e10vq
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2003

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. 1-14164

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 ü   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 May 5, 2003

 
Class A Common Stock par value $.01 per share
Class B Common Stock par value $.01 per share
  71,498,328 shares
14,990,000 shares

 


 

TABLE OF CONTENTS

INDEX

HOLLINGER INTERNATIONAL INC.

                   
              PAGE
             
PART I
  FINANCIAL INFORMATION   1
 
       
Item 1
  Condensed Financial Statements   1
 
       
Item 2
  Management's Discussion and Analysis of Financial Condition and Results of Operations   20
 
               
Item 3
  Quantitative and Qualitative Disclosure about Market Risk   30
 
               
Item 4
  Controls and Procedures   31
 
               
PART II
  OTHER INFORMATION   32
 
               
Item 6
  Exhibits and reports on Form 8-K   32
           
 
  Signatures   33

 


 

PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2003 and March 31, 2002
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                   
      Three Months Ended
     
      March 31, 2003   March 31, 2002
     
 
              (Restated -
              Notes 3(a),(b) and (c))
Operating revenues:
               
 
Advertising
  $ 182,484     $ 175,129  
 
Circulation
    66,381       60,933  
 
Job printing
    3,676       3,790  
 
Other
    7,806       7,111  
 
 
   
     
 
 
Total operating revenues
    260,347       246,963  
 
 
   
     
 
Operating costs and expenses:
               
 
Newsprint
    17,999       38,590  
 
Newsprint incurred through joint ventures
    19,759       106  
 
Compensation costs
    81,205       76,100  
 
Other operating costs
    102,988       90,006  
 
Other operating costs incurred through joint ventures
    12,497       11,307  
 
Infrequent items
    167       177  
 
Depreciation
    8,834       8,843  
 
Amortization (note 3(a))
    3,415       4,135  
 
 
   
     
 
 
Total operating costs and expenses
    246,864       229,264  
 
 
   
     
 
Operating income
    13,483       17,699  
Other income (expense):
               
 
Interest expense
    (13,928 )     (17,240 )
 
Amortization of deferred financing costs
    (598 )     (1,886 )
 
Interest and dividend income
    4,211       5,807  
 
Foreign currency gains (losses), net (note 7)
    43,979       (82,946 )
 
Other income (expense), net (note 7)
    (38,915 )     (23,292 )
 
 
   
     
 
 
Total other expense
    (5,251 )     (119,557 )
 
 
   
     
 
Earnings (loss) before income taxes, minority interest and cumulative effect of change in accounting principle
    8,232       (101,858 )
Income taxes (recovery)
    4,189       (18,265 )
 
 
   
     
 
Earnings (loss) before minority interest and cumulative effect of change in accounting principle
    4,043       (83,593 )
Minority interest
    1,702       356  
 
 
   
     
 
Earnings (loss) before cumulative effect of change in accounting principle
    2,341       (83,949 )
Cumulative effect of change in accounting principle
          (20,079 )
 
 
   
     
 
Net earnings (loss)
  $ 2,341     $ (104,028 )
 
 
   
     
 
Earnings (loss) per share before cumulative effect of change in accounting principle
               
 
Basic
  $ 0.03     $ (0.87 )
 
Diluted
  $ 0.03     $ (0.87 )
 
 
   
     
 
Net earnings (loss) per share
               
 
Basic
  $ 0.03     $ (1.08 )
 
Diluted
  $ 0.03     $ (1.08 )
 
 
   
     
 
Weighted average shares outstanding-basic
    89,027       96,048  
 
 
   
     
 
Weighted average shares outstanding-diluted
    89,532       96,048  
 
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

1


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2003 and March 31, 2002
(Amounts in Thousands)
(Unaudited)

                   
      Three Months Ended March 31
     
      2003   2002
     
 
              (Restated Notes
              3(a), (b) and (c))
Net earnings (loss)
  $ 2,341     $ (104,028 )
Other comprehensive income (loss):
               
 
Unrealized gain on securities available for sale, net of taxes
    4,039       242  
 
Foreign currency translation adjustment
    (21,451 )     72,232  
 
   
     
 
Comprehensive loss
  $ (15,071 )   $ (31,554 )
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

2


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002
(Amounts in Thousands)

                   
      March 31   December 31
      2003   2002
     
 
      (Unaudited)        
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 115,473     $ 113,368  
 
Accounts receivable, net
    211,860       205,843  
 
Inventories
    8,502       10,194  
 
Prepaid expenses and other current assets
    26,552       18,358  
 
Escrow deposits and restricted cash
          545,952  
 
 
   
     
 
Total current assets
    362,387       893,715  
Loan to affiliate
    20,349       45,848  
Investments
    138,220       124,076  
Advances under printing contracts and notes receivable — joint ventures
    46,821       50,591  
Property, plant, and equipment, net of accumulated depreciation
    294,771       299,686  
Intangible assets, net of accumulated amortization
    114,967       117,179  
Goodwill
    530,775       533,677  
Prepaid pension benefit
    68,142       63,146  
Deferred financing costs and other assets
    68,881       60,214  
 
 
   
     
 
 
  $ 1,645,313     $ 2,188,132  
 
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Current installments of long-term debt
  $ 5,359     $ 4,814  
 
Senior Subordinated Notes
          504,906  
 
Accounts payable
    78,451       87,445  
 
Accounts payable — joint ventures
    12,046       12,454  
 
Accrued expenses
    96,746       106,878  
 
Amounts due to related parties, net
    32,133       30,358  
 
Income taxes payable
    337,779       295,971  
 
Deferred revenue
    46,084       42,792  
 
 
   
     
 
Total current liabilities
    608,598       1,085,618  
Long term debt, less current installments
    572,047       574,658  
Deferred income taxes
    249,477       249,731  
Other liabilities
    111,417       132,503  
 
 
   
     
 
Total liabilities
    1,541,539       2,042,510  
 
 
   
     
 
Minority interest
    20,513       17,097  
 
 
   
     
 
Redeemable preferred stock
          8,650  
 
 
   
     
 
Stockholders’ equity:
               
 
Convertible preferred stock
           
 
Class A common stock
    838       858  
 
Class B common stock
    150       150  
 
Additional paid-in capital
    432,841       441,476  
 
Accumulated other comprehensive loss
    (101,765 )     (84,353 )
 
Deficit
    (108,843 )     (98,296 )
 
 
   
     
 
 
    223,221       259,835  
 
Class A common stock in treasury
    (139,960 )     (139,960 )
 
 
   
     
 
Total stockholders’ equity
    83,261       119,875  
 
 
   
     
 
 
  $ 1,645,313     $ 2,188,132  
 
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

3


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and March 31, 2002
(Amount in Thousands)
(Unaudited)

                       
          2003   2002
         
 
                  (Restated-
                  Notes 3(a),(b) and c))
Cash Flows From Operating Activities:
               
 
Net earnings (loss)
  $ 2,341     $ (104,028 )
 
Adjustments to reconcile net earnings (loss) to net cash provided by (used) in operating activities:
               
   
Depreciation and amortization
    12,249       12,978  
   
Amortization of deferred financing costs
    598       1,886  
   
Minority interest
    1,702       356  
   
Premium on debt extinguishments
    19,657       26,400  
   
Gain on sale of investments
    (900 )      
   
Loss (gain) on sales of assets
    296       (5,433 )
   
Non-cash interest income
    (1,659 )     (1,244 )
   
Total return equity swap
          (9,801 )
   
Foreign currency translation loss (note 7(b))
          78,217  
   
Cumulative effect of change in accounting principle
          20,079  
   
Other
    (33,740 )     (8,445 )
 
Changes in working capital, net
    (2,397 )     (29,907 )
 
 
   
     
 
     
Cash used in operating activities
    (1,853 )     (18,942 )
 
 
   
     
 
Cash Flows From Investing Activities:
               
 
Capital expenditures
    (4,093 )     (6,069 )
 
Additions to investments and other assets
    (5,723 )     (3,981 )
 
Proceeds from disposal of investments and other assets
    3,971       10,746  
 
Other investing activities
    558        
 
 
   
     
 
     
Cash provided by (used in) investing activities
    (5,287 )     696  
 
 
   
     
 
Cash Flows From Financing Activities:
               
 
Repayments of long-term debt
    (526,769 )     (317,701 )
 
Escrow deposits and restricted cash
    545,952        
 
Changes in amounts due from affiliates (note 9)
    (1,557 )     (3,459 )
 
Dividends and distributions to minority interests
          (465 )
 
Cash dividends paid
    (4,374 )     (9,870 )
 
Other financing activities
    (3,041 )     275  
 
 
   
     
 
     
Cash provided by (used in) financing activities
    10,211       (331,220 )
 
 
   
     
 
Effect of exchange rate changes on cash
    (966 )     6,181  
 
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    2,105       (343,285 )
Cash and cash equivalents at beginning of period
    113,368       479,514  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 115,473     $ 136,229  
 
 
   
     
 
Cash paid for interest
  $ 39,230     $ 37,201  
 
 
   
     
 
Cash paid for taxes
  $ 1,230     $ 3,155  
 
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

4


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Unaudited Financial Statements

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2002.

