e10vq
Table of Contents

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

FORM 10-Q

     
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended September 30, 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   [   ]            No   [   ]

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

           
Class     Outstanding at November 6, 2002

   
Class A Common Stock par value $.01 per share
    91,789,614 shares
Class B Common Stock par value $.01 per share
    14,990,000 shares

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certification of Chief Executive Officer
Certification of Chief Financial Officer


Table of Contents

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     23  
 
               
Item 3.
  Quantitative and Qualitative Analysis about Market Risk     38  
 
               
Item 4.
  Controls and Procedures     40  
 
               
PART II
  OTHER INFORMATION        
 
               
Items 6.
  Exhibits and Reports on Form 8-K     41  
 
               
 
  Signatures     42  

 


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.   Condensed Financial Statements

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2002 and September 30, 2001
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                                   
      Three Months Ended September 30   Nine Months Ended September 30
     
 
      2002   2001   2002   2001
     
 
 
 
Operating revenues:
                               
 
Advertising
  $ 170,125     $ 179,977     $ 524,669     $ 630,163  
 
Circulation
    63,125       68,204       182,537       215,430  
 
Job printing
    3,757       5,478       12,566       19,319  
 
Other
    7,412       9,865       22,387       31,135  
 
   
     
     
     
 
 
Total operating revenues
    244,419       263,524       742,159       896,047  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
    37,938       48,447       113,708       161,976  
 
Compensation costs
    77,078       87,490       229,519       285,560  
 
Stock-based compensation
    (95 )     (486 )           (1,364 )
 
Other operating costs
    108,312       128,460       317,113       415,433  
 
Infrequent items
    165       953       436       4,808  
 
Depreciation
    9,146       9,440       26,788       28,287  
 
Amortization (note 3(a))
    2,861       8,769       8,355       27,506  
 
   
     
     
     
 
 
Total operating costs and expenses
    235,405       283,073       695,919       922,206  
 
   
     
     
     
 
 
Operating income (loss)
    9,014       (19,549 )     46,240       (26,159 )
Other income (expense):
                               
 
Interest expense
    (12,405 )     (19,659 )     (42,444 )     (59,505 )
 
Amortization of debt issue costs
    (1,234 )     (2,511 )     (4,352 )     (7,207 )
 
Interest and dividend income
    4,359       18,749       14,109       64,293  
 
Other income (expense), net (note 6)
    (35,314 )     (158,090 )     (111,585 )     (162,952 )
 
   
     
     
     
 
 
Total other income (expense)
    (44,594 )     (161,511 )     (144,272 )     (165,371 )
 
   
     
     
     
 
Loss before income taxes, minority interest and extraordinary item
    (35,580 )     (181,060 )     (98,032 )     (191,530 )
Recovery of income taxes
    (3,754 )     (39,020 )     (3,703 )     (31,231 )
 
   
     
     
     
 
Loss before minority interest and extraordinary item
    (31,826 )     (142,040 )     (94,329 )     (160,299 )
Minority interest (recovery)
    (343 )     (2,425 )     1,446       (6,535 )
 
   
     
     
     
 
Loss before extraordinary item
    (31,483 )     (139,615 )     (95,775 )     (153,764 )
Extraordinary loss on debt extinguishments, net of tax
                (21,276 )      
 
   
     
     
     
 
Net loss
  $ (31,483 )   $ (139,615 )   $ (117,051 )   $ (153,764 )
 
   
     
     
     
 
Basic loss per share before extraordinary item
  $ (0.33 )   $ (1.37 )   $ (1.00 )   $ (1.57 )
 
   
     
     
     
 
Diluted loss per share before extraordinary item
  $ (0.33 )   $ (1.37 )   $ (1.00 )   $ (1.57 )
 
   
     
     
     
 
Basic net loss per share
  $ (0.33 )   $ (1.37 )   $ (1.22 )   $ (1.57 )
 
   
     
     
     
 
Diluted net loss per share
  $ (0.33 )   $ (1.37 )   $ (1.22 )   $ (1.57 )
 
   
     
     
     
 
Weighted average shares outstanding-basic
    96,225       101,677       96,123       100,861  
 
   
     
     
     
 
Weighted average shares outstanding-diluted
    96,225       101,677       96,123       100,861  
 
   
     
     
     
 

See accompanying notes to condensed consolidated financial statements.

 


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months and Nine Months Ended September 30, 2002 and September 30, 2001
(Amounts in Thousands)
(Unaudited)

                                   
      Three Months Ended September 30   Nine Months Ended September 30
     
 
      2002   2001   2002   2001
     
 
 
 
Net loss
  $ (31,483 )   $ (139,615 )   $ (117,051 )   $ (153,764 )
Other comprehensive income (loss):
                               
 
Unrealized gain (loss) on securities available for sale, net of taxes
    567       (84,034 )     825       (45,193 )
 
Foreign currency translation adjustment
    21,811       3,531       110,352       (31,916 )
 
   
     
     
     
 
Comprehensive loss
  $ (9,105 )   $ (220,118 )   $ (5,874 )   $ (230,873 )
 
   
     
     
     
 

See accompanying notes to condensed consolidated financial statements.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2002 and December 31, 2001
(Amounts in Thousands)

                   
      September 30,   December 31,
      2002   2001
     
 
      (Unaudited)        
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 168,374     $ 479,514  
 
Accounts receivable, net
    210,448       203,442  
 
Amounts due from related companies, net
    16,144       32,228  
 
Inventories
    8,109       21,209  
 
Prepaid expenses and other current assets
    17,222       25,910  
 
   
     
 
Total current assets
    420,297       762,303  
Investments
    203,790       200,906  
Property, plant and equipment, net of accumulated depreciation
    301,520       309,272  
Intangible assets, net of accumulated amortization
          471,424  
Goodwill (note 3(a))
    640,032       180,958  
Non-compete agreements, net of accumulated amortization
    4,833       7,658  
Deferred financing costs and other assets
    47,535       49,230  
 
   
     
 
 
  $ 1,618,007     $ 1,981,751  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Current installments of long-term debt
  $ 2,624     $ 3,008  
 
Accounts payable
    95,131       97,097  
 
Accrued expenses
    102,541       134,691  
 
Income taxes payable
    292,701       290,587  
 
Deferred revenue
    44,584       41,208  
 
   
     
 
Total current liabilities
    537,581       566,591  
Long-term debt, less current installments
    517,226       809,652  
Deferred income taxes
    119,758       163,050  
Other liabilities
    118,544       92,124  
 
   
     
 
Total liabilities
    1,293,109       1,631,417  
 
   
     
 
Minority interest
    16,419       15,977  
 
   
     
 
Redeemable preferred stock
    8,616       8,582  
 
   
     
 
Stockholders’ equity:
               
 
Class A common stock
    991       968  
 
Class B common stock
    150       150  
 
Additional paid-in capital
    580,764       554,891  
 
Accumulated other comprehensive loss
    (60,199 )     (171,376 )
 
Retained earnings (deficit)
    (13,387 )     132,693  
 
   
     
 
 
    508,319       517,326  
 
Class A common stock in treasury, at cost
    (132,896 )     (132,896 )
 
Class A common stock in escrow
    (75,560 )     (58,655 )
 
   
     
 
Total stockholders’ equity
    299,863       325,775  
 
   
     
 
 
  $ 1,618,007     $ 1,981,751  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and September 30, 2001
(Amounts in Thousands)
(Unaudited)

                     
        2002   2001
       
 
Cash Flows From Operating Activities:
               
 
Net loss
  $ (117,051 )   $ (153,764 )
 
Items not involving cash:
               
   
Depreciation and amortization
    35,143       55,793  
   
Amortization of debt issue costs
    4,352       7,207  
   
Minority interest
    1,446       (6,535 )
   
Loss on sale of investments
          29,157  
   
Gains on sales of assets
    (6,128 )     (7,311 )
   
Non-cash interest income
    (4,235 )     (45,255 )
   
Total Return Equity Swap
    18,142       66,726  
   
Foreign currency translation loss
    78,217        
   
Other non-cash items
    14,883       (29,307 )
 
Changes in working capital, net
    (29,277 )     (467 )
 
   
     
 
   
Cash used in operating activities
    (4,508 )     (83,756 )
 
   
     
 
Cash Flows From Investing Activities:
               
 
Capital expenditures
    (21,416 )     (38,018 )
 
Additions to investments and other assets
    (7,447 )     (44,411 )
 
Proceeds from disposal of investments and assets
    12,272       537,255  
 
   
     
 
   
Cash provided by (used in) investing activities
    (16,591 )     454,826  
 
   
     
 
Cash Flows From Financing Activities:
               
 
Proceeds from long-term debt
          90,245  
 
Repayments of long-term debt
    (293,516 )     (92,545 )
 
Repurchase of common shares and redemption of preferred shares
          (145,900 )
 
Proceeds on issuance of common shares
    3,430        
 
Changes in amounts due from related companies
    14,088       (15,504 )
 
Dividends and distributions to minority interests
    (917 )     (30,950 )
 
Cash dividends paid
    (24,250 )     (41,320 )
 
Other financing activities
    657       6,026  
 
   
     
 
   
Cash used in financing activities
    (300,508 )     (229,948 )
 
   
     
 
Effect of exchange rate changes on cash
    10,467       (5,563 )
 
   
     
 
Net (decrease) increase in cash and cash equivalents
    (311,140 )     135,559  
Cash and cash equivalents at beginning of period
    479,514       137,671  
 
   
     
 
Cash and cash equivalents at end of period
  $ 168,374     $ 273,230  
 
   
     
 
Cash paid for interest
  $ 62,029     $ 82,918  
 
   
     
 
Cash paid for taxes
  $ 4,419     $ 52,338  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

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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 September 30, 2002 owned approximately 29.6% of the combined equity and approximately 70.7% of the combined voting power of the outstanding Common Stock of the Company, without giving effect to the future issuance of Class A Common Stock upon conversion of the Company’s remaining Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”).

     The Condensed Consolidated Financial Statements include the accounts of the Company and its majority owned subsidiaries and other controlled entities. At September 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.

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 been reclassified to goodwill effective January 1, 2002.

