprehensive income (loss)
  $ 14,019     $ 51,385     $ 3,231     $ (10,755 )
 
   
     
     
     
 

     See accompanying notes to condensed consolidated financial statements.

2


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2002 and December 31, 2001
(Amounts in Thousands)
                   
      June 30,   December 31,
      2002   2001
     
 
      (Unaudited)   (Restated note 3(b))
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 169,629     $ 479,514  
 
Accounts receivable, net
    216,374       199,338  
 
Amounts due from related companies, net
    22,094       32,228  
 
Inventories
    6,168       21,209  
 
Prepaid expenses and other current assets
    19,160       25,807  
 
Assets of discontinued operation held for sale (note 3(b))
    29,817       29,945  
 
   
     
 
Total current assets
    463,242       788,041  
Investments
    210,214       200,925  
Property, plant and equipment, net of accumulated depreciation
    301,385       308,685  
Intangible assets, net of accumulated amortization
          471,424  
Goodwill
    606,389       155,788  
Non-compete agreements, net of accumulated amortization
    5,775       7,658  
Deferred financing costs and other assets
    48,024       49,230  
 
   
     
 
 
  $ 1,635,029     $ 1,981,751  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Current installments of long-term debt
  $ 2,739     $ 3,008  
 
Accounts payable
    95,009       95,909  
 
Accrued expenses
    120,158       133,454  
 
Income taxes payable
    315,867       290,587  
 
Deferred revenue
    43,216       38,456  
 
Liabilities of discontinued operation held for sale (note 3(b))
    4,453       5,588  
 
   
     
 
Total current liabilities
    581,442       567,002  
Long-term debt, less current installments
    517,871       809,652  
Deferred income taxes
    111,730       163,050  
Other liabilities
    87,781       91,713  
 
   
     
 
Total liabilities
    1,298,824       1,631,417  
 
   
     
 
Minority interest
    17,452       15,977  
 
   
     
 
Redeemable preferred stock
    8,997       8,582  
 
   
     
 
Stockholders’ equity:
               
 
Convertible preferred stock
           
 
Class A common stock
    966       968  
 
Class B common stock
    150       150  
 
Additional paid-in capital
    556,152       554,891  
 
Accumulated other comprehensive loss
    (82,577 )     (171,376 )
 
Retained earnings
    22,602       132,693  
 
   
     
 
 
    497,293       517,326  
 
Class A common stock in treasury, at cost
    (132,896 )     (132,896 )
 
Class A common stock in escrow
    (54,641 )     (58,655 )
 
   
     
 
Total stockholders’ equity
    309,756       325,775  
 
   
     
 
 
  $ 1,635,029     $ 1,981,751  
 
   
     
 

     See accompanying notes to condensed consolidated financial statements.

3


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and June 30, 2001

(Amounts in Thousands)
(Unaudited)
                     
        2002   2001
       
 
                (Restated note 3(b))
Cash Flows From Operating Activities:
               
 
Net loss
  $ (85,568 )   $ (14,149 )
 
Items not involving cash:
               
   
Depreciation and amortization
    23,024       37,125  
   
Amortization of debt issue costs
    3,118       4,696  
   
Minority interest
    1,672       (4,265 )
   
Gain (loss) on sale of investments
    546       (55 )
   
Gains on sales of assets
    (4,790 )     (56,465 )
   
Non-cash interest income
    (2,689 )     (33,077 )
   
Total Return Equity Swap
    (4,935 )     30,054  
   
Foreign currency translation loss
    78,217        
   
Assets and liabilities of discontinued operation
    (508 )     391  
   
Other non-cash items
    (746 )     (2,311 )
 
Changes in working capital, net
    (2,856 )     (11,511 )
 
   
     
 
   
Cash provided by (used in) operating activities
    4,485       (49,567 )
 
   
     
 
Cash Flows From Investing Activities:
               
 
Capital expenditures
    (13,537 )     (17,493 )
 
Additions to investments and other assets
    (9,292 )     (45,821 )
 
Proceeds from disposal of investments and assets
    10,746       85,852  
 
   
     
 
   
Cash provided by (used in) investing activities
    (12,083 )     22,538  
 
   
     
 
Cash Flows From Financing Activities:
               
 
Proceeds from long-term debt
          67,394  
 
Repayments of long-term debt
    (292,756 )     (3,882 )
 
Changes in amounts due from related companies
    4,549        
 
Dividends and distributions to minority interests
    (917 )     (12,983 )
 
Cash dividends paid
    (19,744 )     (28,957 )
 
Other financing activities
    459       3,476  
 
   
     
 
   
Cash provided by (used in) financing activities
    (308,409 )     25,048  
 
   
     
 
Effect of exchange rate changes on cash
    6,122       787  
 
   
     
 
Net decrease in cash and cash equivalents
    (309,885 )     (1,194 )
Cash and cash equivalents at beginning of period
    479,514       137,671  
 
   
     
 
Cash and cash equivalents at end of period
  $ 169,629     $ 136,477  
 
   
     
 
Cash paid for interest
  $ 37,614     $ 36,714  
 
   
     
 
Cash paid for taxes
  $ 4,045     $ 34,959  
 
   
     
 

     See accompanying notes to condensed consolidated financial statements.

4


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Unaudited Financial Statements

     The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is presumed that the reader has already read the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

     In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001

Note 2 — Principles of Presentation and Consolidation

     The Company is a subsidiary of Hollinger Inc., a Canadian corporation, which at June 30, 2002 owned approximately 29.7 % of the combined equity and approximately 70.8 % of the combined voting power of the outstanding Common Stock of the Company, without giving effect to the future issuance of Class A Common Stock upon conversion of the Company’s remaining 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. At June 30, 2002 the Company’s interest in Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”) was 87%.

     All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made in the 2001 financial statements to conform to the 2002 presentation as described in Note 3 (b) below.

Note 3 — Changes in Accounting Principles

(a)   Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”. The new standard requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The standard also specifies criteria that intangible assets must meet to be recognized and reported apart from goodwill. In addition, SFAS No. 142 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 in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

     As of the date of adoption of SFAS No. 142, the Company has discontinued amortization of all existing goodwill, evaluated existing intangible assets and has made the necessary reclassifications in order to conform with the new criteria for recognition of intangible assets apart from goodwill. Amounts previously ascribed to circulation and certain other intangible assets have now been reclassified to goodwill effective January 1, 2002.

5


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

The transitional provisions of SFAS No. 142 also require the Company to assess whether goodwill is impaired as of January 1, 2002. As a result of this transitional impairment test, the Company has determined that the carrying amounts of certain of the Company’s Canadian Newspapers and of certain of the properties of the Jerusalem Post are in excess of their estimated fair value. The goodwill recorded in respect of these operations approximates $36.0 million. The Company will determine the extent of the transitional impairment no later than December 31, 2002. Any transitional impairment will be recognized as of January 1, 2002 as a cumulative effect of a change in accounting principle. The Company has determined that the fair value of all other reporting units is in excess of the respective carrying amounts.