     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, 2002.

Note 2 — Principles of Presentation and Consolidation

     The Company is a subsidiary of Hollinger Inc., a Canadian corporation, which at March 31, 2003 held approximately 30.3 % of the combined equity and approximately 72.6 % of the combined voting power of the outstanding Common Stock of the Company.

     The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. At March 31, 2003 the Company’s interest in Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”) was 87%.

     All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made in the 2002 financial statements to conform to the 2003 presentation as described in Note 3 below.

Note 3 — Changes in Accounting Principles and Restatements

(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 No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

     Upon initial adoption of SFAS No. 142 the Company classified $117,287,000 of advertiser and subscriber relationship intangible assets as goodwill. However, based on the consensus reached by the Emerging Issues Task Force in Issue No. 02-17, “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination” in October 2002, the Company subsequently concluded that its advertiser and subscriber relationship intangible assets do meet the criteria for recognition apart from goodwill under SFAS No. 142. Therefore, during the fourth quarter of 2002 the advertiser and subscriber relationship intangible assets were reclassified from goodwill to identifiable intangible assets as of January 1, 2002 and continue to be amortized over 30 years.

     Amortization expense was increased by $1,145,000 and income tax expense was reduced by approximately $458,000 for the three months ended March 31, 2002 from amounts previously reported, to reflect the adjustment to amortization and related tax effect resulting from the reclassification.

     The Company’s reclassification of advertiser and subscriber relationship intangible assets apart from goodwill had no impact on the asset impairment tests and the Company’s cumulative effect of a change in accounting principle.

5


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

     In connection with the SFAS No. 142 transitional impairment evaluation, by December 31, 2002 the Company was required to assess whether goodwill was impaired as of January 1, 2002. The Company completed its transitional impairment test as of January 1, 2002 in the quarter ended December 31, 2002 and wrote down goodwill amounting to $20,079,000. In accordance with SFAS No. 142, the results for the quarter ended March 31, 2002 have been restated to reflect this adjustment.

     The changes in the carrying amount of goodwill as of March 31, 2003, as allocated by reportable segment for the three months ended March 31, 2003 are as follows:

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

 
 
 
 
 
Balance as of December 31, 2002
  $ 128,054     $     $ 360,394     $ 45,229     $ 533,677  
Foreign currency translation
                (6,306 )     3,404       (2,902 )
 
   
     
     
     
     
 
Balance as of March 31, 2003
  $ 128,054     $     $ 354,088     $ 48,633     $ 530,775  
 
   
     
     
     
     
 

     The Company’s amortizable 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 and subscriber and advertiser relationship intangible assets which are amortized on a straight-line basis over 30 years.

The components of amortizable intangible assets as at March 31, 2003 are as follows:

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

 
 
 
Amortizable intangible assets
  Non-competition agreements   $ 14,000     $ 10,592     $ 3,408  
 
Subscriber and advertiser relationships
    139,547       27,988       111,559  
 
   
     
     
 
 
  $ 153,547     $ 38,580     $ 114,967  
 
   
     
     
 

Amortization of amortizable intangible assets for the three months ended March 31, 2003 and 2002 was $2,212,000 and $2,087,000, respectively.

6


 

(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 March 31, 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 and its results were reported in discontinued operations. Effective in the third quarter of 2002 due to changes in circumstances, this group of assets no longer met criteria under GAAP to be classified as held for sale. Accordingly, results for the three months ended March 31, 2002 have been reclassified to reflect BIG as a component of continuing operations. As a result, operating revenues increased by $6,161,000 and operating income increased by $210,000 in the quarter ended March 31, 2002.

(c)  Losses on debt extinguishment

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No.145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 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”. As a result of the Company’s adoption of SFAS No. 145, the Company’s net after tax loss on the extinguishment of debt of $20.8 million (pre-tax loss of $34.7 million) for the three months ended March 31, 2002 no longer qualifies as an extraordinary item and has been reclassified to “Other income (expense), net”. Similarly, losses of $37.3 million incurred on the January 22, 2003 extinguishment of senior subordinated notes have been included in “Other income (expense), net” for the three month period ended March 31, 2003.

(d)  Accounting for Asset Retirement Obligations

Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS No. 143 addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets. There was no material impact on adoption of this standard.

(e)  Guarantee Obligations

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (the “Interpretation”), which addresses the accounting for and disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. For guarantees entered into or modified after December 31, 2002, the Interpretation requires the guarantor to recognize a liability for the non-contingent component of guarantees, being the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued without a premium payment or as part of a transaction with multiple elements. The Company had previously adopted the disclosure requirements of the Interpretation and effective January 1, 2003, applies the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002. There has been no change in guarantees by the Company during the quarter except that the uninsured exposure in respect of death benefits for certain journalists reporting from the Middle East has been reduced from £5.2 million to £2.6 million as of March 31, 2003.

7


 

(f)  Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“VIE’s”) which requires that companies that control another entity through interests other than a voting interest should consolidate the controlled entity. In the absence of clear control through a voting equity interest, a company’s exposure (variable interest) to the economic risks and the potential rewards from a VIE’s assets and activities are the best evidence of a controlling financial interest. VIE’s created after January 31, 2003, of which the Company has none, must be consolidated immediately. VIE’s existing prior to February 1, 2003 must be consolidated by the Company commencing with its third quarter 2003 interim financial statements. The Company has not yet determined whether it has any VIE’s which will require consolidation.

(g)  New Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. In particular, it clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative as discussed in SFAS No. 133; clarifies when a derivative contains a financing component; amends the definition of an underlying to conform it to the language used in the FASB Interpretation No. 45; and amends certain other existing pronouncements.

SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company will adopt the provisions of SFAS No. 149 for the quarter ending June 30, 2003 and is currently assessing the impact, if any, that the adoption of SFAS No. 149 will have on its results of operations and financial position.

Note 4 — Stock-Based Compensation

The Company uses the intrinsic value based method of accounting for its stock-based compensation arrangements. Stock options granted to employees of The Ravelston Corporation Limited (“Ravelston”), the parent company of Hollinger Inc., are recorded using the fair value based method and are reflected as a dividend in kind. During the quarter ended March 31, 2003, such dividends amounted to $8.5 million and are recorded as an increase to both Additional paid-in capital and Deficit.

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

                 
    Three months ended March 31
   
    2003   2002
   
 
    (in thousands except per share amounts)
Net earnings (loss) as reported
  $ 2,341     $ (104,028 )
Add: compensation expense, as reported
           
Deduct: pro forma compensation expense
    (1,590 )     (1,953 )
 
   
     
 
Pro forma net earnings (loss)
  $ 751     $ (105,981 )
 
   
     
 
Basic net earnings (loss) per share as reported
  $ 0.03     $ (1.08 )
Diluted net earnings (loss) per share as reported
  $ 0.03     $ (1.08 )
Pro forma basic net earnings (loss) per share
  $ 0.01     $ (1.10 )
Pro forma diluted net earnings (loss) per share
  $ 0.01     $ (1.10 )

8


 

The fair value of each stock option granted during the three month periods ended March 31, 2003 and 2002 was estimated on the date of grant for pro forma disclosure purposes using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the first quarter of each of 2003 and 2002, respectively: dividend yield of 1.89% and 4.1%; expected volatility of 87.2% and 55.2%; risk-free interest rates of 4.25% and 4.5%; expected lives of 10 years. Weighted average fair value of options granted by the Company during the three month periods ended March 31, 2003 and 2002 was $6.65 and $5.65, respectively.