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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 $617.4 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 nine months ended September 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   Nine Months
    Ended   Ended
    September 30, 2001   September 30, 2001
   
 

    (In thousands)   (In thousands)
   
 
Net loss — as reported
    ($139,615 )     ($153,764 )
Add goodwill amortization, net of income tax and minority interest
    4,653       15,031  
 
   
     
 
Adjusted net loss
    ($134,962 )     ($138,733 )
 
   
     
 
Basic net loss per share — as reported
    ($1.37 )     ($1.57 )
 
   
     
 
Basic adjusted net loss per share
    ($1.33 )     ($1.42 )
 
   
     
 
Diluted net loss per share — as reported
    ($1.37 )     ($1.57 )
 
   
     
 
Diluted adjusted net loss per share
    ($1.33 )     ($1.42 )
 
   
     
 

Adjusted net earnings, noted above, reflects only the reduction in goodwill amortization expense and does not give effect to the impact that this change in accounting policy would have had on the gains and losses resulting from the disposal of operations during 2001.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued (Unaudited)

Goodwill as of September 30, 2002, 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     $ 352,086     $ 45,050     $ 640,032  
   
 
 
 
 

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 September 30, 2002 are as follows:

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

 
 
 
Amortizable Intangible Assets
                       
Non-competition agreements
  $ 11,500     $ 6,667     $ 4,833  
   
 
 

Amortization of non-competition agreements for the three months ended September 30, 2002 and 2001 was $941,000 and $941,000, respectively, and for the nine months ended September 30, 2002 and 2001 was $2,824,000 and $2,824,000, respectively. Future amortization of non-competition agreements is as follows: 2002 (in total) — $3,766,000, 2003 — $3,766,000, 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 nine months ended September 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 classified as held for sale under the provisions of SFAS No. 144. During the third quarter 2002 due to changes in circumstances, this group of assets no longer meets the criteria under GAAP to be classified as held for sale. Accordingly, the results for the third quarter and year to date include BIG as a component of continuing operations.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued (Unaudited)

Note 4 — Earnings (loss) per share

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

                           
      Three Months Ended September 30, 2002
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Loss before extraordinary item
  $ (31,483 )                
Add dividends:
                       
 
Series E Preferred Stock
    (67 )                
 
   
                 
Basic EPS
                       
Loss before extraordinary item available to common stockholders
    (31,550 )     96,225     $ (0.33 )
Effect of dilutive securities
                       
 
None
                   
 
   
     
         
Diluted EPS
                       
Loss before extraordinary item available to common stockholders
  $ (31,550 )     96,225     $ (0.33 )
 
   
     
         
                           
      Three Months Ended September 30, 2001
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Loss before extraordinary item
  $ (139,615 )                
Add dividends:
                       
 
Series E Preferred Stock
    (108 )                
 
   
                 
Basic EPS
                       
Loss before extraordinary item available to common stockholders
    (139,723 )     101,677     $ (1.37 )
Effect of dilutive securities
                   
 
None
                 
 
   
     
         
Diluted EPS
                       
Loss before extraordinary item available to common stockholders
  $ (139,723 )     101,677     $ (1.37 )
 
   
     
         

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

                           
      Nine Months Ended September 30, 2002
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Loss before extraordinary item
  $ (95,775 )                
Add dividends:
                       
 
Series E Preferred Stock
    (218 )                
 
   
                 
Basic EPS
                       
Loss before extraordinary item available to common stockholders
    (95,993 )     96,123     $ (1.00 )
Effect of dilutive securities
                       
 
None
                   
 
   
     
         
Diluted EPS
                       
Loss before extraordinary item available to common stockholders
  $ (95,993 )     96,123     $ (1.00 )
 
   
     
         
                           
      Nine Months Ended September 30, 2001
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Loss before extraordinary item
  $ (153,764 )                
Add dividends:
                       
 
Convertible preferred stock
    (4,274 )                
 
Series E Preferred Stock
    (359 )                
 
   
                 
Basic EPS
                       
Loss before extraordinary item available to common stockholders
    (158,397 )     100,861     $ (1.57 )
Effect of dilutive securities
                       
 
None
                   
 
   
     
         
Diluted EPS
                       
Loss before extraordinary item available to common stockholders
  $ (158,397 )     100,861     $ (1.57 )
 
   
     
         

9


Table of Contents

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”)). The following is a summary of the segments of the Company:

                                                 
    Three months ended September 30, 2002
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
Revenues
  $ 110,445     $ 3,042     $ 114,915     $ 16,017     $     $ 244,419  
Depreciation and amortization
  $ 7,484     $ 485     $ 3,232     $ 265     $ 541     $ 12,007  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 11,672     $ (1,377 )   $ 3,889     $ (789 )   $ (4,311 )   $ 9,084  
Equity in income (loss) of affiliates
  $ 11     $     $ (901 )   $ 98     $ (52 )   $ (844 )
                                                 
    Nine months ended September 30, 2002
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
Revenues
  $ 328,644     $ 10,144     $ 352,912     $ 50,459     $     $ 742,159  
Depreciation and amortization
  $ 22,257     $ 1,257     $ 9,358     $ 954     $ 1,317     $ 35,143  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 30,823     $ (3,235 )   $ 35,414     $ (2,256 )   $ (14,070 )   $ 46,676  
Equity in income (loss) of affiliates
  $ (757 )   $     $ (2,073 )   $ 309     $ (181 )   $ (2,702 )
Total assets
  $ 546,612     $ 44,041     $ 633,105     $ 99,766     $ 294,483     $ 1,618,007  
Capital expenditures
  $ 11,989     $ 4,485     $ 3,906     $ 1,010     $ 26     $ 21,416  

10


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

                                                 
    Three months ended September 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
Revenues
  $ 109,982     $ 4,850     $ 111,340     $ 37,352     $     $ 263,524  
Depreciation and amortization
  $ 9,276     $ 611     $ 5,190     $ 2,675     $ 457     $ 18,209  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 1,660     $ (436 )   $ (1,215 )   $ (14,972 )   $ (4,119 )   $ (19,082 )
Equity in loss of affiliates
  $ (628 )   $     $ (2,308 )   $     $     $ (2,936 )
                                                 
    Nine months ended September 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
Revenues
  $ 333,580     $ 15,131     $ 371,161     $ 176,175     $     $ 896,047  
Depreciation and amortization
  $ 27,374     $ 1,647     $ 14,473     $ 10,873     $ 1,426     $ 55,793  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 6,878     $ (2,480 )   $ 24,841     $ (38,065 )   $ (13,889 )   $ (22,715 )
Equity in loss of affiliates
  $ (2,893 )   $     $ (10,411 )   $     $     $ (13,304 )
Total assets
  $ 612,030     $ 58,235     $ 546,397     $ 337,093     $ 617,803     $ 2,171,558  
Capital expenditures
  $ 9,503     $ 712     $ 13,869     $ 2,525     $ 11,409     $ 38,018  

11


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 6 — Other Income (Expense), net

                                 
    Three months ended September 30   Nine months ended September 30
   
 
(In thousands)   2002   2001   2002   2001

 
 
 
 
Foreign exchange gain (loss)
    ($5,682 )     ($44 )     ($85,816 )   $ 52  
Equity in loss of affiliates
    (844 )     (2,936 )     (2,702 )     (13,304 )
Total Return Equity Swap loss
    (25,352 )     (39,426 )     (22,994 )     (77,042 )
Net losses on sales of publishing interests
    0       (70,455 )     0       (12,134 )
Net gains (losses) on sales of assets
    (50 )     0       5,416       0  
Write-down of investments
    (4,256 )     (13,048 )     (5,740 )     (28,400 )
Net losses on sale of investments
    0       (29,717 )     0       (29,806 )
Other
    870       (2,464 )     251       (2,318 )
 
   
     
     
     
 
 
    ($35,314 )     ($158,090 )     ($111,585 )     ($162,952 )
 
   
     
     
     
 

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 nine months ended September 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 nine months ended September 30, 2002, $72,037,000 is not deductible for income tax purposes.

12


Table of Contents

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 nine months ended September 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 nine months ended September 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 presented as an extraordinary item, net of income tax.

Note 8 — Related Party Transaction

On July 3, 2002, NP Holdings Company, (“NP Holdings”) a subsidiary of the Company, was sold to Ravelston Management Inc. (“Ravelston”), a wholly-owned subsidiary of Ravelston Corporation Limited, a holding company controlled by Lord Black through which most of his interest in the Company is ultimately controlled, for $3,760,000 (Cdn$5,750,000). The only asset of NP Holdings was Canadian tax losses. The tax losses, only a portion of which were previously recognized for accounting purposes, were effectively sold at their carrying value. Due to the inability of NP Holdings to utilize its own tax losses prior to their expiry, as a result of its disposing of its interest in the National Post, it sold these losses to a company which would be able to utilize the losses. The only other potential purchaser for these losses, CanWest Global Communications Corp. (“CanWest”), declined the opportunity to acquire the losses. The terms of the sale of the tax losses to Ravelston were approved by the independent directors of the Company.

Note 9 — Subsequent Events

i)   Total Return Equity Swap

On October 3, 2002, subsequent to the end of the third quarter, the Company borrowed $50.0 million at 10.5% under a term facility expiring December 31, 2003. The proceeds of that financing plus an additional $5.0 million of available cash have been used to prepay $55.0 million outstanding under the Company’s Total Return Equity Swap leaving an outstanding notional amount of $40.0 million at the date of this report. After the prepayment, there remain outstanding 7 million shares included as Class A common stock in Shareholders’ Equity that are subject to the Total Return Equity Swap. The Swap arrangements expire on February 28, 2003.

ii)   Additional Debt

The $50.0 million borrowed to retire the Swap obligations referred to in 9 (i) above was obtained under a term lending facility expiring December 31, 2003 at a rate of 10.5% payable monthly in arrears. Principal is due in its entirety at the end of the term but may be prepaid with no penalty. A general security agreement has been executed granting a first charge security interest to the lender over all of the Company’s assets, principally consisting of shares of subsidiaries.

13


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

The Company is continuing to pursue a comprehensive financing initiative in order to extend debt maturities and provide more advantageous borrowing terms. This initiative may include a new amended syndicated credit facility and may include the sale, in a private placement, of long-term debt securities. Completion of these transactions will be subject to market conditions, conclusion of definitive agreements and satisfaction of conditions in such agreements. If these transactions are completed, a portion of the proceeds would be used to repay the $50.0 million of borrowings made under the new $50.0 million term facility and to retire the remaining Total Return Equity Swap of $40.0 million. If the financing initiative is not completed, the Company might need to make alternative arrangements for settlement of the term facility upon its maturity.

14


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information

The Senior Notes due 2005, and Senior Subordinated Notes due 2006 and 2007 are obligations of Publishing, a wholly owned subsidiary of the Company. These obligations are guaranteed fully and unconditionally by the Company, and no other subsidiary of the Company or of Publishing has guaranteed the securities.

Supplemental condensed consolidating financial information of the Company and Publishing, is presented below. The Company’s other directly owned subsidiary, Hollinger Telegraph New Media LLC is minor and therefore has not been disclosed separately. The Company’s and Publishing’s investments in subsidiaries are presented on the equity method, and the Eliminations column reflects the elimination of investments in subsidiaries and intercompany balances and transactions, and the inclusion of assets and liabilities, revenues, expenses and cash flows of Publishing’s subsidiaries.