Effective January 1, 2002, the Company had unamortized goodwill in the amount of $592.2 million, which is no longer being amortized. This amount is before any reduction for the transitional impairment. This change in accounting policy cannot be applied retroactively and the amounts presented for prior periods have not been restated for this change. If this change in accounting policy were applied to the reported consolidated statements of operations for the three months and the six months ended June 30, 2001, the impact of the change, in respect of goodwill and intangible assets with indefinite useful lives not being amortized, would be as follows:

                 
    Three months   Six months
    ended   ended
    June 30, 2001   June 30, 2001
   
 
    (In thousands)   (In thousands)
 
Net loss — as reported
    ($15,535 )     ($14,149 )
Add goodwill amortization, net of income tax and minority interest
    5,083       10,378  
 
   
     
 
Adjusted net loss
    ($10,452 )     ($3,771 )
 
   
     
 
Basic net loss per share — as reported
    ($0.17 )     ($0.19 )
 
   
     
 
Basic adjusted net loss per share
    ($0.12 )     ($0.08 )
 
   
     
 
Diluted net loss per share — as reported
    ($0.17 )     ($0.19 )
 
   
     
 
Diluted adjusted net loss per share
    ($0.12 )     ($0.08 )
 
   
     
 

6


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Goodwill as of June 30, 2002, as allocated by reportable segment, is as follows:

                                         
                    U.K.   Canadian        
    Chicago   Community   Newspaper   Newspaper        
(In thousands)   Group   Group   Group   Group   Total

 
 
 
 
 
Goodwill
  $ 222,817     $ 20,079     $ 342,590     $ 20,903     $ 606,389  
 
   
     
     
     
     
 

The Company’s amortized intangible assets consist of non-competition agreements with former owners of acquired newspapers which are amortized using the straight-line method over the term of the respective non-competition agreements, which range from 3 to 5 years. The components of intangible assets at June 30, 2002 are as follows:

                         
    Gross                
    Carrying   Accumulated   Net Book
(In thousands)   Amount   Amortization   Value

 
 
 
Amortizable Intangible Assets
Non-competition agreements
  $ 11,500     $ 5,725     $ 5,775  
 
   
     
     
 

Amortization of non-competition agreements for the three months ended June 30, 2002 and 2001 was $941,000 and $941,000, respectively, and for the six months ended June 30, 2002 and 2001 was $1,883,000 and $1,883,000, respectively. Future amortization of non-competition agreements is as follows: 2002 (in total) — $3,766,000, 2003 — $3,767,000, 2004 — $100,000 and 2005 — $25,000.

There were no significant changes in the carrying amount in local currency of goodwill or non-competition agreements during the six months ended June 30, 2002.

(b)     Accounting for the impairment or disposal of long-lived assets

Effective January 1, 2002, the Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 extends discontinued operations presentation to a component of an entity that either has been disposed of or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

At June 30, 2002, the Company’s Business Information Group (“BIG”), which publishes trade magazines in Canada, was held for sale in accordance with the provisions of SFAS No. 144. Accordingly, assets, liabilities and the results of operations of BIG have been classified as discontinued, and prior period results have been restated. BIG is a component of the Company’s Canadian Newspaper Group segment.

7


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

The results of operation of this discontinued operation are as follows:

                                 
    Three months ended June 30   Six months ended June 30
   
 
(In thousands)   2002   2001   2002   2001

 
 
 
 
Revenue
  $ 7,906     $ 8,132     $ 14,067     $ 15,191  
 
   
     
     
     
 
Earnings before income taxes and minority interest
  $ 1,402     $ 1,593     $ 1,721     $ 2,236  
Income tax
    (511 )     (600 )     (602 )     (797 )
Minority interest
    (100 )     (117 )     (117 )     (155 )
 
   
     
     
     
 
Net earnings from discontinued operation
  $ 791     $ 876     $ 1,002     $ 1,284  
 
   
     
     
     
 

Business units which were disposed of in fiscal 2001 did not meet the criteria to be reported as discontinued operations under Accounting Principles Board Opinion No. 30 which was applicable for 2001. Accordingly, the discontinued operation as restated, includes only assets, liabilities and results of operations of BIG. No loss on disposal has been recorded as the estimated fair value of the assets held for sale exceeds their carrying value. A gain on disposal will be recorded in the period in which the sale is consummated, net of income taxes and minority interest. The major classes of assets and liabilities of the discontinued operation included in the consolidated balance sheets are as follows:

                 
    June 30   December 31
(In thousands)   2002   2001

 
 
Assets of Discontinued Operation held for sale
Accounts receivable
  $ 2,843     $ 4,104  
Prepaid expenses
    160       84  
Property, plant and equipment (net of accumulated depreciation)
    660       587  
Goodwill (net of accumulated amortization)
    26,154       25,170  
 
   
     
 
Total Assets
  $ 29,817     $ 29,945  
 
   
     
 

                 
    June 30   December 31
(In thousands)   2002   2001

 
 
Liabilities of Discontinued Operation held for sale
Accounts payable
  $ 352     $ 1,188  
Accrued expenses
    676       1,237  
Deferred revenue
    2,998       2,752  
Other liabilities
    427       411  
 
   
     
 
Total Liabilities
  $ 4,453     $ 5,588  
 
   
     
 

8


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 4 — Earnings per share

     The following table reconciles the numerator and denominator for the calculation of basic and diluted loss per share before discontinued operations and extraordinary items for the three and six months ended June 30, 2002 and 2001:

                         
    Three Months Ended June 30, 2002
   
    Income   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
   
 
 
            (in thousands)        
Loss before discontinued operation and extraordinary item
  $ (2,662 )                
Add dividends:
                       
Series E Preferred Stock
    (67 )                
 
   
                 
Basic EPS
                       
Loss before discontinued operation and extraordinary item available to common stockholders
    (2,729 )     96,070     $ (0.03 )
Effect of dilutive securities None
None
                   
 
   
     
         
Diluted EPS
                       
Loss before discontinued operation and extraordinary item available to common stockholders
  $ (2,729 )     96,070     $ (0.03 )
 
   
     
         
                         
    Three Months Ended June 30, 2001
   
    Income   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
   
 
 
            (in thousands)  
Loss before discontinued operation
  $ (16,411 )                
Deduct dividends:
                       
Convertible preferred stock
    (2,137 )                
Series E Preferred Stock
    (127 )                
 
   
                 
Basic EPS
                       
Loss before discontinued operation available to common stockholders
    (18,675 )     101,830     $ (0.18 )
Effect of dilutive securities
                       
None
                   
 
   
     
         
Diluted EPS
                       
Loss before discontinued operation available to common stockholders
  $ (18,675 )     101,830     $ (0.18 )
 
   
     
         

9


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

                           
      Six Months Ended June 30, 2002
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Loss before discontinued operation and extraordinary item
  $ (65,294 )                
Add dividends:
                       
   Series E Preferred Stock
    (151 )                
       
               
Basic EPS
                       
   Loss before discontinued operation and extraordinary item available to
   common stockholders
    (65,445 )     96,059     $ (0.68 )
Effect of dilutive securities
                       
 
                       
   None
                   
       
     
       
Diluted EPS
                       
   Loss before discontinued operation and extraordinary item available to
   common stockholders
  $ (65,445 )     96,059     $ (0.68 )
       
     
       
                           
      Six Months Ended June 30, 2001        
     
       
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Earnings before discontinued operation
  $ (15,443 )                
Deduct dividends:
                       
   Convertible preferred stock
    (4,274 )                
   Series E Preferred Stock
    (251 )                
       
               
Basic EPS
                       
   Loss before discontinued operation available to common stockholders
    (19,958 )     100,346     $ (0.20 )
Effect of dilutive securities
                       
   None
                       
       
     
       
Diluted EPS
                       
   Loss before discontinued operation available to common stockholders
  $ (19,958 )     100,346     $ (0.20 )
       
     
       

10


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 5 — Segment Information

     The Company operates principally in the business of publishing, printing and distributing of newspapers and magazines and holds investments principally in companies that operate in the same business as the Company. The Community Group includes the results of the Jerusalem Post and the results of the last remaining United States community newspaper property which was sold in August 2001. The Canadian Newspaper Group includes the operations of Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”), Hollinger L.P. and until August 31, 2001, The National Post Company (“National Post”). On September 1, 2001, the Company sold its 50% interest in National Post. During 2001 HCPH Co. (formerly Hollinger Canadian Publishing Holdings Inc.) became the successor to the operations of XSTM Holdings (2000) Inc. (formerly Southam Inc. (“Southam”)). Segment information for the three and six months ended June 30, 2001 has been restated in accordance with the adoption of SFAS No. 144 previously described in Note 3(b). The following is a summary of the segments of the Company:

                                                 
    Three months ended June 30, 2002
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
                    (in thousands)                
Revenues
  $ 113,464     $ 3,877     $ 114,458     $ 11,072     $     $ 242,871  
Depreciation and amortization
  $ 7,144     $ 405     $ 3,019     $ 291     $ 391     $ 11,250  
Operating income (loss), excluding infrequent items and
stock-based compensation
  $ 14,264     $ (672 )   $ 9,106     $ (713 )   $ (4,714 )   $ 17,271  
Equity in loss of affiliates
  $ (359 )   $     $ (408 )   $     $ (129 )   $ (896 )
                                                 
    Six months ended June 30, 2002
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
                    (in thousands)                
Revenues
  $ 218,199     $ 7,102     $ 237,997     $ 20,375     $     $ 483,673  
Depreciation and amortization
  $ 14,773     $ 772     $ 6,126     $ 577     $ 776     $ 23,024  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 19,151     $ (1,858 )   $ 31,525     $ (2,977 )   $ (9,759 )   $ 36,082  
Equity in loss of affiliates
  $ (768 )   $     $ (1,172 )   $     $ (129 )   $ (2,069 )
Total assets
  $ 542,757     $ 39,254     $ 601,052     $ 135,212     $ 316,754     $ 1,635,029  
Capital expenditures
  $ 6,571     $ 3,680     $ 2,653     $ 616     $ 17     $ 13,537  

11


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued

(Unaudited)
                                                 
    Three months ended June 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
                    (in thousands)                
Revenues
  $ 115,451     $ 5,377     $ 115,912     $ 61,301     $     $ 298,041  
Depreciation and amortization
  $ 9,153     $ 489     $ 4,814     $ 3,781     $ 600     $ 18,837  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 8,126     $ (713 )   $ 808     $ (10,839 )   $ (6,129 )   $ (8,747 )
Equity in loss of affiliates
  $ (2,003 )   $     $ (863 )   $     $     $ (2,866 )
                                                 
    Six months ended June 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
                    (in thousands)                
Revenues
  $ 223,598     $ 10,281     $ 259,821     $ 123,632     $     $ 617,332  
Depreciation and amortization
  $ 18,098     $ 1,036     $ 9,283     $ 7,739     $ 969     $ 37,125  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 5,218     $ (2,044 )   $ 26,056     $ (25,108 )   $ (9,770 )   $ (5,648 )
Equity in loss of affiliates
  $ (2,265 )   $     $ (8,103 )   $     $     $ (10,368 )
Total assets
  $ 611,024     $ 60,314     $ 520,268     $ 507,798     $ 990,054     $ 2,689,458  
Capital expenditures
  $ 5,522     $ 197     $ 9,751     $ 1,823     $ 200     $ 17,493  

12


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued

(Unaudited)

Note 6 — Other Income (Expense), net

                                 
    Three months ended June 30   Six months ended June 30
   
 
(In thousands)   2002   2001   2002   2001

 
 
 
 
Foreign exchange gain (loss)
  $ 2,812     $ 289       ($80,134 )   $ 96  
Equity in loss of affiliates
    (896 )     (2,866 )     (2,069 )     (10,368 )
Total Return Equity Swap gain (loss)
    (6,167 )     (11,358 )     2,358       (37,616 )
Net gains on sales of publishing interests
    0       9,566       0       58,321  
Net gains on sales of assets
    33       0       5,466       0  
Write-down of investments
    (152 )     (10,000 )     (1,484 )     (15,352 )
Other
    (501 )     (528 )     (619 )     (165 )
 
   
     
     
     
 
 
    ($4,871 )     ($14,897 )     ($76,482 )     ($5,084 )
 
   
     
     
     
 

During March 2002, the Company significantly reduced its investment in the Canadian Newspaper Group. Substantial Canadian dollar cash balances were distributed to the Company, converted to United States dollars and used to reduce long-term debt (note 7). As a result of the substantial reduction of the Company’s net investment in the Canadian Newspaper Group, foreign exchange losses in the amount of $78,217,000 have been included in net earnings during the six months ended June 30, 2002. These foreign exchange losses have accumulated since the Company’s original investment in the Canadian Newspaper Group and, until realized through the substantial reduction of the Company’s net investment, had been included in the accumulated other comprehensive income component of stockholders’ equity. Of the above $78,217,000 foreign exchange loss expensed in the six months ended June 30, 2002, $72,037,000 is not deductible for income tax purposes.

13


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued

(Unaudited)

Note 7 — Long-term Debt

On February 14, 2002, Hollinger International Publishing Inc. (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. In addition, during the six months ended June 30, 2002, Publishing purchased for retirement an additional $6.1 million in aggregate principal amount of the 8.625% Senior Notes due 2005, $10.1 million in aggregate principal amount of the 9.25% Senior Subordinated Notes due 2006 and $25.0 million in aggregate principal amount of the 9.25% Senior Subordinated Notes due 2007.

The total principal amount of the Publishing Senior and Senior Subordinated Notes retired during the six months ended June 30, 2002 was $290.0 million. The premiums paid to retire the debt totalled $27.1 million which together with a write-off of $8.3 million of related deferred financing costs have been included in extraordinary items, net of income tax.

14


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

The Company’s business is concentrated in the publishing, printing and distributing of newspapers and includes the Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group. The Chicago Group includes the Chicago Sun-Times, Post Tribune and city and suburban newspapers in the Chicago metropolitan area. The Community Group includes the Jerusalem Post and in 2001, one U.S. community newspaper until it was sold in August 2001. The U.K. Newspaper Group includes the operating results of the Telegraph, its subsidiaries and joint ventures. The Canadian Newspaper Group consists of the operations of HCPH Co., the Company’s 87% investment in Hollinger L.P. and until it was sold September 1, 2001, a 50% interest in National Post.

Effective January 1, 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” as described in Note 3(a) to the Condensed Consolidated Financial Statements. The new standard requires that goodwill and intangible assets with indefinite useful lives, no longer be amortized but instead be tested for impairment at least annually. This change in accounting policy cannot be applied retroactively and the amounts presented for prior periods have not been restated for the change.

Also effective January 1, 2002, the Company adopted SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” as described in Note 3(b) to the Condensed Consolidated Financial Statements. At June 30, 2002, the Company’s Business Information Group, which publishes trade magazines in Canada was held for sale in accordance with the provisions of SFAS No. 144 and, accordingly, the operating results thereof have been classified as discontinued and prior period results have been restated.

CONSOLIDATED RESULTS OF OPERATIONS

A net loss in the second quarter 2002 amounted to $2.3 million or a loss of $0.02 per share compared with a net loss of $15.5 million or a loss of $0.17 per share in 2001. A net loss in the six months ended June 30, 2002 amounted to $85.6 million or a loss of $0.89 per share compared with a net loss of $14.1 million or a loss of $0.19 per share in 2001.

In the second quarter 2002, the loss before discontinued operations and extraordinary items was $2.7 million or a loss of $0.03 per share compared with a loss of $16.4 million or a loss of $0.18 per share in 2001. For the six months ended June 30, 2002, the loss before discontinued operations and extraordinary items was $65.3 million or a loss of $0.68 per share compared with a loss of $15.4 million or a loss of $0.20 per share in 2001.

There were a number of infrequent, unusual and non-recurring items affecting the results of both years. In second quarter 2002, infrequent, unusual and non-recurring items, after tax and minority interest amounted to a loss of $5.9 million and primarily included a $6.2 million loss before tax in respect of the Total Return Equity Swap, offset in part by a foreign exchange gain before tax of $3.2 million in respect of the Hollinger Participation Trust. In second quarter 2001, infrequent, unusual and non-recurring items after tax and minority interest amounted to a loss of $10.8 million and primarily included a $9.6 million gain before tax on the sale of certain Canadian properties, $1.5 million before tax of duplicative start-up costs related to the new printing facility in Chicago, a $10.0 million before tax write-down of investments and an $11.4 million before tax accounting loss in respect of the Total Return Equity Swap.