Note 5 — Earnings per share

     The following table reconciles the numerator and denominator for the calculation of basic and diluted earnings (loss) per share before the cumulative effect of change in accounting principle for the three months ended March 31, 2003 and 2002:

                         
    Three Months Ended March 31, 2003
   
    Income   Shares   Per Share
    (Numerator)   (Denominator)   Amount
   
 
 
    (in thousands)
Net earnings
  $ 2,341                  
Add dividends:
                       
Series E Preferred Stock
                     
 
   
                 
Basic EPS
                       
Net earnings available to common stockholders
    2,341       89,027     $ 0.03  
Effect of dilutive securities
          505          
 
   
     
         
Diluted EPS
                       
Net earnings available to common stockholders
  $ 2,341       89,532     $ 0.03  
 
   
     
     
 
                           
      Three Months Ended March 31, 2002
     
      Income   Shares   Per Share
      (Numerator)   (Denominator)   Amount
     
 
 
      (in thousands)
Net Loss before cumulative effect of change in accounting principle
  $ (83,949 )                
Add dividends:
                       
Series E Preferred Stock
    (67 )                
 
   
                 
Basic EPS
                       
 
Loss before cumulative effect of change in accounting principle available to common stockholders
    (84,016 )     96,048     $ (0.87 )
Effect of dilutive securities
                       
 
None
                   
 
   
     
         
Diluted EPS
                       
 
Loss before cumulative effect of change in accounting principle available to common stockholders
  $ (84,016 )     96,048     $ (0.87 )
 
   
     
     
 

9


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 6 — Segment Information

     The Company operates principally in the business of publishing, printing and distribution of newspapers and magazines and holds investments principally in companies that operate in the same business as the Company. The Community Group includes the results of the Jerusalem Post. The Canadian Newspaper Group includes the operations of Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”) and Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”). Segment information for the three months ended March 31, 2002 has been restated to reflect the matters described in Note 3 including the reclassification of the Company’s Business Information Group as a component of continuing operations and the reclassification of certain components of goodwill as identifiable intangible assets. The following is a summary of the segmented financial data of the Company:

                                                 
    Three months ended March 31, 2003
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
Revenues
  $ 106,014     $ 2,742     $ 134,555     $ 17,036     $     $ 260,347  
Depreciation and amortization
  $ 7,862     $ 207     $ 3,478     $ 305     $ 397     $ 12,249  
Operating income (loss)
  $ 6,294     $ (1,718 )   $ 16,579     $ (1,517 )   $ (6,155 )   $ 13,483  
Equity in loss of affiliates
  $ (305 )   $     $ (805 )   $ 153     $     $ (957 )
Total assets
  $ 559,720     $ 23,944     $ 567,454     $ 225,538     $ 268,657     $ 1,645,313  
Capital expenditures
  $ 1,651     $ 189     $ 1,767     $ 460     $ 26     $ 4,093  
                                                 
    Three months ended March 31, 2002
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
 
 
 
 
 
    (in thousands)
    (Restated)
Revenues
  $ 104,735     $ 3,225     $ 123,539     $ 15,464     $     $ 246,963  
Depreciation and amortization
  $ 8,774     $ 367     $ 3,107     $ 345     $ 385     $ 12,978  
Operating income (loss)
  $ 3,565     $ (1,186 )   $ 22,419     $ (2,054 )   $ (5,045 )   $ 17,699  
Equity in loss of affiliates
  $ (409 )   $     $ (764 )   $ 108     $     $ (1,065 )
Capital expenditures
  $ 2,399     $ 2,056     $ 1,166     $ 443     $ 5     $ 6,069  

10


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Note 7 — Other Income (Expense)

(a)  Other income (expense), net

                 
    Three months ended March 31  
   
 
(In thousands)   2003   2002  

 
 
 
Loss on extinguishment of debt (Notes 3 (c) and 8)
  $ (37,291 )   $ (34,735 )
Equity in loss of affiliates
    (957 )     (1,065 )
Total Return Equity Swap
          8,525  
Net gains on sales of investments
    900        
Net gains (losses) on sales of property, plant and equipment
    (296 )     5,433  
Write-down of investments
          (1,332 )
Other
    (1,271 )     (118 )
 
   
     
 
 
  $ (38,915 )   $ (23,292 )
 
   
     
 

(b)  Foreign currency losses, net

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 8). As a result of the substantial liquidation of the Company’s net investment in the Canadian Newspaper Group, foreign exchange losses in the amount of $78,217,000 were included in net earnings during the three months ended March 31, 2002. These foreign exchange losses had accumulated since the Company’s original investment in the Canadian Newspaper Group and until realized through the substantial liquidation of the Company’s net investment, had been included in the accumulated other comprehensive income component of stockholders’ equity.

(c)  Derivative instruments

The Company may enter into various swap, option and forward contracts from time to time when management believes conditions warrant. Such contracts are limited to those that relate to the Company’s actual exposure to commodity prices, interest rates and foreign currency risks. If, in management’s view, the conditions that made such arrangements worthwhile no longer exist, the contracts may be closed. At March 31, 2002, there were no material contracts or arrangements of these types other than the forward exchange contract related to the Participation Trust. 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 March 2002, the Company sold Cdn. $199 million of its foreign currency contract at a time when the exchange rate was 0.6308. The Company entered into an additional foreign currency contract in March 2002 which required the Company to sell Cdn. $50 million on June 25, 2002 at a forward rate of 0.6330. This contract was marked to market and the related gains and losses included in foreign exchange losses, net in other income (expense), net at March 31, 2002.

On December 27, 2002, a United Kingdom subsidiary of the Company entered into two cross-currency rate swap transactions to hedge principal and interest payments on U.S. dollar borrowings under the December 23, 2002 Senior Credit Facility. The contracts have a total foreign currency obligation notional value of U.S. $265 million, fixed at a rate of U.S. $1.5922 to £1, convert the interest rate on such borrowing from floating to fixed, and expire as to $45 million on December 29, 2008 and as to $220 million on December 29, 2009.

On January 22, 2003 and February 6, 2003, Hollinger International Publishing Inc. (“Publishing”), a subsidiary of the Company, entered into interest rate swaps to convert U.S. $150 million and U.S. $100 million, respectively, of the Publishing Notes issued in December 2002 to floating rates for the period to December 15, 2010, subject to early termination notice.

11


 

Changes in the value of derivatives comprising the forward exchange contract and cross-currency swaps described above amounted to a gain of $1.2 million and a loss of $5.3 million in the three months ended March 31, 2003 and 2002, respectively. These changes are reported in foreign currency gains (losses), net on the condensed consolidated statements of operations. The change in the value of derivatives comprising the interest rate swaps amounted to a gain of $1.8 million in the three months ended March 31, 2003 and has been reported in interest expense in the condensed consolidated statements of operations. The fair value of these contracts as of March 31, 2003 and December 31, 2002 is included in the condensed consolidated balance sheets in other liabilities.

Note 8 — Long-term Debt

On February 14, 2002, Publishing commenced a cash tender offer for any and all of its outstanding 8.625% Senior Notes due 2005. On March 15, 2002, $248.9 million in aggregate principal amount had been validly tendered pursuant to the offer and these noteholders were paid out in full. In addition, during the three months ended March 31, 2002, Publishing purchased for retirement an additional $6.0 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 three months ended March 31, 2002 was $290.0 million. The premiums paid in the first quarter to retire the debt totaled $26.4 million and related deferred financing costs written off totaled $8.3 million.

On December 23, 2002, Publishing completed an offering for 9% Senior Notes due 2010 in the face amount of $300.0 million as well as the closing of a Senior Credit Facility under which $265.0 million was advanced under the term loan provisions of that facility. Proceeds from the 9% Senior Notes and the Senior Credit Facility were used in part to repay the $504.9 million due under its 9.25% Senior Subordinated Notes due 2006 and 2007. Publishing gave notice of redemption to the holders of the Senior Subordinated Notes on December 23, 2002 and retired the Notes in January 2003. Accordingly, the Senior Subordinated Notes remained outstanding as a current liability as at December 31, 2002 with the related financing proceeds held in escrow at that date. Premiums on early redemption totaled $19.7 million and the write-off of related deferred financing costs totaled $17.6 million for a loss on extinguishment of $37.3 million.

Note 9 — Related Party Transactions

(i)   On March 10, 2003, the Company repurchased shares of its Class A common stock and redeemed shares of Series E preferred stock from a subsidiary of Hollinger Inc., its parent, and revised certain debt arrangements it had in place with Hollinger Inc.’s subsidiary. These transactions were completed in conjunction with Hollinger Inc. closing a private placement of Senior Secured Notes.

Contemporaneously with the closing of the private placement, the Company:

(a) repurchased for cancellation, from one of Hollinger Inc.’s wholly owned subsidiaries, 2,000,000 shares of Class A common stock of the Company at $8.25 per share for a total of $16.5 million; and
 
(b) redeemed, from the same subsidiary of Hollinger Inc., pursuant to a redemption request, all of the 93,206 outstanding shares of Series E Redeemable Convertible Preferred Stock of the Company at the fixed redemption price of Cdn. $146.63 per share being a total of $9.3 million.

As a result, Hollinger Inc.’s equity and voting interests were reduced to 30.3% and 72.6%, respectively.

Proceeds from the repurchase and redemption were offset against debt due from Hollinger Inc.’s subsidiary (totaling $45.8 million as of December 31, 2002 and classified as loan to affiliate on the consolidated balance sheet), resulting in net outstanding debt due to the Company of approximately $20.4 million as of March 10, 2003. The remaining debt bears interest at 14.25% or, if paid in additional notes, 16.5% and is subordinated to the Hollinger Inc. Notes (so long as the Notes are outstanding), guaranteed by the Ravelston Corporation Limited, the controlling shareholder of Hollinger Inc., and secured by certain assets of Ravelston.

