HOLLINGER INTERNATIONAL INC
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
Form 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Fiscal Year ended December 31, 2003
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from          to

Commission File No. 1-14164

Hollinger International Inc.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  95-3518892
(I.R.S. Employer
Identification Number)
712 Fifth Avenue,
New York, New York
(Address of Principal Executive Office)
  10019
(Zip Code)

Registrant’s telephone number, including area code

(212) 586-5666

Securities registered pursuant to Section 12(b) of the Act:

     
Title of Each Class: Name of Each Exchange on Which Registered:


Class A Common Stock par value $.01 per share
8 5/8% Senior Notes due 2005
9% Senior Notes due 2010
  New York Stock Exchange
New York Stock Exchange
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes o         No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in the Securities Exchange Act of 1934 Rule 12b-2)    Yes þ         No o

     The aggregate market value of Class A Common Stock held by non-affiliates as of June 30, 2003, was approximately $644,988,310 determined using the closing price per share on that date of $10.77, as reported on the New York Stock Exchange. As of such date, non-affiliates held no shares of Class B Common Stock. There is no active market for the Class B Common Stock.

     The number of outstanding shares of each class of the registrant’s common stock as of December 31, 2004 was as follows: 75,687,055 shares of Class A Common Stock and 14,990,000 shares of Class B Common Stock.




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EXPLANATORY NOTE

      The Company is filing this annual report on Form 10-K for the fiscal year ended December 31, 2003 following its review of the report of the Special Committee of Independent Directors (the “Special Committee”). The Company’s Board of Directors formed the Special Committee on June 17, 2003 to investigate, among other things, allegations described in a beneficial ownership report on Schedule 13D filed with the SEC by Tweedy, Browne & Company, LLC (“Tweedy Browne”), an unaffiliated stockholder of the Company, on May 19, 2003, as amended on June 11, 2003, and any other matters the Special Committee determined should be investigated. The Special Committee filed its report with the U.S. District Court for the Northern District of Illinois on August 30, 2004. The Company included the full text of the report as an exhibit to a current report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on August 31, 2004, as amended by a current report on Form 8-K/A filed with the SEC on December 15, 2004.

      The Company previously made public its need to review the Special Committee’s report before it could complete its annual report on Form 10-K for the year ended December 31, 2003. The Company expects to file, within a reasonable time, quarterly reports on Form 10-Q for the periods ended March 31, 2004, June 30, 2004 and September 30, 2004 and the required pro forma financial information reflecting the sale of Telegraph Group Limited on a current report on Form 8-K.

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HOLLINGER INTERNATIONAL INC.

2003 FORM 10-K

               
Page

           
     Business     4  
     Properties     36  
     Legal Proceedings     38  
     Submission of Matters to a Vote of Security Holders     45  
 
           
     Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    46  
     Selected Financial Data     48  
     Management’s Discussion and Analysis of Financial Condition and Results of Operations     56  
     Quantitative and Qualitative Disclosure about Market Risk     84  
     Financial Statements and Supplementary Data     85  
     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     85  
     Controls and Procedures     85  
     Other Information     88  
 
           
     Directors and Executive Officers of the Registrant     89  
     Executive Compensation     92  
     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     103  
     Certain Relationships and Related Transactions     105  
     Principal Accountant Fees and Services     115  
 
           
     Exhibits, Financial Statement Schedules, and Reports on Form 8-K     116  
 EX-3.1: RESTATED CERTIFICATE OF INCORPORATION
 EX-3.2: BYLAWS
 EX-10.1: STOCK PURCHASE AGREEMENT
 EX-10.2: FACILITATION AGREEMENT
 EX-10.19: BUSINESS OPPORTUNITIES AGREEMENT
 EX-10.20: RELEASE AND SETTLEMENT AGREEMENT
 EX-10.21: OPTION EXERCISE AGREEMENT
 EX-10.22: CONSULTING AGREEMENT
 EX-10.23: COMPROMISE AGREEMENT
 EX-10.24: DEFERRED STOCK UNIT AGREEMENT
 EX-10.25: SUMMARY OF PRINCIPLE TERMS
 EX-10.26: NOTICE TO OPTION PLAN PARTICIPANTS
 EX-21.1: SIGNIFICANT SUBSIDIARIES
 EX-23.1: CONSENT OF KPMG LLP
 EX-31.1: CERTIFICATION OF CEO
 EX-31.2: CERTIFICATION OF CFO
 EX-32.1: CERTIFICATION OF CEO
 EX-32.2: CERTIFICATION OF CFO

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FORWARD-LOOKING STATEMENTS

      This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. These statements relate to future events or the Company’s future financial performance with respect to its financial condition, results of operations, business plans and strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of management, capital expenditures, growth and other matters. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company or the newspaper industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” or “continue” or the negative of those terms or other comparable terminology. These statements are only predictions and such expectations may prove to be incorrect. Some of the things that could cause the Company’s actual results to differ substantially from its current expectations are:

  •  changes in prevailing economic conditions, particularly in the target markets of the Company’s newspapers;
 
  •  actions of the Company’s controlling stockholder;
 
  •  continuing investigations by the SEC and other government agencies in the United States and Canada;
 
  •  adverse developments in pending litigation involving the Company and its affiliates, directors and executive officers;
 
  •  actions of competitors, including price changes and the introduction of competitive service offerings;
 
  •  changes in the preferences of readers and advertisers, particularly in response to the growth of Internet-based media;
 
  •  the effects of changing cost or availability of raw materials, including changes in the cost or availability of newsprint and magazine body paper;
 
  •  changes in laws or regulations, including changes that affect the way business entities are taxed;
 
  •  changes in accounting principles or in the way such principles are applied; and
 
  •  other matters identified in “Item 1 — Business — Risk Factors.”

      The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date this Form 10-K is filed with the SEC. The Company does not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under the caption “Risk Factors.”

      The Company cautions that the areas of risk described above may not be exhaustive. The Company operates in a continually changing business environment, and new risks emerge from time to time. Management cannot predict such new risks, nor can it assess either the impact, if any, of such risks on the Company’s businesses or the extent to which any risk or combination of risks may cause actual results to differ materially from those projected in any forward-looking statements. In light of these risks, uncertainties and assumptions, it should be kept in mind that events, trends or financial performance described in any forward-looking statement made in this annual report on Form 10-K might not occur.

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PART I

 
Item 1. Business

Overview

      The Company is a leading publisher of English-language newspapers in the United States and Canada. The Company owns or has interests in over 200 publications, including daily and non-daily newspapers, and magazines. The Company’s premier title is the Chicago Group’s Chicago Sun-Times, which has the second highest daily readership and circulation of any newspaper in the Chicago metropolitan area and had the eighth highest daily readership of any metropolitan daily newspaper in the United States, as reported in the 2003 Scarborough Report.

      Unless the context requires otherwise, all references herein to the “Company” are to Hollinger International Inc., its predecessors and consolidated subsidiaries, “Publishing” refers to Hollinger International Publishing Inc., a wholly-owned subsidiary of the Company, and “Hollinger Inc.” refers to the Company’s parent, Hollinger Inc. and its affiliates.

 
Chicago Group

      The Chicago Group consists of more than 100 newspapers in the greater Chicago metropolitan area. The Chicago Group’s primary newspaper is the Chicago Sun-Times, which was founded in 1948 and is one of Chicago’s most widely read newspapers. The Chicago Sun-Times is published in a tabloid format and has the second highest daily readership and circulation of any newspaper in the 16-county Chicago metropolitan area, attracting approximately 1.6 million readers daily as reported in the 2003 Scarborough Report. The Chicago Group pursues a clustering strategy in the greater Chicago metropolitan market, covering all of Chicago’s major suburbs as well as its surrounding high growth counties. This strategy enables the Company to offer joint selling programs to advertisers, thereby expanding advertisers’ reach. For the year ended December 31, 2003, the Chicago Group had revenues of $450.8 million and operating income of $24.5 million.

 
Canadian Newspaper Group

      The Canadian Newspaper Group includes the operations of Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”) that has an 87% interest in Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”). HCPH Co. and Hollinger L.P. own numerous daily and non-daily newspaper properties and Canadian trade magazines and tabloids for the transportation, construction, natural resources and manufacturing industries, among others. In addition, the Canadian Newspaper Group administers the retirement plans, and absorbs the costs related to post-retirement, post-employment benefit and pension plans of certain retired employees of HCPH Co. (successor of Southam Inc.). For the year ended December 31, 2003, the Canadian Newspaper Group had revenues of approximately $80.5 million and an operating loss of approximately $5.0 million.

Recent Developments

 
Investigation of and Legal Proceedings Relating to Certain Related Party Transactions

      Hollinger Inc., a Canadian publicly traded company, directly or indirectly owns approximately 17.4% of the equity and 66.8% of the voting interest in the Company. In beneficial ownership reports filed with the SEC on Schedule 13D, The Ravelston Corporation Limited (“Ravelston”), a privately held Canadian company, and Lord Conrad M. Black of Crossharbour (“Black”), a Director and former Chairman and Chief Executive Officer of the Company, claim beneficial ownership over Hollinger Inc.’s interests in the Company. Black also owns 600 shares of the Company’s Class A Common Stock directly. In addition, Black claims beneficial ownership over 1,363,750 shares of Class A Common Stock underlying stock options that Black has alleged he exercised in February and April 2004. These shares have not been issued by the Company, pending the outcome of litigation involving the alleged option exercises. See “Item 3 — Legal Proceedings — Black v. Hollinger International Inc., filed on April 5, 2004.”

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      The above ownership figures are based on 75,687,055 shares of Class A Common Stock and 14,990,000 shares of Class B Common Stock outstanding as of December 31, 2004 and beneficial ownership reports of Hollinger Inc., Ravelston and Black filed with the SEC. According to those reports, Hollinger Inc. owns directly or indirectly, and Ravelston and Black claim beneficial ownership over, all of the shares of Class B Common Stock outstanding, each of which carries the right of 10 votes per share.

      On June 17, 2003, the Board of Directors established a special committee of independent directors (the “Special Committee”) to investigate, among other things, certain allegations regarding various related party transactions, including allegations described in a beneficial ownership report on Schedule 13D filed with the SEC by Tweedy Browne, an unaffiliated stockholder of the Company, on May 19, 2003, as amended on June 11, 2003. In its Schedule 13D report, Tweedy Browne made allegations with respect to the terms of a series of transactions between the Company and certain former executive officers and certain current and former members of the Board of Directors, including Black, F. David Radler (“Radler”), the Company’s former President and Chief Operating Officer, J.A. Boultbee (“Boultbee”), a former Executive Vice-President and a former member of the Board of Directors, and Peter Y. Atkinson (“Atkinson”), a former Executive Vice-President and a former member of the Board of Directors. The allegations concern, among other things, payments received directly or indirectly by such persons relating to “non-competition” agreements arising from asset sales by the Company, payments received by such persons under the terms of management services agreements between the Company and Ravelston, Ravelston Management Inc. (“RMI”), Moffat Management Inc. (“Moffat”) and Black-Amiel Management Inc. (“Black-Amiel”) and sales by the Company of assets to entities with which such persons were affiliated. In October 2003, the Special Committee found references to previously undisclosed “non-competition” payments to Hollinger Inc. while reviewing documents obtained from the Company. The Special Committee also found information showing that “non-competition” payments to Black, Radler, Boultbee and Atkinson had been falsely described in, among other filings, the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2001 (the “2001 Form 10-K”). The Special Committee and the Audit Committee each conducted expedited investigations into these matters.

      On November 15, 2003, the Special Committee and the Audit Committee disclosed to the Board of Directors the preliminary results of their investigations. The committees determined that a total of $32.2 million in payments characterized as “non-competition” payments were made by the Company without appropriate authorization by either the Audit Committee or the full Board of Directors. Of the total unauthorized payments, approximately $16.6 million was paid to Hollinger Inc. in 1999 and 2000, approximately $7.2 million was paid to each of Black and Radler in 2000 and 2001, and $602,500 was paid to each of Boultbee and Atkinson in 2000 and 2001. As a consequence of these findings, the Special Committee then entered into discussions with Black that culminated in the Company and Black signing an agreement on November 15, 2003 (the “Restructuring Agreement”). The Restructuring Agreement provides for, among other things, restitution by Hollinger Inc., Black, Radler, Boultbee and Atkinson to the Company of the full amount of the unauthorized payments, plus interest; the hiring by the Board of Directors of Lazard Frères & Co. LLC and Lazard & Co., Limited (collectively, “Lazard”) as financial advisors to explore alternative strategic transactions, including the sale of the Company as a whole or the sale of its specific businesses (the “Strategic Process”); and certain management changes, including the retirement of Black as CEO and the resignations of Radler, Boultbee and Atkinson. In addition, Black agreed, as the majority stockholder of Hollinger Inc., that during the pendency of the Strategic Process he would not support a transaction involving ownership interests in Hollinger Inc. if such transaction would negatively affect the Company’s ability to consummate a transaction resulting from the Strategic Process unless the transaction were necessary to enable Hollinger Inc. to avoid a material default or insolvency.

      On November 19, 2003, Black retired as CEO of the Company. Gordon Paris (“Paris”) became the Company’s Interim CEO upon Black’s retirement. Effective November 16, 2003, Radler resigned as President and Chief Operating Officer of the Company and as publisher of the Chicago Sun-Times, at which time Paris became Interim President. On November 16, 2003, Radler and Atkinson also resigned as members of the Board of Directors. The Company terminated Boultbee as an officer on November 16, 2003. On January 17, 2004, Black was removed as non-executive Chairman of the Board of Directors and Paris was elected as Interim Chairman on January 20, 2004. On March 5, 2004 Black was removed as Executive Chairman of the

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Telegraph Group Limited. On March 23, 2004, Colson retired as Chief Operating Officer of the Company and Chief Executive Officer of the Telegraph Group Limited in accordance with the terms of his Compromise Agreement with the Company. On April 27, 2004, Atkinson resigned as Executive Vice President of the Company under the terms of his settlement with the Company.

      Although Radler was not a direct party to the Restructuring Agreement, he has agreed to pay the amount identified as attributable to him in the Restructuring Agreement. Prior to the end of December 2003, Radler paid the Company $850,000. During 2004, Radler paid an additional amount of approximately $7.8 million, including interest of $1.5 million.

      Although Atkinson was not a direct party to the Restructuring Agreement, he agreed to pay the amount identified as attributable to him in the Restructuring Agreement. On April 27, 2004, Atkinson and the Company entered into a settlement agreement in which Atkinson has agreed to pay a total amount of approximately $2.8 million, representing all “non-competition” payments and payments under the incentive compensation plan of Hollinger Digital LLC (“Hollinger Digital”) that he received, plus interest. The total amount of $2.8 million includes approximately $603,000 identified as attributable to Atkinson in the Restructuring Agreement. Prior to the end of December 2003, Atkinson paid the Company $350,000. On April 27, 2004, Atkinson exercised his vested options and the net proceeds of $4.0 million from the sale of the underlying shares of Class A Common Stock were deposited into an escrow account. Upon the approval of the terms of the settlement agreement by the Court of Chancery in the State of Delaware (the “Delaware Chancery Court”), the Company will receive $2.4 million. Included in the $2.4 million is approximately $253,000 which represents the balance identified, before interest, as attributable to Atkinson at December 31, 2003 in the Restructuring Agreement. On April 27, 2004, the Company entered into a consulting agreement with Atkinson. See “Item 13 — Certain Relationships and Related Transactions — Release and Settlement Agreement with Atkinson” and “— Consulting Agreement with Atkinson.”

      By Order and Judgment dated June 28, 2004, the Delaware Chancery Court found, among other things, that Black and Hollinger Inc. breached their respective obligations to make restitution pursuant to the Restructuring Agreement and ordered, among other things, that Black and Hollinger Inc. pay the Company $29.8 million in aggregate. Hollinger Inc. and Black paid the Company the amount ordered by the court on July 16, 2004, but both have appealed the order to the Delaware Supreme Court. See “Item 3 — Legal Proceedings — Hollinger International Inc. v. Conrad M. Black, Hollinger Inc., and 504468 N.B. Inc.

      Boultbee has not paid to the Company any amounts in restitution for the unauthorized “non-competition” payments set forth in the Restructuring Agreement, and has filed a suit in Canada against the Company and members of the Special Committee seeking damages for an alleged wrongful dismissal. See “Item 3 — Legal Proceedings — Other Actions.

      As more fully described under “Item 13 — Certain Relationships and Related Transactions — Services Agreements,” the Company was party to management services agreements with RMI, Moffat and Black-Amiel. The Restructuring Agreement provides for the termination of these agreements in accordance with their terms, effective June 1, 2004, and the negotiation of the management fee payable thereunder for the period from January 1, 2004 until June 1, 2004. In November 2003, in accordance with the terms of the Restructuring Agreement, the Company notified RMI of the termination of the services agreements effective June 1, 2004 and subsequently proposed a reduced management fee of $100,000 per month for the period from January 1, 2004 through June 1, 2004. RMI did not accept the Company’s offer and demanded a management fee of $2.0 million per month, which the Company did not accept. RMI seeks damages from the Company for alleged breaches of the services agreements in legal actions pending before the courts. See “Item 3 — Legal Proceedings — Hollinger International Inc. v. Ravelston, RMI and Hollinger Inc.

      On January 16, 2004, the Company consented to the entry of a partial final judgment and order of permanent injunction (the “Court Order”) against the Company in an action brought by the SEC in the U.S. District Court for the Northern District of Illinois (the “January 2004 SEC Action”). The Court Order enjoins the Company from violating provisions of the Exchange Act, including the requirements to file accurate annual reports on Form 10-K and quarterly reports on Form 10-Q and keep accurate books and records. The Court Order requires the Company to permit the Special Committee to complete its

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investigation and to take whatever actions the Special Committee, in its sole discretion, deems necessary to fulfill its mandate, including to pursue litigation and collect damages and recover assets for the Company. The Court Order also provides for the automatic appointment of Richard C. Breeden (“Breeden”), currently advisor and legal counsel to the Special Committee, as Special Monitor of the Company, in order to complete the ongoing Special Committee investigation, pursue litigation and collect damages and assets for the Company and protect the Company’s assets, in the event that the Board of Directors or the Company’s stockholders take actions in violation of the Court Order.