15


 

In the six months ended June 30, 2002, infrequent, unusual and non-recurring items, after tax and minority interest amounted to a loss of $91.7 million and primarily included foreign exchange losses before tax of $78.8 million, an extraordinary loss after tax of $21.3 million related to the early retirement of debt, partly reduced by a $2.4 million gain before tax in respect of the Total Return Equity Swap and a $5.5 million gain before tax on asset sales. Included in the $78.8 million foreign exchange losses is $78.2 million related to the substantial liquidation of the Company’s investment in the Canadian Newspaper Group. During March 2002, substantial Canadian dollar cash balances held by the Canadian Newspaper Group were distributed to Hollinger International Inc., converted to United States dollars and used to reduce long-term debt. As a result of this substantial liquidation of the Company’s net investment in the Canadian Newspaper Group, foreign exchange losses in the amount of $78.2 million are included in the first quarter 2002 net loss. These foreign exchange losses have accumulated since the Company’s original investment in the Canadian Newspaper Group and, until realized in the first quarter, had been included in the accumulated other comprehensive income component of stockholders’ equity. Of the $78.2 million expensed, $72.0 million is not deductible for income tax purposes. In the six months ended June 30, 2001, infrequent, unusual and non-recurring items after tax and minority interest amounted to a loss of $16.4 million and primarily consisted of a $58.3 million gain before tax on the sale of certain Canadian operations, a $37.6 million loss before tax in respect of the Total Return Equity Swap, a $15.4 million before tax write-down of investments, a $7.0 million before tax equity accounting loss in Interactive Investor International and $3.6 million before tax of duplicative start-up costs related to the new printing facility in Chicago.

Net earnings from comparable operations, which excludes infrequent, unusual and non-recurring items and also excludes discontinued operations and extraordinary items amounted to $3.6 million or $0.04 per diluted share in second quarter 2002 compared with a net loss of $4.8 million or a loss of $0.04 per diluted share in 2001. Net earnings from comparable operations for the six months ended June 30, 2002 amounted to $6.1 million or $0.06 per diluted share compared with $2.3 million or $0.02 per diluted share in 2001.

Operating revenue in second quarter 2002 was $242.9 million compared with $298.0 million in 2001 and for the six months ended June 30 was $483.7 million in 2002 compared with $617.3 million in 2001. The reduction in operating revenue in 2002 results primarily from the sales of Canadian properties in 2001 but is also due to lower operating revenue at both the U.K. Newspaper Group and Chicago Group.

Operating income in second quarter 2002 was $17.1 million compared with an operating loss of $10.2 million in 2001 and for the six months ended June 30 was $35.7 million in 2002 compared with an operating loss of $8.6 million in 2001. The improvement in year over year operating income primarily results from improved operating results at the Chicago Group and U.K. Newspaper Group, the 2001 sale of the National Post, which incurred significant operating losses in the second quarter and six months ended June 30, 2001 and the adoption on January 1, 2002 of SFAS No. 142 which resulted in goodwill not being amortized subsequent to January 1, 2002. Amortization of intangibles with indefinite useful lives, excluding amortization of the discontinued operation, approximated $6.4 million in second quarter 2001 and for the six months ended June 30, 2001 approximated $13.3 million. The above increases to operating income were reduced by the sale in 2001 of Canadian newspapers which contributed operating income in 2001.

Interest and dividend income in second quarter 2002 amounted to $3.9 million compared with $21.2 million in 2001, a decrease of $17.3 million. Interest and dividend income for the six months ended June 30, 2002 amounted to $9.8 million compared with $45.5 million in 2001, a decrease of $35.7 million. Interest and dividend income in 2001 included interest on debentures issued by a subsidiary of CanWest Global Communications Corp. (“CanWest”) and a dividend on CanWest shares. In September 2001, CanWest temporarily suspended its semi-annual dividend. In the latter part of 2001, all of the shares were sold and participation interests were sold in nearly all of the debentures resulting in significantly lower interest income in 2002. Most of the proceeds from the disposal of the

16


 

CanWest investments were retained as short-term investments at low rates of interest until March 2002 when a portion of the Company’s long-term debt was retired.

Interest expense in the second quarter 2002 amounted to $12.8 million compared with $20.7 million in 2001, and for the six months ended June 30, 2002 amounted to $30.0 million compared with $39.8 million in 2001, decreases of $7.9 million and $9.8 million, respectively. The lower interest expense in 2002 primarily results from the retirement of a portion of long-term debt in 2001 and in March 2002.

Net other expenses in the second quarter of 2002 amounted to $4.9 million and primarily included a loss on the Total Return Equity Swap of $6.2 million offset in part by a $3.2 million foreign exchange gain in respect of the Hollinger Participation Trust. Net other expenses in the second quarter of 2001 amounted to $14.9 million and primarily included a loss on the Total Return Equity Swap of $11.4 million and a $10.0 million write-down of investments offset in part by a $9.6 million gain on sale of certain Canadian properties. Net other expenses in the six months ended June 30, 2002 amounted to $76.5 million and primarily included foreign exchange losses of $80.1 million, which mainly related to the substantial reduction of the Company’s investment in the Canadian Newspaper Group reduced by a gain on the Total Return Equity Swap of $2.4 million and net gains on sales of assets totalling $5.5 million. Net other expenses in the six months ended June 30, 2001 amounted to $5.1 million and primarily included a loss on the Total Return Equity Swap of $37.6 million, net gains on sales of publishing interests of $58.3 million, equity losses in investments of $10.4 million and the write-down of investments of $15.4 million.

Minority interest in second quarter 2002 totaled $1.3 million compared to a recovery of $7.9 million in 2001. Minority interest in the six months ended June 30, 2002 totaled $1.7 million compared to a recovery of $4.3 million in 2001. Minority interest in 2002 primarily represents the minority share of net earnings of Hollinger L.P. In 2001 minority interest included the minority’s share of the National Post loss offset by the minority share of net earnings of Hollinger L.P., including the minority’s share of the gain on sale of Canadian properties.

Discontinued operations, net of tax, in the second quarter 2002 was $0.8 million compared with $0.9 million in 2001. For the six months ended June 30, 2002 discontinued operations, net of tax was $1.0 million compared with $1.3 million in 2001. This represents the operating results of the Business Information Group held for sale.

Extraordinary items, net of tax, in the second quarter 2002 totaled $0.4 million and in the six months ended June 30, 2002 totaled $21.3 million. The extraordinary item represented the cost of retiring a portion of the Company’s long-term debt including the premium paid for early retirement and the write-off of the unamortized deferred finance costs related to the retired debt.

17


 

                                   
      Three Months Ended June 30,   Six Months Ended June 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Operating revenues:
                               
 
Chicago Group
  $ 113,464     $ 115,451     $ 218,199     $ 223,598  
 
Community Group
    3,877       5,377       7,102       10,281  
 
U.K. Newspaper Group
    114,458       115,912       237,997       259,821  
 
Canadian Newspaper Group
    11,072       61,301       20,375       123,632  
 
Investment and Corporate Group
                       
 
   
     
     
     
 
Total operating revenue
  $ 242,871     $ 298,041     $ 483,673     $ 617,332  
 
   
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation:
                               
 
Chicago Group
  $ 14,264     $ 8,126     $ 19,151     $ 5,218  
 
Community Group
    (672 )     (713 )     (1,858 )     (2,044 )
 
U.K. Newspaper Group
    9,106       808       31,525       26,056  
 
Canadian Newspaper Group
    (713 )     (10,839 )     (2,977 )     (25,108 )
 
Investment and Corporate Group
    (4,714 )     (6,129 )     (9,759 )     (9,770 )
 
   
     
     
     
 
Total operating income (loss), excluding infrequent items and stock-based compensation
  $ 17,271     $ (8,747 )   $ 36,082     $ (5,648 )
 
   
     
     
     
 
EBITDA:
                               
 
Chicago Group
  $ 21,408     $ 17,279     $ 33,924     $ 23,316  
 
Community Group
    (267 )     (224 )     (1,086 )     (1,008 )
 
U.K. Newspaper Group
    12,125       5,622       37,651       35,339  
 
Canadian Newspaper Group
    (422 )     (7,058 )     (2,400 )     (17,369 )
 