12


 

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — Continued
(Unaudited)

Following a review by a special committee of the Board of Directors of the Company, comprised entirely of independent directors, of all aspects of the transaction relating to the changes in the debt arrangements with Hollinger Inc. and the subordination of this remaining debt, the special committee approved the new debt arrangements, including the subordination.

(ii)  During the quarter, the Company made a venture capital investment of $2.5 million in a fund in which a director of the Company has a minority interest.

Note 10 — Subsequent Events

i) Repurchase of Shares

Commencing April 3, 2003, the Company began purchasing its own shares through the public market and holding the shares acquired as treasury stock. During the period April 3, 2003 to May 5, 2003, the Company acquired 1,000,000 shares of its Class A common stock at an average price of $8.79 per share for total cash consideration of $8.8 million.

ii) Redemption of CanWest Debentures

On April 10, 2003, 3815668 Canada Inc. (the issuer of the 12 1/8% Subordinated Debentures due 2010 received by the Company in partial consideration on sale of certain of the Company’s Canadian newspaper operations to CanWest Global Communications Corp. (“CanWest”) in November 2000) notified the Company of their intention to redeem Cdn. $265.0 million of the 12 1/8% debentures on May 11, 2003. Of the total proceeds received, $159.8 million relates to debentures for which Participations were sold to the Participation Trust and has been paid to the Participation Trust. The balance of $27.6 million was retained by the Company in respect of its interest in the debentures, a portion of which it is unable to transfer to an unaffiliated third party until November 4, 2005.

iii) Reduction of intercompany indebtedness

At the time of the Company’s repurchase and redemption of shares as described in Note 9, the special committee of the Board of Directors referred to in Note 9 also agreed to the partial offset of the remaining $20.4 million of debt owed by a subsidiary of Hollinger Inc. to the Company against amounts owed by the Company to Ravelston Management Inc. (“RMI”). On April 30, 2003, $15.7 million of that debt was transferred to RMI leaving a balance of $4.7 million due to the Company bearing interest at 14.25% or, if paid in additional notes, 16.25%.

Note 11 — Supplemental Condensed Consolidating Financial Information

     The Senior Notes due 2005 and 2010 are obligations of Publishing, a wholly owned subsidiary of the Company. These obligations are guaranteed fully and unconditionally by the Company. 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.

13


 

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2003
(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 182,484     $ 182,484  
 
Circulation
                66,381       66,381  
 
Job Printing
                3,676       3,676  
 
Other
                7,806       7,806  
 
 
   
     
     
     
 
Total operating revenues
                260,347       260,347  
 
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                17,999       17,999  
 
Newsprint incurred through joint ventures
                19,759       19,759  
 
Compensation costs
          954       80,251       81,205  
 
Other operating costs
    366       6,352       96,270       102,988  
 
Other operating costs incurred through joint ventures
                12,497       12,497  
 
Infrequent items
                167       167  
 
Depreciation
          326       8,508       8,834  
 
Amortization
                3,415       3,415  
 
 
   
     
     
     
 
Total operating costs and expenses
    366       7,632       238,866       246,864  
 
 
   
     
     
     
 
Operating income (loss)
    (366 )     (7,632 )     21,481       13,483  
 
 
   
     
     
     
 
Other income (expense):
                               
 
Interest expense
          (7,829 )     (6,099 )     (13,928 )
 
Amortization of deferred financing costs
          (598 )           (598 )
 
Interest and dividend income
    468       6,013       (2,270 )     4,211  
 
Foreign currency gains (losses), net
    31,291       403       12,285       43,979  
 
Other income (expense), net
    (18,733 )     (23,250 )     3,068       (38,915 )
 
 
   
     
     
     
 
Total other income (expense)
    13,026       (25,261 )     6,984       (5,251 )
 
 
   
     
     
     
 
Earnings (loss) before income taxes and minority interest
    12,660       (32,893 )     28,465       8,232  
Provision for income tax (recovery)
    10,319       (18,464 )     12,334       4,189  
 
 
   
     
     
     
 
Earnings (loss) before minority interest
    2,341       (14,429 )     16,131       4,043  
Minority interest
                1,702       1,702  
 
 
   
     
     
     
 
Net earnings (loss)
  $ 2,341     $ (14,429 )   $ 14,429     $ 2,341  
 
 
   
     
     
     
 

14


 

Hollinger International Inc.
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2002

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
Operating revenues:
                               
 
Advertising
  $     $     $ 175,129     $ 175,129  
 
Circulation
                60,933       60,933  
 
Job Printing
                3,790       3,790  
 
Other
                7,111       7,111  
 
 
   
     
     
     
 
Total operating revenues
                246,963       246,963  
 
 
   
     
     
     
 
Operating costs and expenses:
                               
 
Newsprint
                38,590       38,590  
 
Newsprint incurred through joint ventures
                106       106  
 
Compensation costs
          803       75,297       76,100  
 
Other operating costs
    134       5,730       84,142       90,006  
 
Other operating costs incurred through joint ventures
                11,307       11,307  
 
Infrequent items
                177       177  
 
Depreciation
          323       8,520       8,843  
 
Amortization
                4,135       4,135  
 
 
   
     
     
     
 
Total operating costs and expenses
    134       6,856       222,274       229,264  
 
 
   
     
     
     
 
Operating income (loss)
    (134 )     (6,856 )     24,689       17,699  
 
 
   
     
     
     
 
Other income (expense):
                               
 
Interest expense
          (17,049 )     (191 )     (17,240 )
 
Amortization of deferred financing costs
          (1,886 )           (1,886 )
 
Interest and dividend income
    796       1,310       3,701       5,807  
 
Foreign currency gains (losses) net
    4,381       (3,218 )     (84,109 )     (82,946 )
 
Other income (expense), net
    (109,184 )     (89,610 )     175,502       (23,292 )
 
 
   
     
     
     
 
Total other income (expense)
    (104,007 )     (110,453 )     94,903       (119,557 )
 
 
   
     
     
     
 
Earnings (loss) before income taxes and minority interest
    (104,141 )     (117,309 )     119,592       (101,858 )
Provision for income tax (recovery)
    (113 )     (18,992 )     840       (18,265 )
 
 
   
     
     
     
 
Loss before minority interest
    (104,028 )     (98,317 )     118,752       (83,593 )
Minority interest
                356       356  
 
 
   
     
     
     
 
Earnings (loss) before cumulative effect of change in accounting principle
    (104,028 )     (98,317 )     118,396       (83,949 )
Cumulative effect of change in accounting principle
                (20,079 )     (20,079 )
 
 
   
     
     
     
 
Net earnings (loss)
  $ (104,028 )   $ (98,317 )   $ 98,317     $ (104,028 )
 
 
   
     
     
     
 

15


 

Hollinger International Inc.
Condensed Consolidating Balance Sheet as of March 31, 2003

(Amounts in thousands)

                                   
      Hollinger                        
      International Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
ASSETS
                               
Current assets:
                               
 
Cash and cash equivalents
  $ 34,039     $ 15,378     $ 66,056     $ 115,473  
 
Accounts receivable, net
    151       196       211,513       211,860  
 
Intercompany accounts receivable
    9,327       380,439       (389,766 )      
 
Inventories
                8,502       8,502  
 
Prepaid expenses and other current assets
    28       84       26,440       26,552  
 
 
   
     
     
     
 
Total current assets
    43,545       396,097       (77,255 )     362,387  
Loan to affiliate
    20,349                   20,349  
Investments
    257,835       1,340,345       (1,459,960 )     138,220  
Advances under printing contracts and notes receivable — joint ventures
                46,821       46,821  
Property, plant and equipment, net of accumulated depreciation
          4,591       290,180       294,771  
Intangible assets, net of accumulated amortization
                114,967       114,967  
Goodwill
                530,775       530,775  
Prepaid pension benefit
                68,142       68,142  
Deferred financing costs and other assets
    22,383       24,154       22,344       68,881  
 
 
   
     
     
     
 
 
  $ 344,112     $ 1,765,187     $ (463,986 )   $ 1,645,313  
 
 
   
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Current liabilities:
                               
 
Current installments of long-term debt
  $     $     $ 5,359     $ 5,359  
 
Accounts payable
    15       23       78,413       78,451  
 
Accounts payable — joint ventures
                12,046       12,046  
 
Accrued expenses
    5,081       8,368       83,297       96,746  
 
Amounts due to related parties, net
    223,252       1,023,580       (1,214,699 )     32,133  
 
Income taxes payable (recoverable)
    53,310       (17,616 )     302,085       337,779  
 
Deferred revenue
                46,084       46,084  
 
 
   
     
     
     
 
Total current liabilities
    281,658       1,014,355       (687,415 )     608,598  
Long term debt, less current installments
          305,082       266,965       572,047  
Deferred income taxes
    (20,807 )     59,603       210,681       249,477  
Other liabilities
                111,417       111,417  
 
 
   
     
     
     
 