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2002

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 170,125     $ 170,125  
 
Circulation
                63,125       63,125  
 
Job Printing
                3,757       3,757  
 
Other
                7,412       7,412  
 
   
     
     
     
 
 
Total Operating Revenues
                244,419       244,419  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                37,938       37,938  
 
Compensation costs
          852       76,226       77,078  
 
Stock-based compensation
    (95 )                 (95 )
 
Other operating costs
    77       2,839       105,396       108,312  
 
Infrequent items
                165       165  
 
Depreciation
          321       8,825       9,146  
 
Amortization
                2,861       2,861  
 
   
     
     
     
 
 
Total operating costs and expenses
    (18 )     4,012       231,411       235,405  
 
   
     
     
     
 
 
Operating income (loss)
    18       (4,012 )     13,008       9,014  
Other income (expense):
                               
 
Interest expense
          (11,678 )     (727 )     (12,405 )
 
Amortization of debt issue costs
          (1,234 )         (1,234 )
 
Interest and dividend income
    705       213       3,441       4,359  
 
Other income (expense), net
    (35,199 )     4,178       (4,293 )     (35,314 )
 
   
     
     
     
 
 
Total other income (expense)
    (34,494 )     (8,521 )     (1,579 )     (44,594 )
 
   
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary item
    (34,476 )     (12,533 )     11,429       (35,580 )
Provision for income tax (recovery)
    (2,993 )     (5,000 )     4,239       (3,754 )
 
   
     
     
     
 
Loss before minority interest and extraordinary item
    (31,483 )     (7,533 )     7,190       (31,826 )
Recovery of minority interest
                (343 )     (343 )
 
   
     
     
     
 
Loss before extraordinary item
    (31,483 )     (7,533 )     7,533       (31,483 )
Extraordinary loss on debt extinguishments, net of tax
                       
 
   
     
     
     
 
Net earnings (loss)
  $ (31,483 )   $ (7,533 )   $ 7,533     $ (31,483 )
 
   
     
     
     
 

15


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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the three months ended September 30, 2001

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 179,977     $ 179,977  
 
Circulation
                68,204       68,204  
 
Job printing
                5,478       5,478  
 
Other
                9,865       9,865  
 
   
     
     
     
 
 
Total operating revenues
                263,524       263,524  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                48,447       48,447  
 
Compensation costs
          1,058       86,432       87,490  
 
Stock-based compensation
    (486 )                 (486 )
 
Other operating costs
    913       2,038       125,509       128,460  
 
Infrequent items
                953       953  
 
Depreciation
          285       9,155       9,440  
 
Amortization
          170       8,599       8,769  
 
   
     
     
     
 
 
Total operating costs and expenses
    427       3,551       279,095       283,073  
 
   
     
     
     
 
 
Operating income (loss)
    (427 )     (3,551 )     (15,571 )     (19,549 )
Other income (expense):
                               
 
Interest expense
    (1,171 )     (18,098 )     (390 )     (19,659 )
 
Amortization of debt issue costs
    (625 )     (1,886 )           (2,511 )
 
Interest and dividend income
    8,607       153       9,989       18,749  
 
Other income (expense), net
    (137,189 )     (49,766 )     28,865       (158,090 )
 
   
     
     
     
 
 
Total other income (expense)
    (130,378 )     (69,597 )     38,464       (161,511 )
 
   
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary item
    (130,805 )     (73,148 )     22,893       (181,060 )
Provision for income tax (recovery)
    8,810       (17,336 )     (30,494 )     (39,020 )
 
   
     
     
     
 
Loss before minority interest and extraordinary item
    (139,615 )     (55,812 )     53,387       (142,040 )
Recovery of minority interest
                (2,425 )     (2,425 )
 
   
     
     
     
 
Loss before extraordinary item
    (139,615 )     (55,812 )     55,812       (139,615 )
Extraordinary loss on debt extinguishments, net of tax
                       
 
   
     
     
     
 
Net earnings (loss)
  $ (139,615 )   $ (55,812 )   $ 55,812     $ (139,615 )
 
   
     
     
     
 

16


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2002

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 524,669     $ 524,669  
 
Circulation
                182,537       182,537  
 
Job Printing
                12,566       12,566  
 
Other
                22,387       22,387  
 
   
     
     
     
 
 
Total Operating Revenues
                742,159       742,159  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                113,708       113,708  
 
Compensation costs
          2,407       227,112       229,519  
 
Stock-based compensation
                       
 
Other operating costs
    333       10,061       306,719       317,113  
 
Infrequent items
                436       436  
 
Depreciation
          971       25,817       26,788  
 
Amortization
                8,355       8,355  
 
   
     
     
     
 
 
Total operating costs and expenses
    333       13,439       682,147       695,919  
 
   
     
     
     
 
 
Operating income (loss)
    (333 )     (13,439 )     60,012       46,240  
Other income (expense):
                               
 
Interest expense
          (40,653 )     (1,791 )     (42,444 )
 
Amortization of debt issue costs
          (4,352 )           (4,352 )
 
Interest and dividend income
    945       1,772       11,392       14,109  
 
Other income (expense), net
    (124,451 )     (31,057 )     43,923       (111,585 )
 
   
     
     
     
 
 
Total other income (expense)
    (123,506 )     (74,290 )     53,524       (144,272 )
 
   
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary item
    (123,839 )     (87,729 )     113,536       (98,032 )
Provision for income tax (recovery)
    (6,788 )     (9,749 )     12,834       (3,703 )
 
   
     
     
     
 
Loss before minority interest and extraordinary item
    (117,051 )     (77,980 )     100,702       (94,329 )
Minority interest (recovery)
                1,446       1,446  
 
   
     
     
     
 
Loss before extraordinary item
    (117,051 )     (77,980 )     99,256       (95,775 )
Extraordinary loss on debt extinguishments, net of tax
          (21,276 )           (21,276 )
 
   
     
     
     
 
Net earnings (loss)
  $ (117,051 )   $ (99,256 )   $ 99,256     $ (117,051 )
 
   
     
     
     
 

17


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the nine months ended September 30, 2001

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 630,163     $ 630,163  
 
Circulation
                215,430       215,430  
 
Job printing
                19,319       19,319  
 
Other
                31,135       31,135  
 
   
     
     
     
 
 
Total operating revenues
                896,047       896,047  
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                161,976       161,976  
 
Compensation costs
          2,968       282,592       285,560  
 
Stock-based compensation
    (1,364 )                 (1,364 )
 
Other operating costs
    407       6,705       408,321       415,433  
 
Infrequent items
                4,808       4,808  
 
Depreciation
          913       27,374       28,287  
 
Amortization
          510       26,996       27,506  
 
   
     
     
     
 
 
Total operating costs and expenses
    (957 )     11,096       912,067       922,206  
 
   
     
     
     
 
 
Operating income (loss)
    957       (11,096 )     (16,020 )     (26,159 )
Other income (expense):
                               
 
Interest expense
    (3,402 )     (54,214 )     (1,889 )     (59,505 )
 
Amortization of debt issue costs
    (1,560 )     (5,647 )           (7,207 )
 
Interest and dividend income
    28,409       329       35,555       64,293  
 
Other income (expense), net
    (170,824 )     (72,868 )     80,740       (162,952 )
 
   
     
     
     
 
 
Total other income (expense)
    (147,377 )     (132,400 )     114,406       (165,371 )
 
   
     
     
     
 
Earnings (loss) before income taxes, minority interest and extraordinary item
    (146,420 )     (143,496 )     98,386       (191,530 )
Provision for income tax (recovery)
    7,344       (27,325 )     (11,250 )     (31,231 )
 
   
     
     
     
 
Loss before minority interest and extraordinary item
    (153,764 )     (116,171 )     109,636       (160,299 )
Recovery of minority interest
                (6,535 )     (6,535 )
 
   
     
     
     
 
Loss before extraordinary item
    (153,764 )     (116,171 )     116,171       (153,764 )
Extraordinary loss on debt extinguishments, net of tax                        
 
   
     
     
     
 
Net earnings (loss)
  $ (153,764 )   $ (116,171 )   $ 116,171     $ (153,764 )
 
   
     
     
     
 

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Balance Sheet as at September 30, 2002

(Amounts in thousands)

                                   
      Hollinger                        
      International Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
ASSETS
                               
Current assets
                     
 
Cash and cash equivalents
  $ 25,696     $ 22,548     $ 120,130     $ 168,374  
 
Accounts receivable, net
    6,611       4,485       199,352       210,448  
 
Amounts due from (to) related companies, net
    45,573       (4,589 )     (24,840 )     16,144  
 
Intercompany accounts receivable
    91,718       658,637       (750,355 )      
 
Inventories
                8,109       8,109  
 
Prepaid expense and other current assets
    7,663       2,019       7,540       17,222  
 
   
     
     
     
 
Total current assets
    177,261       683,100       (440,064 )     420,297  
Investments
    347,251       1,010,382       (1,153,843 )     203,790  
Property, plant and equipment, net of accumulated depreciation
          5,191       296,329       301,520  
Goodwill
                640,032       640,032  
Intangible assets, net of accumulated amortization
                       
Non-compete agreements, net of accumulated amortization
                4,833       4,833  
Deferred financing costs and other assets
          19,295       28,240       47,535  
 
   
     
     
     
 
 
  $ 524,512     $ 1,717,968     $ (624,473 )   $ 1,618,007  
 
   
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Current liabilities
                               
 
Current installments of long-term debt
  $     $     $ 2,624     $ 2,624  
 
Accounts payable
                95,131       95,131  
 
Intercompany accounts payable
    167,495       1,074,894       (1,242,389 )      
 
Intercompany notes payable
          34,775       (34,775 )      
 
Accrued expenses
    18,562       6,088       77,891       102,541  
 
Income taxes payable (recoverable)
    10,186       (43,738 )     326,253       292,701  
 
Deferred revenue
                44,584       44,584  
 
   
     
     
     
 
Total current liabilities
    196,243       1,072,019       (730,681 )     537,581  
Long term debt, less current installments
          509,988       7,238       517,226  
Deferred income taxes
    (11,380 )     83,279       47,859       119,758  
Other liabilities
    31,170             87,374       118,544  
 
   
     
     
     
 
Total liabilities
    216,033       1,665,286       (588,210 )     1,293,109  
 
   
     
     
     
 
Minority interest
                16,419       16,419  
 
   
     
     
     
 
Redeemable preferred stock
    8,616                   8,616  
 
   
     
     
     
 
Total stockholders’ equity
    299,863       52,682       (52,682 )     299,863  
 
   
     
     
     
 
 
  $ 524,512     $ 1,717,968     $ (624,473 )   $ 1,618,007  
 
   
     
     
     
 

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Balance Sheet as at December 31, 2001

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
ASSETS
                               
Current assets
                               
 
Cash and cash equivalents
  $ 64,247     $ 101,333     $ 313,934     $ 479,514  
 
Accounts receivable, net
    3,678       4,389       195,375       203,442  
 
Amounts due from (to) related companies, net
    44,173       (6,969 )     (4,976 )     32,228  
 