      On January 28, 2004, the Company filed a civil complaint in the United States District Court for the Northern District of Illinois asserting breach of fiduciary duty and other claims against Hollinger Inc., Ravelston, RMI, Black, Radler and Boultbee, which complaint was first amended on May 7, 2004. The amended complaint added certain other defendants, including Barbara Amiel Black (“Amiel Black”), a Director of the Company and wife of Black, and Daniel W. Colson (“Colson”), former Chief Operating Officer and Director of the Company, sought approximately $484.5 million in damages, including approximately $103.9 million in pre-judgment interest, and also included claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), which provides for a trebling of damages and attorneys’ fees. On October 8, 2004, the court granted the defendants’ motion to dismiss the RICO claims and also dismissed the remaining claims without prejudice on jurisdictional grounds. On October 29, 2004, the Company filed a second amended complaint seeking to recover approximately $542.0 million in damages, including prejudgment interest of approximately $117.0 million, and punitive damages. The second amended complaint adds Richard N. Perle (“Perle”), a Director of the Company, as a defendant and withdrew as defendants certain companies affiliated with Black and Radler. The Company is seeking to appeal the dismissal of the RICO claims. On December 13, 2004, defendants moved to dismiss the second amended complaint. The motions are pending. See “Item 3 — Legal Proceedings — Litigation Involving Controlling Stockholder, Senior Management and Directors.

      On August 30, 2004, the Special Committee published the results of its investigation. See “— Report of the Special Committee” below.

      On November 15, 2004, the SEC filed an action in the United States District Court for the Northern District of Illinois against Black, Radler and Hollinger Inc. seeking injunctive, monetary and other equitable relief. In the action, the SEC alleges that the three defendants violated federal securities laws by engaging in a fraudulent and deceptive scheme to divert cash and assets from the Company and to conceal their self-dealing from the Company’s public stockholders from at least 1999 through at least 2003. The SEC also alleges that Black, Radler and Hollinger Inc. were liable for the Company’s violations of certain federal securities laws at least during this period. See “Item 3 — Legal Proceedings — United States Securities and Exchange Commission v. Conrad M. Black, et al.

      The Company is party to several lawsuits either as plaintiff or as a defendant, including several stockholder class action lawsuits, in connection with the events described above. See “Item 3 — Legal Proceedings.”

 
Corporate Review Committee; Adoption of Shareholder Rights Plan; Delaware Court Injunction

      On January 18, 2004, Black and Ravelston entered into a Tender and Stockholder Support and Acquisition Agreement with Press Holdings International Limited (“PHIL”) for the sale of the control of Hollinger Inc., (the “Hollinger Sale”). The Company formed the Corporate Review Committee of the Board of Directors, consisting of all directors, other than Black, Amiel Black and Colson, all of whom were directly or indirectly interested in the Hollinger Sale, to review the terms of the Hollinger Sale and supervise the Strategic Process. The Corporate Review Committee adopted a shareholder rights plan (“SRP”), described further below. On January 23, 2004, Hollinger Inc. adopted by written stockholder consent amendments to the Company’s bylaws and attempted to dissolve all committees of the Board of Directors, including the Corporate Review Committee, other than the Special Committee and the Audit Committee. On January 26, 2004, the Company commenced legal action in Delaware seeking relief declaring that Hollinger Inc.’s actions were invalid; that the adoption of the SRP was valid; and that Black and Hollinger Inc. breached their fiduciary duties to the Company and the terms of the Restructuring Agreement. On March 4, 2004, the Delaware Chancery Court issued a decision in favor of the Company declaring the bylaw amendments invalid;

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upholding the validity of the SRP; and enjoining Black and Hollinger Inc. from taking any action to consummate any transaction in violation of the provisions of the Restructuring Agreement, including the Hollinger Sale, or committing any other breaches of the Restructuring Agreement. As a result, PHIL withdrew its offer and the Hollinger Sale was abandoned. On June 28, 2004, the Delaware Chancery Court extended through October 31, 2004 its injunctive relief that enjoined Black and Hollinger Inc. from taking any action to consummate any transaction in violation of the provisions of the Restructuring Agreement. On October 29, 2004, the Company, Hollinger Inc. and Black reached an agreement (the “Extension Agreement”) to voluntarily extend the injunction until the earlier of January 31, 2005 or the date of the completion of any distribution by the Company to its stockholders of a portion of the proceeds of the Company’s sale of the Telegraph Group Limited (described below), net of taxes to be paid on the sale of the Telegraph Group Limited and less amounts used to pay down the Company’s indebtedness, through one or more of a dividend, a self-tender offer, or some other mechanism. On October 30, 2004, the court issued an order extending the injunction as provided in, and incorporating the other terms of, the Extension Agreement.

      On February 27, 2004, under the terms of the SRP, the Company paid a dividend of one preferred share purchase right (a “Right”) for each share of Class A Common Stock and Class B Common Stock held of record at the close of business on February 5, 2004. Each Right, if and when exercisable, entitles its holder to purchase from the Company one one-thousandth of a share of a new series of preferred stock at an exercise price of $50.00.

      The SRP provides that the Rights will separate from the Class A Common Stock and Class B Common Stock and become exercisable only if a person or group beneficially acquires, directly or indirectly, 20% or more of the outstanding stockholder voting power of the Company or if a person or group announces a tender offer which, if consummated, would result in such person or group beneficially owning 20% or more of such voting power, in either case, without the approval of the Company’s directors, who may amend or redeem the SRP. The directors of the Company may redeem the Rights at $0.001 per Right or amend the terms of the SRP at any time prior to the separation of the Rights from the Class A Common Stock and Class B Common Stock.

      If a person or group acquires 20% or more of the stockholder voting power of the Company, each Right will entitle its holder (other than such person or group), in lieu of purchasing preferred stock, to purchase one share of Class A Common Stock at a 50% discount to the then current per share market price. In addition, in the event of certain business combinations following such an acquisition, each Right will entitle its holder to purchase the common stock of an acquirer of the Company at a 50% discount from the market value of the acquirer’s stock.

      Black and each of his controlled affiliates, including Hollinger Inc., are considered “exempt stockholders” under the terms of the SRP. This means that so long as Black and his controlled affiliates do not collectively, directly or indirectly, increase the number of shares of Class A and Class B Common Stock above the level owned by them when the SRP was adopted, their ownership will not cause the Rights to separate from the Common Stock. This exclusion would not apply to any person or group to whom Black or one of his affiliates transfers ownership, whether directly or indirectly, of any of the Company’s shares. Consequently, the Rights may become exercisable if Black transfers sufficient voting power to an unaffiliated third party through a sale of interests in the Company, Hollinger Inc., Ravelston or another affiliate.

      The SRP provides that on or before January 25, 2005, the Special Committee (or any other committee of independent directors of the Board of Directors who were not the subject of the report delivered by the Special Committee described below) will re-evaluate the SRP to determine whether it remains in the best interests of the Company’s stockholders. If determined as necessary, such committee may recommend amendments to the terms of the SRP, or redemption of the Rights. Unless earlier redeemed, exercised or exchanged, the Rights will expire on January 25, 2014.

      The validity of the SRP is the subject of an appeal to the Delaware Supreme Court. See “Item 3 — Legal Proceedings — Hollinger International Inc. v. Conrad M. Black, Hollinger Inc., and 504468 N.B. Inc.

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Sale of the Telegraph Group

      As part of the Strategic Process, on July 30, 2004, the Company completed the sale of Telegraph Group Limited (“Telegraph Group”) to Press Holdings Limited and Holyrood Holdings Limited, affiliates of PHIL. Telegraph Group operated the Company’s business in the United Kingdom, including The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk and The Spectator and Apollo magazines. Under the terms of the agreement, Press Acquisitions Limited acquired all of the outstanding shares of Telegraph Group for a purchase price of £729.6 million in cash (or approximately $1,323.9 million at an exchange rate of $1.8145 to £1 as of the date of sale). This purchase price is subject to adjustment depending on certain working capital levels in the Telegraph Group, but the Company does not expect any such adjustment to be material.

      The Company used approximately $603.1 million of the proceeds of the sale of the Telegraph Group to repay long-term indebtedness and related derivative contracts. The Board of Directors also declared a special cash dividend (the “Special Dividend”) payable on January 18, 2005 in an aggregate amount of approximately $227.0 million, this being the first tranche of a total amount of $500.0 million which the Board of Directors determined was in the best interest of the Company and its stockholders to be distributed to stockholders. The Board of Directors intends to distribute approximately $273.0 million of the proceeds of the sale of the Telegraph Group, this being the second tranche of the $500.0 million cash distribution, either by way of a tender offer or a second special dividend. See “— Declaration of Special and Regular Dividend.”

      For the year ended December 31, 2003, the U.K. Newspaper Group had revenues of approximately $519.5 million and operating income of approximately $40.7 million. Results of the U.K. Newspaper Group for the year ended December 31, 2003 are included in the Consolidated Financial Statements of the Company for that period.

 
9% Senior Notes

      In June 2004, the Company commenced a tender offer and consent solicitation to purchase and retire Publishing’s 9% Senior Notes due in 2010 (the “9% Senior Notes”) and eliminate the covenants in place with respect to principal amounts not tendered. Approximately 97% of the principal amount of the 9% Senior Notes were tendered, and the covenants were removed from the 9% Senior Notes that remained outstanding. The Company used approximately $344.8 million of the proceeds from the sale of the Telegraph Group to purchase the 9% Senior Notes tendered and for related expenses. The Company also used $10.5 million to cancel the interest rate swaps the Company had in place on the 9% Senior Notes. The tender closed on August 2, 2004. The Company has since purchased and retired an additional $3.4 million in principal amount of the 9% Senior Notes. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 
Senior Credit Facility

      On July 30, 2004, the Company used approximately $213.4 million of the proceeds from the sale of the Telegraph Group to repay all amounts outstanding under and cancel the Company’s $310.0 million Senior Credit Facility with Wachovia Bank, N.A. (the “Senior Credit Facility”). In addition, the Company paid approximately $2.1 million in fees related to this early repayment and incurred costs of $32.3 million in fees to cancel the cross currency interest rate swaps the Company had in place with respect to amounts outstanding under the Senior Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 
Declaration of Special and Regular Dividend

      On December 16, 2004, from the proceeds of the sale of the Telegraph Group, the Board of Directors declared a Special Dividend of $2.50 per share payable on the Company’s Class A and Class B Common Stock on January 18, 2005 to holders of record of such shares on January 3, 2005, in an aggregate amount of approximately $227.0 million, this being the first tranche of a total amount of $500.0 million which the Board of Directors determined was in the best interest of the Company and its stockholders to be distributed to

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stockholders. The Board of Directors intends to distribute approximately $273.0 million of the proceeds from the sale of the Telegraph Group, this being the second tranche of the $500.0 million cash distribution, in the form of a tender offer for its shares of Class A and Class B Common Stock. The Board of Directors expects to make a final determination about whether to proceed with a tender offer during the first quarter of 2005. Alternatively, the Board may consider a second special cash dividend to complete the distribution, instead of a tender offer. There can be no assurance that the second distribution will be made or, if made, whether it will be in the form of a tender offer or a dividend, and if a tender offer, as to the price or form such offer will take. The Board of Directors believes that following the Special Dividend and the second distribution, the Company will have sufficient liquidity to fund its operations and obligations and to avail itself of strategic opportunities. Following the Special Dividend, it is expected that the outstanding grants under the Company’s stock incentive plans will be appropriately adjusted to take into account this return of cash to existing stockholders.

      On December 16, 2004, the Board of Directors also declared a regular quarterly dividend in the amount of $0.05 per share, payable on the Company’s Class A and Class B Common Stock on January 18, 2005 to stockholders of record on January 3, 2005.

 
The Chicago Sun-Times Circulation Overstatement

      On June 15, 2004, the Company announced that the Audit Committee was conducting an internal review into practices that resulted in the overstatement of circulation figures for the Chicago Sun-Times. On October 5, 2004, the Company announced the results of this internal review. The review by the Audit Committee determined that weekday and Sunday average circulation of the Chicago Sun-Times, as reported in the audit reports issued by the Audit Bureau of Circulations (“ABC”) commencing in 1998, had been overstated. The Audit Committee found no overstatement of Saturday circulation data. The inflated circulation figures were submitted by the Company to ABC, which then reported these figures in its annual audit report issued with respect to the Chicago Sun-Times.

      Inflation of the Chicago Sun-Times single-copy circulation began modestly and increased over time. In the most recent report of the Chicago Sun-Times circulation published by ABC, which covered the period ended March 2003, the average single-copy circulation was found by the Audit Committee to have been overstated by approximately 50,000 weekday copies and 17,000 Sunday copies. The inflation of circulation continued to grow during the twelve-month period ended March 28, 2004, but these circulation figures were not included in an ABC audit report.

      The Chicago Sun-Times announced a plan intended to make restitution to its advertisers for losses associated with the overstatements in the ABC circulation figures. To cover the estimated cost of restitution and settlement of related lawsuits filed against the Company, the Company recorded pre-tax charges of approximately $24.1 million for 2003 and approximately $2.9 million for the first quarter of 2004. The Company will evaluate the adequacy of the accruals as negotiations with advertisers proceed. See “— Risk Factors” below.

      The Company has implemented procedures to help ensure that similar circulation overstatements do not occur in the future. See “Item 9A — Controls and Procedures.”

      The Audit Committee also conducted a Company-wide review and found that certain circulation inflation practices were employed at two other Chicago area newspapers, the Daily Southtown and The Star, as well as at The Jerusalem Post. Since the inflation practices at the Daily Southtown and The Star began in mid-2003, none of the inflated circulation figures have been reported publicly in ABC circulation audit reports. There is no independent third-party, such as the ABC, that audits or reports circulation figures for Israeli newspapers. The overstatement practices have been discontinued at these newspapers, and the Company does not expect the practices at these three newspapers will have a material impact on the Company.

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Sale of Interest in Trump Joint Venture

      On June 21, 2004, the Company entered into an agreement to sell its 50% interest in the real estate joint venture that was established by the Company and an entity affiliated with Mr. Donald Trump for the development of the property on which a portion of the facilities of the Chicago Sun-Times operations were situated. Immediately prior to the sale of the interest in the joint venture, the Company contributed to the joint venture, its property in downtown Chicago where the Chicago Sun-Times had conducted its editorial, pre-press, marketing, sales and administrative activities. Under the terms of the agreement, the Company received $4.0 million in cash upon the signing of the sales agreement and the balance of approximately $66.7 million, net of closing costs and adjustments, was received in cash on closing. The Company completed this transaction on October 15, 2004.

      As a result of the decision to sell its interest in the joint venture and the property to be developed, the Chicago Sun-Times entered into a 15-year operating lease for new office space. The Chicago Sun-Times relocated to the new office space in the fourth quarter of 2004.

 
Report of the Special Committee

      On August 30, 2004, the Special Committee released its report setting out the scope and results of its investigation into certain related party transactions involving certain former executive officers and certain current and former directors of the Company and Hollinger Inc. and its affiliates. The report was delivered to the SEC and filed with the U.S. District Court for the Northern District of Illinois. In addition, on August 31, 2004, the Company filed a copy of the report with the SEC as an exhibit to a current report on Form 8-K, as amended by a current report on Form 8-K/A filed with the SEC on December 15, 2004. The report, as filed with the SEC in an amended form on such date, is hereinafter referred to as the “Report”.

      Below is a summary of the results of the Special Committee’s investigation contained in the Report. For a complete discussion of the results of the investigation of the Special Committee, see the Report, as amended, included as an exhibit to the Company’s Form 8-K/A filed with the SEC.

      As noted under “Item 3 — Legal Proceedings,” most of the findings of the Special Committee set forth in the Report are the subject of ongoing litigation and are being disputed by the former executive officers and certain of the current and former directors of the Company who are the subject of the Report. The amount of damages sought by the Company in these actions is set out in “Item 3 — Legal Proceedings.” It should be noted that all of the directors do not necessarily agree with all of the findings of the Report as to any one or more of the directors who are the subject of the Report.

      Where disclosure either as a related party transaction or otherwise is required, such disclosure, including corrections to previously disclosed information, has been made in this annual report on Form 10-K, including the Consolidated Financial Statements and related Notes, or in the Report.

 
(a) Report’s Findings of Excessive Management Fees Paid by the Company to Ravelston and RMI

      The Special Committee concluded that Hollinger Inc., Ravelston and RMI collected excessive and unjustifiable management fees from the Company for the benefit of Black, Radler and certain other former executive officers of the Company. From 1997 through 2003, the Company paid approximately $218.4 million in management fees to Hollinger Inc., Ravelston, RMI and their affiliates (including Moffat and Black-Amiel, as discussed below). As noted above, the Restructuring Agreement provided for the termination of the services agreements with RMI as of June 1, 2004.

      The Company disclosed publicly the amounts charged by and paid to Hollinger Inc., Ravelston and RMI as related party transactions in previous years. In its 2002 Form 10-K (by way of incorporating portions of its proxy statement), the Company attributed a portion of the management fees to the compensation of Black, Radler, Colson, Atkinson and Boultbee for 2001 and 2002. For years prior to 2001, the Company did not attribute any portion of the management fees to executive compensation. The Company has commenced legal actions to recoup the excessive management fees that the Company paid to Hollinger Inc., Ravelston and RMI. See “Item 3 — Legal Proceedings — Litigation Involving Controlling Stockholders, Senior Management and Directors.”

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      Moffat and Black-Amiel, offshore companies directly or indirectly owned by Black and certain other former executive officers of the Company, also entered into management services agreements with the Company. The Special Committee concluded that these services agreements did not have any economic substance, nor did they provide any direct benefit to the Company, and were in fact created as a means to allow those former executive officers to divert monies from the Company to offshore entities. The management fees paid to these companies have been disclosed publicly as related party transactions in previous years. The Company did not attribute any portion of these management fees to executive compensation in previous years. Additionally, in or about August 1999, former management caused the Company to pay $900,000 to Moffat that was recorded as a “broker fee.” The Special Committee determined that this related party payment was never authorized by the Company’s independent directors, and moreover, that it was a sham and unfair to the Company’s public stockholders because neither Moffat nor its principals ever performed “broker” services for the Company. The Company has commenced legal action, as noted above, to recoup this $900,000 payment.

 
(b) Report Stated that Unwarranted and Excessive Compensation Was Paid by the Company to Amiel Black

      The Special Committee concluded that there was no economic substance for compensation of $1.4 million paid to Amiel Black since 1999, for serving as the Company’s Vice President, Editorial. These salary and bonus payments were in addition to payments of director fees and for writing columns. The Company is seeking to recover these payments through legal action pending before the courts. See “Item 3 — Legal Proceedings.”