Total liabilities
    260,851       1,379,040       (98,352 )     1,541,539  
 
 
   
     
     
     
 
Minority interest
                20,513       20,513  
 
 
   
     
     
     
 
Redeemable preferred stock
          138,309       (138,309 )      
 
 
   
     
     
     
 
Total stockholders’ equity
    83,261       247,838       (247,838 )     83,261  
 
 
   
     
     
     
 
 
  $ 344,112     $ 1,765,187     $ (463,986 )   $ 1,645,313  
 
 
   
     
     
     
 

16


 

Hollinger International Inc.
Condensed Consolidating Balance Sheet as of December 31, 2002

(Amounts in thousands)

                                   
      Hollinger                        
      International                        
      Inc.   Publishing   Eliminations   Consolidated
     
 
 
 
ASSETS
                               
Current assets:
                               
 
Cash and cash equivalents
  $ 39,750     $ 11,394     $ 62,224     $ 113,368  
 
Accounts receivable, net
    407       282       205,154       205,843  
 
Amounts due from related companies, net
    191       15,968       (16,159 )      
 
Intercompany accounts receivable
    8,921       358,950       (367,871 )      
 
Inventories
                10,194       10,194  
 
Prepaid expenses and other current assets
    7       56       18,295       18,358  
 
Escrow deposits and restricted cash
          545,952             545,952  
 
 
   
     
     
     
 
Total current assets
    49,276       932,602       (88,163 )     893,715  
Loan to affiliate
    45,848                   45,848  
Investments
    273,151       1,340,857       (1,489,932 )     124,076  
Advances under printing contracts and notes receivable — joint ventures
                50,591       50,591  
Property, plant and equipment, net of accumulated depreciation
          4,891       294,795       299,686  
Intangible assets, net of accumulated amortization
                117,179       117,179  
Goodwill
                533,677       533,677  
Prepaid pension benefit
                63,146       63,146  
Deferred financing costs and other assets
    66       37,456       22,692       60,214  
 
 
   
     
     
     
 
 
  $ 368,341     $ 2,315,806     $ (496,015 )   $ 2,188,132  
 
 
   
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                               
Current liabilities:
                               
 
Current installments of long-term debt
  $     $     $ 4,814     $ 4,814  
 
Senior Subordinated Notes
          504,906             504,906  
 
Accounts payable
    247       207       86,991       87,445  
 
Accounts payable — joint ventures
                12,454       12,454  
 
Accrued expenses
    5,101       18,748       83,029       106,878  
 
Amounts due to related parties, net
    194,182       1,034,417       (1,198,241 )     30,358  
 
Income taxes payable (recoverable)
    53,310       (22,226 )     264,887       295,971  
 
Deferred revenue
                42,792       42,792  
 
 
   
     
     
     
 
Total current liabilities
    252,840       1,536,052       (703,274 )     1,085,618  
Long term debt, less current installments
          305,082       269,576       574,658  
Deferred income taxes
    (23,300 )     69,362       203,669       249,731  
Other liabilities
    10,276             122,227       132,503  
 
 
   
     
     
     
 
Total liabilities
    239,816       1,910,496       (107,802 )     2,042,510  
 
 
   
     
     
     
 
Minority interest
                17,097       17,097  
 
 
   
     
     
     
 
Redeemable preferred stock
    8,650       138,309       (138,309 )     8,650  
 
 
   
     
     
     
 
Total stockholders’ equity
    119,875       267,001       (267,001 )     119,875  
 
 
   
     
     
     
 
 
  $ 368,341     $ 2,315,806     $ (496,015 )   $ 2,188,132  
 
 
   
     
     
     
 

17


 

Hollinger International Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003

(Amounts in Thousands)

                                     
        Hollinger                        
        International Inc.   Publishing   Eliminations   Consolidated
       
 
 
 
Cash Flows From Operating Activities:
                               
 
Net earnings (loss)
  $ 2,341     $ (14,429 )   $ 14,429     $ 2,341  
 
Items not involving cash:
                               
   
Depreciation and amortization
          326       11,923       12,249  
   
Amortization of debt issue costs
          598             598  
   
Minority interest
                1,702       1,702  
   
Premium on debt extinguishments
          19,657             19,657  
   
Gain on sale of investments
                (900 )     (900 )
   
Loss on sale of assets
                296       296  
   
Non-cash interest income
    (77 )           (1,582 )     (1,659 )
   
Other non-cash items
    2,797       (939 )     (35,598 )     (33,740 )
 
Changes in working capital, net
    (32,666 )     (5,824 )     36,093       (2,397 )
 
 
   
     
     
     
 
   
Cash provided by (used in) operating activities
    (27,605 )     (611 )     26,363       (1,853 )
 
 
   
     
     
     
 
Cash Flows From Investing Activities:
                               
 
Capital expenditures
          (26 )     (4,067 )     (4,093 )
 
Additions to investments and other assets
    (2,500 )           (3,223 )     (5,723 )
 
Proceeds from disposal of investments and other assets
                3,971       3,971  
 
Other investing activities
                558       558  
 
 
   
     
     
     
 
   
Cash used in investing activities
    (2,500 )     (26 )     (2,761 )     (5,287 )
 
 
   
     
     
     
 
Cash Flows From Financing Activities:
                               
 
Repayment of long-term debt
          (524,563 )     (2,206 )     (526,769 )
 
Escrow deposits and restricted cash
          545,952             545,952  
 
Changes in amounts due from affiliates
    28,658       (16,768 )     (13,447 )     (1,557 )
 
Cash dividends paid
    (4,374 )                 (4,374 )
 
Other financing activities
    110             (3,151 )     (3,041 )
 
 
   
     
     
     
 
   
Cash provided by (used in) financing activities
    24,394       4,621       (18,804 )     10,211  
 
 
   
     
     
     
 
 
Effect of exchange rate changes on cash
                (966 )     (966 )
 
 
   
     
     
     
 
 
Net increase (decrease) in cash and cash equivalents
    (5,711 )     3,984       3,832       2,105  
 
Cash and cash equivalents at beginning of period
    39,750       11,394       62,224       113,368  
 
 
   
     
     
     
 
 
Cash and cash equivalents at end of period
  $ 34,039     $ 15,378     $ 66,056     $ 115,473  
 
 
   
     
     
     
 

18


 

Hollinger International Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2002

(Amounts in thousands)

                                     
        Hollinger                        
        International Inc.   Publishing   Eliminations   Consolidated
       
 
 
 
Cash Flows From Operating Activities:
                               
 
Net earnings (loss)
  $ (104,028 )   $ (98,317 )   $ 98,317     $ (104,028 )
 
Items not involving cash:
                               
   
Depreciation and amortization
          493       12,485       12,978  
   
Amortization of debt issue costs
          1,886             1,886  
   
Minority interest
                356       356  
   
Premium on debt extinguishments
          26,400             26,400  
   
Gain on sales of assets
                (5,433 )     (5,433 )
   
Non-cash interest income
                (1,244 )     (1,244 )
   
Total Return Equity Swap
    (9,801 )                 (9,801 )
   
Foreign currency translation loss
    6,420             71,797       78,217  
   
Cumulative effect of change in accounting principle
                20,079       20,079  
   
Other non-cash items
    105,342       66,508       (180,295 )     (8,445 )
 
Changes in working capital, net
    (3,408 )     (21,079 )     (5,420 )     (29,907 )
 
 
   
     
     
     
 
   
Cash provided by (used in) operating activities
    (5,475 )     (24,109 )     10,642       (18,942 )
 
 
   
     
     
     
 
Cash Flows From Investing Activities:
                               
 
Capital expenditures
          (5 )     (6,064 )     (6,069 )
 
Additions to investments and other assets
                (3,981 )     (3,981 )
 
Proceeds from disposal of investments and other assets
          602,200       (591,454 )     10,746  
 
 
   
     
     
     
 
   
Cash provided by (used in) investing activities
          602,195       (601,499 )     696  
 
 
   
     
     
     
 
Cash Flows From Financing Activities:
                               
 
Repayments of long-term debt
          (316,412 )     (1,289 )     (317,701 )
 
Changes in amounts due from affiliates
    823       (332,771 )     328,489       (3,459 )
 
Dividends and distributions to minority interests
                (465 )     (465 )
 
Cash dividends paid
    (9,870 )                 (9,870 )
 
Other financing activities
    142             133       275  
 
 
   
     
     
     
 
   
Cash provided by (used in) financing activities
    (8,905 )     (649,183 )     326,868       (331,220 )
 
 
   
     
     
     
 
 
Effect of exchange rate changes on cash
                6,181       6,181  
 
 
   
     
     
     
 
 
Net decrease in cash and cash equivalents
    (14,380 )     (71,097 )     (257,808 )     (343,285 )
 
Cash and cash equivalents at beginning of period
    64,247       101,333       313,934       479,514  
 
 
   
     
     
     
 
 
Cash and cash equivalents at end of period
  $ 49,867     $ 30,236     $ 56,126     $ 136,229  
 
 
   
     
     
     
 

19


 

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 distribution of newspapers and includes the Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group. The Chicago Group includes the Chicago Sun-Times, Post Tribune and city and suburban newspapers in the Chicago metropolitan area. The Community Group includes the Jerusalem Post and related publications. The U.K. Newspaper Group includes the operating results of the Telegraph, its subsidiaries and joint ventures. The Canadian Newspaper Group consists of its magazine and business information group and community newspapers in western Canada, the major portion of which are held through the Company’s 87% interest in Hollinger L.P.