Intercompany accounts receivable
    90,685       375,614       (466,299 )      
 
Inventories
                21,209       21,209  
 
Prepaid expenses and other current assets
    7,555       5,061       13,294       25,910  
 
   
     
     
     
 
Total current assets
    210,338       479,428       72,537       762,303  
Investments
    313,388       1,742,049       (1,854,531 )     200,906  
Property, plant and equipment, net of accumulated depreciation
          6,134       303,138       309,272  
Intangible assets, net of accumulated amortization
                471,424       471,424  
Goodwill
                180,958       180,958  
Non-compete agreements, net of accumulated amortization
                7,658       7,658  
Deferred financing costs and other assets
          31,679       17,551       49,230  
 
   
     
     
     
 
 
  $ 523,726     $ 2,259,290     $ (801,265 )   $ 1,981,751  
 
   
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Current liabilities
                               
 
Current installments of long-term debt
  $     $     $ 3,008     $ 3,008  
 
Accounts payable
    175       15       96,907       97,097  
 
Intercompany accounts payable
    153,832       1,145,433       (1,299,265 )      
 
Intercompany notes payable
          34,640       (34,640 )      
 
Accrued expenses
    22,396       25,177       87,118       134,691  
 
Income taxes payable (recoverable)
    16,974       (33,989 )     307,602       290,587  
 
Deferred revenue
                41,208       41,208  
 
   
     
     
     
 
Total current liabilities
    193,377       1,171,276       (798,062 )     566,591  
Long term debt, less current installments
          800,000       9,652       809,652  
Deferred income taxes
    (11,380 )     83,279       91,151       163,050  
Other liabilities
    7,372             84,752       92,124  
 
   
     
     
     
 
Total liabilities
    189,369       2,054,555       (612,507 )     1,631,417  
 
   
     
     
     
 
Minority interest
                15,977       15,977  
 
   
     
     
     
 
Redeemable preferred stock
    8,582                   8,582  
 
   
     
     
     
 
Total stockholders’ equity
    325,775       204,735       (204,735 )     325,775  
 
   
     
     
     
 
 
  $ 523,726     $ 2,259,290     $ (801,265 )   $ 1,981,751  
 
   
     
     
     
 

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002

(Amounts in Thousands)

                                     
        Hollinger                        
        International Inc.   Publishing   Eliminations   Consolidated
       
 
 
 
Cash Flows From Operating Activities:
                               
 
Net Loss
  $ (117,051 )   $ (99,256 )   $ 99,256     $ (117,051 )
 
Items not involving cash:
                               
   
Depreciation and amortization
          971       34,172       35,143  
   
Amortization of debt issue costs
          4,352             4,352  
   
Minority interest
                1,446       1,446  
   
Loss on sale of investments
                       
   
Gains on sales of assets
                (6,128 )     (6,128 )
   
Non-cash interest income
                (4,235 )     (4,235 )
   
Total Return Equity Swap
    18,142                   18,142  
   
Foreign currency translation loss (gain)
                78,217       78,217  
   
Other non-cash items
    82,595       57,797       (125,509 )     14,883  
 
Changes in working capital, net
    (599 )     64,280       (92,958 )     (29,277 )
 
   
     
     
     
 
   
Cash provided by (used in) operating activities
    (16,913 )     28,144       (15,739 )     (4,508 )
 
   
     
     
     
 
Cash Flows From Investing Activities:
                               
 
Capital expenditures
          (28 )     (21,388 )     (21,416 )
 
Additions to investments and other assets
    (2,835 )     (1,375 )     (3,237 )     (7,447 )
 
Proceeds from disposal of investments and assets
          187,242       (174,970 )     12,272  
 
   
     
     
     
 
   
Cash provided by (used in) investing activities
    (2,835 )     185,839       (199,595 )     (16,591 )
 
   
     
     
     
 
Cash Flows From Financing Activities:
                               
 
Proceeds from long-term debt
                       
 
Repayments of long-term debt
          (290,012 )     (3,504 )     (293,516 )
 
Proceeds on issuance of common shares
    3,430                   3,430  
 
Changes in amounts due from related companies
    (1,400 )     (2,380 )     17,868       14,088  
 
Dividends and distributions to minority interests
                (917 )     (917 )
 
Cash dividends paid
    (24,250 )                 (24,250 )
 
Other financing activities
    3,417       (375 )     (2,385 )     657  
 
   
     
     
     
 
   
Cash provided by (used in) financing activities
    (18,803 )     (292,767 )     11,062       (300,508 )
 
   
     
     
     
 
 
Effect of exchange rate changes on cash
                10,467       10,467  
 
   
     
     
     
 
 
Net decrease in cash and cash equivalents
    (38,551 )     (78,784 )     (193,805 )     (311,140 )
 
Cash and cash equivalents at beginning of period
    64,247       101,333       313,934       479,514  
 
   
     
     
     
 
 
Cash and cash equivalents at end of period
  $ 25,696     $ 22,549     $ 120,129     $ 168,374  
 
   
     
     
     
 

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 10 — Supplemental Condensed Consolidating Financial Information — Continued

Hollinger International Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2001

(Amounts in thousands)

                                     
        Hollinger                        
        International Inc.   Publishing   Eliminations   Consolidated
       
 
 
 
Cash Flows From Operating Activities:
                               
 
Net Earnings
  $ (153,764 )   $ (116,171 )   $ 116,171     $ (153,764 )
 
Items not involving cash:
                           
   
Depreciation and amortization
          1,423       54,370       55,793  
   
Amortization of debt issue costs
    1,560       5,647             7,207  
   
Minority interest
                (6,535 )     (6,535 )
   
(Gain) Loss on sale of investments
    (16,768 )     (57 )     45,982       29,157  
   
(Gain) Loss on sales of assets
                (7,311 )     (7,311 )
   
Non-cash interest income
                (45,255 )     (45,255 )
   
Total Return Equity Swap
    66,726                   66,726  
   
Foreign currency translation loss
                       
   
Other non-cash items
    116,146       151,220       (296,673 )     (29,307 )
 
Changes in working capital, net
    4,500       (20,144 )     15,177       (467 )
 
   
     
     
     
 
   
Cash provided by (used in) operating activities
    18,400       21,918       (124,074 )     (83,756 )
 
   
     
     
     
 
Cash Flows From Investing Activities:
                               
 
Capital expenditures
          (169 )     (37,849 )     (38,018 )
 
Additions to investments and other assets
    (331,451 )     (15,741 )     302,781       (44,411 )
 
Proceeds from disposal of investments and assets
    287,858       525       248,872       537,255  
 
   
     
     
     
 
   
Cash provided by (used in) investing activities
    (43,593 )     (15,385 )     513,804       454,826  
 
   
     
     
     
 
Cash Flows From Financing Activities:
                               
 
Proceeds from long-term debt
    88,000             2,245       90,245  
 
Repayments of long-term debt
    (88,000 )           (4,545 )     (92,545 )
 
Repurchase of common shares and redemption of preferred shares
    (145,900 )                 (145,900 )
 
Changes in amounts due to/from related companies
    284,554       (9,551 )     (290,507 )     (15,504 )
 
Dividends and distributions to minority interests
                (30,950 )     (30,950 )
 
Cash dividends paid
    (41,320 )     (14,400 )     14,400       (41,320 )
 
Other financing activities
    1,323       (967 )     5,670       6,026  
 
   
     
     
     
 
   
Cash provided by (used in) financing activities
    98,657       (24,918 )     (303,687 )     (229,948 )
 
   
     
     
     
 
 
Effect of exchange rate changes on cash
                (5,563 )     (5,563 )
 
   
     
     
     
 
 
Net increase (decrease) in cash and cash equivalents
    73,464       (18,385 )     80,480       135,559  
 
Cash and cash equivalents at beginning of period
    2,109       22,325       113,237       137,671  
 
   
     
     
     
 
 
Cash and cash equivalents at end of period
  $ 75,573     $ 3,940     $ 193,717     $ 273,230  
 
   
     
     
     
 

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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 Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”), the Company’s 87% investment in Hollinger L.P. and, until it was sold on 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 (“BIG”), which publishes trade magazines in Canada, was classified as held for sale under the provisions of SFAS No. 144. During the third quarter 2002, due to changes in circumstances, this group of assets no longer meets the criteria under GAAP to be classified as held for sale. Accordingly, the results for the third quarter and year to date include BIG as a component of continuing operations.

CONSOLIDATED RESULTS OF OPERATIONS

The net loss in the third quarter 2002 amounted to $31.5 million or a loss of $0.33 per share compared with a net loss of $139.6 million or a loss of $1.37 per share in 2001. The net loss in the nine months ended September 30, 2002 amounted to $117.1 million or a loss of $1.22 per share compared with a net loss of $153.8 million or a loss of $1.57 per share in 2001.

For the nine months ended September 30, 2002, the loss before extraordinary items was $95.8 million or a loss of $1.00 per share compared with a loss of $153.8 million or a loss of $1.57 per share in 2001.

There were a number of infrequent, unusual and non-recurring items affecting the results of both years. In third quarter 2002, infrequent, unusual and non-recurring items, after tax and minority interest, amounted to a loss of $29.9 million primarily consisting of a $25.4 million loss before tax in respect of the Total Return Equity Swap, a $4.3 million before tax write-down of investments and a foreign exchange loss before tax of $4.7 million in respect of the Hollinger Participation Trust. In third quarter 2001, infrequent, unusual and non-recurring items, after tax and minority interest, amounted to a loss of $127.0 million and consisted largely of a $70.5 million loss before tax on the sale of primarily Canadian operations, a $13.0 million before tax write-down of investments, a $29.7 million before tax loss on the sale of investments and a $39.4 million before tax loss in respect of the Total Return Equity Swap.

23


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In the nine months ended September 30, 2002, infrequent, unusual and non-recurring items, after tax and minority interest, amounted to a loss of $122.5 million and primarily included foreign exchange losses before tax of $83.6 million, an extraordinary loss after tax of $21.3 million related to the early retirement of debt, a $23.0 million loss before tax in respect of the Total Return Equity Swap, a $5.7 million before tax write-down of investments and a $5.4 million gain before tax on asset sales. Included in the $83.6 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 were included in net earnings in the first quarter 2002. 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 total $83.6 million foreign exchange loss expensed, $72.0 million is not deductible for income tax purposes. In the nine months ended September 30, 2001, infrequent, unusual and non-recurring items, after tax and minority interest, amounted to a loss of $144.7 million and primarily consisted of a $12.1 million loss before tax on the sale of primarily Canadian operations, a $77.0 million before tax loss in respect of the Total Return Equity Swap, a $28.4 million before tax write-down of investments, a $29.8 million before tax loss on the sale of investments, an $8.3 million before tax equity accounting loss in Interactive Investor International and $4.5 million before tax of duplicative start-up costs related to the new printing facility in Chicago.