 
(c) Report’s Findings Relating to U.S. Community Newspaper Transactions and Related “Non-Competition” Styled Payments and Transfers of Company Cash to Hollinger Inc., Black, Radler, Boultbee and Atkinson

      The Special Committee investigated several past transactions relating to sales of U.S. community newspapers formerly owned by the Company to both related and third parties. The Special Committee concluded, among other things, that as part of these transactions significant payments ($32.2 million) of purported “non-competition” fees were made to Hollinger Inc., Black, Radler, Boultbee and Atkinson without the approval of the Audit Committee or the Board of Directors. The Special Committee also determined that there was no economic rationale for the payments of the purported “non-competition” fees made to Hollinger Inc., Black, Radler, Boultbee and Atkinson, and that those payments were unfair to the Company. The Special Committee also determined that the Company’s past public disclosures made with respect to the following transactions were incomplete or inaccurate.

      (i) Intertec Publishing Co.

      In its 1998 Form 10-K, the Company disclosed that it had concluded a transaction to sell American Trucker magazine. The purchase and sale agreement provided for the payment by the purchaser of a $2.0 million “non-competition” fee to the Company. The Company failed to disclose that on February 1, 1999, approximately eight months after the sale closed, the Company transferred funds equivalent to the “non-competition” fee to Hollinger Inc. According to the Report, no approval of the Audit Committee or the full Board of Directors was sought or obtained for this transfer of funds.

      (ii) Community Newspaper Holdings Inc. I

      In its 1998 Form 10-K, the Company disclosed as a subsequent event that it had concluded a transaction to sell certain U.S. community newspaper properties. The underlying agreement for the purchase and sale allocated $50.0 million of the proceeds to a “non-competition” agreement and included Hollinger Inc. as a non-competition covenantor along with the Company. The Company failed to disclose that upon closing of the transaction $12.0 million of the “non-competition” fee was paid to Hollinger Inc. According to the Report, neither the Audit Committee nor the Board of Directors was informed of or approved this payment to Hollinger Inc.

      The Special Committee determined that Hollinger Inc. used the $14.0 million of unauthorized payments, which Hollinger Inc. received from the Company on February 1, 1999 out of the Company’s proceeds from the Intertec and Community Newspaper Holdings Inc. (“CNHI”) I transactions, to ostensibly repay a portion of a 1997 $42.5 million overdue loan from the Company.

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      (iii) Horizon Publications Inc.

      In its 1999 Form 10-K, the Company disclosed that it had concluded a transaction with Horizon Publications Inc. (“Horizon”), a company controlled by Black and Radler, to sell various community newspapers. The underlying agreement for the purchase and sale provided for a “non-competition” payment by Horizon of $5.0 million. Of this amount $1.2 million was paid directly to Hollinger Inc. The existence of this payment was not disclosed in the 1999 Form 10-K. According to the Report, neither the Audit Committee nor the Board of Directors was informed of or approved this payment, nor were they informed of the extent of ownership and participation of Black and Radler in Horizon.

      (iv) Forum Communications Inc., Paxton Media Group and Community Newspaper Holdings Inc. II

      In its 2000 Form 10-K, the Company disclosed that it had concluded three separate transactions to sell various publishing assets to Forum Communications Inc. (“Forum”), Paxton Media Group (“Paxton”) and CNHI. The underlying agreements for the purchase and sale provided for the payment of “non-competition” fees to Hollinger Inc. totaling $1.4 million in connection with these transactions, which occurred in September and November of 2000. According to the Report, neither the Audit Committee nor the Board of Directors was informed of or approved these payments.

      In addition to the above noted “non-competition” payments, the Special Committee determined that an additional $9.5 million of sale proceeds from the CNHI II transaction was improperly paid to Black, Radler, Boultbee and Atkinson in 2000 without the authorization of either the Audit Committee or the full Board of Directors. The Special Committee also concluded that further amounts totaling $5.5 million were paid to the same executive officers in February 2001, which payments were purportedly supported by sham “non-competition” agreements backdated to December 31, 2000. Lastly, according to the Report, in April 2001, payments totaling $600,000 were made to the same four executive officers without approval of either the Audit Committee or the full Board of Directors and without any underlying “non-competition” agreements. The Special Committee determined that these latter payments were made out of unutilized post-closing accruals relating to certain U.S. community newspaper sale transactions.

      The Company failed to disclose the above discussed payments, totaling $15.6 million, in its 2000 Form 10-K. Although disclosure of those payments was made in the 2001 Form 10-K, based on the Report, the disclosure was incorrect and incomplete in several ways, including the following:

  •  the Company asserted falsely that its independent directors had approved the terms of the payments;
 
  •  no disclosure was made of the $1.4 million paid to Hollinger Inc. in connection with the Forum, Paxton and CNHI II transactions;
 
  •  the $600,000 in payments to Black, Radler, Boultbee and Atkinson were incorrectly stated to have been made in connection with the sale of U.S. newspaper properties;
 
  •  the “non-competition” agreements and payments were falsely stated to have been made to satisfy a closing condition of the sale; and
 
  •  the payment of the $5.5 million was incorrectly characterized as having been made in 2000. The payment was actually made and documented in 2001.
 
(d) Report’s Findings Relating to the CanWest Global Communications Transaction and Related Party Payments

      On November 16, 2000, the Company completed the sale of most of its Canadian newspapers and related assets to CanWest Global Communications Corporation (“CanWest”). In connection with that sale, “non-competition” payments totaling Cdn.$80.0 million ($51.8 million) and interest payments totaling $1.1 million were made to Ravelston, Black, Radler, Boultbee and Atkinson. According to the Report, under the terms of a management services agreement between CanWest and Ravelston, which was entered into in conjunction with the CanWest transaction, Ravelston received, and continues to receive, an annual management fee of Cdn.$6.0 million until the fee arrangement is terminated. If the agreement is terminated by CanWest,

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Ravelston is to receive Cdn.$45.0 million and if terminated by Ravelston, Ravelston is to receive Cdn.$22.5 million.

      In connection with these payments, the Special Committee concluded that:

  •  the structure of the management services and “non-competition” provisions of the CanWest transaction resulted in substantial and unjustifiable damage to the Company’s public stockholders;
 
  •  the terms of the management services agreement between CanWest and Ravelston had the effect of reducing the purchase price otherwise payable to the Company by Cdn.$60.0 million ($39.0 million);
 
  •  although the “non-competition” agreements were approved by the Board of Directors and the Audit Committee prior to the sale, such approval and the ratification of such approval in May 2001, were based on false, misleading and incomplete information.
 
  •  the interest payments of $1.1 million were never disclosed to the Audit Committee nor was approval for those payments sought or obtained;
 
  •  the “non-competition” fees and interest payments had the effect of reducing the transaction proceeds to the Company upon sale by $52.9 million;
 
  •  no one was negotiating on behalf of the Company’s public stockholders with respect to the above fees;
 
  •  none of the payment recipients was entitled to any consideration for signing the “non-competition” agreements because they remained Company officers and the Company was itself bound not to compete with CanWest;
 
  •  although the properties sold to CanWest included assets of both the Company and Hollinger L.P., prior management of the Company directed that the entire “non-competition” payment attributable to the assets sold to CanWest by Hollinger L.P. be made from the Company’s share of the Hollinger L.P. distribution. In other words, the Company bore 100%, rather than its pro rata share of 87%, of this burden;
 
  •  the entirety of the payments to Ravelston, Black, Radler, Boultbee and Atkinson represents proceeds from a direct violation of their fiduciary duties to the Company and its public stockholders.

      The Company’s 2000 Form 10-K disclosed the transactions with CanWest but failed to disclose the existence of the above-mentioned “non-competition” and interest payments and management fees.

      The management fees and “non-competition” payments to Ravelston and the four former executive officers were disclosed in the Company’s 2001 Form 10-K. However, the Special Committee concluded that disclosure to be deficient in at least the following ways:

  •  payment of $1.1 million in interest in connection with the “non-competition” payments was not disclosed;
 
  •  the disclosure incorrectly stated the allocation of amounts between Ravelston and the four former executive officers;
 
  •  the disclosure creates the false impression that the “non-competition” payments were paid in addition to the purchase price, when in fact they effectively reduced the purchase price, and that the negotiation with CanWest determined the amounts paid to the individuals and Ravelston when, in fact, the allocation of the payments was determined solely by the Company’s former executive officers; and
 
  •  contrary to the disclosure, CanWest did not require as a condition to the closing of the transaction the “non-competition” agreements from Boultbee and Atkinson.
 
(e) Report’s Findings Relating to Osprey Media Holdings Inc. and “Non-competition” Styled Payments

      In two separate transactions in July and November 2001, the Company completed the sale of most of its remaining Canadian newspapers to Osprey Media Holdings Inc. (“Osprey Media”). In connection with these

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transactions, the Company paid “non-competition” fees totaling $5.2 million to Black, Radler, Boultbee and Atkinson. According to the Report, these fees were presented to the Audit Committee only after the closing of each of the transactions and ratified by the Audit Committee on the basis of misleading information. The Special Committee determined these payments to be unfair, and that none of the payment recipients was entitled to any consideration for signing the “non-competition” agreements because they remained Company officers and the Company was itself bound not to compete with Osprey. The Special Committee also concluded, as in the CanWest transaction, that Black and former management avoided having to seek the Hollinger L.P. independent directors’ approval of the “non-competition” payments by directing that the entire “non-competition” payment attributable to the Hollinger L.P. assets sold to Osprey be made from the Company’s share of the Hollinger L.P. distribution, thereby further unfairly reducing net proceeds to the Company from the sale. Although the transactions and related “non-competition” payments totaling $5.2 million were disclosed in the Company’s 2001 Form 10-K, according to the Report, the 2001 Form 10-K did not disclose, among other things, (i) that the allocation had been decided by the former executive officers or (ii) that no part of the “non-competition” fees was paid by Hollinger L.P.
 
(f) Report Concluded that Unauthorized and Excessive Payment Was Made to Colson

      The Special Committee determined that there was no economic substance to or valid business purpose for a $1.1 million payment made to Colson on September 5, 2001, which payment was not approved by either the Audit Committee or the Compensation Committee of the Board of Directors.

 
(g) Report’s Findings Relating to Related Party Asset Sales to Horizon and Bradford Publishing Co.

      The Special Committee concluded that during the period from early 1999 to January 2003, Black and Radler diverted income, assets and opportunities from the Company to Horizon and Bradford Publishing Co. (“Bradford”), newspaper-publishing companies controlled by Black and Radler. According to the Report, the diversion was effected by repeatedly transferring some of the Company’s publications to Horizon and Bradford at less than fair market value and by usurping corporate opportunities belonging to the Company. These actions, the Special Committee concluded, constituted a violation of Black’s and Radler’s fiduciary duties as controlling stockholders and as officers and directors of the Company.

      Although in a number of instances the Horizon and Bradford transactions were approved by the Audit Committee, the Special Committee determined that the approvals were based on false, misleading or incomplete information. In only one instance was a fairness opinion obtained and, in that case, the Special Committee concluded that the opinion was based in large part on false information and incorrect assumptions. The Special Committee found no evidence that this opinion was ever submitted to the Board of Directors.

      The transactions between the Company and Horizon and Bradford during the years 1999 to 2001 were not properly disclosed in the Company’s annual reports on Form 10-K. Among other things, the Company aggregated the asset transfers into one combined disclosure relating to the Company’s sales of U.S. community newspapers, and failed to identify that some of these transactions were conducted with related parties. In 2001, the Company amended the disclosures to state the number of properties sold to Bradford and Horizon and the total aggregate consideration for those properties, but did not identify assets that were transferred to Horizon or Bradford.

 
(h) Report’s Findings Relating to Hollinger Digital, Trireme, and the Franklin Delano Roosevelt Collection

      The Special Committee reviewed certain aspects of the Company’s technology and other investments, in particular, those made through its subsidiary Hollinger Digital and its investment in Trireme Associates LLC (“Trireme”). The Special Committee determined that the incentive compensation plan of Hollinger Digital (“Digital Incentive Plan”) was excessive and unfair to the Company’s public stockholders, in particular because incentive compensation was based solely upon investment gains with no offset for the effect of losses and because these “upside-only” bonuses were awarded based on a definition of “realized gain” on an investment that was divorced from the amount the Company actually realized. The Special Committee also

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concluded that Audit Committee approval, when sought, was based on incomplete and misleading information; conflicts of interest with respect to both compensation and investments were not disclosed; and disclosure of compensation under the Digital Incentive Plan in the Company’s financial statements was inaccurate.

      The Company did not disclose in its 2000 or 2001 Form 10-Ks or proxy statements that Black, Radler, Colson, Boultbee and Atkinson received payments under the Digital Incentive Plan, totaling approximately $5.2 million, although the Company’s proxy statements for the same periods contain some incomplete disclosures with respect to these payments. In addition, the Company did not disclose in its 2000 or 2001 Form 10-Ks or proxy statements that one of its directors, Perle, received $3.1 million in incentive payments under the Digital Incentive Plan. Overall, the Special Committee found that former management received over $8.0 million in Digital Incentive Plan payments, while the Company suffered an aggregate net loss of approximately $68.0 million on its investments through Hollinger Digital as of December 31, 2003. No payments were made under the Digital Incentive Plan in either 2002 or 2003.

      According to the Report, in late 2002, Perle purported to commit the Company to invest $25.0 million in Trireme, a venture capital fund in which Perle had a significant financial interest. The Report also stated that, although this commitment was not binding on the Company, the Company subsequently invested $2.5 million in Trireme. At the time, Perle was a director of the Company and a director and executive officer of Hollinger Digital. The Special Committee concluded that the Trireme investment was a related party transaction that required the approval of the independent directors or the Audit Committee and that no such approval was ever sought or obtained.

      The Special Committee also reviewed the Company’s acquisitions of papers and other memorabilia of President Franklin Delano Roosevelt (the “FDR Collection”). The Special Committee found that the Company paid at least $9.6 million for the FDR Collection. According to the Report, no approval for the purchases was obtained from the Board of Directors or the Audit Committee prior to their consummation. The Special Committee determined that: (i) Black arranged the Company’s purchases of the FDR Collection without obtaining independent appraisals; (ii) the majority of the items comprising the FDR Collection were displayed or stored in Black’s private residences; (iii) during the period over which the Company purchased the FDR Collection, Black was writing a biography of President Roosevelt; and (iv) the Company significantly overpaid for portions of the FDR Collection, at Black’s direction. The U.S. National Archives has asserted an ownership claim to a portion of the FDR Collection known as the Grace Tully Collection.

 
(i) Report’s Findings Relating to Perquisites Paid to Black, Radler, Colson and Amiel Black

      The Special Committee concluded that a number of perquisites paid by the Company for the benefit of Black, Radler, Colson and Amiel Black were contrary to the public stockholders’ interests because the aggregate cost of the perquisites was prohibitive; there was no legitimate business purpose for most of the expenditures; and the perquisites were not submitted for approval of either the Compensation Committee or the Audit Committee. In addition, there was inadequate disclosure of the perquisites in the Company’s public filings. According to the Report these perquisites included, among other things: personal use of corporate aircraft; Company provided cars and drivers; payment for personal staff; payment for household staff costs; and car repairs.

      The Special Committee also concluded that Black violated his fiduciary duties to the Company by causing the Company to sell to him an apartment it owned in Manhattan for a fraction of its actual value in December 2000. According to the Report, this related party transaction was not presented to the Audit Committee or the full Board of Directors for approval. The Report stated that the transaction was falsely characterized in the Company’s 2001 and 2002 proxy statements as having been made for “fair market value,” when, in fact, Black paid substantially less than fair market value.

 
(j) Report’s Findings Relating to Charitable Giving

      The Special Committee concluded, among other things, that the Company’s charitable giving was tainted by Black’s and Radler’s usurpation of public credit for substantial cash donations made with Company funds. The Special Committee also concluded that Black and Radler abused the Company’s charitable giving to

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serve their personal interests, and failed to seek the Audit Committee or full Board of Directors approval for these donations.
 
(k) Report’s Findings Relating to the Sale of NP Holdings Company Tax Losses to Ravelston

      In 2002, the Company sold its subsidiary, NP Holdings Company (“NP Holdings”), to RMI allowing RMI to use tax loss carryforwards which the Company was unable to fully use. Although this sale was approved by the Audit Committee, the Special Committee concluded that this approval was based upon false and misleading information. The Special Committee also concluded, among other things, that the transaction was unfair to the Company and that no disclosure was made to the Audit Committee of either a higher offer for NP Holdings or of an underlying financing arrangement exposing the Company to a contingent liability of $14.6 million arising from the sale. According to the Report, prior disclosure of this transaction in the Company’s public filings was false and misleading with respect to these issues.

 
(l) Report’s Findings Relating to Loan Transactions to Hollinger Inc.

      The Special Committee determined that during the period from 1997 to 2002, former executive officers caused the Company to enter into a number of unfair related party transactions to the detriment of the Company, which allowed Hollinger Inc. to, among other things, borrow money from the Company at below market rates of interest, “repay” the Company with the Company’s own funds, use the Company’s limited liquidity to Hollinger Inc.’s advantage, and defer obligations to Hollinger Inc. creditors by drawing on the Company’s credit capacity without adequate compensation to the Company. The Special Committee concluded that the various manipulations of loan structures caused the Company to suffer significant financial loss. The Report stated that these transactions were undertaken, for the most part, either without Audit Committee approval or with Audit Committee approval predicated upon false, misleading and incomplete information. The Special Committee concluded that Black, Radler and Boultbee made material misrepresentations to the Audit Committee and breached their fiduciary duties to the Company in these transactions. The Special Committee found that the Company’s financial statement disclosure regarding a reduction in the interest rate charged on one of the related party loans was incorrect because it suggested that the reduction had been properly approved.

 
(m) Report’s Findings Relating to the Conduct of the Company’s Audit Committee

      The Special Committee concluded that the Audit Committee was deliberately misled repeatedly by prior management. The Special Committee also determined that, although the Audit Committee was generally entitled to reasonably rely on representations and presentations by management, the Audit Committee was not sufficiently deliberate in its evaluation of certain related party transactions. The Special Committee Report also notes that since June 2003, the Audit Committee has performed ably and in the interests of the Company’s public stockholders.

 
Hollinger L.P. Tender Offer

      On August 6, 2004, the Toronto Stock Exchange (“TSX”) suspended the listing of the units of Hollinger L.P. because the general partner of Hollinger L.P. does not have at least two independent directors as required by TSX listing requirements. On August 5, 2004, the Company expressed an interest in pursuing a tender offer for the units of Hollinger L.P. not held by affiliates of the Company. An independent committee of the general partner of Hollinger L.P., consisting of the sole independent director of the general partner, was formed and it retained independent legal counsel and financial advisors. Continuing liquidity for minority unit holders during the tender process has been provided through a listing of the units on a junior board of the TSX Venture Exchange. On December 10, 2004, it was announced that the Company would not pursue the tender until such time as Hollinger L.P. is current in its financial statement filings.