Effective January 1, 2003, the Company adopted SFAS No. 143 “Accounting for Asset Retirement Obligations”, as described in Note 3(d) to the Condensed Consolidated Financial Statements.

Effective January 1, 2003, the Company adopted SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” as described in Note 3 (c) to the Condensed Consolidated Financial Statements relating to the presentation of losses on debt extinguishment.

Effective January 1, 2003, the Company adopted the requirements of FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” as described in Note 3(e) to the Condensed Consolidated Financial Statements with respect to the recording of liabilities for certain guarantees.

As a result of the adoption of the above statements and interpretations, as well as other guidance issued during the course of 2002, and changes in circumstances affecting the manner of presentation, the results for the three month period ended March 31, 2002 have been restated as more fully described in Note 3 to the Condensed Consolidated Financial Statements. The following discussion reflects the restated amounts.

CONSOLIDATED RESULTS OF OPERATIONS

Net earnings in the first quarter 2003 amounted to $2.3 million or net earnings of $0.03 per share compared to a net loss of $104.0 million in the first quarter 2002 or a net loss of $1.08 per share. In both quarters, there were a number of infrequent and unusual items affecting the net earnings and net loss. In the first quarter of 2003, such items included primarily losses of $37.3 million on the extinguishment of debt in January 2003 offset by a gain on the sale of a marketable investment of $0.9 million and a foreign exchange gain on our Participation Trust obligations totaling $43.3 million, all on a before tax basis. In the first quarter of 2002, infrequent and unusual items primarily included foreign exchange losses before tax of $78.2 million related to the substantial liquidation of the Company’s investment in the Canadian Newspaper Group, a before tax loss of $34.7 million related to the early retirement of debt offset in part by a gain in respect of the Total Return Equity Swap (terminated in the fourth quarter of 2002) and gains on asset sales.

Operating revenue and operating income in first quarter 2003 were $260.3 million and $13.5 million, respectively, compared with $247.0 million and $17.7 million in 2002. The increase in operating revenue of $13.3 million is principally a reflection of an increase in revenue at the UK Newspaper Group, a consequence of the strengthening of the British pound against the U.S. dollar, with smaller revenue gains at the Chicago Newspaper Group and the Canadian Newspaper Group.

Total operating costs and expenses increased by $17.6 million to $246.9 million in the first quarter of 2003 from $229.3 million in the first quarter of 2002. The increase is primarily a result of an increase in other operating costs at the U.K. Newspaper Group. That increase reflects both an actual increase in costs measured in British pounds as well as an increase due to a strengthening of the British pound against the dollar.

20


 

Interest expense totaled $13.9 million in the first quarter 2003 compared with $17.2 million in the prior year period. The reduction reflects more favorable interest rates on debt outstanding during the quarter than those on debt in the prior year quarter, a reduction in the average level of indebtedness outstanding during the quarter and a reduction in the amortization expense of deferred financing costs.

Interest and dividend income was $4.2 million in the first quarter 2003 compared with $5.8 million in the same quarter of 2002. The net reduction of $1.6 million in interest and dividend income results from numerous factors including the length of time during the respective quarters that funds were held for debt retirement, interest earned in the prior year on income tax overpayments and interest on the CanWest debentures.

Net foreign currency gains in first quarter 2003 amounted to $44.0 million compared with net foreign currency losses of $82.9 million in the first quarter 2002. Foreign exchange gains on the Participation Trust obligations were $43.3 million and accounted for the largest portion of the first quarter 2003 gain whereas losses of $78.2 million on the substantial liquidation of the Company’s investment in the Canadian Newspaper Group accounted for the major portion of the prior year first quarter loss.

Net other income (expense) in first quarter 2003 amounted to a loss of $38.9 million and consisted primarily of the write-off of deferred financing costs and premiums paid of $37.3 million on the redemption of the Company’s 9.25% Senior Subordinated notes in January 2003. Net other income (expense) for first quarter 2002 amounted to a loss of $23.3 million and primarily included the write-off of deferred financing charges and premiums paid on the redemption of the Company’s 8.625% Senior Notes totaling $34.7 million offset by gains on the Total Return Equity Swaps of $8.5 million and net gains on sales of assets totaling $5.4 million.

Minority interest in 2003 totaled $1.7 million compared to $0.3 million in 2002. Minority interest represents the minority share of net earnings of Hollinger L.P. The increase is due primarily to foreign exchange gains in Hollinger L.P. as a result of the strengthening of the Canadian dollar.

21


 

                   
      Three Months Ended March 31,
     
      2003   2002
     
 
      (dollar amounts in thousands)
              (Restated)
Operating revenues:
               
 
Chicago Group
  $ 106,014     $ 104,735  
 
Community Group
    2,742       3,225  
 
U.K. Newspaper Group
    134,555       123,539  
 
Canadian Newspaper Group
    17,036       15,464  
 
Investment and Corporate Group
           
 
 
   
     
 
Total operating revenue
  $ 260,347     $ 246,963  
 
 
   
     
 
Operating income (loss)
               
 
Chicago Group
  $ 6,294     $ 3,565  
 
Community Group
    (1,718 )     (1,186 )
 
U.K. Newspaper Group
    16,579       22,419  
 
Canadian Newspaper Group
    (1,517 )     (2,054 )
 
Investment and Corporate Group
    (6,155 )     (5,045 )
 
 
   
     
 
Total operating income (loss)
  $ 13,483     $ 17,699  
 
 
   
     
 
Operating revenues:
               
 
Chicago Group
    40.7 %     42.4 %
 
Community Group
    1.1 %     1.3 %
 
U.K. Newspaper Group
    51.7 %     50.0 %
 
Canadian Newspaper Group
    6.5 %     6.3 %
 
Investment and Corporate Group
    0.0 %     0.0 %
 
 
   
     
 
Total operating revenue
    100.0 %     100.0 %
 
 
   
     
 
Operating income (loss)
               
 
Chicago Group
    46.7 %     20.1 %
 
Community Group
    -12.7 %     -6.7 %
 
U.K. Newspaper Group
    123.0 %     126.7 %
 
Canadian Newspaper Group
    -11.3 %     -11.6 %
 
Investment and Corporate Group
    -45.7 %     -28.5 %
 
 
   
     
 
Total operating income (loss)
    100.0 %     100.0 %
 
 
   
     
 
Operating income margin:
               
 
Chicago Group
    5.9 %     3.4 %
 
Community Group
  Neg.     Neg.  
 
U.K. Newspaper Group
    12.3 %     18.1 %
 
Canadian Newspaper Group
  Neg.     Neg.  
 
Investment and Corporate Group
    N/A       N/A  
 
 
   
     
 
Total operating income margin
    5.2 %     7.2 %
 
 
   
     
 

22


 

                     
        Three Months Ended March 31,
       
        2003   2002
       
 
        (dollar amounts in thousands)
                (Restated)
Chicago Group
               
 
Operating revenue
               
   
Advertising
  $ 81,188     $ 79,380  
   
Circulation
    22,010       22,852  
   
Job printing and other
    2,816       2,503  
   
 
   
     
 
 
Total operating revenue
    106,014       104,735  
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    16,255       16,795  
   
Compensation costs
    43,321       43,053  
   
Other operating costs
    32,115       32,371  
   
Infrequent items
    167       177  
   
Depreciation
    4,447       4,639  
   
Amortization
    3,415       4,135  
   
 
   
     
 
 
Total operating costs
    99,720       101,170  
   
 
   
     
 
 
Operating income
  $ 6,294     $ 3,565  
   
 
   
     
 
Community Group
               
 
Operating revenue
               
   
Advertising
  $ 874     $ 986  
   
Circulation
    1,529       1,545  
   
Job printing and other
    339       694  
   
 
   
     
 
 
Total operating revenue
    2,742       3,225  
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    305       461  
   
Compensation costs
    1,498       1,895  
   
Other operating costs
    2,450       1,688  
   
Depreciation
    207       367  
   
 
   
     
 
 
Total operating costs
    4,460       4,411  
   
 
   
     
 
 
Operating loss
  $ (1,718 )   $ (1,186 )
   
 
   
     
 
U.K. Newspaper Group
               
 
Operating revenue
               
   
Advertising
  $ 88,291     $ 83,934  
   
Circulation
    40,209       33,952  
   
Job printing and other
    6,055       5,653  
   
 
   