Net loss from comparable operations, comprising the reported net loss exclusive of infrequent, unusual and non-recurring items, stock-based compensation and extraordinary item, amounted to a net loss of $1.6 million or a loss of $0.02 per diluted share in third quarter 2002 compared with a net loss of $12.6 million or a loss of $0.13 per diluted share in 2001. Net earnings from comparable operations for the nine months ended September 30, 2002 amounted to $5.5 million or $0.05 per diluted share compared with a net loss of $9.0 million or a loss of $0.09 per diluted share in 2001.

Operating revenue in third quarter 2002 was $244.4 million compared with $263.5 million in 2001 and for the nine months ended September 30 was $742.2 million in 2002 compared with $896.0 million in 2001. The reduction in operating revenue in the third quarter primarily resulted from sales of Canadian properties in 2001. The reduction in operating revenue in the nine months ended September 30, 2002, resulted primarily from sales of Canadian properties in 2001 and lower advertising revenue at the U.K. Newspaper Group.

Operating income in third quarter 2002 was $9.0 million compared with an operating loss of $19.5 million in 2001 and for the nine months ended September 30 was $46.2 million in 2002 compared with an operating loss of $26.2 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 third quarter and nine months ended September 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 approximated $6.1 million in third quarter 2001 and, for the nine months ended September 30, 2001, approximated $19.8 million. The above increases to operating income were partly offset by the sale in 2001 of Canadian newspapers which contributed operating income in 2001.

Interest and dividend income in third quarter 2002 amounted to $4.4 million compared with $18.7 million in 2001, a decrease of $14.3 million. Interest and dividend income for the nine months ended September 30, 2002 amounted to $14.1 million compared with $64.3 million in 2001, a decrease of $50.2 million. Interest and dividend income in 2001 included interest on debentures issued by a subsidiary of 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 respect of all but approximately $50 million of the debentures resulting in significantly lower interest income in 2002. Most of the proceeds from the disposal of the 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.

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Interest expense in the third quarter 2002 amounted to $12.4 million compared with $19.7 million in 2001, and for the nine months ended September 30, 2002, amounted to $42.4 million compared with $59.5 million in 2001, decreases of $7.3 million and $17.1 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 third quarter of 2002 amounted to $35.3 million consisting primarily of a loss on the Total Return Equity Swap of $25.4 million, a $4.7 million foreign exchange loss in respect of the Hollinger Participation Trust and a $4.3 million write-down of investments. Net other expenses in the third quarter of 2001 amounted to $158.1 million and primarily included a loss on the Total Return Equity Swap of $39.4 million, a $13.0 million write-down of investments, a $70.5 million net loss on sale of primarily Canadian properties, and a $29.7 million net loss on the sales of various investments. Net other expenses in the nine months ended September 30, 2002 amounted to $111.6 million and primarily included foreign exchange losses of $85.8 million, which mainly related to the substantial reduction of the Company’s investment in the Canadian Newspaper Group, a loss on the Total Return Equity Swap of $23.0 million, net gains on sales of assets totalling $5.4 million and the write-down of investments of $5.7 million. Net other expenses in the nine months ended September 30, 2001 amounted to $163.0 million and primarily included a loss on the Total Return Equity Swap of $77.0 million, net losses on sales of publishing interests of $12.1 million, equity losses in investments of $13.3 million, the write-down of investments of $28.4 million and the loss on sales of investments of $29.8 million.

Minority interest in third quarter 2002 was a recovery of $0.3 million compared to a recovery of $2.4 million in 2001. Minority interest in the nine months ended September 30, 2002 totaled $1.4 million compared to a recovery of $6.5 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.

Extraordinary items, net of tax, in the nine months ended September 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.

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      Three Months Ended September 30,   Nine Months Ended September 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Operating revenues:
                               
 
Chicago Group
  $ 110,445     $ 109,982     $ 328,644     $ 333,580  
 
Community Group
    3,042       4,850       10,144       15,131  
 
U.K. Newspaper Group
    114,915       111,340       352,912       371,161  
 
Canadian Newspaper Group
    16,017       37,352       50,459       176,175  
 
Investment and Corporate Group
                       
       
     
     
     
Total operating revenue
  $ 244,419     $ 263,524     $ 742,159     $ 896,047  
       
     
     
     
Operating income (loss), excluding infrequent items and stock-based compensation:
                               
 
Chicago Group
  $ 11,672     $ 1,660     $ 30,823     $ 6,878  
 
Community Group
    (1,377 )     (436 )     (3,235 )     (2,480 )
 
U.K. Newspaper Group
    3,889       (1,215 )     35,414       24,841  
 
Canadian Newspaper Group
    (789 )     (14,972 )     (2,256 )     (38,065 )
 
Investment and Corporate Group
    (4,311 )     (4,119 )     (14,070 )     (13,889 )
       
     
     
     
Total operating income (loss), excluding infrequent items and stock-based compensation
  $ 9,084     $ (19,082 )   $ 46,676     $ (22,715 )
       
     
     
     
EBITDA:
                               
 
Chicago Group
  $ 19,156     $ 10,936     $ 53,080     $ 34,252  
 
Community Group
    (892 )     175       (1,978 )     (833 )
 
U.K. Newspaper Group
    7,121       3,975       44,772       39,314  
 
Canadian Newspaper Group
    (524 )     (12,297 )     (1,302 )     (27,192 )
 
Investment and Corporate Group
    (3,770 )     (3,662 )     (12,753 )     (12,463 )
       
     
     
     
Total EBITDA
  $ 21,091     $ (873 )   $ 81,819     $ 33,078  
       
     
     
     
Operating revenues:
                               
 
Chicago Group
    45.2 %     41.7 %     44.3 %     37.2 %
 
Community Group
    1.2 %     1.8 %     1.4 %     1.7 %
 
U.K. Newspaper Group
    47.0 %     42.3 %     47.5 %     41.4 %
 
Canadian Newspaper Group
    6.6 %     14.2 %     6.8 %     19.7 %
 
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
    128.5 %     -8.7 %     66.0 %     -30.3 %
 
Community Group
    -15.2 %     2.3 %     -6.9 %     10.9 %
 
U.K. Newspaper Group
    42.8 %     6.4 %     75.9 %     -109.3 %
 
Canadian Newspaper Group
    -8.7 %     78.5 %     -4.8 %     167.6 %
 
Investment and Corporate Group
    -47.4 %     21.5 %     -30.2 %     61.1 %
       
     
     
     
Total operating income (loss), excluding infrequent items and stock-based compensation
    100.0 %     100.0 %     100.0 %     100.0 %
       
     
     
     
EBITDA:
                               
 
Chicago Group
    90.8 %     -1252.7 %     64.9 %     103.5 %
 
Community Group
    -4.2 %     -20.1 %     -2.4 %     -2.5 %
 
U.K. Newspaper Group
    33.8 %     -455.3 %     54.7 %     118.9 %
 
Canadian Newspaper Group
    -2.5 %     1408.6 %     -1.6 %     -82.2 %
 
Investment and Corporate Group
    -17.9 %     419.5 %     -15.6 %     -37.7 %
       
     
     
     
Total EBITDA
    100.0 %     100.0 %     100.0 %     100.0 %
       
     
     
     
EBITDA Margin:
                               
 
Chicago Group
    17.3 %     9.9 %     16.2 %     10.3 %
 
Community Group
    Neg.       3.6 %     Neg.       Neg.  
 
U.K. Newspaper Group
    6.2 %     3.6 %     12.7 %     10.6 %
 
Canadian Newspaper Group
    Neg.       Neg.       Neg.       Neg.  
 
Investment and Corporate Group
    N/A       N/A       N/A       N/A  
Total EBITDA Margin
    8.6 %     Neg.       11.0 %     3.7 %

See Notes on page 30

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      Three Months Ended September 30,   Nine Months Ended September 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Chicago Group
                               
 
Operating revenue
                               
   
Advertising
  $ 85,636     $ 84,092     $ 252,901     $ 254,407  
   
Circulation
    22,076       22,950       67,780       69,626  
   
Job printing and other
    2,733       2,940       7,963       9,547  
         
     
     
     
 
Total operating revenue
    110,445       109,982       328,644       333,580  
         
     
     
     
 
Operating costs
                               
   
Newsprint
    15,901       19,321       48,215       57,747  
   
Compensation costs
    42,478       44,940       128,176       136,122  
   
Other operating costs
    32,910       34,785       99,173       105,459  
   
Depreciation
    4,623       4,303       13,902       12,491  
   
Amortization
    2,861       4,973       8,355       14,883  
         
     
     
     
 
Total operating costs
    98,773       108,322       297,821       326,702  
         
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
  $ 11,672     $ 1,660     $ 30,823     $ 6,878  
         
     
     
     
Community Group
                               
 
Operating revenue
                               
   
Advertising
  $ 883     $ 1,276     $ 2,892     $ 4,604  
   
Circulation
    1,579       1,966       4,551       5,953  
   
Job printing and other
    580       1,608       2,701       4,574  
         
     
     
     
 
Total operating revenue
    3,042       4,850       10,144       15,131  
         
     
     
     
 
Operating costs
                               
   
Newsprint
    333       619       1,228       1,661  
   
Compensation costs
    1,710       1,694       5,493       6,450  
   
Other operating costs
    1,891       2,362       5,401       7,853  
   
Depreciation
    485       392       1,257       957  
   
Amortization
          219             690  
         
     
     
     
 
Total operating costs
    4,419       5,286       13,379       17,611  
         
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (1,377 )   $ (436 )   $ (3,235 )   $ (2,480 )
         
     
     
     
U.K. Newspaper Group
                               
 
Operating revenue
                               
   
Advertising
  $ 72,127     $ 71,280     $ 233,093     $ 254,921  
   
Circulation
    36,978       34,835       102,140       101,431  
   
Job printing and other
    5,810       5,225       17,679       14,809  
         
     
     
     
 
Total operating revenue
    114,915       111,340       352,912       371,161  
         
     
     
     
 
Operating costs
                               
   
Newsprint
    20,465       22,341       60,450       71,781  
   
Compensation costs
    23,773       23,212       68,385       70,237  
   
Other operating costs
    63,556       61,812       179,305       189,829  
   
Depreciation
    3,232       2,916       9,358       7,647  
   
Amortization
          2,274             6,826  
         
     
     
     
 
Total operating costs
    111,026       112,555       317,498       346,320  
         
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 3,889     $ (1,215 )   $ 35,414     $ 24,841  
         
     
     
     

See Notes on page 30

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      Three Months Ended September 30,   Nine Months Ended September 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Canadian Newspaper Group
                               