Investment and Corporate Group
    (4,323 )     (5,529 )     (8,983 )     (8,801 )
 
   
     
     
     
 
Total EBITDA
  $ 28,521     $ 10,090     $ 59,106     $ 31,477  
 
   
     
     
     
 
Operating revenues:
                               
 
Chicago Group
    46.7 %     38.7 %     45.1 %     36.2 %
 
Community Group
    1.6 %     1.8 %     1.5 %     1.7 %
 
U.K. Newspaper Group
    47.1 %     38.9 %     49.2 %     42.1 %
 
Canadian Newspaper Group
    4.6 %     20.6 %     4.2 %     20.0 %
 
Investment and Corporate Group
    0.0 %     0.0 %     0.0 %     0.0 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation:
                               
 
Chicago Group
    82.6 %     -93.0 %     53.1 %     -92.4 %
 
Community Group
    -3.9 %     8.2 %     -5.1 %     36.2 %
 
U.K. Newspaper Group
    52.7 %     -9.2 %     87.3 %     -461.3 %
 
Canadian Newspaper Group
    -4.1 %     123.9 %     -8.3 %     444.5 %
 
Investment and Corporate Group
    -27.3 %     70.1 %     -27.0 %     173.0 %
 
   
     
     
     
 
Total operating income (loss), excluding infrequent items and stock-based compensation
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
EBITDA:
                               
 
Chicago Group
    75.1 %     171.3 %     57.4 %     74.1 %
 
Community Group
    -0.9 %     -2.2 %     -1.8 %     -3.2 %
 
U.K. Newspaper Group
    42.5 %     55.7 %     63.7 %     112.3 %
 
Canadian Newspaper Group
    -1.5 %     -70.0 %     -4.1 %     -55.2 %
 
Investment and Corporate Group
    -15.2 %     -54.8 %     -15.2 %     -28.0 %
 
   
     
     
     
 
Total EBITDA
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
EBITDA Margin:
                               
 
Chicago Group
    18.9 %     15.0 %     15.5 %     10.4 %
 
Community Group
  Neg.   Neg.   Neg.   Neg.
 
U.K. Newspaper Group
    10.6 %     4.9 %     15.8 %     13.6 %
 
Canadian Newspaper Group
  Neg.   Neg.   Neg.   Neg.
 
Investment and Corporate Group
    N/A       N/A       N/A       N/A  
Total EBITDA Margin
    11.7 %     3.4 %     12.2 %     5.1 %

     See Notes on page 22

18


 

                                   
      Three Months Ended June 30,   Six Months Ended June 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Chicago Group
                               
Operating revenue
                               
 
Advertising
  $ 87,885     $ 89,066     $ 167,265     $ 170,315  
 
Circulation
    22,852       23,139       45,704       46,676  
 
Job printing and other
    2,727       3,246       5,230       6,607  
 
   
     
     
     
 
Total operating revenue
    113,464       115,451       218,199       223,598  
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    15,519       19,540       32,314       38,426  
 
Compensation costs
    42,645       44,584       85,698       91,182  
 
Other operating costs
    33,892       34,048       66,263       70,674  
 
Depreciation
    4,640       4,128       9,279       8,188  
 
Amortization
    2,504       5,025       5,494       9,910  
 
   
     
     
     
 
Total operating costs
    99,200       107,325       199,048       218,380  
 
   
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
  $ 14,264     $ 8,126     $ 19,151     $ 5,218  
 
   
     
     
     
 
Community Group
                               
Operating revenue
                               
 
Advertising
  $ 1,023     $ 1,743     $ 2,009     $ 3,328  
 
Circulation
    1,427       1,948       2,972       3,987  
 
Job printing and other
    1,427       1,686       2,121       2,966  
 
   
     
     
     
 
Total operating revenue
    3,877       5,377       7,102       10,281  
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    434       521       895       1,042  
 
Compensation costs
    1,888       2,445       3,783       4,756  
 
Other operating costs
    1,822       2,635       3,510       5,491  
 
Depreciation
    405       254       772       565  
 
Amortization
          235             471  
 
   
     
     
     
 
Total operating costs
    4,549       6,090       8,960       12,325  
 
   
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (672 )   $ (713 )   $ (1,858 )   $ (2,044 )
 
   
     
     
     
 
U.K. Newspaper Group
                               
Operating revenue
                               
 
Advertising
  $ 77,032     $ 77,759     $ 160,966     $ 183,641  
 
Circulation
    31,210       33,444       65,162       66,596  
 
Job printing and other
    6,216       4,709       11,869       9,584  
 
   
     
     
     
 
Total operating revenue
    114,458       115,912       237,997       259,821  
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    19,800       23,737       39,985       49,440  
 
Compensation costs
    22,547       23,355       44,612       47,025  
 
Other operating costs
    59,986       63,198       115,749       128,017  
 
Depreciation
    3,019       2,567       6,126       4,731  
 
Amortization
          2,247             4,552  
 
   
     
     
     
 
Total operating costs
    105,352       115,104       206,472       233,765  
 
   
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
  $ 9,106     $ 808     $ 31,525     $ 26,056  
 
   
     
     
     
 

     See notes on page 22

19


 

                                   
Canadian Newspaper Group
                               
Operating revenue
                               
 
Advertising
  $ 8,054     $ 41,202     $ 14,675     $ 82,770  
 
Circulation
    1,036       12,412       2,058       26,133  
 
Job printing and other
    1,982       7,687       3,642       14,729  
 
   
     
     
     
 
Total operating revenue
    11,072       61,301       20,375       123,632  
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    1,321       12,052       2,576       24,621  
 
Compensation costs
    5,622       22,487       11,250       47,617  
 
Other operating costs
    4,551       33,820       8,949       68,763  
 
Depreciation
    291       2,276       577       4,643  
 
Amortization
          1,505             3,096  
 
   
     
     
     
 
Total operating costs
    11,785       72,140       23,352       148,740  
 
   
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (713 )   $ (10,839 )   $ (2,977 )   $ (25,108 )
 
   
     
     
     
 
Investment and Corporate Group
                               
Operating revenue
                               
 
Advertising
  $     $     $     $  
 
Circulation
                       
 
Job printing and other
                       
 
   
     
     
     
 
Total operating revenue
                       
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
                       
 
Compensation costs
    755       948       1,560       1,915  
 
Other operating costs
    3,568       4,581       7,423       6,886  
 
Depreciation
    391       430       776       629  
 
Amortization
          170             340  
 
   
     
     
     
 
Total operating costs
    4,714       6,129       9,759       9,770  
 
   
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (4,714 )   $ (6,129 )   $ (9,759 )   $ (9,770 )
 
   
     
     
     
 

     See notes on page 22

20


 

                                   
      Three Months Ended June 30,   Six Months Ended June 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      Percentage   Percentage   Percentage   Percentage
     
 
 
 
Chicago Group
                               
Operating revenue
                               
 
Advertising
    77.5 %     77.2 %     76.7 %     76.2 %
 
Circulation
    20.1 %     20.0 %     20.9 %     20.9 %
 
Job printing and other
    2.4 %     2.8 %     2.4 %     2.9 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    13.7 %     16.9 %     14.8 %     17.2 %
 
Compensation costs
    37.6 %     38.6 %     39.2 %     40.8 %
 
Other operating costs
    29.9 %     29.5 %     30.4 %     31.6 %
 
Depreciation
    4.1 %     3.6 %     4.3 %     3.7 %
 
Amortization
    2.2 %     4.4 %     2.5 %     4.4 %
 
   
     
     
     
 
Total operating costs
    87.5 %     93.0 %     91.2 %     97.7 %
 
   
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
    12.5 %     7.0 %     8.8 %     2.3 %
 
   
     
     
     
 
Community Group
                               
Operating revenue
                               
 
Advertising
    26.4 %     32.4 %     28.3 %     32.4 %
 
Circulation
    36.8 %     36.2 %     41.8 %     38.8 %
 
Job printing and other
    36.8 %     31.4 %     29.9 %     28.8 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    11.2 %     9.7 %     12.6 %     10.1 %
 