     
 
 
Total operating revenue
    134,555       123,539  
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    19,759       20,185  
   
Compensation costs
    25,785       22,065  
   
Other operating costs
    68,954       55,763  
   
Depreciation
    3,478       3,107  
   
 
   
     
 
 
Total operating costs
    117,976       101,120  
   
 
   
     
 
 
Operating income
  $ 16,579     $ 22,419  
   
 
   
     
 

23


 

                     
        Three Months Ended March 31,
       
        2003   2002
       
 
        (dollar amounts in thousands)
                (Restated)
Canadian Newspaper Group
               
 
Operating revenue
               
   
Advertising
  $ 12,131     $ 10,829  
   
Circulation
    2,633       2,584  
   
Job printing and other
    2,272       2,051  
   
 
   
     
 
 
Total operating revenue
    17,036       15,464  
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    1,439       1,255  
   
Compensation costs
    9,646       8,282  
   
Other operating costs
    7,163       7,636  
   
Depreciation
    305       345  
   
 
   
     
 
 
Total operating costs
    18,553       17,518  
   
 
   
     
 
 
Operating loss
  $ (1,517 )   $ (2,054 )
   
 
   
     
 
Investment and Corporate Group
               
 
Operating revenue
               
   
Advertising
  $     $  
   
Circulation
           
   
Job printing and other
           
   
 
   
     
 
 
Total operating revenue
           
   
 
   
     
 
 
Operating costs
               
   
Newsprint
           
   
Compensation costs
    955       805  
   
Other operating costs
    4,803       3,855  
   
Depreciation
    397       385  
   
 
   
     
 
 
Total operating costs
    6,155       5,045  
   
 
   
     
 
 
Operating loss
  $ (6,155 )   $ (5,045 )
   
 
   
     
 

24


 

                     
        Three Months Ended March 31,
       
        2003   2002
       
 
        Percentage   Percentage
            (Restated)
Chicago Group
               
 
Operating revenue
               
   
Advertising
    76.6 %     75.8 %
   
Circulation
    20.8 %     21.8 %
   
Job printing and other
    2.6 %     2.4 %
   
 
   
     
 
 
Total operating revenue
    100.0 %     100.0 %
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    15.3 %     16.0 %
   
Compensation costs
    40.9 %     41.1 %
   
Other operating costs
    30.3 %     30.9 %
   
Infrequent items
    0.2 %     0.2 %
   
Depreciation
    4.2 %     4.4 %
   
Amortization
    3.2 %     4.0 %
   
 
   
     
 
 
Total operating costs
    94.1 %     96.6 %
   
 
   
     
 
 
Operating income
    5.9 %     3.4 %
   
 
   
     
 
Community Group
               
 
Operating revenue
               
   
Advertising
    31.9 %     30.6 %
   
Circulation
    55.8 %     47.9 %
   
Job printing and other
    12.3 %     21.5 %
   
 
   
     
 
 
Total operating revenue
    100.0 %     100.0 %
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    11.1 %     14.3 %
   
Compensation costs
    54.6 %     58.8 %
   
Other operating costs
    89.4 %     52.3 %
   
Depreciation
    7.6 %     11.4 %
   
 
   
     
 
 
Total operating costs
    162.7 %     136.8 %
   
 
   
     
 
 
Operating loss
    -62.7 %     -36.8 %
   
 
   
     
 
U.K. Newspaper Group
               
 
Operating revenue
               
   
Advertising
    65.6 %     67.9 %
   
Circulation
    29.9 %     27.5 %
   
Job printing and other
    4.5 %     4.6 %
   
 
   
     
 
 
Total operating revenue
    100.0 %     100.0 %
   
 
   
     
 
 
Operating costs
               
   
Newsprint
    14.7 %     16.4 %
   
Compensation costs
    19.2 %     17.9 %
   
Other operating costs
    51.2 %     45.1 %
   
Depreciation
    2.6 %     2.5 %
   
 
   
     
 
 
Total operating costs
    87.7 %     81.9 %
   
 
   
     
 
 
Operating income
    12.3 %     18.1 %
   
 
   
     
 

25


 

                     
        Three Months Ended March 31,
       
        2003   2002
       
 
        Percentage   Percentage
            (Restated)
Canadian Newspaper Group
               
 
Operating revenue
               
   
Advertising
    71.2 %     70.0 %
   
Circulation
    15.5 %     16.7 %
   
Job printing and other
    13.3 %     13.3 %
 
 
     
     
 
 
Total operating revenue
    100.0 %     100.0 %
 
 
     
     
 
 
Operating costs
               
   
Newsprint
    8.5 %     8.1 %
   
Compensation costs
    56.6 %     53.6 %
   
Other operating costs
    42.0 %     49.4 %
   
Depreciation
    1.8 %     2.2 %
 
 
     
     
 
 
Total operating costs
    108.9 %     113.3 %
 
 
     
     
 
 
Operating loss
    -8.9 %     -13.3 %
 
 
     
     
 

26


 

GROUP OPERATING RESULTS

Chicago Group

Operating revenues for the Chicago Group were $106.0 million in first quarter 2003 compared with $104.7 million in 2002, an increase of $1.3 million or 1.2%. Advertising revenue in first quarter 2003 was $81.2 million compared with $79.4 million in 2002, an increase of $1.8 million or 2.3%. Advertising revenue at the Chicago Sun-Times at $40.2 million for the first quarter of 2003 increased by $0.6 million or 1.5% over first quarter 2002 advertising revenue of $39.6 million. The balance of the Chicago Group had advertising revenues of $41.0 million, up $1.2 million or 3.0% from the prior year. The increased advertising revenue at the Chicago Sun-Times reflected increases in all three advertising revenue categories: national, retail and classified. Increases at other Chicago Group operations came from increases in retail and classified advertising.

Circulation revenue in first quarter 2003 was $22.0 million compared with $22.9 million in 2002, a decrease of $0.9 million or 3.9%. The decrease was a consequence of price discounting and reduced volume. The Chicago Sun-Times average daily circulation in the first quarter 2003 was approximately 4,000 lower than the average daily paid circulation in the first quarter 2002. Printing and other revenue was $2.8 million in 2003 compared with $2.5 million in 2002, an increase of $0.3 million.

Total operating costs in 2003 were $99.7 million compared with $101.2 million in 2002, a decrease of $1.5 million.

Newsprint expense in the first quarter 2003 was $16.3 million compared with $16.8 million in 2002, a decrease of $0.5 million or 3.1%. Total newsprint consumption in the quarter increased by 4.0% over the first quarter of 2002 with per tonne average costs declining by about 7.0% from first quarter 2002 average cost. Compensation costs at $43.3 million in 2003 increased by only $0.3 million or 0.7% over compensation costs of $43.0 million in 2002. Control over staffing levels and wage and salary increases have been offset by substantial increases in the costs of employee benefits over the prior year. Other operating costs at $32.1 million in the first quarter of 2003 were relatively unchanged from other costs of $32.4 million in 2002. Depreciation and amortization at $7.9 million is $0.9 million lower than that in the first quarter of 2002 of $8.8 million.

Operating income was $6.3 million in first quarter 2003 compared to $3.6 million in first quarter 2002, an increase of $2.7 million. The increase in operating income was largely a result of increased advertising revenue, lower newsprint costs and a reduction of $0.9 million in depreciation and amortization charges offset in part by lower circulation revenue. The increase reflects continued efforts at cost control combined with a modest increase in revenue over the prior year.

U.K. Newspaper Group

Operating revenues for the U.K. Newspaper Group were $134.6 million in 2003 compared with $123.5 million in 2002, an increase of $11.1 million or 9.0%. In pounds sterling, operating revenues in 2003 were £84.0 million compared with £86.6 million in 2002, a decrease of £2.6 million or 3.0%. The decrease in operating revenue relates entirely to declines in advertising revenue from £58.9 million in 2002 to £55.1 million in 2003, a decrease of £3.8 million or 6.5%. The major portion of the decrease occurred in March of 2003, reflecting continuing poor overall confidence in the economy. Display advertising was down 6.4% year over year with recruitment advertising and auto advertising down by 17.5% and 12.0% respectively. The reduction is largely a consequence of declining linage with overall average rates showing little movement from the prior year.

Circulation revenues improved from £23.8 million in the first quarter of 2002 to £25.1 million in 2003, an increase of £1.3 million or 5.5%. Circulation volume has declined in the first quarter of 2003 from that in the prior year period as a result of management’s decision to reduce both bulk and foreign print sales and to reinvest the significant associated costs in developing and marketing the newspapers. In spite of the planned reductions in circulation, at an average daily circulation of 926,500 in March, The Daily Telegraph remains approximately 250,000 copies ahead of its nearest competitor. Those declines were compensated for by the impact of a price increase implemented in September of 2002 and, as price increases are only implemented as existing subscription programs expire, the continuing impact of a September 2001 price increase.