 
Operating revenue
                               
   
Advertising
  $ 11,479     $ 23,329     $ 35,783     $ 116,231  
   
Circulation
    2,492       8,453       8,066       38,420  
   
Job printing and other
    2,046       5,570       6,610       21,524  
         
     
     
     
 
Total operating revenue
    16,017       37,352       50,459       176,175  
         
     
     
     
 
Operating costs
                               
   
Newsprint
    1,239       6,166       3,815       30,787  
   
Compensation costs
    8,263       16,584       25,051       69,776  
   
Other operating costs
    7,039       26,899       22,895       102,804  
   
Depreciation
    265       1,543       954       6,277  
   
Amortization
          1,132             4,596  
         
     
     
     
 
Total operating costs
    16,806       52,324       52,715       214,240  
         
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (789 )   $ (14,972 )   $ (2,256 )   $ (38,065 )
         
     
     
     
Investment and Corporate Group
                               
 
Operating revenue
                               
   
Advertising
  $     $     $     $  
   
Circulation
                       
   
Job printing and other
                       
         
     
     
     
 
Total operating revenue
                       
         
     
     
     
 
Operating costs
                               
   
Newsprint
                       
   
Compensation costs
    854       1,060       2,414       2,975  
   
Other operating costs
    2,916       2,602       10,339       9,488  
   
Depreciation
    541       286       1,317       915  
   
Amortization
          171             511  
         
     
     
     
 
Total operating costs
    4,311       4,119       14,070       13,889  
         
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
  $ (4,311 )   $ (4,119 )   $ (14,070 )   $ (13,889 )
         
     
     
     

See Notes on page 30

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        Three Months Ended September 30,   Nine Months Ended September 30,
       
 
        2002   2001   2002   2001
       
 
 
 
        Percentage   Percentage   Percentage   Percentage
       
 
 
 
Chicago Group
                               
 
Operating revenue
                               
   
Advertising
    77.5 %     76.4 %     77.0 %     76.3 %
   
Circulation
    20.0 %     20.9 %     20.6 %     20.9 %
   
Job printing and other
    2.5 %     2.7 %     2.4 %     2.8 %
         
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
         
     
     
     
 
Operating costs
                               
   
Newsprint
    14.4 %     17.6 %     14.7 %     17.3 %
   
Compensation costs
    38.4 %     40.9 %     39.0 %     40.8 %
   
Other operating costs
    29.8 %     31.6 %     30.2 %     31.6 %
   
Depreciation
    4.2 %     3.9 %     4.2 %     3.7 %
   
Amortization
    2.6 %     4.5 %     2.5 %     4.5 %
         
     
     
     
 
Total operating costs
    89.4 %     98.5 %     90.6 %     97.9 %
         
     
     
     
 
Operating income, excluding infrequent items and stock-based compensation
    10.6 %     1.5 %     9.4 %     2.1 %
         
     
     
     
Community Group
                               
 
Operating revenue
                               
 
Advertising
    29.0 %     26.3 %     28.5 %     30.4 %
 
Circulation
    51.9 %     40.5 %     44.9 %     39.4 %
 
Job printing and other
    19.1 %     33.2 %     26.6 %     30.2 %
         
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
         
     
     
     
 
Operating costs
                               
   
Newsprint
    11.0 %     12.8 %     12.1 %     11.0 %
   
Compensation costs
    56.2 %     34.9 %     54.2 %     42.6 %
   
Other operating costs
    62.2 %     48.7 %     53.2 %     51.9 %
   
Depreciation
    15.9 %     8.1 %     12.4 %     6.3 %
   
Amortization
    0.0 %     4.5 %     0.0 %     4.6 %
         
     
     
     
 
Total operating costs
    145.3 %     109.0 %     131.9 %     116.4 %
         
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
    -45.3 %     -9.0 %     -31.9 %     -16.4 %
         
     
     
     
U.K. Newspaper Group
                               
 
Operating revenue
                               
   
Advertising
    62.8 %     64.0 %     66.1 %     68.7 %
   
Circulation
    32.2 %     31.3 %     28.9 %     27.3 %
   
Job printing and other
    5.0 %     4.7 %     5.0 %     4.0 %
         
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
         
     
     
     
 
Operating costs
                               
   
Newsprint
    17.8 %     20.1 %     17.1 %     19.3 %
   
Compensation costs
    20.7 %     20.9 %     19.4 %     18.9 %
   
Other operating costs
    55.3 %     55.5 %     50.8 %     51.2 %
   
Depreciation
    2.8 %     2.6 %     2.7 %     2.1 %
   
Amortization
    0.0 %     2.0 %     0.0 %     1.8 %
         
     
     
     
 
Total operating costs
    96.6 %     101.1 %     90.0 %     93.3 %
         
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation
    3.4 %     -1.1 %     10.0 %     6.7 %
         
     
     
     

See Notes on page 30

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        Three Months Ended September 30,   Nine Months Ended September 30,
       
 
        2002   2001   2002   2001
       
 
 
 
        Percentage   Percentage   Percentage   Percentage
       
 
 
 
Canadian Newspaper Group
                               
 
Operating revenue
                               
   
Advertising
    71.7 %     62.5 %     70.9 %     66.0 %
   
Circulation
    15.5 %     22.6 %     16.0 %     21.8 %
   
Job printing and other
    12.8 %     14.9 %     13.1 %     12.2 %
         
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
         
     
     
     
 
Operating costs
                               
   
Newsprint
    7.7 %     16.5 %     7.6 %     17.5 %
   
Compensation costs
    51.6 %     44.4 %     49.6 %     39.6 %
   
Other operating costs
    43.9 %     72.1 %     45.4 %     58.3 %
   
Depreciation
    1.7 %     4.1 %     1.9 %     3.6 %
   
Amortization
    0.0 %     3.0 %     0.0 %     2.6 %
         
     
     
     
 
Total operating costs
    104.9 %     140.1 %     104.5 %     121.6 %
         
     
     
     
 
Operating loss, excluding infrequent items and stock-based compensation
    -4.9 %     -40.1 %     -4.5 %     -21.6 %
         
     
     
     
 
Notes:   1) EBITDA and operating income exclude infrequent items and stock-based compensation.

  EBITDA is a financial measure of operational profitability and is presented to assist in understanding the Company’s operating results. However, it is not intended to represent cash flow or results of operations in accordance with US GAAP. The reconciliation presented above represents a reconciliation of EBITDA, operating income and net earnings (loss) from comparable operations. Results of comparable operations exclude infrequent, unusual and non-recurring items, the effects of re-priced options and extraordinary items.

  2) 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 nine months ended September 30, 2001 have not been restated, and therefore include amortization of intangibles, including goodwill, as previously reported.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

COMPARABLE OPERATIONS RECONCILIATION WITH CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002 and 2001
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                                                   
              2002                   2001        
     
 
      Consolidated   Adj   Comp Ops   Consolidated   Adj   Comp Ops
     
 
 
 
 
 
Revenue
  $ 244,419     $     $ 244,419     $ 263,524     $     $ 263,524  
       
     
     
     
     
     
Income (loss) before interest, taxes depreciation and amortization (“EBITDA”)
  $ 21,091     $     $ 21,091     $ (873 )   $     $ (873 )
Depreciation
    (9,146 )           (9,146 )     (9,440 )           (9,440 )
Amortization
    (2,861 )           (2,861 )     (8,769 )           (8,769 )
Infrequent items
    (165 )     165 (b)           (953 )     953 (b)      
Stock-based compensation
    95       (95 )(c)           486       (486 )(c)      
       
     
     
     
     
     
 
Operating income (loss)
    9,014       70       9,084       (19,549 )     467       (19,082 )
Other income (expense):
                                               
Interest expense
    (12,405 )           (12,405 )     (19,659 )           (19,659 )
Amort. of debt issue costs
    (1,234 )           (1,234 )     (2,511 )             (2,511 )
Interest and dividend income
    4,359             4,359       18,749             18,749  
Other income (expense), net
    (35,314 )     33,608 (a)     (1,706 )     (158,090 )     156,812 (d)     (1,278 )
       
     
     
     
     
     
Earnings (loss) before income taxes and minority interest
    (35,580 )     33,678       (1,902 )     (181,060 )     157,279       (23,781 )
Minority interest
    343       (585 )     (242 )     2,425       1,268       3,693 (e)
Income taxes
    3,754       (3,205 )     549       39,020       (31,553 )     7,467  
       
     
     
     
     
     
Net earnings (loss)
  $ (31,483 )   $ 29,888     $ (1,595 )   $ (139,615 )   $ 126,994     $ (12,621 )
       
     
     
     
     
     
Weighted average shares outstanding-diluted
                    96,225                       101,677  
                       
                     
Diluted loss per share
                  $ (0.02 )                   $ (0.13 )
                       
                     

(a)   Primarily accounting loss on the Total Return Equity Swap, a net foreign exchange loss in respect of the Hollinger Participation Trust and the write-off of investments.
(b)   Primarily start-up costs related to the new printing facility in Chicago, and in 2001, severance costs in Canada.
(c)   Stock-based compensation reversal related to the 1999 repricing of options originally issued by the Company in 1998.
(d   Primarily gains and losses on sales of certain Canadian operations, gains and losses on sales of investments, write-off of investments and accounting loss on Total Return Equity Swap.
(e)   Includes minority share of National Post loss.

Note:

  EBITDA is a financial measure of operational profitability and is presented to assist in understanding the Company’s operating results. However, it is not intended to represent cash flow or results of operations in accordance with US GAAP. The reconciliation presented above represents a reconciliation of EBITDA, operating income and net earnings (loss) from comparable operations. Results of comparable operations exclude infrequent, unusual and non-recurring items, the effects of re-priced options and extraordinary items.