 
CanWest Debentures

      In November 2000, the Company and Hollinger L.P., received approximately Cdn.$766.8 million aggregate principal amount of 12 1/8% Fixed Rate Subordinated Debentures due November 15, 2010 (the “CanWest Debentures”) issued by a wholly-owned subsidiary of CanWest called 3815668 Canada Inc. (the

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“Issuer”). The CanWest Debentures were guaranteed by CanWest and were issued to the Company and Hollinger L.P. in partial payment for the sale of certain Canadian newspaper and Internet assets to CanWest. In 2001, the Company and Hollinger L.P. sold participations of approximately Cdn.$756.8 million (US$490.5 million) principal amount of the CanWest Debentures to a special purpose trust (the “Participation Trust”). Notes of the Participation Trust, denominated in U.S. dollars (the “Trust Notes”), were in turn issued and sold by the Participation Trust to third parties. As a result of the periodic interest payments on the CanWest Debentures made in kind in 2002, 2003 and 2004 and a partial redemption by the Issuer of the CanWest Debentures in 2003, as of September 30, 2004, there was outstanding approximately Cdn.$889.5 million aggregate principal amount of CanWest Debentures. The Company and Hollinger L.P. were the record owners of all of these CanWest Debentures, but as of September 30, 2004, beneficially owned only approximately Cdn.$4.7 million and Cdn.$83.8 million principal amount, respectively, of CanWest Debentures, with the balance beneficially owned by the Participation Trust.

      On October 7, 2004, the Company and Hollinger L.P. entered into a Facilitation Agreement (the “Facilitation Agreement”) with CanWest pursuant to which the parties agreed to redeem the CanWest Debentures and dissolve the Trust. CanWest exchanged the Trust Notes for new debentures issued by CanWest (the “CanWest Exchange Offer”). The CanWest Exchange Offer closed on November 18, 2004, and the amount received by the Company and Hollinger L.P. was approximately $133.6 million in cash in respect of CanWest Debentures beneficially owned and residual interests in the Participation Trust attributable to foreign currency exchange. As a result of the closing, the Participation Trust has been unwound and neither the Company nor Hollinger L.P. have retained any ownership in the CanWest Debentures.

     Sale of The Jerusalem Post

      On December 15, 2004, the Company announced that as part of the Strategic Process, it had completed the sale of The Palestine Post Limited, the publisher of The Jerusalem Post, The Jerusalem Report and related publications, to Mirkaei Tikshoret Ltd. (“MTL”). The transaction involved the sale by the Company of its debt and equity interests in The Palestine Post Limited to MTL for $13.2 million.

General

      Hollinger International Inc. was incorporated in the State of Delaware on December 28, 1990 and its wholly owned subsidiary Publishing was incorporated in the State of Delaware on December 12, 1995. The Company’s principal executive offices are at 712 Fifth Avenue, New York, New York, 10019, telephone number (212) 586-5666.

Business Strategy

      Pursue Revenue Growth by Leveraging the Company’s Leading Market Position. The Company intends to continue to leverage its leading position in daily readership in the attractive Chicago market in order to drive revenue growth. Following the successful sale of the Telegraph Group for approximately $1.3 billion, the Company’s primary asset is the Chicago Group, including its flagship property, the Chicago Sun-Times. The Company will seek to continue to build revenues by taking advantage of the extensive cluster of the combined Chicago Group publications which allows the Company to offer local advertisers geographically and demographically targeted advertising solutions and national advertisers an efficient one-stop vehicle to reach the entire Chicago market.

      Publish Relevant and Trusted High Quality Newspapers. The Company is committed to maintaining the high quality of the Company’s newspaper products and editorial integrity in order to ensure continued reader loyalty. The Chicago Sun-Times has been recognized for its editorial quality with several Pulitzer Prize-winning writers and awards for excellence from Illinois’ major press organizations. The Company will continue to explore ways in which it can define and institute best practices for the Company’s publications.

      Prudent Asset Management. In addition to pursuing revenue growth from existing publications, from time to time the Company may pursue acquisitions to expand the Chicago Group and selective newspaper acquisitions in the United States and non-core divestitures. Many of the Company’s Internet and other non-

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core investments remain available for sale. The Company successfully completed the sale of the Telegraph Group and the sale of The Jerusalem Post and related publications in 2004. Sufficient funds were realized from the sale of the Telegraph Group to enable the Company to repay substantially all of its outstanding long-term debt.

      Institute Strong Corporate Governance Practices. The Company is committed to the implementation and maintenance of strong and effective corporate governance policies and practices and to high ethical business practices.

Risk Factors

      Certain statements contained in this report under various sections, including but not limited to “Business Strategy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements that involve risks and uncertainties. Such statements are subject to the following important factors, among others, which in some cases have affected, and in the future could affect, the Company’s actual results and could cause the Company’s actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company:

Risks Relating to Recent Developments

 
The Company’s controlling stockholder may cause actions to be taken that are not supported by the Company’s Board of Directors or management, and which might not be in the best interests of the Company’s public stockholders.

      The Company is controlled by Hollinger Inc., and is indirectly controlled by Black through his control of Ravelston, which in turn controls Hollinger Inc. Through its controlling interest, Hollinger Inc. is able to determine the outcome of all matters that require stockholder approval, including the election of directors, amendment of the Company’s charter, adoption or amendment of bylaws and approval of significant corporate transactions such as a sale of assets. Hollinger Inc. can also have a significant influence over decisions affecting the Company’s capital structure, including the incurrence of additional indebtedness and the declaration of dividends.

      As more fully described in its Report, the Special Committee concluded that during the period from at least 1997 to at least 2003, Black, in breach of his fiduciary duties as a controlling stockholder and officer and director, used his control over the affairs of the Company to divert cash and assets from the Company and to conceal his actions from the Company’s public stockholders. The SEC, in its complaint filed with the federal court in Illinois on November 15, 2004, alleges that certain of the acts and omissions of Black violated federal securities laws in several respects in the period from at least 1999 to at least 2003. In addition, the Delaware Chancery Court found that during the period from November 2003 to early 2004, Black breached his fiduciary and contractual duties “persistently and seriously” in connection with the Strategic Process and purported to adopt bylaws “disabling the Board of Directors from protecting the Company from his wrongful acts.”

      The Company’s current management, the Special Committee and the Corporate Review Committee, as well as the SEC, have undertaken several actions designed to prevent Black from repeating his past practices. The Court Order in the January 2004 SEC Action, among other things, requires the Company to comply with its undertaking to allow the Special Committee to complete its work and provides for the appointment of Breeden as a Special Monitor of the Company under certain circumstances. For example, Breeden would become Special Monitor upon the adoption of any resolution that discharges the Special Committee before it completes its work, diminishes or limits the powers of the Special Committee or narrows the scope of its investigations or review, or if any directors are removed prior to the end of their terms, or there is a failure to nominate or re-elect any incumbent director (unless such director voluntarily decides not to seek nomination or re-election to the Board of Directors), or there is an election of any new person as a director unless such action is approved by 80% of the then incumbent directors. In addition, the Delaware Chancery Court has enjoined Hollinger Inc. and Black from taking any action in violation of the Restructuring Agreement, including interference with the Strategic Process, until the earlier of January 31, 2005 or the date of the

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completion of any distribution by the Company to its stockholders of a portion of the proceeds from the sale of the Telegraph Group.

      Although the various court remedies are designed to prevent Hollinger Inc. and Black from engaging again in similar practices, there can be no assurance that they will remain in place or will not be modified or vacated in the future or that Hollinger Inc. or Black will comply with those remedies. If any of these events were to occur, there is a risk that Black, Ravelston and Hollinger Inc. will again use their control over the affairs of the Company to repeat past practices identified in the Report or otherwise take actions detrimental to the public stockholders of the Company.

 
The Company may face interference by its controlling stockholder that will prevent it from recovering on its claims.

      The Company, through the Special Committee, has commenced litigation against Hollinger Inc., Black, other former officers and current and former directors of the Company and certain entities affiliated with the Company’s controlling stockholder. There is a material risk that the controlling stockholder may attempt to thwart or obstruct the efforts of the Company and the Special Committee and that if any such efforts succeed, the Company may not fully recover on its claims. Even without such interference, there can be no assurance that the Company will prevail on its claims and damages allegations, or that it will be able to collect money from any judgment it may obtain against Hollinger Inc., Black and their co-defendants.

 
Continued scrutiny resulting from ongoing SEC investigations may have a material adverse effect on the Company’s business and results of operations.

      The Company has received various subpoenas and requests from the SEC and other government agencies in the United States and Canada, seeking the production of documentation in connection with various investigations into the Company’s governance, management and operations. The Company is cooperating fully with these investigations and is complying with these requests. See “Item 3 — Legal Proceedings” for a more detailed description of these investigations. On January 16, 2004, the Company consented to the entry of the Court Order against it in the January 2004 SEC Action. The Court Order, among other things, enjoins the Company from violating certain provisions of the Exchange Act, including the requirements to file accurate annual reports on Form 10-K, quarterly reports on Form 10-Q and keep accurate books and records. As part of the Court Order, the Company agreed that the SEC has the right to amend its complaint in the January 2004 SEC Action to assert that the conduct alleged in such action also violated other federal securities laws, including the anti-fraud provisions of the Exchange Act, and to add allegations of other conduct the SEC believes to have violated federal securities laws. The Company cannot predict when these government investigations will be completed, nor can the Company predict what the outcome of these investigations may be. It is possible that the Company will be required to pay material amounts in disgorgement, interest and/or fines, consent to or be subject to additional court orders or injunctions, or suffer other sanctions, each of which could have a material adverse effect on the Company’s business and results of operations.

 
The Company’s controlling stockholder may take actions that trigger the Special Monitor provisions of the Court Order.

      The Court Order, to which the Company consented, provides for a Special Monitor under certain circumstances, including the adoption of any resolution that discharges the Special Committee before it completes its work, diminishes or limits the powers of the Special Committee or narrows the scope of its investigations or review, or if any directors are removed prior to the end of their term, or there is a failure to nominate or re-elect any incumbent director (unless such director voluntarily decides not to seek nomination or re-election to the Board of Directors), or there is an election of any new person as a director unless such action is approved by 80% of the then incumbent directors. Although nothing in the Court Order prevents the Company’s controlling stockholder from changing the composition of the Board of Directors, the Court Order may make it less likely that there will be any changes in the composition of the Board of Directors while the Court Order remains in effect. There is a risk, however, that the Company’s controlling stockholder will, by written stockholder consent, make such change even while the Court Order remains in effect. Under the terms

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of the Court Order, if the controlling stockholder takes such an action, the Special Monitor would be appointed. There may be further litigation concerning the Special Monitor. The Special Monitor’s mandate will be to protect the interests of the public stockholders of the Company to the extent permitted by law, to prevent the dissipation of assets of the Company, to investigate possible illegal or improper conduct by the Company or any of its current or former officers, directors, employees and agents, to recover property of the Company and to assert claims on behalf of the Company based upon his investigation, and he will be authorized to take any steps he deems necessary to fulfill his mandate. The Company will be required to fully cooperate with the Special Monitor, to provide access to corporate records and to pay reasonable compensation to the Special Monitor and any experts the Special Monitor retains to assist the Special Monitor in performing his duties.
 
Pending litigation could have a material adverse effect on the Company.

      The Company is currently involved, either as plaintiff or as defendant, in several lawsuits, including: a derivative action brought by Cardinal Value Equity Partners, L.P. against certain of the Company’s former executive officers and certain of its current and former directors, entities affiliated with them and the Company as “nominal” defendant; purported class actions brought by stockholders against it, certain former executive officers and certain of its current and former directors, Hollinger Inc., Ravelston, other affiliated entities, Torys LLP, the Company’s former legal counsel and the Company’s independent registered public accounting firm, KPMG LLP; and, several suits and counterclaims brought by Black and/or Hollinger Inc. Tweedy Browne has also initiated a suit against the Company for attorneys’ fees. In addition, Black has commenced libel actions against certain of the Company’s current directors, officers and advisors to whom the Company has indemnification obligations. See “Item 3 — Legal Proceedings” for a more detailed description of these proceedings. Several of these actions remain in preliminary stages and it is not yet possible to determine their ultimate outcome. The Company cannot provide assurance that the legal and other costs associated with the defense of all of these actions, the amount of time required to be spent by management and the Board of Directors in these matters and the ultimate outcome of these actions will not have a material adverse effect on the Company’s business, financial condition and results of operations.

 
The Company’s senior management team is required to devote significant attention to matters arising from actions of prior management.

      The efforts of the current senior management team and Board of Directors to manage the Company’s business have been hindered at times by their need to spend significant time and effort to resolve issues inherited from and arising from the conduct of the prior senior management team and the direct and indirect controlling stockholders. To the extent the senior management team and the Board of Directors will be required to devote significant attention to these matters in the future, this may have, at least in the near term, an adverse effect on operations.

 
Weaknesses in the Company’s internal controls and procedures could have a material effect on the Company.

      Based in part on the results of the investigations of the Special Committee set forth in its Report, the Company’s management concluded that both significant deficiencies and material weaknesses existed in the Company’s systems of internal controls and procedures prior to, during the year ended and as of December 31, 2003. The SEC, in its complaint filed with the federal court in Illinois on November 15, 2004 naming Black, Radler and Hollinger Inc. as defendants, alleges that Black, Radler and Hollinger Inc. were liable for the Company’s failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) from at least 1999 through at least 2003. The SEC also alleges that Black, Radler and Hollinger Inc., directly and indirectly, falsified or caused to be falsified books, records, and accounts of the Company in order to conceal their self-dealing from the Company’s public stockholders. In addition, subsequent to December 31, 2003, the Company became aware that circulation figures for the Chicago Sun-Times and certain other publications had been

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overstated for a number of years starting in 1997, and went undetected, largely as a result of the same significant deficiencies and material weaknesses in internal controls noted above. Current management has taken steps to correct these deficiencies and weaknesses during and subsequent to 2003, and believes that the Company’s internal controls and procedures have strengthened. However, it is possible that the Company has not yet discovered or addressed all deficiencies or weaknesses that may be material to the Company’s business, results of operations or financial position. See “Item 9A — Controls and Procedures.”
 
The Company’s internal controls over financial reporting may not be effective.

      Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require that management document and test the Company’s internal control over financial reporting and assert in the annual report for the year ended December 31, 2004 whether the Company’s internal control over financial reporting at December 31, 2004 was effective. In addition, the Company’s independent registered public accounting firm must report on management’s assessment and the effectiveness of the Company’s internal controls. Any material weakness in internal control over financial reporting existing at that date will preclude either management or the independent registered public accounting firm from making positive assertions.

      The Company is in the process of documenting and testing its internal control over financial reporting to provide the basis for management’s report. However, at this time, due to the recent instances of breakdowns in the Company’s internal controls and procedures and the ongoing evaluation and testing, it is possible that the Company will identify continued material weaknesses in internal control over financial reporting that will be required to be reported as of December 31, 2004.

      In addition, the Company’s independent registered public accounting firm only recently completed their audit of the 2003 consolidated financial statements and have not yet provided the Company with a “management letter” in connection with such audit. It is possible that, in connection with their 2003 audit, the independent registered public accounting firm will identify certain matters involving internal controls over financial reporting and their operation that the independent registered public accounting firm considers to be reportable conditions under standards established by the American Institute of Certified Public Accountants as well as material weaknesses in internal controls over financial reporting, which the Company would not have addressed prior to December 31, 2004.

 
The Company has postponed the filing of its most recent quarterly reports, and material information concerning its current operating results and financial condition is therefore unavailable.

      The Company has postponed the filing of its periodic reports for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 and the required pro forma financial information reflecting the sale of the Telegraph Group on a current report on Form 8-K. Although the Company intends to make these filings within a reasonable time, it cannot state with certainty when complete financial and operational information relating to its first three quarters of 2004 will become available. When these reports are filed they may reflect changes or trends that are material to the Company’s business.

 
Black’s renunciation of his Canadian citizenship could negatively affect the Canadian Operations.

      Under the Canadian Income Tax Act (the “ITA”), there are limits on the deductibility by advertisers of the cost of advertising in newspapers that are not considered Canadian-owned under the ITA. The Canada Revenue Agency (“CRA”) may find that, as a consequence of Black’s renunciation of his Canadian citizenship in June 2001, certain of the Company’s Canadian newspapers are no longer considered to be Canadian-owned for purposes of the ITA. Although the Company believes that it has a structure in place that meets the ITA Canadian ownership rules for at least a portion of the period since June 2001, that structure may be challenged by the CRA. Should any challenge be successful, advertisers might seek compensation from the Company for any advertising costs disallowed or otherwise seek a reduction of advertising rates for certain Canadian newspaper publications.

      Additionally, one or more of the Company’s Canadian subsidiaries has received funding under a Canadian governmental program that is intended to benefit entities that are Canadian owned or controlled.

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The Canadian government could seek the return of these funds as a result of Black’s renunciation of his Canadian citizenship.
 
Actual cost of restitution and settlement of lawsuits related to overstatement of circulation figures of the Chicago Sun-Times may exceed current estimates; overstatement of circulation figures in the past may result in the loss of advertisers in the future.

      In June 2004, the Company announced that the Audit Committee had initiated an internal review into practices that resulted in the overstatement of circulation figures for the Chicago Sun-Times. Following the announcement, several lawsuits were filed against the Company, some of which are purported class actions composed of all persons who purchased advertising space in the Chicago Sun-Times during the period in which circulation figures were overstated.

      In October 2004, the Company announced the results of the internal review of the Audit Committee. The Audit Committee determined that weekday and Sunday average circulation of the Chicago Sun-Times, as reported in the audit reports published by ABC commencing in 1998, had been overstated. The Audit Committee found no overstatement of Saturday circulation data. The Chicago Sun-Times announced a plan intended to make restitution to its advertisers for losses associated with the overstatements in the ABC circulation figures. To cover the estimated cost of the restitution and settlement of related lawsuits filed against the Company, the Company recorded pre-tax charges of approximately $24.1 million for 2003 and approximately $2.9 million for the first quarter of 2004. The Company will evaluate the adequacy of the accruals as negotiations with advertisers proceed. If the actual total cost of restitution and settlement of related lawsuits significantly exceeds the Company’s current estimates this could have an adverse effect on the Company’s results of operations and liquidity.