Compensation costs
    48.7 %     45.5 %     53.3 %     46.3 %
 
Other operating costs
    47.0 %     49.0 %     49.4 %     53.4 %
 
Depreciation
    10.4 %     4.7 %     10.9 %     5.5 %
 
Amortization
    0.0 %     4.4 %     0.0 %     4.6 %
 
   
     
     
     
 
Total operating costs
    117.3 %     113.3 %     126.2 %     119.9 %
 
   
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
    -17.3 %     -13.3 %     -26.2 %     -19.9 %
 
   
     
     
     
 
U.K. Newspaper Group
                               
Operating revenue
                               
 
Advertising
    67.3 %     67.1 %     67.6 %     70.7 %
 
Circulation
    27.3 %     28.8 %     27.4 %     25.6 %
 
Job printing and other
    5.4 %     4.1 %     5.0 %     3.7 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    17.3 %     20.5 %     16.8 %     19.0 %
 
Compensation costs
    19.7 %     20.2 %     18.7 %     18.1 %
 
Other operating costs
    52.4 %     54.5 %     48.7 %     49.3 %
 
Depreciation
    2.6 %     2.2 %     2.6 %     1.8 %
 
Amortization
    0.0 %     1.9 %     0.0 %     1.8 %
 
   
     
     
     
 
Total operating costs
    92.0 %     99.3 %     86.8 %     90.0 %
 
   
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
    8.0 %     0.7 %     13.2 %     10.0 %
 
   
     
     
     
 

     See notes on page 22

21


 

                                   
      Three Months Ended June 30,   Six Months Ended June 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      Percentage   Percentage   Percentage   Percentage
     
 
 
 
Canadian Newspaper Group
                               
Operating revenue
                               
 
Advertising
    72.7 %     67.2 %     72.0 %     66.9 %
 
Circulation
    9.4 %     20.3 %     10.1 %     21.2 %
 
Job printing and other
    17.9 %     12.5 %     17.9 %     11.9 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating costs
                               
 
Newsprint
    11.9 %     19.7 %     12.6 %     19.9 %
 
Compensation costs
    50.8 %     36.7 %     55.3 %     38.5 %
 
Other operating costs
    41.1 %     55.2 %     43.9 %     55.6 %
 
Depreciation
    2.6 %     3.7 %     2.8 %     3.8 %
 
Amortization
    0.0 %     2.4 %     0.0 %     2.5 %
 
   
     
     
     
 
Total operating costs
    106.4 %     117.7 %     114.6 %     120.3 %
 
   
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
    -6.4 %     -17.7 %     -14.6 %     -20.3 %
 
   
     
     
     
 


Notes :  1)   EBITDA and operating income exclude infrequent items and stock-based compensation.
 
  2) Amounts in respect of the Canadian Newspaper Group for the six months ended June 30, 2001 have been restated in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company’s Canadian Business Information Group is classified as held for sale and its results have been presented as a discontinued operation. However, amounts for 2001 cannot be restated, to present as discontinued operations, those business units disposed of in 2001 and the results presented above reflect the results of such operations to the dates of disposal.
 
  3) The Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets” effective January 1, 2002. With the adoption of SFAS No. 142, goodwill and certain intangibles are no longer being amortized. In accordance with SFAS No. 142, results for the six months ended June 30, 2001 have not been restated, and therefore include amortization of intangibles, including goodwill, as previously reported.

22


 

GROUP OPERATING RESULTS

Chicago Group

Operating revenues for the Chicago Group were $113.5 million in second quarter 2002 and $218.2 million in the six months ended June 30, 2002 compared with $115.5 million and $223.6 million in 2001, decreases of $2.0 million or 1.7 % and $5.4 million or 2.4%, respectively. Advertising revenue was $87.9 million in second quarter 2002 and $167.3 million in the six months ended June 30, 2002 compared with $89.1 million and $170.3 million in 2001, decreases of $1.2 million or 1.3% and $3.0 million or 1.8%, respectively. The second quarter decrease results almost entirely from lower retail advertising revenue with national and classified advertising revenues being relatively stable year over year. Increased classified advertising revenue in the real estate and automotive sectors offset lower revenues from recruitment advertising.

Circulation revenue was $22.9 million in second quarter 2002 and $45.7 million in the six months ended June 30, 2002 compared with $23.1 million and $46.7 million in 2001, decreases of $0.2 million or 1.2% and $1.0 million or 2.0%, respectively. The decreases were primarily as a result of price discounting. Printing and other revenue was $2.7 million in second quarter 2002 and $5.2 million in the six months ended June 30, 2002 compared with $3.2 million and $6.6 million in 2001, decreases of $0.5 million and $1.4 million, respectively.

Total operating costs, excluding infrequent items, in second quarter 2002 were $99.2 million and in the six months ended June 30, 2002 were $199.0 million compared with $107.3 million and $218.4 million in 2001, decreases of $8.1 million and $19.4 million, respectively.

Newsprint expense in the second quarter was $15.5 million compared with $19.5 million in 2001, a decrease of $4.0 million or 20.6% in the quarter. Total newsprint consumption in the quarter increased approximately 3.0% compared with the second quarter 2001, but the average cost per tonne of newsprint in the second quarter 2002 was approximately 24.0% lower than in the second quarter 2001. Newsprint expense in the six months ended June 30, 2002 was $32.3 million compared with $38.4 million in 2001, a decrease of $6.1 million. Compensation costs in second quarter 2002 were $42.6 million and in the six months ended June 30, 2002 were $85.7 million compared with $44.6 million and $91.2 million in 2001, decreases of $2.0 million or 4.4% and $5.5 million or 6.0%, respectively. The decreases primarily result from staff reductions which took effect during 2001. Other operating costs in second quarter 2002 were $33.9 million and in the six months ended June 30, 2002 were $66.3 million compared with $34.0 million and $70.7 million in 2001, decreases of $0.1 million or 0.5% and $4.4 million or 6.2%, respectively. The decrease in other operating costs resulted from general cost reductions across all areas. Amortization in the second quarter 2002 was $2.5 million and in the six months ended June 30, 2002 was $5.5 million compared with $5.0 million and $9.9 million in 2001, reductions of $2.5 million and $4.4 million, respectively. The reductions primarily result from the adoption, effective January 1, 2002, of SFAS No. 142 which resulted in intangible assets with indefinite useful lives not being amortized in 2002. Approximately $2.2 million of amortization in the second quarter 2001 and $4.8 million in the six months ended June 30, 2001 related to such assets.

Operating income, excluding infrequent items in the second quarter 2002 totaled $14.3 million and in the six months ended June 30, 2002 totaled $19.2 million compared with $8.1 million and $5.2 million in 2001, increases of $6.2 million and $14.0 million, respectively. The increases result from lower newsprint, compensation and other operating costs and reduced amortization resulting from the adoption of SFAS No. 142, offset in part by lower operating revenue.

23


 

U.K. Newspaper Group

Operating revenues for the U.K. Newspaper Group were $114.5 million in second quarter 2002 compared with $115.9 million in 2001, a decrease of $1.4 million or 1.3%. In the six months ended June 30, 2002 operating revenues were $238.0 million compared with $259.8 million in 2001, a decrease of $21.8 million or 8.4%. In pounds sterling, operating revenues in second quarter 2002 were £78.3 million compared with £81.6 million in 2001, a decrease of £3.3 million or 4.1%. For the six months ended June 30 2002 operating revenues were £164.9 million compared with £180.3 million in 2001, a decrease of £15.4 million or 8.5%.

The decrease in operating revenue was mainly the result of lower advertising revenue, which, in local currency, was £52.7 million in second quarter 2002 compared with £54.7 million in 2001, a decrease of £2.0 million or 3.8%. Display advertising decreased by 3.0% in the second quarter year over year and this included a 1% decrease in financial advertising. In the six months ended June 30, 2002 advertising revenue, in local currency, was £111.5 million compared with £127.3 million in 2001, a decrease of £15.8 million or 12.4%.