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HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

COMPARABLE OPERATIONS RECONCILIATION WITH CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2002 and 2001
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                                                   
              2002                   2001        
     
 
      Consolidated   Adj   Comp Ops   Consolidated   Adj   Comp Ops
     
 
 
 
 
 
Revenue
  $ 742,159     $     $ 742,159     $ 896,047     $     $ 896,047  
Income before interest, taxes, depreciation and amortization (“EBITDA”)
  $ 81,819     $     $ 81,819     $ 33,078     $     $ 33,078  
Depreciation
    (26,788 )           (26,788 )     (28,287 )           (28,287 )
Amortization
    (8,355 )           (8,355 )     (27,506 )           (27,506 )
Infrequent items
    (436 )     436 (d)           (4,808 )     4,808 (d)      
Stock-based compensation
                      1,364       (1,364 )(e)      
       
     
     
     
     
     
 
Operating income (loss)
    46,240       436       46,676       (26,159 )     3,444       (22,715 )
Other income (expense):
                                               
Interest expense
    (42,444 )           (42,444 )     (59,505 )           (59,505 )
Amort. of debt issue costs
    (4,352 )           (4,352 )     (7,207 )           (7,207 )
Interest and dividend income
    14,109             14,109       64,293             64,293  
Other income (expense), net
    (111,585 )     106,965 (a)     (4,620 )     (162,952 )     159,299 (f)     (3,653 )
       
     
     
     
     
     
Earnings (loss) before income taxes, minority interest and extraordinary item
    (98,032 )     107,401       9,369       (191,530 )     162,743       (28,787 )
Minority interest
    (1,446 )     344       (1,102 )     6,535       7,936 (g)     14,471 (h)
Income taxes
    3,703       (6,480 )     (2,777 )     31,231       (25,958 )     5,273  
Extraordinary item
    (21,276 )     21,276 (b)                        
       
     
     
     
     
     
Net earnings (loss)
  $ (117,051 )   $ 122,541     $ 5,490     $ (153,764 )   $ 144,721     $ (9,043 )
       
     
     
     
     
     
Weighted average shares outstanding-diluted
                    96,581 (c)                     104,779 (i)
                       
                     
Diluted earnings (loss) per share
                  $ 0.05                     $ (0.09 )
                       
                     
(a)   Primarily foreign exchange loss related to the substantial liquidation of the investment in the Canadian Newspaper Group, an accounting loss on the Total Return Equity Swap, gains on asset sales and the write-off of investments.
(b)   Consists of the write-off of unamortized deferred financing costs and the premium paid for early retirement of a portion of long-term debt.
(c)   Includes Class A common shares issuable on exercise of stock options (calculated using the treasury stock method).
(d)   Primarily start-up costs related to the new printing facility in Chicago and in 2001 severance costs in Canada.
(e)   Stock-based compensation reversal related to the 1999 repricing of options originally issued by the Company in 1998.
(f)   Primarily gains and losses on sales of certain Canadian operations, gains and losses on sales of investments, write-off of investments, equity losses in internet related investments and accounting loss on Total Return Equity Swap.
(g)   Includes minority share of gain on sale of Canadian operations by Hollinger L.P.
(h)   Includes minority share of National Post losses from operations.
(i)   Includes Class A common shares issuable on exercise of stock options (calculated using the treasury stock method) and on conversion of convertible instruments, each of which may be anti-dilutive.

Note:

  EBITDA is a financial measure of operational profitability and is presented to assist in understanding the Company’s operating results. However, it is not intended to represent cash flow or results of operations in accordance with US GAAP. The reconciliation presented above represents a reconciliation of EBITDA, operating income and net earnings (loss) from comparable operations. Results of comparable operations exclude infrequent, unusual and non-recurring items, the effects of re-priced options and extraordinary items.

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GROUP OPERATING RESULTS

Chicago Group

Operating revenues for the Chicago Group were $110.4 million in third quarter 2002 compared with $110.0 million in 2001, an increase of $0.4 million or 0.4%. Operating revenues in the nine months ended September 30, 2002 were $328.6 million compared with $333.6 million in 2001, a decrease of $5.0 million or 1.5%. Advertising revenue in third quarter 2002 was $85.6 million compared with $84.1 million in 2001, an increase of $1.5 million or 1.8%. Advertising revenue in the nine months ended September 30, 2002 was $252.9 million compared with $254.4 million, a decrease of $1.5 million or 0.6%. The third quarter increase results almost entirely from improved retail and national advertising revenue with classified advertising revenues being relatively stable year over year. Increased classified advertising revenue in the private party and real estate sectors offset lower revenues from recruitment advertising.

Circulation revenue was $22.1 million in third quarter 2002 and $67.8 million in the nine months ended September 30, 2002 compared with $23.0 million and $69.6 million in 2001, decreases of $0.9 million or 3.8% and $1.8 million or 2.6%, respectively. The decreases were primarily as a result of price discounting. Printing and other revenue was $2.7 million in third quarter 2002 and $8.0 million in the nine months ended September 30, 2002 compared with $2.9 million and $9.5 million in 2001, decreases of $0.2 million and $1.5 million, respectively.

Total operating costs, excluding infrequent items, in third quarter 2002 were $98.8 million and in the nine months ended September 30, 2002 were $297.8 million compared with $108.3 million and $326.7 million in 2001, decreases of $9.5 million and $28.9 million, respectively.

Newsprint expense in the third quarter was $15.9 million compared with $19.3 million in 2001, a decrease of $3.4 million or 17.7% in the quarter. Total newsprint consumption in the quarter increased approximately 4.0% compared with the third quarter 2001, but the average cost per tonne of newsprint in the third quarter 2002 was approximately 21.0% lower than in the third quarter 2001. Newsprint expense in the nine months ended September 30, 2002 was $48.2 million compared with $57.7 million in 2001, a decrease of $9.5 million. Compensation costs in third quarter 2002 were $42.5 million and in the nine months ended September 30, 2002 were $128.2 million compared with $44.9 million and $136.1 million in 2001, decreases of $2.4 million or 5.5% and $7.9 million or 5.8%, respectively. The decreases primarily result from staff reductions which took effect during 2001. Other operating costs in third quarter 2002 were $32.9 million and in the nine months ended September 30, 2002 were $99.2 million compared with $34.8 million and $105.5 million in 2001, decreases of $1.9 million or 5.4% and $6.3 million or 6.0%, respectively. The decrease in other operating costs resulted from general cost reductions across most areas. Amortization in the third quarter 2002 was $2.9 million and in the nine months ended September 30, 2002 was $8.4 million compared with $5.0 million and $14.9 million in 2001, reductions of $2.1 million and $6.5 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 $2.3 million of amortization in the third quarter 2001 and $7.1 million in the nine months ended September 30, 2001 related to such assets.

Operating income, excluding infrequent items in the third quarter 2002 totaled $11.7 million and in the nine months ended September 30, 2002 totaled $30.8 million compared with $1.7 million and $6.9 million in 2001, increases of $10.0 million and $23.9 million, respectively. The increases result from lower newsprint, compensation and other operating costs and reduced amortization resulting from the adoption of SFAS No. 142. The nine month increase is offset in part by lower operating revenue.

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U.K. Newspaper Group

Operating revenues for the U.K. Newspaper Group were $114.9 million in third quarter 2002 compared with $111.3 million in 2001, an increase of $3.6 million or 3.2%. In the nine months ended September 30, 2002 operating revenues were $352.9 million compared with $371.2 million in 2001, a decrease of $18.3 million or 4.9%. In pounds sterling, operating revenues in third quarter 2002 were £74.1 million compared with £77.3 million in 2001, a decrease of £3.2 million or 4.2%. For the nine months ended September 30 2002 operating revenues were £239.0 million compared with £257.6 million in 2001, a decrease of £18.6 million or 7.2%.

The decrease in operating revenue was mainly the result of lower advertising revenue, which, in local currency, was £46.5 million in third quarter 2002 compared with £49.5 million in 2001, a decrease of £3.0 million or 6.0%. The third quarter year over year decline in advertising revenue mainly resulted from a 1% decrease in display advertising and a 28.5% decrease in revenues in the recruitment area. In the nine months ended September 30, 2002 advertising revenue, in local currency, was £158.0 million compared with £176.8 million in 2001, a decrease of £18.8 million or 10.6%.

Circulation revenue, in local currency, was £23.9 million in third quarter 2002 compared with £24.2 million in 2001, a decrease of £0.3 million or 1.4%. Increased revenue resulting from the increase to the price of The Daily Telegraph implemented in September 2001 and September 2002 has been offset by lower revenue from the change in the mix of sales between newsstand and subscribers. In the nine months ended September 30, 2002 circulation revenue in local currency, was £69.0 million compared with £70.5 million in 2001, a decrease of £1.5 million or 2.0%.

Total operating costs, excluding infrequent items, in third quarter 2002 were $111.0 million and in the nine months ended September 30, 2002 were $317.5 million compared with $112.6 million and $346.3 million in 2001, decreases of $1.6 million and $28.8 million, respectively.

Newsprint costs for the third quarter 2002, in local currency, were £13.2 million compared with £15.5 million in 2001, a decrease of £2.3 million or 14.9%. The decrease results from a 5.8% reduction in consumption due to lower pagination as a result of lower advertising revenue, and a 9.7% reduction in the average price per tonne of newsprint. In the nine months ended September 30, 2002 newsprint costs, in local currency, were £40.9 million compared with £49.9 million in 2001, a decrease of £9.0 million or 18.0%.

Compensation costs for the third quarter 2002, in local currency, were £15.3 million compared with £16.1 million in 2001, a decrease of £0.8 million or 5.0%. In the nine months ended September 30, 2002 compensation costs, in local currency, were £46.2 million compared with £48.8 million in 2001, a decrease of £2.6 million or 5.3%. The lower compensation costs in 2002 result primarily from reduced staff levels, mainly in editorial, which occurred at the end of 2001 as well as a general salary level freeze for the current year.

Other operating expenses, in local currency, were £41.0 million in 2002 compared with £42.9 million in 2001, a reduction of £1.9 million or 4.5%. In the nine months ended September 30, 2002 other operating costs in local currency, were £121.1 million compared with £131.8 million in 2001, a decrease of £10.7 million or 8.1%. The lower costs result from savings in editorial and production, as well as marketing costs at the internet division.

Earnings before interest, taxes, other income (expense), depreciation and amortization (EBITDA) in third quarter 2002, in local currency, were £4.6 million in 2002 compared with £2.8 million in 2001, an increase of £1.8 million which was primarily the result of savings in newsprint, compensation and other operating expenses offset by lower advertising and circulation revenue. In the nine months ended September 30, 2002 EBITDA, in local currency, was £30.7 million compared with £27.2 million in 2001, an increase of £3.5 million.

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Operating income in third quarter 2001 of a loss of $1.2 million and for the nine months ended September 30, 2001 income of $24.8 million is after deduction of $2.3 million and $6.8 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 third quarter 2002 were $16.0 million compared with $37.4 million in 2001 and for the nine months ended September 30, 2002 were $50.5 million compared with $176.2 million in 2001. The operating loss, excluding infrequent items, was $0.8 million in third quarter 2002 compared with $15.0 million in 2001 and was $2.3 million in the nine months ended September 30, 2002 compared with $38.1 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 net reduction in year over year operating loss also results from the sales of properties. The 2001 operating loss included the results of the National Post which reported an operating loss of Cdn.$14.0 million in third quarter 2001 and Cdn.$57.3 million in the nine months ended September 30, 2001.