      In addition, a significant portion of the Company’s revenue is derived from the sale of advertising space in the Chicago Sun-Times. Should certain advertisers decide not to advertise with the Chicago Sun-Times in the future, the Company’s business, results of operations and financial condition could be adversely affected.

Risks Relating to the Company’s Business and the Industry

 
The Company’s revenues are cyclical and dependent upon general economic conditions in the Company’s newspapers’ target markets.

      Advertising and circulation are the Company’s two primary sources of revenue. The Company’s advertising revenues and, to a lesser extent, circulation revenues are cyclical and dependent upon general economic conditions in the Company’s newspapers’ target markets. Historically, increases in advertising revenues have corresponded with economic recoveries while decreases, as well as changes in the mix of advertising, have corresponded with general economic downturns and regional and local economic recessions. Advertising revenue for the Chicago Group in 2003 was up by $10.8 million or 3.2% over the prior year. However, the Company’s dependency on advertising sales, which generally have a short lead-time, means that the Company has only a limited ability to accurately predict future results.

 
The Company is a holding company and relies on the Company’s subsidiaries to meet its financial obligations.

      The Company is a holding company and its assets consist primarily of investments in subsidiaries and affiliated companies. The Company relies on distributions from subsidiaries to meet its financial obligations. The Company’s ability to meet its future financial obligations may be dependent upon the availability of cash flows from its domestic and foreign subsidiaries through dividends, intercompany advances, management fees and other payments. Similarly, the Company’s ability to pay dividends on its common stock may be limited as a result of being dependent upon the distribution of earnings of the Company’s 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 domestic and foreign subsidiaries, are subject to statutory restrictions and may become subject to restrictions in future debt agreements that limit their ability to pay dividends.

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The Company has substantial potential tax liabilities.

      The Company’s Consolidated Balance Sheet as of December 31, 2003 includes $748.8 million of accruals intended to cover contingent liabilities related to additional taxes and interest it may be required to pay in various tax jurisdictions. A substantial portion of these accruals relate to the tax treatment of gains on the sale of a portion of the Company’s non-U.S. operations. The accruals to cover contingent tax liabilities also relate to management fees, “non-competition” payments and other items that have been deducted in arriving at taxable income, which deductions may be disallowed by taxing authorities. If those deductions were to be disallowed, the Company would be required to pay additional taxes and interest since the dates such taxes would have been paid had the deductions not been taken, and it may be subject to penalties. The Company will continue to record accruals for interest that it may be required to pay with respect to its contingent tax liabilities.

      Although the Company believes that it has defensible positions with respect to significant portions of these tax liabilities, there is a risk that the Company may be required to make payment of the full amount of such tax liabilities. Although these accruals for contingent tax liabilities are reflected in the Company’s Consolidated Balance Sheet, if the Company were required to make payment of the full amount, this could result in a significant cash payment obligation. The actual payment of such cash amount could have a material adverse effect on the Company’s liquidity and on the Company’s ability to borrow funds.

 
The Company has substantial accruals for tax contingencies in a foreign jurisdiction; if payments are required, a portion may be paid with funds denominated in U.S. dollars.

      The Company’s Consolidated Balance Sheet at December 31, 2003 includes $455.6 million of accruals for tax contingencies in a foreign jurisdiction. The accruals are denominated in foreign currency and translated into U.S. dollars at the period-end currency exchange rate effective as of each balance sheet date. If the Company were required to make payments with respect to such tax contingencies, it may be necessary for the Company to transfer U.S. dollar-denominated funds to its foreign subsidiaries to fund such payments. The amount of U.S. dollar-denominated funds that may need to be transferred will depend primarily on the resolution of the matters described in the preceding paragraph. The amount of U.S. dollar-denominated funds that may need to be transferred also will depend upon the currency exchange rate between the U.S. dollar and the foreign currency at the time or times such funds might be transferred. The Company cannot predict future currency exchange rates. Changes in the exchange rate could have a material effect on the Company’s financial position, results of operations and cash flows, depending on the extent and timing of transfers of funds, if any are required.

 
Newsprint represents the Company’s single largest raw material expense and increases in the price of newsprint could decrease net income.

      Newsprint represents the Company’s single largest raw material expense and is the most significant operating cost, other than employee costs. In 2003, newsprint costs represented approximately 14.0% of revenues. Newsprint costs vary widely from time to time and trends in pricing can vary between geographic regions. If newsprint prices increase in the future and the Company is unable to pass these costs on to customers, such increases may have a material adverse effect on the Company’s results of operations. Although the Company has, in the past, implemented measures in an attempt to offset a rise in newsprint prices, such as reducing page width where practical and managing waste through technology enhancements, price increases have in the past had a material adverse effect on the Company and may do so again in the future.

 
Competition in the newspaper industry originates from many sources. The advent of new technologies and industry practices, such as the provision of newspaper content on free Internet sites, may decrease sales or force the Company to make other changes that harm operating performance.

      Revenues in the newspaper industry are dependent primarily upon advertising revenues and paid circulation. Competition for advertising and circulation revenue comes from local and regional newspapers,

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radio, broadcast and cable television, direct mail and other communications and advertising media that operate in the Company’s markets. The extent and nature of such competition is, in large part, determined by the location and demographics of the markets and the number of media alternatives in those markets. Some of the Company’s competitors are larger and have greater financial resources than the Company has. The Company may experience price competition from competing newspapers and other media sources in the future. In addition, competing newspapers in certain markets have added new, free publications that target similar demographics to those that are particularly strong for some of the Company’s newspapers. Lastly, the use of alternative means of delivery, such as free Internet sites, for news and other content, has increased significantly in the past few years. Should significant numbers of customers choose to receive content using these alternative delivery sources rather than the Company’s newspapers, the Company may be forced to decrease the prices charged for the Company’s newspapers or make other changes in the way the Company operates, or the Company may face a long-term decline in circulation, any or all of which may harm the Company’s results of operations and financial condition.
 
The Company’s publications have experienced declines in circulation in the past and may do so in the future.

      The Chicago Sun-Times has experienced declines in circulation. Any declines in circulation the Company may experience at its publications could have a material adverse impact on the Company’s business and results of operations, particularly on advertising revenue. Any future significant declines in circulation could lead to a material adverse effect in addition to that occasioned by the previously described overstatement of circulation. Significant declines in circulation could result in an impairment of the value of the Company’s intangible assets, which could have a material adverse effect on the Company’s results of operations and financial position.

 
The Company may experience labor disputes, which could slow down or halt production or distribution of the Company’s newspapers or other publications.

      Approximately 36% of the Chicago Group employees are represented by labor unions and those employees are mostly covered by collective bargaining or similar agreements which are regularly renewable. A work stoppage or strike may occur prior to the expiration of the current labor agreements or during negotiations of new labor agreements or extensions of existing labor agreements. Work stoppages or other labor-related developments could slow down or halt production or distribution of the newspapers, which would adversely affect results of operations.

 
A substantial portion of the Company’s operations are concentrated in one geographic area.

      The geographic diversification the Company previously experienced has been substantially curtailed. With the sale of the Telegraph Group in July 2004, and The Jerusalem Post in December 2004, approximately 85% of the Company’s revenue for the year ended December 31, 2003, excluding the U.K. Newspaper Group and The Jerusalem Post and related publications, and a major portion of the Company’s business activities are concentrated in the greater Chicago metropolitan area. As a result, the Company’s revenues are heavily dependent on economic and competitive factors affecting the greater Chicago metropolitan area.

Risks Related to Voting Control by a Single Stockholder

 
The Company’s controlling stockholder has used its control over the affairs of the Company to engage in activities that were not in the best interests of the Company’s public stockholders; there is a risk that the controlling stockholder will use its control in a similar way in the future.

      The Company is controlled by Hollinger Inc., and is indirectly controlled by Black through his control of Ravelston, which in turn controls Hollinger Inc. Through its controlling interest, Hollinger Inc. is able to control the affairs of the Company. As more fully described above under “Risks Relating to Recent Developments,” and as detailed in the Report, in the past, Hollinger Inc. and Black have used their control over the Company to engage in practices that conflicted with the interests of the Company’s public

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stockholders. Although the Company’s current management, the Special Committee and the Corporate Review Committee, as well as the SEC, have undertaken several actions designed to prevent Hollinger Inc. and Black from engaging again in similar practices, there can be no assurance that they will remain in place or will not be modified or vacated in the near future or that Hollinger Inc. and Black will comply with these remedies. Thus, there is a risk that Hollinger Inc. and Black will attempt to exercise their control in the future in a manner contrary to the interests of public stockholders.
 
There could be a change of control of the Company through a change in control of Hollinger Inc. under circumstances not approved by the independent directors of the Company.

      Hollinger Inc., Ravelston and Black are currently restricted in their ability to sell their beneficial interests in the Company to third parties by the terms of an order of the Delaware Chancery Court, the Restructuring Agreement and the Company’s SRP. The scope and time of these restrictions are the subject of legal proceedings pending before the Delaware Supreme Court and the final outcome is uncertain.

      If Hollinger Inc., Ravelston and Black were not restricted in their ability to sell their beneficial controlling interest in the Company, and they chose to make such a sale, such a sale could result in a change of control of the Company under circumstances not approved by the independent directors of the Company.

      Under the terms of the Restructuring Agreement, Black agreed, among other things, that the Company would hire Lazard as financial advisor to pursue the Strategic Process. Black agreed that during the pendency of the Strategic Process, in his capacity as the majority stockholder of Hollinger Inc., he would not support a transaction involving ownership interests in Hollinger Inc. if such transaction would negatively affect the Company’s ability to consummate a transaction resulting from the Strategic Process, unless such a transaction involving Hollinger Inc. was necessary to enable it to avoid a material default or insolvency.

      In January 2004, Black attempted to sell his controlling interest in Hollinger Inc. as part of the Hollinger Sale. The Company filed a suit in the Delaware Chancery Court for judgment declaring that, among other things, the Hollinger Sale violated the terms of the Restructuring Agreement. The Delaware Chancery Court, among other things, has enjoined Black and Hollinger Inc. from taking any action to consummate any transaction in violation of the provisions of the Restructuring Agreement, including the Hollinger Sale. On October 29, 2004, the Company, Hollinger Inc. and Black entered into the Extension Agreement to voluntarily extend the injunction until the earlier of January 31, 2005 or the date of the completion of a distribution by the Company to its stockholders of a portion of the proceeds of the Company’s sale of the Telegraph Group. On October 30, 2004, the court issued an order extending the injunction as provided in, and incorporating the other terms of, the Extension Agreement.

      In February 2004, the Company adopted a shareholder rights plan. This SRP is designed to prevent any third person from acquiring, directly or indirectly, without the approval of the Company’s Board of Directors (or Corporate Review Committee of the Board of Directors), a beneficial interest in the Company’s Class A Common Stock and Class B Common Stock that represents over 20% of the outstanding voting power of the Company. Through its ownership of all outstanding Class B Common Stock, Hollinger Inc. currently controls approximately 66.8% of the Company’s outstanding voting power, which ownership is excluded from triggering the provisions of the SRP. However, a transaction resulting in a change of control in Hollinger Inc., without the approval of the Company’s Board of Directors (or the Corporate Review Committee), would have the effect of triggering the SRP. As part of its June 2004 judgment, the Delaware Chancery Court upheld the validity of the plan as to its effect on Hollinger Inc. However, Black and Hollinger Inc. have appealed the court’s judgment. There can be no assurance that the plan will be upheld on appeal.

      The Company is unable to determine what impact, if any, a change of control may have on the Company’s corporate governance or business initiatives.

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The Company is a party to a Business Opportunities Agreement with Hollinger Inc., the terms of which limit the Company’s ability to pursue certain business opportunities in certain countries.

      The Business Opportunities Agreement sets forth the terms under which Hollinger Inc. and the Company will resolve conflicts over business opportunities. The Company and Hollinger Inc. agreed to allocate to the Company opportunities relating to the start-up, acquisition, development and operation of newspaper businesses and related media businesses in the United States, Israel, the United Kingdom and other member states of the European Union, Australia and New Zealand and to Hollinger Inc. opportunities relating to the start-up, acquisition, development and operation of media businesses, other than related media businesses, globally and newspaper businesses and related media businesses in Canada. For purposes of the agreement, “newspaper business” means the business of publishing and distributing newspapers, magazines and other paid or free publications having national, local or targeted markets, “media business” means the business of broadcast of radio, television, cable and satellite programs, and “related media business” means any media business that is an affiliate of, or is owned or operated in conjunction with, a newspaper business. The terms of the Business Opportunities Agreement will be in effect for so long as Hollinger Inc. holds at least 50% of the Company’s voting power. See “Item 13 — Certain Relationships and Related Transactions — Business Opportunities Agreement.”

      The Business Opportunities Agreement may have the effect of preventing the Company from pursuing business opportunities that the Company’s management would have otherwise pursued.

 
If Hollinger Inc., the Company’s immediate parent company, sought protection from its creditors or became the subject of bankruptcy or insolvency proceedings there may be harm to and there may be a change of control of the Company.

      Hollinger Inc. has publicly stated that as of December 15, 2004, Hollinger Inc. owned, directly or indirectly 782,923 shares of the Company’s Class A Common Stock and 14,990,000 shares of the Company’s Class B Common Stock (which represent all of the issued and outstanding shares of Class B Common Stock). All of the direct and indirect interest of Hollinger Inc. in the shares of the Company’s Class A Common Stock is being held in escrow with a licensed trust company in support of future retractions of Hollinger Inc.’s Series II Preference Shares and all of the direct and indirect interest of Hollinger Inc. in the shares of the Company’s Class B Common Stock is pledged as security in connection with Hollinger Inc.’s outstanding 11 7/8% Senior Secured Notes due 2011 and 11 7/8% Second Priority Secured Notes due 2011. Hollinger Inc. reported that, as of the close of business on December 10, 2004, $78.0 million principal amount of the Senior Secured Notes and $15.0 million principal amount of the Second Priority Secured Notes were outstanding.

      Under the terms of the Series II Preference Shares of Hollinger Inc., each Preference Share may be retracted by its holder for 0.46 of a share of the Company’s Class A Common Stock. Until the Series II Preference Shares are retracted in accordance with their terms, Hollinger Inc. may exercise the economic and voting rights attached to the underlying shares of the Company’s Class A Common Stock.

      Hollinger Inc. has relied on payments from Ravelston to fund its operating losses and service its debt obligations. Ravelston financed its support of Hollinger Inc., in part, from the management fees received from the Company under the terms of the management services agreement with RMI. The Company terminated this agreement effective June 1, 2004.

      If Hollinger Inc. or any of its subsidiaries that own shares of Class A or Class B Common Stock of the Company were to commence proceedings to restructure its indebtedness under the Companies’ Creditors Arrangement Act (Canada), (the “CCAA”), or became the subject of an insolvency or liquidation proceeding under the Bankruptcy and Insolvency Act (Canada) (the “BIA”) or enforcement proceedings by the pledgee, the collectibility of amounts owed by Hollinger Inc. to the Company may be negatively impacted.

      In any such proceedings, issues may arise in connection with any transfer or attempted transfer of shares of the Company’s Class B Common Stock. Under the terms of the Company’s certificate of incorporation, such transfers may constitute a non-permitted transfer. In the event of a non-permitted transfer, the Class B Common Stock would automatically convert into Class A Common Stock as a result of which the controlling

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voting rights currently assigned to the Class B Common Stock would be eliminated. There is a risk that this result would be challenged in court by Hollinger Inc. or its insolvency representatives.

      In an insolvency or secured creditor enforcement proceeding, the ownership rights, including voting rights, attached to the shares of the Company’s Class A and Class B Common Stock would be exercised with a view to maximizing value for the secured creditors and other stakeholders of Hollinger Inc. Since the interests of secured creditors and other stakeholders of Hollinger Inc. may not be aligned with the interests of the Company’s public stockholders, actions might be taken that are not in the best interests of the Company’s public stockholders.

Description of Historical Business

      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. The Company divides its business into four principal segments; the Chicago Group, the U.K. Newspaper Group, the Community Group and the Canadian Newspaper Group. In addition, the Company’s operations include its Investment and Corporate Group, which performs various administrative and corporate functions. On July 30, 2004, the Company sold the Telegraph Group which carried out the operations of the U.K. Newspaper Group. See “Item 1 — Recent Developments — Sale of the Telegraph Group.” On December 15, 2004, the Company completed the sale of The Palestine Post, the publisher of The Jerusalem Post and related publications, which represented substantially all of the assets and operations of the Community Group. See “Item 1 — Recent Developments — Sale of The Jerusalem Post.”

 
Chicago Group

      The Chicago Group consists of more than 100 newspapers in the greater Chicago metropolitan area including the Chicago Sun-Times, the Post Tribune in northwest Indiana and Chicago’s Daily Southtown. The Chicago Group’s other newspaper properties in the greater Chicago metropolitan area include:

  •  Pioneer Newspapers Inc. (“Pioneer”), which currently publishes 57 weekly newspapers in Chicago’s northern and northwestern suburbs;
 
  •  Midwest Suburban Publishing Inc., which in addition to the Daily Southtown, publishes 23 biweekly newspapers, 13 weekly newspapers and four free distribution papers primarily in Chicago’s southern and southwestern suburbs;
 
  •  Fox Valley Publications Inc., which does business as Chicago Suburban Newspapers and publishes five daily newspapers (The Herald News, The Beacon News, The Courier News, The News Sun and The Naperville Sun), and 13 free distribution newspapers and six free total market coverage (“TMC”) products in the fast growing counties surrounding Chicago and Cook County; and
 
  •  Post Tribune, located in northwest Indiana, publishes a daily newspaper, a weekly newspaper and one TMC product.

      Sources of Revenue. The Chicago Group’s revenues were 42.5%, 43.9% and 38.6% of the Company’s consolidated revenues in 2003, 2002 and 2001, respectively. The following table sets forth the sources of revenue and the percentage such sources represent of total revenues for the Chicago Group during the three years ended December 31, 2003.