Newsprint costs were £12.3 million in the first quarter of 2003 compared to £14.2 million in the prior year, a reduction of £1.9 million or 13.4% reflecting reduced pagination as a consequence of lower advertising volumes, the reduction in bulk sampling and foreign sales as well as a 7.1% reduction in average unit prices for newsprint.

27


 

Compensation costs for the first quarter 2003 were £16.1 million compared to £15.5 million in the comparable prior year quarter, an increase of £0.6 million or 3.9%. The increase is in part due to a 0.6% increase in staffing levels with the balance largely due to increases in rates of compensation.

Other operating expenses were £43.0 million in 2003 compared with £39.1 million in 2002, an increase of £3.9 million or 10.0%. Other operating expenses increased primarily due to increased marketing activities.

Operating income in first quarter 2003 was $16.6 million, a decrease of $5.8 million or 25.9% from prior year operating income of $22.4 million. The decrease primarily reflects declines in the volume of advertising, increased costs, particularly other operating expenses, and a strengthening of the British pound against the U.S. dollar partially offset by increases in circulation revenue and a reduction in newsprint costs.

Canadian Newspaper Group

Operating revenues in the Canadian Newspaper Group in first quarter 2003 were $17.0 million compared with $15.5 million in 2002, an increase of $1.5 million or 9.7%. The first quarter 2003 operating loss was $1.5 million compared to $2.1 million in the prior year. The results for the Canadian Newspaper Group include pension and post-retirement obligation expense of Cdn. $1.9 million in 2003 relating to employees formerly employed by Southam Publications and in respect of whom the obligations were not assumed by CanWest, purchaser of the related newspapers. In the first quarter of 2002, those pension and post-retirement obligation expenses totaled Cdn. $1.9 million. Changes in the average foreign exchange rate during the first quarters of 2003 and 2002 did not have a significant impact on the Company’s overall operating income.

Community Group

Operating revenue and operating income for the Community Group were $2.7 million and a loss of $1.7 million in the first quarter 2003 compared with $3.2 million and a loss of $1.2 million in 2002.

Investment and Corporate Group

Operating costs of the Investment and Corporate Group were $6.2 million in first quarter 2003 compared with $5.0 million in 2002.

28


 

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Working capital consists of current assets less current liabilities. At March 31, 2003, working capital, excluding debt obligations and related funds held in escrow, was a deficiency of $240.9 million compared to a deficiency of $228.1 million at December 31, 2002. Current assets excluding escrow funds and restricted cash were $362.4 million at March 31, 2003 and $347.8 million at December 31, 2002. Current liabilities, excluding debt obligations, were $603.2 million at March 31, 2003, compared with $575.9 million at December 31, 2002. The $12.8 million decrease in working capital is primarily the result of an increase in income taxes payable in U.S. dollar terms largely as a consequence of the strengthening of the Canadian dollar against the U.S. dollar.

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.

Debt

Long-term debt, including the current portion, was $577.4 million at March 31, 2003 compared with $1,084.4 million at December 31, 2002. During the first quarter 2003, the Company retired $504.9 million principal amount of Senior Subordinated Notes, repaid $1.1 million of debt due under its Senior Credit Facility and reduced other debt by $1.1 million. Under the terms of the Senior Credit Facility, the Company is required to repay $2.8 million of amounts advanced as term debt during the remainder of 2003.

During the term of the Senior Credit Facility, the Company is required to make partial principal repayments in each year as follows:

           
      (in thousands)
 
2003
  $ 3,875  
 
2004
    7,263  
 
2005
    9,513  
 
2006
    11,762  
 
2007
    14,012  
Later years
    218,575  
 
 
   
 
 
  $ 265,000  
 
 
   
 

Cash Flows

Cash flows used in operating activities were $1.9 million in the three months ended March 31, 2003, compared with $18.9 million in 2002. Excluding changes in working capital (other than cash), cash flows provided by operating activities were $0.5 million in 2003 and $11.0 million in 2002.

Cash flows used in investing activities were $5.3 million in 2003 compared with cash flows provided by investing activities of $0.7 million in 2002.

Cash flows provided by financing activities were $10.2 million in 2003 and cash flows used in financing activities were $331.2 million in 2002. In 2003, the Company repaid $504.9 million of long-term debt from escrow deposits and restricted cash on hand at December 31, 2002 raised upon issuance of the 9% Senior Notes and completion of the Senior Credit Facility. In 2002, the Company repaid $291.3 million of long-term debt primarily from available cash balances. Long-term debt repayments as disclosed in the Condensed Consolidated Statements of Cash Flows include both principal repayments and premiums paid on extinguishment of debt.

29


 

Capital Expenditures

The Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group have funded their capital expenditures out of cash provided by their respective operating activities and anticipate that they will have sufficient cash flow to continue to do so.

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 which may limit amounts available to the Company for the payment of dividends.

Although the amount available for the payment of dividends and other obligations by the Company at any time is limited as described above, the Company expects its internal cash flow and financing resources to be adequate to meet its foreseeable requirements.

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.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

     Newsprint Newsprint prices continued to fluctuate and on a consolidated basis newsprint expense amounted to $37.8 million in 2003 and $38.7 million in 2002. Management believes that newsprint prices could continue to show significant price variations in the future. We anticipate a newsprint price increase of $35 per tonne during the second quarter of 2003 the effect of which will be limited to our Chicago Group and Canadian Group operations. In the United Kingdom, newsprint prices payable by the Company in 2003 pursuant to longer-term contracts are less than the average prices paid in 2002. 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 three months ended March 31, 2003, a change in the price of newsprint of $50 per tonne would increase or decrease net income for the quarter by about $2.2 million.

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

     Interest Rates At March 31, 2003, the Company had debt totaling $250.0 million which is subject to interest calculated at floating rates as a consequence of fixed to floating swaps arranged by the Company. The current rates of interest are fixed until the third quarter of 2003. A 1% change in the interest rate would result in a change in interest costs in respect of such debt of $0.6 million for the quarter.

     Foreign Exchange Rates A substantial portion of the Company’s income is earned outside of the United States in currencies other than the United States dollar. As a result the Company’s income is vulnerable to changes in the value of the United States dollar. Increases in the value of the United States dollar can reduce net earnings and declines can result in increased earnings. Based on earnings and ownership levels for the three months ended March 31, 2003, a $0.05 change in the important foreign currencies would have the following effect on the Company’s reported net earnings for the three months ended March 31, 2003:

                 
    Actual Average        
    2003 Rate   Increase/Decrease
   
 
United Kingdom
  $ 1.60/£     $ 255,000  
Canada
  $ 0.66/Cdn. $   $ 46,184,000 (1)
 
 
   
 


(1)   Included in the increase/decrease noted is $45.7 million in respect of the Company’s sale of Participations as noted below.

30


 

In 2001, the Company sold Participations in Cdn. $756.8 million principal amount of CanWest debentures to a special purpose trust (“Participation Trust”). In respect of these debentures, based on the original Canadian principal amount, the Company will eventually be required to deliver to the Participation Trust, debentures with a principal amount equivalent to $490.5 million, which equates to a fixed rate of exchange of 0.6482 United States dollars to each Canadian dollar. At March 31, 2003, the obligation to the Participation Trust was $592.8 million and the corresponding CanWest debentures had a principal amount receivable of Cdn. $914.5 million.

As the requirement to deliver debentures is a U.S. dollar obligation and the notes are denominated in Canadian dollars, the Company is exposed to fluctuations in the related exchange rate. A $0.05 change in the rate of exchange of U.S. dollars into Canadian dollars applied to the Cdn. $914.5 million principal amount of CanWest debentures at March 31, 2003 would result in a $45.7 million loss or gain to the Company. Subsequent to March 31, 2003, CanWest redeemed a total of Cdn. $265.0 million principal amount of debentures and, of the total proceeds received, $159.8 million was paid to the Participation Trust. Upon receipt of the notice of redemption, the Company entered into a U.S. dollar forward purchase contract for the full amount of the Canadian dollar redemption proceeds to coincide with the date of receipt of the proceeds.

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

     Item 4. Controls and Procedures

     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 Office 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.

31


 

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

99.1                      Certification
99.2                      Certification

(b)  Reports on Form 8-K

None

32


 

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: May 15, 2003 By: /s/ Conrad M. Black
    Lord Black of Crossharbour, PC(C), OC, KCSG
Chairman of the Board of Directors and Chief Executive Officer
     
Date: May 15, 2003 By: /s/ Peter K. Lane
    Peter K. Lane
Vice President and Chief Financial Officer

33


 

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: May 15, 2003

/s/ Conrad M. Black

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

34


 

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: May 15, 2003

/s/ Peter K. Lane

Peter K. Lane
Vice President and
Chief Financial Officer

35