On a “same store” basis, operating revenues and operating income of the remaining operations, excluding infrequent items, were Cdn.$25.0 million and an operating loss of Cdn.$1.2 in third quarter 2002 compared with Cdn.$24.6 million and an operating loss of Cdn.$10.3 million in 2001. For the nine months ended September 30, 2002 operating revenues and operating income on a same store basis were Cdn.$78.8 million and an operating loss of Cdn.$3.0 compared with Cdn.$82.9 million and an operating loss of Cdn.$16.6 million in 2001. Included in the operating losses in 2002 is a Cdn.$1.6 million expense in the third quarter and a Cdn.$5.2 million expense in the nine months ended September 30, 2002 in respect of employee benefit costs of retired former Southam employees. The same store operating loss for third quarter 2001 and the nine months ended September 30, 2001 is after deducting Cdn.$0.3 million and Cdn.$2.7 million, respectively, in respect of amortization which under SFAS No. 142 was not incurred in 2002. In addition, the third quarter 2001 and nine months ended September 30, 2001 “same store” operating loss is after deducting year to date adjustments in respect of employee benefit costs and the write-off of amounts that were subsequently determined to be, and reclassified as, non-recurring.

Community Group

Operating revenue and operating income for the Community Group was $3.0 million and a loss of $1.4 million in the third quarter 2002 compared with $4.9 million and a loss of $0.4 million in 2001. For the nine months ended September 30, 2002 operating revenue and operating income was $10.1 million and a loss of $3.2 million compared with $15.1 million and a loss of $2.5 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 $0.1 million and break even operating income in the third quarter 2001 and operating revenue of $0.8 million and an operating loss of $0.2 million in the nine months ended September 30, 2001. In addition, amortization in the amount of $0.2 million in the third quarter and $0.6 million in the nine months ended September 30 at the Jerusalem Post in 2001 was not incurred in 2002 as a result of SFAS No. 142.

Investment and Corporate Group

Operating costs of the Investment and Corporate Group, excluding infrequent items and stock-based compensation, were $4.3 million in third quarter 2002 compared with $4.1 million in 2001. In the nine months ended September 30 operating costs were $14.1 million compared with $13.9 million in 2001.

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LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Working capital consists of current assets less current liabilities. At September 30, 2002, working capital, excluding debt obligations, was a deficiency of $114.7 million compared to working capital of $198.7 million at December 31, 2001. Current assets were $420.3 million at September 30, 2002 and $762.3 million at December 31, 2001. Current liabilities, excluding debt obligations, were $535.0 million at September 30, 2002, compared with $563.6 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 nine months ended September 30, 2002, approximately $317.1 million of cash and cash equivalents was used to retire some of the Company’s long-term debt which included both principal repayment and related premiums. 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 September 30, 2002, the Company did not meet a financial test set out in the trust indentures for Publishing’s Senior Subordinated Notes. As a result, until and unless the test is met in the future, Publishing and its subsidiaries, in general, 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 operating results and/or utilizing existing cash balances to reduce the amount of Senior Subordinates Notes outstanding. The Company currently has sufficient cash to meet its current anticipated cash obligations for the next twelve months. The Company is continuing to pursue a comprehensive financing initiative in order to extend debt maturities and provide more advantageous borrowing terms. This initiative may include a new amended syndicated credit facility and may include the sale, in a private placement, of long-term debt securities. Completion of these transactions will be subject to market conditions, conclusion of definitive agreements and satisfaction of conditions in such agreements. If these transactions are completed, a portion of the proceeds would be used to repay the $50.0 million of borrowings made under the new $50.0 million term facility. If the financing initiative is not completed, the Company might need to make alternative arrangements for settlement of the term facility upon its maturity.

Debt

Long-term debt, including the current portion, was $519.9 million at September 30, 2002 compared with $812.7 million at December 31, 2001. During the nine months ended September 30, 2002, the Company retired $293.5 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, and extraordinary items was $21.0 million for third quarter 2002 compared with an EBITDA loss of $1.3 million for third quarter 2001. For the nine months ended September 30, 2002 EBITDA was $81.4 million compared with $29.6 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 properties

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sold in 2001 and included an approximate $7.9 million EBITDA loss at National Post in the third quarter 2001 and $19.6 million in the nine months ended September 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 used in operating activities were $4.5 million in the nine months ended September 30, 2002, compared with $83.8 million in 2001. Excluding changes in working capital (other than cash), cash flows provided by operating activities were $24.8 million in 2002 and cash flows used in operating activities were $83.3 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 $16.6 million in 2002 and cash flows provided by investing activities were $454.8 million in 2001. The cash flows provided by investing activities in 2001 resulted principally from the sale of certain Canadian properties and the sale of participation interests offset in part by additions to investments and capital expenditures.

Cash flows used in financing activities were $300.5 million in 2002 and $229.9 million in 2001. In 2002, the Company repaid $293.5 million of long-term debt primarily from available cash balances. The cash flows used in financing activities in 2001 included the repurchase of Class A common shares and the redemption of preferred shares totalling $145.9 million.

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. In 2003, the Company expects to invest approximately $20 million in capital expenditures primarily through available cash flow.

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 September 30, 2002, Publishing did not meet a financial test set out in the trust indentures for Publishing’s Senior Subordinated Notes. As a result, until and unless the test is met in the future, Publishing and its subsidiaries, in general, will be unable to make advances, pay dividends or make other distributions to the Company. The Company has reduced its quarterly dividend in September 2002 to $0.05 per common share effective with the October dividend payment.

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 cash requirements for the next twelve months. However, the Company has an obligation to repay on December 31, 2003, the $50.0 million borrowed on October 3, 2002 under a term facility. As discussed in note 9(ii), the Company is pursuing a comprehensive refinancing of both this borrowing as well as other long-term debt.

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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 (“SFAS 145”). The Statement addresses, among other things, the income statement treatment of gains and losses related to debt extinguishments, requiring that such expenses 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. Upon adoption of SFAS 145, the Company’s net loss on the repayment of debt of $21.3 million for the nine months ended September 30, 2002 will no longer qualify as an extraordinary item.

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities, and is effective for exit or disposal activities initiated after December 31, 2002. FAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 (“EITF 94-3”) Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring). The principal difference between FAS 146 and EITF 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity. FAS 146 requires that the cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas under EITF 94-3 the liability was recognized at the date of an entity’s commitment to an exit plan. The Company is currently assessing the impact of SFAS 146 on its financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

     Newsprint On a consolidated basis, newsprint expense in the nine months ended September 30 amounted to $113.7 million in 2002 and $162.0 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 nine months ended September 30, 2002, a change in the price of newsprint of $50 per tonne would increase or decrease year-to-date net income by approximately $6.8 million.

     Total Return Equity Swap Under the terms of the Total Return Equity Swap, a decline in the value of the Company’s share price could result in the Company having to issue additional shares or to pay a cash settlement of any loss suffered by the counterparties to the swap contracts. As previously discussed, subsequent to September 30, 2002, the Company has prepaid $55.0 million outstanding under the Total Return Equity Swap, reducing the notional obligation under the swap arrangement to $40.0 million. After this prepayment, there remains outstanding a forward purchase contract on 7 million common shares. A change in the Company’s share price of $1.00 per share would result in an accounting gain or loss to the Company each in the amount 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, the United Kingdom and Canada.

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     Interest Rates At September 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. As at September 30, 2002, the outstanding notional balance under the Total Return Equity Swap was $95.0 million which was subsequently reduced to $40.0 million. A 1% change in the interest rate would have resulted in a change in interest cost, in respect of the $95.0 million under the Total Return Equity Swap of $0.7 million for the nine months ended September 30, 2002.

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. In addition, in 2001, the Company sold Participations in Canadian dollar denominated CanWest debentures to a special purpose trust (“Participation Trust”) in exchange for U.S. dollars. The Company has retained certain foreign exchange exposure in respect of this transaction. 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 nine months ended September 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 nine months ended September 30, 2002:

                 
    Actual Average        
    2002 Rate   Increase/Decrease
   
 
United Kingdom
  $1.48/£   $ 581,000  
Canada
  $0.64/Cdn.$   $ 48,387,000 1
 
   
   
 
1   Included in the exposure noted above is $43.1 million in respect of the Company’s sale of Participations.

The Company sold Participations in Cdn. $756.8 million principal amount of CanWest debentures to the Participation Trust in 2001. 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 September 30, 2002, the accrued liability to the Participation Trust is $559.0 million and the corresponding CanWest debentures had a principal amount receivable of Cdn.$862.4 million. Given that the CanWest debentures are denominated in Canadian dollars, the Company entered into forward foreign exchange contracts in 2001 to mitigate the currency exposure. The foreign currency contract required the Company to sell Cdn. $666.6 million on May 15, 2003 at a forward rate of 0.6423. In 2002, the Company sold certain of its foreign currency contract and subsequently entered into additional foreign currency contracts. However, on September 30, 2002, all of the outstanding contracts were unwound resulting in the net cash receipt of $6.3 million by the Company after discounting for early settlement. This amount has been included in other income (expense), net, in the nine months ended September 30, 2002. The foreign exchange exposure is no longer hedged.

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 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.$862.4 million principal amount of the CanWest debentures at September 30, 2002 would result in a $43.1 million loss or gain to the Company.

The balance of the exposure of $5,287,000 is principally as a result of the substantial reduction in the Company’s net investment in the Canadian operations in the three months ended March 31, 2002. As a result of this reduction, foreign exchange losses in the amount of $78,217,000 were included in net earnings for the three months ended March 31, 2002 and nine months ended September 30, 2002, of which substantially all was not deductible for income tax purposes. Had there been a $0.05 change in the U.S. dollar to Canadian dollar in the three months ended March 31, 2002, net earnings would have increased or decreased by $5.5 million.

Given the sale of Canadian operations in 2000 and 2001, the only significant ongoing exposure to changes in the value of the Canadian dollar is in respect of the Participations noted above.

     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.

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Item 4. Controls and Procedures

Pursuant to Exchange Act Rule 13a-14, an evaluation of the effectiveness of Hollinger International Inc.’s disclosure controls and procedures was undertaken by its Chairman and Chief Executive Officer and its Vice President Finance and Chief Financial Officer, the Company’s principal executive officer and principal financial officer, respectively, within the 90 day period prior to the filing of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that the disclosure controls and procedures as at the time of the evaluation were effective in ensuring that material information requiring disclosure in this filing was brought to their attention on a timely basis. There have been no changes in the Company’s internal controls or in other factors that would significantly affect internal controls since the date of that evaluation.

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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.

(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: November 14, 2002   By:   /s/ Conrad M. Black
       
        Lord Black of Crossharbour, PC(C), OC, KCSG
Chairman of the Board of Directors and Chief Executive Officer

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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: November 14, 2002   By:   /s/ Peter K. Lane
       
        Peter K. Lane Vice President and Chief Financial Officer

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Certification pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Conrad Black, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hollinger International Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/Conrad M. Black

Lord Black of Crossharbour, PC(C), OC, KCSG
Chairman of the Board of Directors and
Chief Executive Officer


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Certification pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Peter K. Lane, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hollinger International Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/Peter K. Lane

Peter K. Lane
Vice President and
Chief Financial Officer