                                                 
Year Ended December 31,

2003 2002 2001



(Dollars in thousands)
Advertising
  $ 352,029       78 %   $ 341,262       77 %   $ 338,521       76 %
Circulation
    86,532       19       89,427       20       92,716       21  
Job printing and Other
    12,228       3       11,089       3       11,647       3  
     
     
     
     
     
     
 
Total
  $ 450,789       100 %   $ 441,778       100 %   $ 442,884       100 %
     
     
     
     
     
     
 

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      Advertising. Substantially all advertising revenues are derived from local and national retailers and classified advertisers. Advertising rates and rate structures vary among the publications and are based on, among other things, circulation, readership, penetration and type of advertising (whether classified, national or retail). In 2003, retail advertising accounted for the largest share of advertising revenues (44%), followed by classified (39%) and national (17%). The Chicago Sun-Times offers a variety of advertising alternatives, including full-run advertisements, geographically zoned issues, special interest pullout sections and advertising supplements in addition to regular sections of the newspaper targeted to different readers. The Chicago area suburban newspapers also offer similar alternatives to the Chicago Sun-Times platform for their daily and weekly publications. The Chicago Group operates the Reach Chicago Newspaper Network, an advertising vehicle, that can reach the combined readership base of all the Chicago Group publications and allows it to offer local advertisers geographically and demographically targeted advertising solutions and national advertisers an efficient one-stop vehicle to reach the entire Chicago market.

      Circulation. Circulation revenues are derived primarily from two sources. The first is sales of single copies of the newspaper made through retailers and vending racks, and the second is home delivery newspaper sales to subscribers. In calendar year 2003, approximately 60% of the copies of the Chicago Sun-Times reported as sold and 60% of the circulation revenues generated were attributable to single-copy sales. Approximately 79% of 2003 circulation revenues of the Company’s suburban newspapers were derived from home delivery subscription sales. When the copies of the Chicago Sun-Times sold in calendar year 2003 are adjusted to eliminate the inflation of single-copy sales, discussed below, the percentage of copies sold attributable to single-copy sales drops to approximately 56%; the revenue percentage remains the same because the inflation techniques did not inflate revenue.

      U.S. newspaper circulation is reported annually in an audit report published by the ABC. Circulation data for the 52 week period ending on the last day of the first quarter of each year is audited by ABC and published in an audit report dated April 1 of the following year. Therefore, for example, circulation occurring in the twelve months ended March 31, 2002 was publicly reported in the audit report dated April 1, 2003.

      The average daily (i.e. Monday through Friday), Saturday and Sunday circulation of the Chicago Sun-Times reported in the ABC audit report dated April 1, 2004 was 482,421, 307,324, and 376,401 copies, respectively. As discussed below, these daily and Sunday circulation figures were overstated. As noted in “Item 1 — Business — Recent Developments,” the Audit Committee initiated an internal review into practices that resulted in the overstatement of Chicago Sun-Times daily and Sunday circulation and determined that inflation of daily and Sunday single-copy circulation of the Chicago Sun-Times began modestly in the late 1990’s and increased over time. The Audit Committee concluded that the report of the Chicago Sun-Times circulation published in April 2004 by ABC, overstated single-copy circulation by approximately 50,000 copies on weekdays and approximately 17,000 copies on Sundays. That published audit report reflected inflated circulation during the 53 week period ended March 30, 2003. The Audit Committee determined that inflation of single-copy circulation continued until all inflation was discontinued in early 2004. The inflation occurring after March 30, 2003 did not affect public disclosures of circulation. The Company has implemented procedures to help ensure that circulation overstatements do not occur in the future.

      The most recent ABC audit reports for other papers produced by the Chicago Group disclosed daily and Sunday paid circulation of the Daily Southtown of approximately 48,000 and 53,000, respectively; daily and Sunday paid circulation of the Post-Tribune of approximately 66,000 and 71,000 respectively; and aggregate daily and Sunday paid circulation of the Chicago Suburban Newspapers of approximately 125,000 and 136,000, respectively. The reported aggregate circulation for the free TMC products disclosed in the most recent ABC audit report was approximately 211,000 copies. Pioneer has reported weekly paid circulation of approximately 187,000 copies and Midwest Suburban Publishing Inc. has 23 bi-weekly newspapers with paid Thursday circulation of approximately 49,000 copies and Sunday circulation of approximately 47,000 copies.

      Other Publications and Business Enterprises. The Chicago Group continues to strengthen its online presence. Suntimes.com and the related Chicago Group websites have approximately 2.5 million unique users with some 35 million-page impressions per month. The www.classifiedschicago.com regional classified-advertising website, which is a partnership with Paddock Publications, pools classified advertisements from all

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Chicago Group publications, as well as Paddock Publications’ metropolitan daily creating a valuable venue for advertisers, readers and on-line users. Additionally, www.DriveChicago.com continues to be a leader in automotive websites. This website, which represents a partnership with the Chicago Automobile Trade Association, pools the automotive classified advertising of three of the metropolitan Chicago area’s biggest dailies with the automotive inventories of many of Chicago’s new car dealerships. In 2004, the Chicago Group launched www.chicagojobs.com, a partnership with Paddock Publications and Shaker Advertising, one of the largest recruitment agencies in the Chicago market. The website provides online users and advertisers an extremely robust employment website that is one of the best in the Chicago market.

      Sales and Marketing. Each operating division in the Chicago Group has its own marketing department that works closely with both advertising and circulation sales and marketing teams to introduce new readers to the Company’s newspapers through various initiatives. The Chicago Sun-Times marketing department uses strategic alliances at major event productions and sporting venues, for on-site promotion and to generate subscription sales. The Chicago Sun-Times has media relationships with local TV and radio outlets that has given it a presence in the market and enabled targeted audience exposure. Similarly at Fox Valley Publications, Pioneer and Midwest Suburban Publishing, marketing professionals work closely with circulation sales professionals to determine circulation promotional activities, including special offers, sampling programs, in-store kiosks, sporting event promotions, dealer promotions and community event participation. In-house printing capabilities allow the Fox Valley marketing department to offer direct mail as an enhancement to customers’ run of press advertising programs. Midwest Suburban Publishing, like the other operating divisions, generally targets readers by zip code and has designed a marketing package that combines the strengths of its daily and bi-weekly publications. The Post-Tribune marketing department focuses on attracting readers in areas with zip codes that major advertisers have identified as being the most attractive.

      Distribution. The Company has gained benefits from its clustering strategy. In recent years, the Company has succeeded in combining distribution networks within the Chicago Group where circulation overlaps. The Chicago Sun-Times is distributed through both an employee and contractor network depending upon the geographic location. The Chicago Sun-Times takes advantage of a joint distribution program with its sister publications, Fox Valley Publications and Midwest Suburban Publishing. The Chicago Sun-Times has approximately 6,000 street newspaper boxes and more than 8,400 newsstands and over the counter outlets from which single copy newspapers are sold, as well as approximately 270 street “hawkers” selling the newspapers in high-traffic urban areas. Midwest Suburban Publishing’s Daily Southtown is distributed primarily by Chicago Sun-Times independent contractors. Additionally, in certain western suburbs, the Daily Southtown has a joint distribution program with Fox Valley Publications. The Daily Southtown and its sister publication, The Star, are also distributed in approximately 2,100 outlets and newspaper boxes in Chicago’s southern suburbs and Chicago’s south side and downtown areas. Midwest’s Penny Saver is distributed through the United States Postal Service and through independent contractors. Approximately 82% of Fox Valley Publications’s circulation is from home delivery subscriptions. While 83% of the Post-Tribune’s circulation is by home delivery, it also distributes newspapers to approximately 620 retail outlets and approximately 420 single copy newspaper boxes. Pioneer has a solid home delivery base that represents 96% of its circulation. Pioneer is also distributed to approximately 80 newspaper boxes and is in more than 800 newsstand locations.

      Printing. The Chicago Sun-Times’ Ashland Avenue printing facility was completed in April 2001 and gave the Chicago Group printing presses with the quality and speed necessary to effectively compete with the other regional newspaper publishers. Fox Valley Publications’ 100,000 sq. ft. plant, which has been operating since 1992, houses a state-of-the-art printing facility in Plainfield, Illinois, which prints all of its products. Midwest Suburban Publishing prints all of its publications at its South Harlem Avenue facility in Chicago. Pioneer prints the main body of its weekly newspapers at its Northfield production facility. In order to provide advertisers with more color capacity, certain of Pioneer’s newspaper’s sections are printed at the Chicago Sun-Times Ashland Avenue facility. The Post-Tribune has one press facility in Gary, Indiana. The Chicago Group has been successful in implementing new production technology, sharing resources and excess capacity available during certain print “windows” to achieve cost savings and effectively compete for commercial print jobs.

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      Competition. Each of the Company’s Chicago area newspapers competes to varying degrees with radio, broadcast and cable television, direct marketing and other communications and advertising media, as well as with other newspapers having local, regional or national circulation. The Chicago metropolitan region comprises Cook County and six surrounding counties and is served by eight local daily newspapers of which the Company owns six. The Chicago Sun-Times competes in the Chicago region with the Chicago Tribune, a large established metropolitan daily and Sunday newspaper. In addition, the Chicago Sun-Times and other Chicago Group newspapers face competition from other newspapers published in adjacent or nearby locations and circulated in the Chicago metropolitan area market. In 2002, the Chicago Sun-Times launched Red Streak, a newspaper targeted at younger readership in the region. The majority of the editorial content is derived from the Chicago Sun-Times. This paper is intended to serve as an effective vehicle to compete with the Red Eye (a publication of the Tribune Company).

      Employees and Labor Relations. As of December 31, 2003, the Chicago Group employed approximately 3,200 employees including approximately 520 part-time employees. Of the 2,674 full-time employees, 678 were production staff, 653 were sales and marketing personnel, 360 were circulation staff, 220 were general and administrative staff, 741 were editorial staff and 22 were facilities staff. Approximately 1,150 employees were represented by 23 collective bargaining units. Employee costs (including salaries, wages, fringe benefits, employment-related taxes and other direct employee costs) equaled approximately 37.8% of the Chicago Group’s revenues in the year ended December 31, 2003.

      There have been no strikes or general work stoppages at any of the Chicago Group’s newspapers in the past five years. The Chicago Group believes that its relationships with its employees are generally good.

      Raw Materials. The primary raw material for newspapers is newsprint. In 2003, approximately 138,000 tonnes were consumed. Newsprint costs equaled approximately 14.4% of the Chicago Group’s revenues. Average newsprint prices for the Chicago Group decreased approximately one percent in 2003 from 2002. The Chicago Group is not dependent upon any single newsprint supplier. The Chicago Group’s access to Canadian, United States and offshore newsprint producers ensures an adequate supply of newsprint. The Chicago Group, like other newspaper publishers in North America, has not entered into any long-term fixed price newsprint supply contracts. The Chicago Group believes that its sources of supply for newsprint are adequate for its anticipated needs.

U.K. Newspaper Group

      On July 30, 2004, the Company completed the sale of the Telegraph Group which carried out the operations of the U.K. Newspaper Group. See “Item 1 — Recent Developments — Sale of the Telegraph Group.” The following information reflects the U.K. Newspaper Group’s business while the Telegraph Group was owned by the Company. The U.K. Newspaper Group’s operations included The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines.

      Sources of Revenue. The U.K. Newspaper Group’s revenues were 49.0%, 47.9% and 42.4% of the Company’s consolidated revenues in 2003, 2002 and 2001, respectively. The following table sets forth the sources of revenue and their percentage of total revenues for the U.K. Newspaper Group during the three years ended December 31, 2003.

                                                 
Year Ended December 31,

2003 2002 2001



(In thousands of British pounds sterling)
Advertising
  £ 195,462       62 %   £ 211,045       66 %   £ 228,715       68 %
Circulation
    105,961       33       93,640       29       94,502       28  
Other
    16,377       5       16,261       5       14,252       4  
     
     
     
     
     
     
 
Total
  £ 317,800       100 %   £ 320,946       100 %   £ 337,469       100 %
     
     
     
     
     
     
 

      Advertising. Advertising is the largest source of revenue at the Telegraph Group. The Daily Telegraph and The Sunday Telegraph display advertising strengths in the financial, automobile and travel sections. The

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level of classified advertisements, especially recruitment advertisements, has historically fluctuated with the economy. Classified advertising revenue represented 27% of total advertising revenue in 2003. Recruitment advertising was the largest classified advertising category, representing about 32% of all classified advertising in terms of revenue in 2003.

      Circulation. In 2003, The Daily Telegraph had an average net circulation of approximately 925,000 and The Sunday Telegraph had an average net circulation of approximately 717,000. The Daily Telegraph had 311,000 pre-paid non-postal subscriptions. The Sunday Telegraph was the second highest circulation quality Sunday newspaper in the U.K.

      Other Publications and Business Enterprises. The Telegraph Group is involved in several other publications and business enterprises, including The Spectator and Apollo magazines, The Weekly Telegraph newspaper and telegraph.co.uk (formerly Electronic Telegraph). Telegraph.co.uk had approximately 3.0 million unique users with some 30.0 million page impressions per month in 2003.

      Sales and Marketing. The Telegraph Group’s marketing department helps introduce new readers to its newspapers through strategic marketing initiatives. The Telegraph Group uses research groups that seek the views of readers and non-readers providing useful information to better target editorial, promotional and commercial activities. In addition, the direct marketing department is responsible for the development of a customer contact strategy, circulation initiatives such as subscription programs, discount vouchers supporting the launch of new sections and supplements, and various support promotions.

      Distribution. The Telegraph Group’s newspapers are distributed to wholesalers by truck under a contract with a subsidiary of TNT Express (U.K.) Limited (“TNT”). The arrangements with wholesalers contain performance provisions to ensure minimum standards of copy availability while controlling the number of unsold copies. On May 25, 2001, a new contract with TNT was entered into by West Ferry Printers, a joint venture of the Telegraph Group and another British newspaper publisher.

      Wholesalers distribute newspapers to retail news outlets. The number of retail news outlets throughout the United Kingdom has increased as a result of a 1994 ruling by the British Department of Trade and Industry that prohibits wholesalers from limiting the number of outlets in a particular area. More outlets do not necessarily mean more sales and the Telegraph Group’s circulation department has continued to develop its control of wastage while taking steps to ensure that copies remain in those outlets with high single copy sales. In addition to single copy sales, many retail news outlets offer home delivery services. In 2003, home deliveries accounted for approximately 45% of sales of both The Daily Telegraph and The Sunday Telegraph.

      Printing. The majority of copies of The Daily Telegraph and The Sunday Telegraph are printed by West Ferry Printers and another joint venture, Trafford Park Printers. The magazine sections of the Saturday edition of The Daily Telegraph and of The Sunday Telegraph are printed under contract by external magazine printers. The Telegraph Group also prints the majority of its overseas copies under contracts with external printers in Northern Ireland, Spain and Belgium.

      Major capital expenditures at each joint venture require the approval of the Boards of Directors of the joint venture partners. There is high utilization of the plants at West Ferry Printers and Trafford Park Printers, with little spare capacity.

      West Ferry Printers has 18 presses, six of which are configured for The Telegraph Group’s newspapers, eight are used for the newspapers published by The Telegraph Group’s joint venture partner, and the remaining four are used by contract printing customers. Trafford Park Printers has six presses, two of which are used primarily for The Telegraph Group’s newspapers.

      Competition. The Telegraph Group’s newspapers compete for advertising revenue with other forms of media, particularly television, magazine, direct mail, posters and radio. In addition, total gross advertising expenditures, including financial, display and recruitment classified advertising, are affected by economic conditions in the United Kingdom. The Daily Telegraph’s primary competition in the United Kingdom is The Times.

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      Employees and Labor Relations. At December 31, 2003, the Telegraph Group and its subsidiaries employed approximately 1,238 persons and the joint venture printing companies employed an additional 917 persons. Of the Telegraph Group’s approximately 1,238 employees, 49 were production staff, 397 were sales and marketing personnel, 204 were general and administrative staff and 588 were editorial staff.

      Raw Materials. Newsprint represents the single largest expense next to employee costs. Approximately 146,000 tonnes of newsprint are consumed annually. In 2003, the total cost was approximately 14.5% of the U.K. Newspaper Group’s revenues. Prices were fixed throughout 2003 at levels some 7.6% below the average price paid during 2002. Negotiated contracts for 2004 are consistent with those in 2003.

      On October 17, 2001, Paper Purchase and Management Limited was established as a joint venture between the Telegraph Group and Guardian Media Group plc. The main purpose of the joint venture is to control the specifications and sourcing, as well as monitoring the usage of newsprint throughout the printing plants operated by one or both of the joint venture partners and at other locations where the joint venture partners’ publications are printed on a contract basis. Further, by combining the purchasing power of the joint venturers, the Telegraph Group is able to obtain better prices. The joint venture purchases newsprint from a number of different suppliers located primarily in Canada, the United Kingdom, Scandinavia and continental Europe.

Community Group

      On December 15, 2004, the Company announced that it had completed the sale of The Palestine Post Limited, the publisher of The Jerusalem Post and related publications, which represented substantially all assets and operations of the Community Group. See “Item 1 — Recent Developments — Sale of The Jerusalem Post.” The following information reflects the Community Group’s business without giving effect to the sale of The Jerusalem Post and related publications.

      Sources of Revenue. The Community Group’s revenues were 1.0%, 1.3% and 1.7% of the Company’s consolidated revenues in 2003, 2002 and 2001, respectively. The following table sets forth the sources of revenue and the percentage that such sources represented of total revenues for The Jerusalem Post during the three years ended December 31, 2003.

                                                 
Year Ended December 31,

2003 2002 2001



(Dollars in thousands)
Advertising
  $ 3,585       34 %   $ 3,937       30 %   $ 5,806       30 %
Circulation
    5,717       55       6,082       46       7,751       41  
Job printing and other
    1,095       11       3,212       24       5,558       29  
     
     
     
     
     
     
 
Total
  $ 10,397       100 %   $ 13,231       100 %   $ 19,115       100 %
     
     
     
     
     
     
 

      The Community Group’s primary source of revenue is from circulation of The Jerusalem Post and its related publications, including The Jerusalem Report, which is a bi-weekly magazine. It also derives revenue from advertising and from specialty job printing. The Jerusalem Post in the past derived a relatively high percentage of its revenues from job printing as a result of a long-term contract to print and bind copies of the Golden Pages, Israel’s equivalent of a Yellow Pages telephone directory. During 2002, Golden Pages ceased placing printing orders. An action was commenced by The Jerusalem Post in 2003 against the Golden Pages seeking damages for alleged breach of contract.

      Distribution. The Jerusalem Post daily and Friday editions are available through either home delivery subscriptions or single-copy kiosk sales. The daily products are sold at approximately 2,000 retail outlets across Israel.

      Printing. The Jerusalem Post and its related publications use two offset printing presses for printing various daily and weekend editions of the newspaper and for commercial printing. The Jerusalem Post commenced production, in August 2003, on a state-of-the-art press that reduced the paper’s operating costs and increased printing revenue through meeting the growing demands of contract printing clients. Automation

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and quality improvements will significantly reduce labor costs and will result in a meaningful reduction in newsprint wastage.