Circulation revenue, in local currency, was £21.4 million in second quarter 2002 compared with £23.5 million in 2001, a decrease of £2.1 million or 9.2%. Circulation revenue in the second quarter has been reduced by a £2.2 million provision following a revised estimate of expected redemption rates for vouchers issued principally prior to second quarter 2002 to attract new sales. Excluding this provision, circulation revenue in second quarter 2002 was comparable to 2001. Increased revenue resulting from the increase to the price of The Daily Telegraph implemented in September 2001 has been offset by lower revenue from the change in the mix of sales between newsstand and subscribers. In the six months ended June 30, 2002 circulation revenue in local currency, was £45.2 million compared with £46.3 million in 2001, a decrease of £1.1 million or 2.4%.

Total operating costs, excluding infrequent items, in second quarter 2002 were $105.4 million and in the six months ended June 30, 2002 were $206.5 million compared with $115.1 million and $233.8 million in 2001, decreases of $9.7 million and $27.3 million, respectively.

Newsprint costs for the second quarter 2002, in local currency, were £13.5 million compared with £16.7 million in 2001, a decrease of £3.2 million or 19.0%. The decrease results from an 9.9% reduction in consumption due to lower pagination as a result of lower advertising revenue, and a 10.0% reduction in the average price per tonne of newsprint. In the six months ended June 30, 2002 newsprint costs, in local currency, were £27.7 million compared with £34.3 million in 2001, a decrease of £6.6 million or 19.4%.

Compensation costs for the second quarter 2002, in local currency, were £15.4 million compared with £16.4 million in 2001, a decrease of £1.0 million or 6.2%. In the six months ended June 30, 2002 compensation costs, in local currency, were £30.9 million compared with £32.7 million in 2001, a decrease of £1.8 million or 5.5%. The lower compensation costs in 2002 result primarily from reduced staff mainly in editorial.

Other operating expenses, in local currency, were £41.1 million in 2002 compared with £44.5 million in 2001, a reduction of £3.4 million or 7.6%. In the six months ended June 30, 2002 other operating costs in local currency, were £80.1 million compared with £88.9 million in 2001, a decrease of £8.8 million or 9.9%. The lower costs result from savings in most areas but particularly editorial and marketing.

Earnings before interest, taxes, other income (expense), depreciation and amortization (EBITDA) in second quarter 2002, in local currency, were £8.3 million in 2002 compared with £4.0 million in 2001, an increase of £4.3 million which was primarily the result of savings in newsprint, compensation and other operating expenses offset by lower advertising and circulation revenue. In the six months ended June 30, 2002 EBITDA, in local currency, was £26.2 million compared with £24.4 million in 2001, an increase of £1.8 million.

24


 

Operating income in second quarter 2001 of $0.8 million and for the six months ended June 30, 2001 of $26.1 million is after deduction of $2.2 million and $4.6 million, respectively, of amortization of goodwill, which, as a result of the adoption of SFAS No. 142 with effect from January 1, 2002, was not incurred in 2002.

Canadian Newspaper Group

Operating revenues in the Canadian Newspaper Group in second quarter 2002 were $11.1 million compared with $61.3 million in 2001 and for the six months ended June 30, 2002 were $20.4 million compared with $123.6 million in 2001. The operating loss, excluding infrequent items, was $0.7 million in second quarter 2002 compared with $10.8 million in 2001 and was $3.0 million in the six months ended June 30, 2002 compared with $25.1 million in 2001. The results for 2001 included the National Post and other Canadian newspaper properties, all of which were sold during 2001. These sales of newspapers accounted for the majority of the decrease in year over year operating revenue. The reduction in year over year operating loss also results from the sales of properties since the 2001 operating loss included the results of the National Post which reported an operating loss of Cdn.$20.6 million in second quarter 2001 and Cdn.$43.3 million in the six months ended June 30, 2001.

On a same store basis, operating revenues and operating income of the remaining operations, excluding infrequent items and the results of the Business Information Group which has been disclosed as a discontinued operation, were Cdn.$17.0 million and an operating loss of Cdn.$0.6 in second quarter 2002 compared with Cdn.$18.4 million and an operating loss of Cdn.$1.6 million in 2001. For the six months ended June 30, 2002 operating revenues and operating income on a same store basis were Cdn.$31.5 million and an operating loss of Cdn.$3.3 compared with Cdn.$33.8 million and an operating loss of Cdn.$4.9 million in 2001. Included in the operating losses in 2002 is a Cdn.$1.7 million expense in the second quarter and Cdn.$3.6 million expense in the six months ended June 30, 2002 in respect of employee benefit costs of retired former Southam employees. The same store operating loss for second quarter 2001 and the six months ended June 30, 2001 is after deducting Cdn.$0.3 million and Cdn.$0.6 million, respectively, in respect of amortization which under SFAS No. 142 was not incurred in 2002.

Community Group

Operating revenue and operating income for the Community Group was $3.9 million and a loss of $0.7 million in the second quarter 2002 compared with $5.4 million and a loss of $0.7 million in 2001. For the six months ended June 30, 2002 operating revenue and operating income was $7.1 million and a loss of $1.9 million compared with $10.3 million and a loss of $2.0 million in 2001. The results for 2001 include one U.S. Community Group newspaper which was sold in August 2001. This newspaper had operating revenue of $0.4 million and break even operating income in the second quarter 2001 and operating revenue of $0.7 million and an operating loss of $0.2 million in the six months ended June 30, 2001. In addition, amortization in the amount of $0.2 million in the second quarter and $0.4 million in the six months ended June 30 at the Jerusalem Post in 2001 was not incurred in 2002 as a result of SFAS No. 142.

Corporate Group

Operating costs of the Corporate Group, excluding infrequent items and stock-based compensation, were $4.7 million in second quarter 2002 compared with $6.1 million in 2001. In the six months ended June 30 operating costs were $9.8 million in each year. Costs in second quarter 2001 included a year-to-date adjustment for management fees charged to other operating divisions in first quarter 2001.

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LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Working capital consists of current assets less current liabilities. At June 30, 2002, working capital, excluding debt obligations, was a deficiency of $115.5 million compared to working capital of $224.0 million at December 31, 2001. Current assets were $463.2 million at June 30, 2002 and $788.0 million at December 31, 2001. Current liabilities, excluding debt obligations, were $578.7 million at June 30, 2002, compared with $564.0 million at December 31, 2001. The reduction in working capital is primarily the result of reduced cash and cash equivalents since December 31, 2001. During the six months ended June 30, 2002, approximately $317.4 million of cash and cash equivalents, which included both principal repayment and related premiums, was used to retire some of the Company’s long-term debt. 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 June 30, 2002, 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 cash obligations.

Debt

Long-term debt, including the current portion, was $520.6 million at June 30, 2002 compared with $812.7 million at December 31, 2001. During the six months ended June 30, 2002, the Company retired $292.8 million principal amount of long-term debt.

EBITDA

EBITDA, which is the Company’s earnings before interest expense, amortization of debt issue costs, interest and dividend income, income taxes, depreciation and amortization, minority interest, other income (expense), net, discontinued operations and extraordinary items was $28.3 million for second quarter 2002 compared with $8.6 million for second quarter 2001. For the six months ended June 30, 2002 EBITDA was $58.7 million compared with $28.5 million in 2001. The increased EBITDA results primarily from improved operating results at the Chicago Group and the U.K. Newspaper Group. In addition, 2001 included EBITDA from Canadian

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properties sold in 2001 and included an approximate $11.7 million EBITDA loss at National Post in the second quarter 2001and $24.6 million in the six months ended June 30, 2001. 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.

Cash Flows

Cash flows provided by operating activities were $4.5 million in the six months ended June 30, 2002, compared with cash flows used in operating activities of $49.6 million in 2001. Excluding changes in working capital (other than cash), cash flows provided by operating activities were $7.3 million in 2002 and cash flows used in operating activities were $38.1 million in 2001. Improved EBITDA, as previously explained, and lower cash taxes partly reduced by the premium paid to early retire a portion of long-term debt resulted in improved year over year cash flows provided by operating activities, excluding changes in working capital.