      Competition. The Jerusalem Post is the leading English-language daily newspaper in the Middle East. Its nearest competitor, the English translation of Ha’aretz, Israel’s oldest Hebrew daily newspaper, has a circulation level that is approximately 14% of that of The Jerusalem Post.

      Employees and Labor Relations. As of December 31, 2003, The Jerusalem Post and its related publications employed approximately 150 people, of which 17 were represented by a union. Subsequent to December 31, 2003, the Company replaced the publisher of The Jerusalem Post.

      Raw Materials. Newsprint costs were approximately 9.1% of the Community Group’s revenue in 2003. Newsprint that had been used for the production of the Golden Pages had been provided by the owners of that publication.

      Regulatory Matters. Newspapers in Israel are required by law to obtain a license from the country’s interior minister, who is authorized to restrain publication of certain information if, among other things, it may endanger public safety. To date, The Jerusalem Post has not experienced any difficulties in maintaining its license to publish nor has it been subject to any efforts to restrain publication. In addition, all written media publications in Israel are reviewed by Israel’s military censor prior to publication in order to prevent the publication of information that could threaten national security. Such censorship is considered part of the ordinary course of business in the Israeli media and has not adversely affected The Jerusalem Post’s business in any significant way.

Canadian Newspaper Group

      The Canadian Newspaper Group includes the operations of HCPH Co. that has an 87% interest in Hollinger L.P.

      At December 31, 2003, HCPH Co. and Hollinger L.P. owned numerous daily and non-daily newspaper properties and the Business Information Group (formerly Southam Magazine and Information Group) which publishes Canadian trade magazines and tabloids for the transportation, construction, natural resources and manufacturing industries, among others.

      Sources of Revenue. The Canadian Newspaper Group’s revenues were 7.6%, 6.9% and 17.3% of the Company’s consolidated revenues in 2003, 2002 and 2001, respectively. The following table sets forth the sources of revenue and the revenue mix of the total Canadian Newspaper Group, including operations sold up to the date of sale, during the three years ended December 31, 2003. Operations sold in the past three years include: the sale of French language newspapers to Gesca in 2001; the sale of Ontario community newspapers to Osprey Media in 2001; and the sale of the remaining 50% interest in the National Post to CanWest in 2001. See Note 3 to the Company’s consolidated financial statements.

                                                   
Year Ended December 31,

2003 2002 2001



(In thousands of Canadian Dollars)
Newspapers:
                                               
 
Advertising
  $ 52,114       46 %   $ 47,215       43 %   $ 171,032       56 %
 
Circulation
    7,039       6       6,611       6       53,030       17  
 
Job printing and other
    11,439       10       11,883       11       35,249       12  
Business Communications
    41,633       38       43,412       40       45,763       15  
     
     
     
     
     
     
 
Total
  $ 112,225       100 %   $ 109,121       100 %   $ 305,074       100 %
     
     
     
     
     
     
 

      Advertising. Newspaper advertising revenue in 2003 totaled Cdn. $52.1 million. Advertisements are carried either within the body of the newspapers, and referred to as run-of-press (ROP) advertising, or as inserts. ROP advertising, which represented 91.6% of total advertising revenue in 2003, is categorized as either

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retail, classified or national. The three categories represented 69%, 12% and 19%, respectively, of ROP advertising revenue in 2003.

      Circulation. Virtually all newspaper circulation revenue in 2003 was from subscription sales.

      Competition. The majority of revenue is from advertising. Advertising linage in the newspapers is affected by a variety of factors including competition from print, electronic and other media as well as general economic performance and the level of consumer confidence. Specific advertising segments such as real estate, automotive and help wanted are significantly affected by local factors.

      Employees and Labor Relations. As of December 31, 2003, the Canadian Newspaper Group had approximately 1,223 full time equivalent employees of which approximately 18% are unionized. The percentage of unionized employees varies widely from paper to paper. As a large number of the union contracts are renegotiated every year, labor disruptions are always possible, but no single disruption would have a material effect on the Company.

      The Company has a significant prepaid pension benefit recorded in respect of certain Canadian defined benefit plans. There are uncertainties regarding the Company’s legal right to access any plan surplus and due to the Company having a limited number of active employees in Canada, there are limitations on the ability to utilize the surplus through contribution holidays or increased benefits. In addition, the Canadian Newspaper Group administers and absorbs the costs of the retirement plans for certain retired employees of Southam Inc., predecessor to HCPH Co.

      Raw Materials. Newsprint consumption in 2003 was approximately 11,534 tonnes. The newspapers within the Canadian Newspaper Group have access to adequate supplies to meet anticipated production needs. They are not dependent upon any single newsprint supplier. The Canadian Newspaper Group, like other newspaper publishers in North America, has not entered into any long-term fixed price newsprint supply contracts. The Business Information Group contracts out the printing of its publications.

      Regulatory Matters. The publication, distribution and sale of newspapers and magazines in Canada is regarded as a “cultural business” under the Investment Canada Act and consequently, any acquisition of control of the Canadian Newspaper Group by a non-Canadian investor would be subject to the prior review and approval by the Minister of Industry of Canada.

      Ownership. During 2001, HCPH Co. became the successor to the operations of XSTM Holdings (2000) Inc. The Company indirectly owns a 100% interest in HCPH Co. The Company indirectly owns an 87% interest in Hollinger L.P. There are limits on the deductibility by advertisers of the cost of advertising in newspapers that are not considered Canadian-owned under the ITA. It is possible the CRA may find that, as a consequence of Black’s renunciation of his Canadian citizenship in June 2001, certain of the Company’s Canadian newspapers are no longer considered Canadian-owned for purposes of the ITA. Although the Company believes that it has a structure in place that meets the ITA Canadian ownership rules for at least a portion of the period since June 2001, that structure may be challenged by the CRA.

     Investment and Corporate Group

      The Investment and Corporate Group performs administrative and corporate finance functions for the Company including treasury, accounting, tax planning and compliance and the development and maintenance of the systems of internal controls. At December 31, 2003, the Company’s Investment and Corporate Group operated out of offices in New York, New York and Toronto, Ontario. The Company is in the process of relocating functions performed in Toronto to Chicago, Illinois. As of December 31, 2003, the Investment and Corporate Group employed 10 people. Additional services were provided by RMI pursuant to a management services agreement which was terminated effective June 1, 2004.

 
Environmental

      The Company, similar to other newspaper companies engaged in similar operations, is subject to a wide range of federal, state and local environmental laws and regulations pertaining to air and water quality, storage

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tanks, and the management and disposal of wastes at the Company’s major printing facilities. These requirements are becoming increasingly stringent. The Company believes that the cost of compliance with these laws and regulations will not have a material adverse effect on its business or results of operations.

     Seasonality

      The Company’s operations are subject to seasonality. Typically, the Company’s advertising revenue is highest during the fourth quarter and lowest during the third quarter.

     Intellectual Property

      The Company seeks and maintains protection for its intellectual property in all relevant jurisdictions, and has current registrations, pending applications, renewals or reinstatements for all of its material trademarks. No claim adverse to the interests of the Company of a material trademark is pending or, to the best of the Company’s knowledge, has been threatened. The Company has not received notice, or is otherwise aware, of any infringement or other violation of any of the Company’s material trademarks. Internet domain names also form an important part of the Company’s intellectual property portfolio. Currently, there are approximately 230 domain names registered in the name of the Company or its subsidiaries, including numerous variations on each major name. In the Chicago market, the Company participates in aggregation of advertising information with other periodical companies whereby the Company’s advertisements are presented in an on-line format along with advertisements of others newspapers.

Available Information

      The Company files annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act.

      You may read and copy this information at the Public Reference Room of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically through the “EDGAR” (Electronic Data Gathering, Analysis and Retrieval) System, available on the SEC’s website (http://www.sec.gov).

      The Company also maintains a website on the World Wide Web at www.hollingerinternational.com. The Company makes available, free of charge, on its website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.

      The Company has implemented a Code of Business Conduct and Ethics, which applies to all employees of the Company including each of its CEO, CFO and principal accounting officer or controller or persons performing similar functions. The text of the Code of Business Conduct and Ethics can be accessed on the Company’s website at www.hollingerinternational.com. Any changes to the Code of Business Conduct and Ethics will be posted on the website.

 
Item 2. Properties

      The Company believes that its properties and equipment are in generally good condition, well-maintained and adequate for current operations.

 
Chicago Group

      The Chicago Sun-Times owns a 320,000 square foot, state of the art printing facility. This facility handles all of the production for the Chicago Sun-Times. Until October 2004, the Chicago Sun-Times conducted its editorial, pre-press, marketing, sales and administrative activities in a 535,000 square foot, seven-story building

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in downtown Chicago. In October 2004, the Chicago Sun-Times vacated this facility and relocated its editorial, pre-press, marketing, sales and administrative activities to a 127,000 square foot facility, which is also in downtown Chicago. The Chicago Sun-Times has entered into a 15-year operating lease for this new office space. In 2002, the Company entered into a joint venture established to develop a 90-story residential/commercial tower on property formerly occupied by its seven-story building. In June 2004, the Company agreed to sell its share of the joint venture and a related property for net proceeds of $70.7 million. This transaction closed on October 15, 2004. See Note 28 (f) to the Company’s Consolidated Financial Statements herein and “Item 1 — Business — Recent Developments.”

      Fox Valley Publications produces its newspapers at a 100,000 square foot plant built in 1992 in Plainfield, Illinois. The facility, owned by the Company, also houses Fox Valley Publication’s editorial, pre-print, sales and administrative functions. Fox Valley Publications also owns facilities in the surrounding suburbs where editorial and sales activities take place for each of its daily newspapers. Pioneer utilizes and owns a building in north suburban Chicago for editorial, pre-press, sales and administrative activities. Pioneer leases several outlying satellite offices for its editorial and sales staff in surrounding suburbs. Production currently occurs at a 65,000 square foot leased building in a neighboring suburb. Midwest Suburban Publishing owns one south suburban building which it uses for editorial, pre-press, marketing, sales and administrative activities. Production activities occur at a separate 150,000 square foot owned facility in southwest Chicago. The Post-Tribune editorial, pre-press, marketing, sales and administrative activities are housed in a facility in Merrillville, Indiana, while production activities take place at its facility in Gary, Indiana.

 
U.K. Newspaper Group

      The Telegraph Group was sold on July 30, 2004 and accordingly, the Company no longer holds any real property in the U.K. See “Item 1 — Recent Developments — Sale of the Telegraph Group.”

      At the time of the sale, the Telegraph Group occupied five floors of a tower at Canary Wharf in London’s Docklands under a 25-year operating lease expiring in 2017. Printing of the Telegraph Group’s newspapers titles was done principally at 50% owned joint venture printing plants in London’s Docklands and in Trafford Park, Manchester.

 
Community Group

      The Jerusalem Post is produced and distributed in Israel from a three-story building in Jerusalem owned by The Jerusalem Post. The Jerusalem Post also leases a sales office in Tel Aviv and a sales and distribution office in New York.

      On December 15, 2004 the Company announced that it had completed the sale of The Palestine Post Limited, the publisher of The Jerusalem Post and related publications. Accordingly, the Company no longer holds any real property in Israel. See “Item 1 — Recent Developments — Sale of The Jerusalem Post.”

 
Canadian Newspaper Group

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

     Investment and Corporate Group

      The Investment and Corporate Group has 3,803 square feet of office space leased at 712 Fifth Avenue in New York, New York. This lease expires in May 2007. The Investment and Corporate Group also leases 4,927 square feet of office space in Toronto, Ontario. This lease expires in April 2005. The Company is currently relocating the functions performed in the Toronto office to Chicago, Illinois.

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Item 3. Legal Proceedings
 
Stockholder Derivative Litigation

      On December 9, 2003, Cardinal Value Equity Partners, L.P., a stockholder of the Company, initiated a purported derivative action on behalf of the Company against certain current and former executive officers and directors, including Black and certain entities affiliated with them, and against the Company as a “nominal” defendant.

      This action, which was filed in the Court of Chancery for the State of Delaware in and for New Castle County and is entitled Cardinal Value Equity Partners, L.P. v. Black, et al., asserts causes of action that include breach of fiduciary duty, misappropriation of corporate assets and self-dealing in connection with certain “non-competition” payments, the payment of allegedly excessive management and services fees, and other alleged misconduct. The plaintiff is seeking unspecified money damages. This action has been stayed since January 2004. It is not yet possible to determine the ultimate outcome of this action.

 
Stockholder Class Actions

      In February and April 2004, three alleged stockholders of the Company (Teachers’ Retirement System of Louisiana, Kenneth Mozingo, and Washington Area Carpenters Pension and Retirement Fund) initiated purported class actions suits in the United States District Court for the Northern District of Illinois against the Company, Black, certain former executive officers and certain current and former directors of the Company, Hollinger Inc., Ravelston and certain affiliated entities and KPMG LLP, the Company’s independent registered public accounting firm. On July 9, 2004, the Court consolidated the three actions for pretrial purposes. The consolidated action is entitled In re Hollinger Inc. Securities Litigation, No. 04C-0834. Plaintiffs filed an amended consolidated class action complaint on August 2, 2004, and a second consolidated amended class action complaint on November 19, 2004. The named plaintiffs in the second consolidated amended class action complaint are Teachers’ Retirement System of Louisiana, Washington Area Carpenters Pension and Retirement Fund, and E. Dean Carlson. They are purporting to sue on behalf of an alleged class consisting of themselves and all other purchasers of securities of the Company between and including August 13, 1999 and December 11, 2002. The second consolidated amended class action complaint asserts claims under federal and Illinois securities laws and claims of breach of fiduciary duty and aiding and abetting in breaches of fiduciary duty in connection with misleading disclosures and omissions regarding: certain “non-competition” payments, the payment of allegedly excessive management fees, allegedly inflated circulation figures at the Chicago Sun-Times, and other alleged misconduct. The complaint seeks unspecified money damages, rescission, and an injunction against future violations. This consolidated action is in a preliminary stage, and it is not yet possible to determine its ultimate outcome.

      On September 7, 2004, a group allegedly comprised of those who purchased stock in one or more of the defendant corporations, initiated purported class actions by issuing Statements of Claim in Saskatchewan and Ontario, Canada. The Saskatchewan claim, issued in that province’s Court of Queen’s Bench, and the Ontario claim, issued in that province’s Superior Court of Justice, are identical in all material respects. The defendants include the Company, certain current and former directors and officers of the Company, Hollinger Inc., Ravelston and certain affiliated entities, Torys LLP, the Company’s former legal counsel, and KPMG LLP. The plaintiffs allege, among other things, breach of fiduciary duty, violation of the Ontario Securities Act, 1988, S-42.2, and breaches of obligations under the Canadian Business Corporations Act, R.S.O. 1985, c. C.-44 and seek unspecified money damages. These actions are in preliminary stages and it is not yet possible to determine their ultimate outcome.

 
Tweedy Browne Litigation

      On December 2, 2003, Tweedy, Browne Global Value Fund and Tweedy Browne (together, the “Tweedy Browne Plaintiffs”), stockholders of the Company, initiated an action against the Company in the Court of Chancery for the State of Delaware in and for Castle County to recover attorneys’ fees and costs in connection with informal inquiries and other investigations performed by and on behalf of the Tweedy Browne Plaintiffs concerning conduct that subsequently has been and continues to be investigated by the Special Committee.

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The Tweedy Browne Plaintiffs are seeking an award of attorneys’ fees “commensurate with the corporate benefits that have been or will be conferred on the Company as a result of the efforts undertaken by plaintiffs and their counsel.” This action has been stayed since January 2004. This action is in a preliminary stage, and it is not yet possible to determine its ultimate outcome.
 
Litigation Involving Controlling Stockholder, Senior Management and Directors

      On January 28, 2004, the Company, through the Special Committee, filed a civil complaint in the United States District Court for the Northern District of Illinois asserting breach of fiduciary duty and other claims against Hollinger Inc., Ravelston, RMI, Black, Radler and Boultbee, which complaint was amended on May 7, 2004. The action is entitled Hollinger International Inc. v. Hollinger Inc., et al., Case No. 04C-0698. The amended complaint added certain other defendants, including Amiel Black and Colson, sought approximately $484.5 million in damages, including approximately $103.9 million in pre-judgment interest, and also included claims under RICO, which provides for a trebling of damages and attorney’s fees. On October 8, 2004, the court granted the defendants’ motion to dismiss the RICO claims and also dismissed the remaining claims without prejudice on jurisdictional grounds. On October 29, 2004, the Company filed a second amended complaint seeking to recover approximately $542.0 million in damages, including prejudgment interest of approximately $117.0 million, and also punitive damages, on breach of fiduciary duty, unjust enrichment, conversion, fraud, and civil conspiracy claims asserted in connection with transactions described in the Report of the Special Committee, including unauthorized “non-competition” payments, excessive management fees, sham broker fees and investments and divestitures of Company assets. The second amended complaint also adds Perle, a Director of the Company, as a defendant and eliminated as defendants certain companies affiliated with Black and Radler. The second amended complaint alleges that Perle breached his fiduciary duties while serving as a member of the executive committee of the Company’s Board of Directors by, among other things, signing written consents purporting to authorize various related party transactions, without reading, evaluating or discussing those consents; without negotiating or evaluating the related party transactions he was approving; and without taking steps to ensure that those transactions were presented to and reviewed by the Company’s audit committee. The Company is seeking to appeal the dismissal of the RICO claims. On December 13, 2004, defendants Hollinger Inc., Ravelston, RMI, Black, Radler, Boultbee, and Amiel Black moved to dismiss the second amended complaint for failure to join as parties the other companies affiliated with Black and Radler that had previously been named as defendants. Defendants assert that these companies are indispensable to the litigation but that their presence would deprive the court of jurisdiction. Black, Hollinger Inc., Colson and Perle also moved individually to dismiss the complaint on various grounds, including failure to state a claim for relief, lack of personal jurisdiction and res judicata. The motions are pending. This action is in a preliminary stage and it is not yet possible to determine its ultimate outcome.

 
Hollinger International Inc. v. Conrad M. Black, Hollinger Inc., and 504468 N.B. Inc.

      On January 26, 2004, the Company filed a complaint against Black, Hollinger Inc. and an affiliated entity in the Court of Chancery of the State of Delaware in and for New Castle County. In this action, the Company sought relief declaring: (i) that a written consent by defendants purporting to abolish the Corporate Review Committee and to amend the Company’s bylaws was invalid; (ii) that the SRP adopted by the Corporate Review Committee on January 25, 2004 was valid; and (iii) that, under the Hollinger Sale, the shares of Class B Common Stock held by Hollinger Inc. would convert to shares of Class A Common Stock. The Company’s complaint also asserted claims that defendants breached their fiduciary duties to the Company and breached the terms of the Restructuring Agreement through their activities in connection with the Hollinger Sale and the purported bylaw amendments.