Cash flows used in investing activities were $12.1 million in 2002 and cash flows provided by investing activities were $22.5 million in 2001. The cash flows provided by investing activities in 2001 resulted principally from the sale of UniMédia Company offset in part by additions to investments and capital expenditures.

Cash flows used in financing activities were $308.4 million in 2002 and cash flows provided by financing activities were $25.0 million in 2001. In 2002, the Company repaid $292.8 million of long-term debt primarily from available cash balances.

Capital Expenditures and Acquisition Financing

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 borrowings under the Company’s credit facility.

Dividends and Other Commitments

The amount available for the payment of dividends and other obligations by the Company at any time is a function of (i) restrictions in agreements binding the Company limiting its ability to pay dividends, management fees and other payments and (ii) restrictions in agreements binding the Company’s subsidiaries limiting their ability to pay dividends, management fees and other payments to the Company. The Company is party to a debt agreement that permits the payment of dividends at the present rate. However, certain agreements binding Publishing and other subsidiaries of the Company contain such restrictive provisions. As of June 30, 2002, Publishing 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 make advances, pay dividends or make other distributions to the Company.

The amount available for the payment of dividends and other obligations by the Company at any time is limited by a number of binding agreements, but the Company expects its internal cash flow and financing resources to be adequate to meet its foreseeable requirements.

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Other

Certain of the statements in this Form 10-Q may be deemed to be “forward looking” statements. Refer to the Company’s Annual Report on Form 10-K for a discussion of factors that may affect such statements.

Accounting Pronouncements

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Statement addresses, among other things, the income statement treatment of gains and losses related to debt extinguishments, requiring such expenses to no longer be treated as extraordinary items, unless the items meet the definition of extraordinary per 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. Upon adoption, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented, that does not meet the criteria in Opinion 30 for classification as an extraordinary item, is required to be reclassified. The Company is required to adopt this Statement no later than its fiscal year beginning January 1, 2003. Management is currently evaluating the impact of adoption on the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

     Newsprint   Newsprint prices continued to fluctuate and on a consolidated basis newsprint expense in the six months ended June 30 amounted to $75.8 million in 2002 and $113.5 million in 2001. 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 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, are 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. Based on levels of usage, during the six months ended June 30, 2002, a change in the price of newsprint of $50 per tonne would increase or decrease year-to-date net income by about $4.6 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 increase in the amount due to the counterparties of approximately $7.0 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 June 30, 2002, 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 $0.6 million year-to-date.

     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 earnings and ownership levels for the six months ended June 30, 2002, a $0.05 change in the important foreign currencies would have the following effect on the Company’s reported net loss for the six months ended June 30, 2002:

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    Actual Average        
    2002 Rate   Increase/Decrease
   
 
United Kingdom
    $1.44/£     $ 608,000  
Canada
  $0.64/Cdn.$   $ 4,877,000  
 
   
     
 

As a result of the sale of Canadian properties in 2000 and 2001, and the substantial reduction of investment in Canadian operations in 2002, the Company is significantly less vulnerable to changes in the value of the Canadian dollar compared with the United States dollar.

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, based on the original Canadian principal amount, the Company will eventually be required to deliver to the Participation Trust, including accrued interest, $490.5 million which equates to a fixed rate of exchange of 0.6482 United States dollars to each Canadian dollar. At June 30, 2002, the accrued liability to the Participation Trust is $542.6 million and the corresponding CanWest debentures had a principal amount receivable of Cdn.$837.0 million. Given that the CanWest debentures are denominated in Canadian dollars, the Company has entered into forward foreign exchange contracts to mitigate 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. In March 2002, the Company sold Cdn. $199.0 million of its foreign currency contract at a time when the exchange rate was 0.6308. The Company entered into additional foreign currency contracts in March, April and May 2002 which required the Company to sell on June 25, 2002, a total of Cdn.$399.0 million at a combined average forward rate of 0.6378. These contracts were extended to July 26, 2002 at the forward rate of 0.6372 and further extended to September 6, 2002 at the forward rate of 0.6364.

At any time up to November 5, 2005, CanWest may elect to pay interest on the debentures by way of additional CanWest debentures. The Company has partly hedged the currency exposure which is anticipated to exist on May 15, 2003, being the date at which the debentures may be required to be transferred to the Participation Trust. As at June 30, 2002, the Canadian dollars required to be sold under such contracts are in excess of the current holdings of CanWest debentures, as the Company anticipates that additional debentures will be received in the future as payment in kind for the interest on the debentures. A $0.05 change in the U.S. dollar to Canadian dollar exchange rate applied to the Cdn.$29.7 million ($19.5 million) excess of the foreign exchange contracts over the principal amount of the CanWest debentures at June 30, 2002 would result in a $1.5 million change in the amount available for delivery to the Participation Trust.

     Electronic Media 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.

Item 5. Other Information.

     The Ravelston Corporation Limited (“Ravelston”) has provided additional information regarding the ultimate recipients of the management fee paid pursuant to the management services agreement (the “Services Agreement”) between Ravelston and the Company. In addition, set out below is information regarding the ability of holders of the shares of Class A common stock of the Company (“Class A Shares”), other than Hollinger Inc., to participate in any transaction in which Hollinger Inc. were to sell its control position in the Company.

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Management Fee and Directors’ Fees

     The Company’s independent Audit Committee reviews and approves the total amount of management fees payable to Ravelston. The Company does not determine the allocation of the management fee paid to Ravelston among its ultimate recipients. That allocation is determined by Ravelston. The Company has requested, and Ravelston provided, an allocation of the economic interest, direct or indirect though compensation arrangements, shareholdings or otherwise in the management fee paid during the year ended December 31, 2001 which can reasonably be attributed to the Chief Executive Officer of the Company and the other four most senior officers of the Company whose salaries and bonuses for the year ended December 31, 2001 exceeded $100,000. The allocation provided by Ravelston has not been independently verified by the Company.

         
Name   Amount

 
Lord Black
  $ 6,619,256  
F. David Radler
    3,102,221  
Daniel W. Colson
    1,714,308  
John A. Boultbee
    897,250  
Peter Y. Atkinson
    846,063  

     The Company intends to include disclosure comparable to that set out above in its proxy materials in subsequent years. The Services Agreement is filed as an exhibit to this report.

     The Company has ceased the payment of annual directors’ fees to directors who are also executive officers of the Company.

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Change of Control Transaction

     Hollinger Inc. directly or indirectly owns 14,990,000 shares of Class B common stock, (“Class B Shares”), of the Company and 13,557,831 Class A Shares. Because the Class B Shares are entitled to ten votes per share, Hollinger Inc. owns approximately 70.8% of the combined voting power of the common stock and therefore controls the Company.

     The Restated Certificate of Incorporation of the Company provides that, unless the Class B Shares are transferred to a third party in a transaction (a “Permitted Transaction”) in which the third party concurrently makes a tender offer to purchase all the outstanding Class A Shares at the same consideration per share, the Class B Shares, in effect, will lose their extra voting power. On a sale by Hollinger Inc. of its Class B Shares to a third party in a transaction which does not qualify as a Permitted Transaction, immediately prior to that transfer the Class B Shares will be automatically converted into Class A Shares on a share-for-share basis, and, accordingly, the third party would not acquire a majority of the voting power of the Company.

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PART II.   OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

  (a) Exhibits

  99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 in respect of the Chief Executive Officer.
 
  99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 in respect of the Chief Financial Officer.
 
  99.3 Services Agreement, dated as of January 1, 1998, between the Ravelston Corporation Limited and the Company.

  (b) Reports on Form 8-K
 
    None

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOLLINGER INTERNATIONAL INC.
Registrant

     
Date: August 14, 2002 By: /s/ John A. Boultbee

John A. Boultbee
Executive Vice President
and Chief Financial Officer

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