      On February 3, 2004, defendants filed a counterclaim against the Company, members of the Company’s Corporate Review Committee, and Breeden, advisor and counsel to the Special Committee. In their counterclaim, defendants sought declaratory relief declaring that their bylaw amendments were valid and that the SRP and other actions by the Corporate Review Committee were invalid. Defendants also asserted claims of breach of fiduciary duty, misrepresentation, tortious interference with the Hollinger Sale, breach of the

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Restructuring Agreement, and violation of the just compensation and due process provisions of the Fourteenth Amendment to the U.S. Constitution. In addition to declaratory and injunctive relief, defendants sought unspecified damages.

      On March 4, 2004, the Court of Chancery entered an order and judgment declaring that Hollinger Inc.’s purported amendments to the Company’s bylaws were invalid, that the Corporate Review Committee was and remained duly constituted, and that the SRP was valid. The Court of Chancery’s order also dismissed defendants’ breach of fiduciary duty, tortious interference, and Fourteenth Amendment counterclaims and preliminarily enjoined the defendants from taking any action to consummate any transaction in violation of the provisions of the Restructuring Agreement, including the Hollinger Sale and any other breaches of the Restructuring Agreement by defendants.

      The Company subsequently moved for summary judgment on the remaining claims and to make the injunctive relief permanent. On June 28, 2004, the Court of Chancery entered an order and final judgment, granting summary judgment to the Company on its breach of fiduciary duty and breach of contract claims and dismissing defendants’ remaining counterclaims. The order and final judgment required payments by defendants to the Company totaling $29.8 million in respect of amounts to be reimbursed to the Company pursuant to the Restructuring Agreement, and extended the previously entered injunctive relief through October 31, 2004. On July 16, 2004, defendants made the payments required under the order and final judgment, but have filed notices of appeal of the Court’s rulings to the Delaware Supreme Court. The appeals are pending. It is not yet possible to determine the ultimate outcome of the appeals.

      On October 29, 2004, the Company, Hollinger Inc. and Black entered into the Extension Agreement to voluntarily extend the injunction until the earlier of January 31, 2005 or the date of the completion of a distribution by the Company to its stockholders of a portion of the proceeds of the Company’s sale of the Telegraph Group remaining as of October 26, 2004, net of taxes to be paid on the sale of the Telegraph Group and less amounts used to pay down the Company’s indebtedness, through one or more of a dividend, a self-tender offer, or some other mechanism. On October 30, 2004, the court issued an order extending the injunction as provided in, and incorporating the other terms of, the Extension Agreement.

 
Hollinger Inc. v. Hollinger International Inc.

      On July 1, 2004, Hollinger Inc. and 504468 N.B. Inc. filed an action in the Court of Chancery for the State of Delaware alleging that the Company violated 8 Del. Code § 271 and engaged in inequitable conduct by not seeking stockholder approval of the proposed sale of the Telegraph Group. Plaintiffs sought preliminary injunctive relief to block the sale unless it was approved by the holders of a majority of the voting power of the Company’s common stock, and an award of costs and attorneys’ fees. The Court of Chancery denied Hollinger Inc.’s motion in an opinion issued on July 29, 2004. That same day, plaintiffs moved before the Chancery Court and Delaware Supreme Court for leave to file an interlocutory appeal and an injunction pending appeal. Both courts denied the motions and the matter is completed.

 
Black v. Hollinger International Inc., filed on March 18, 2004

      On March 18, 2004, Black filed an action against the Company in the Court of Chancery of the State of Delaware seeking advancement of legal fees and expenses he purportedly incurred and continues to incur in connection with the SEC and Special Committee investigations and various litigations that he is involved in. In May 2004, the parties entered a stipulation resolving the matter. The Company agreed to pay half of Black’s legal fees in certain actions in which he is a defendant, pursuant to itemized invoices submitted with sworn affidavits and subject to his undertaking that he will repay the amounts advanced to him if and to the extent it is ultimately determined that he is not entitled to indemnification under the terms of the Company’s bylaws.

 
Black v. Hollinger International Inc., filed on April 5, 2004

      On April 5, 2004, Black filed an action against the Company in the U.S. District Court for the Northern District of Illinois alleging that the Company breached its obligations to Black under three stock option plans.

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The complaint seeks (i) specific performance or damages for the alleged breaches, (ii) damages for the Company’s alleged failure to issue to Black 145,000 and 1,218,750 shares of Class A Common Stock upon alleged exercises by Black of options on February 13, 2004 and April 2, 2004, respectively, and (iii) declaratory judgment that Black’s removal as Chairman of the Company and from the Telegraph Group Limited did not constitute termination of employment under the 1997 Stock Option Plan and that his options must be treated equally with those of other executive officers and directors of the Company. The total damages sought are (i) the highest value of 145,000 shares of Class A Common Stock after February 13, 2004, plus prejudgment interest, and (2) the highest value of 1,218,750 shares of Class A Common Stock after April 2, 2004, less the option exercise price, plus prejudgment interest. On November 11, 2004, the Court dismissed the action without prejudice, granting Black leave to refile his claims as counterclaims in Hollinger International Inc. v. Hollinger Inc., et al., Case No. 04C-0698, which is described above under “— Litigation Involving Controlling Stockholder, Senior Management and Directors.”
 
Hollinger International Inc. v. Ravelston, RMI and Hollinger Inc.

      On February 10, 2004, the Company commenced an action in the Ontario Superior Court of Justice (Commercial List) against Ravelston, RMI and Hollinger Inc. This action claimed access to and possession of the Company’s books and records maintained at 10 Toronto Street, Toronto, Ontario, Canada. The parties negotiated and executed a Protocol dated March 25, 2004, providing for access and possession by the Company to the claimed records.

      On March 5, 2004, a statement of defense and counterclaim was issued by Ravelston and RMI against the Company and two of its subsidiaries, Publishing and HCPH Co. The counterclaim seeks damages in the amount of approximately $174.3 million for alleged breaches of the services agreements between the parties and for alleged unjust enrichment and tortious interference with economic relations by reason of those breaches. On March 10, 2004, Hollinger Inc. filed a statement of defense and counterclaim against the Company seeking Cdn.$300.0 million, claiming that by the Company’s refusal to pay its obligations under its services agreement with Ravelston, the Company intended to cause Ravelston to default in its obligations to Hollinger Inc. under a support agreement between Ravelston and Hollinger Inc., and intended to cause Hollinger Inc. to default on its obligations under its outstanding notes, with the resulting loss of its majority control of the Company.

      On May 6, 2004, Ravelston served a motion for an anti-suit injunction, seeking to restrain the Company from continuing the Illinois litigation against it and from bringing any claims against Ravelston arising out of the management of the Company other than in Ontario. On May 28, 2004, the Company served a notice of cross-motion seeking a temporary stay of the Ravelston and Hollinger Inc. counterclaims pending final resolution of the proceedings in Illinois and Delaware. Ravelston’s motion and the Company’s cross-motion were heard on June 29-30, 2004 at the Ontario Superior Court of Justice, Commercial List. On August 11, 2004, the court denied Ravelston’s motion and granted the Company’s cross-motion. On August 18, 2004, Ravelston and Hollinger Inc. appealed to the Ontario Court of Appeal. The appeals are scheduled to be heard on February 22, 2005. On September 21, 2004, the Company served a motion on Hollinger Inc. and Ravelston, seeking to quash their appeals to the Ontario Court of Appeal for want of jurisdiction. On November 30, 2004, the appeals to the Ontario Court of Appeal were quashed. Ravelston and Hollinger Inc. were required to deliver notices of motion in support of a motion for leave to appeal to the Divisional Court by December 30, 2004. Ravelston delivered such a notice of motion on December 20, 2004, but Hollinger Inc. has not delivered such a notice and is therefore not proceeding with an appeal of the stay of its counterclaim. Ravelston’s motion for leave has not yet been scheduled but will likely be heard some time in February of 2005.

 
Black v. Breeden, et al.

      Five defamation actions have been brought by Black in the Ontario Superior Court of Justice against Breeden, Richard C. Breeden & Co., Paris, James Thompson, Richard Burt, Graham Savage and Raymond Seitz. The first case was filed on February 13, 2004; the second and third cases were filed on March 11, 2004; the fourth case was filed on June 15, 2004; and the fifth case was filed on October 6, 2004. The fifth case does

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not name James Thompson and Richard Burt as defendants but adds Paul B. Healy as a defendant. Damages in the amount of Cdn.$850.0 million are sought in the first and second case; damages in the amount of Cdn.$110.0 million are sought in the third and fourth case; and Cdn$1.0 billion in general damages and Cdn$100.0 million in punitive damages are sought in the fifth case. Black has agreed to a stay of these actions pending the determination of the proceedings and appeals of the cases pending before the Delaware Court of Chancery described above.

      The defendants named in the five defamation actions have indemnity claims against the Company for all reasonable costs and expenses they incur in connection with these actions, including judgments, fines and settlement amounts. In addition, the Company is required to advance legal and other fees that the defendants may incur in relation to the defense of those actions.

      The Company agreed to indemnify Breeden and Richard C. Breeden & Co. against all losses, damages, claims and liabilities they may become subject to, and reimburse reasonable costs and expenses as they are incurred, in connection with the services Breeden and Richard C. Breeden & Co. are providing in relation to the Special Committee’s ongoing investigation.

 
United States Securities and Exchange Commission v. Hollinger International Inc.

      On January 16, 2004, the Company consented to the entry of a partial final judgment and order of permanent injunction against the Company in an action brought by the SEC in the U.S. District Court for the Northern District of Illinois. The Court Order enjoins the Company from violating provisions of the Exchange Act, including the requirements to file accurate annual reports on Form 10-K and quarterly reports on Form 10-Q and keep accurate books and records. The Court Order requires the Company to have the previously appointed Special Committee complete its investigation and to permit the Special Committee to take whatever actions it, in its sole discretion, thinks necessary to fulfill its mandate. The Court Order also provides for the automatic appointment of Breeden as Special Monitor of the Company under certain circumstances, including the adoption of any resolution that discharges the Special Committee before it completes its work, diminishes or limits the powers of the Special Committee or narrows the scope of its investigations or review, or if any directors are removed prior to the end of their term, or there is a failure to nominate or re-elect any incumbent director (unless such director voluntarily decides not to seek nomination or re-election to the Board of Directors), or there is an election of any new person as a director unless such action is approved by 80% of the then incumbent directors. On January 26, 2004, Hollinger Inc. filed a motion to vacate certain parts of the Court Order that limit its rights as stockholder. The Court denied Hollinger Inc.’s motion on May 17, 2004.

      The Company has received various subpoenas and requests from the SEC and other agencies seeking the production of documentation in connection with various investigations into the Company’s governance, management and operations. The Company is cooperating fully with these investigations and is complying with these requests.

 
United States Securities and Exchange Commission v. Conrad M. Black, et al.

      On November 15, 2004, the SEC filed an action in the United States District Court for the Northern District of Illinois against Black, Radler and Hollinger Inc. seeking injunctive, monetary and other equitable relief. In the action, the SEC alleges that the three defendants violated federal securities laws by engaging in a fraudulent and deceptive scheme to divert cash and assets from the Company and to conceal their self-dealing from the Company’s public stockholders from at least 1999 through at least 2003. The SEC also alleges that Black, Radler and Hollinger Inc. were liable for the Company’s violations of certain federal securities laws at least during this period.

      The SEC alleges that the scheme used by Black, Radler and Hollinger Inc. included the misuse of so-called “non-competition” payments to divert $85.0 million from the Company to defendants and others; the sale of certain publications owned by the Company at below-market prices to a privately-held company controlled by Black and Radler; the investment of $2.5 million of the Company’s funds in a venture capital fund with which Black and two other directors of the Company were affiliated; and Black’s approval of a press release by the Company in November 2003 in which Black allegedly misled the investing public about his

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intention to devote his time to an effort to sell the Company assets for the benefit of all of the Company’s stockholders and not to undermine that process by engaging in transactions for the benefit of himself and Hollinger Inc. The SEC further alleges that Black and Radler misrepresented and omitted to state material facts regarding related party transactions to the Company’s Audit Committee and Board of Directors and in the Company’s SEC filings and at the Company’s stockholder meetings.

      The SEC’s complaint seeks: (i) disgorgement of ill-gotten gains by Black, Radler and Hollinger Inc. and unspecified civil penalties against each of them; (ii) an order enjoining Black and Radler from serving as an officer or director of any issuer required to file reports with the SEC; (iii) a voting trust upon the shares of the Company held directly or indirectly by Black and Hollinger Inc.; and (iv) an order enjoining Black, Radler and Hollinger Inc. from further violations of the federal securities laws.

 
The Chicago Sun-Times Circulation Cases

      On June 15, 2004, the Company announced that the Audit Committee had initiated an internal review into practices that resulted in the overstatement of circulation figures for the Chicago Sun-Times. Following that announcement, a number of lawsuits were filed against the Company, among others defendants. Several of the suits are brought on behalf of a purported class comprised of all persons who purchased advertising space in the Chicago Sun-Times during the period in which circulation figures were overstated. The complaints allege that the Chicago Sun-Times improperly overstated its circulation and that advertisers overpaid for advertising in the newspaper as a result. The complaints variously allege theories of recovery based on breach of contract, unjust enrichment, civil conspiracy, conversion, negligence, breach of fiduciary duty, common law and statutory fraud, and violations of the federal RICO statute. The complaints seek injunctive and declaratory relief, unspecified actual, treble, and punitive damages, interest, attorneys’ fees and costs, and other relief.

      A number of the actions were filed in the Circuit Court of Cook County, Illinois, including the following purported class action cases filed in the County Department, Chancery Division: Central Furniture, Inc. v. Hollinger International, Inc. and Chicago Sun-Times, Inc., No. 04 CH 9757; Ronald Freeman d/b/a Professional Weight Clinic Inc. v. Hollinger International, Inc. and Chicago Sun-Times, Inc., No. 04 CH 9763; Card & Party Mart II Ltd. v. Hollinger International Inc. and Chicago Sun-Times, Inc., No. 04 CH 9824; Geier Enterprises, Inc. v. Chicago Sun-Times, Inc. and Hollinger International, Inc. No. 04 CH 10032; California Floor Coverings d/b/a Olympic Carpet v. Chicago Sun-Times, Inc., No. 04 CH 10048; BNB Land Venture, Inc. v. Chicago Sun-Times, Inc., Hollinger International Publishing Inc. and Docs 1-5, No. 04 CH 10284; Gleason & McMaster LLC v. Chicago Sun-Times, Inc. and Hollinger International Inc., No. 04 CH 10581; James Rolshouse & Assoc. PLLC v. Hollinger International Inc., Chicago Sun-Times, Inc. and The Sun-Times Co., No. 04 CH 11019; and Mark Triffler Oldsmobile, Inc. et al. v. Hollinger International Inc. and Chicago Sun-Times, Inc., 04 CH 12714. The above-stated cases were filed between June 15, 2004 and August 31, 2004, and an Amended Consolidated Complaint under the heading In re: Chicago Sun-Times Circulation Litigation was filed on October 12, 2004. The Amended Consolidated Complaint lists defendants Chicago Sun-Times, Inc. and Hollinger International Inc., and adds Midwest Suburban Publishing, Inc. Two additional purported class action cases are pending in the County Department, Chancery Division: International Profit Assocs., Inc., v. Chicago Sun-Times, Inc. and Hollinger International Inc., 04 CH 17964, filed October 29, 2004; and Business Pro Communications, Inc. v. Hollinger Inc., Hollinger International Inc. and The Sun-Times Co., 04 CH 19930, filed December 1, 2004. Additionally, the following individual actions were brought in the Circuit Court of Cook County: First Federal Auto Auction, Inc. v. Chicago Sun-Times, Inc., Hollinger International Inc. and F. David Radler, No. 04 L 7501, filed July 2, 2004; American Mattress, Inc. v. Hollinger International Inc. and Chicago Sun-Times, Inc., No. 04 L 7790, filed July 12, 2004; National Foundation for Abused and Neglected Children, Inc. v. Chicago Sun-Times, Inc., Hollinger International Inc. and F. David Radler, No. 04 L 7948, filed July 15, 2004; Joe Rizza Lincoln Mercury, Inc. et al. v. Chicago Sun-Times, Inc., 04 L 11657, filed October 14, 2004; Chicago Sun-Times, Inc. v. Oral Sekendur, 03 M1 170004, circulation-related claims filed October 12, 2004. One case was filed in the United States District Court for the Northern District of Illinois: AJE’s the Salon, Inc. v. The Sun-Times, Co., Hollinger International Inc. and F. David Radler, 04 C 4317, filed June 28, 2004. The AJE’s the Salon,

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Inc. case was voluntarily dismissed. The parties in the consolidated class action case have agreed to mediate in an attempt to settle the case and are conducting discovery. Motions to dismiss have been filed with respect to some of the cases and it is anticipated that similar motions will be filed in the balance of the pending cases. Overall, the cases are in preliminary stages and it is not yet possible to determine their ultimate outcome.

      On October 5, 2004, the Company announced the results of the Audit Committee’s internal review. The review of the Audit Committee determined that weekday and Sunday average circulation of the Chicago Sun-Times, as reported in the audit reports issued by ABC commencing in 1998, had been overstated. The Audit Committee found no overstatement of Saturday circulation data. The inflated circulation figures were submitted to ABC, which then reported these figures in its annual audit reports issued with respect to the Chicago Sun-Times.

      The Chicago Sun-Times announced a plan intended to make restitution to its advertisers for losses associated with the overstatements in the ABC circulation figures. To cover the estimated cost of restitution and settlement of the related lawsuits, the Company recorded a pre-tax charge of approximately $24.1 million for 2003 and approximately $2.9 million for the first quarter of 2004. The Company will evaluate the adequacy of the accruals as negotiations with advertisers proceed. The impact of restitution on the ultimate outcome of the pending litigation is not possible to determine at this time.

 
CanWest Arbitration

      On December 19, 2003, CanWest commenced notices of arbitration against the Company and others with respect to disputes arising from CanWest’s purchase of certain newspaper assets from the Company. CanWest claims the Company and certain of its direct subsidiaries owe CanWest approximately Cdn.$83.2 million. The Company believes that it has valid defenses to this claim, as well as significant counterclaims against CanWest. The arbitration is in preliminary stages, and it is not yet possible to determine its ultimate outcome.

 
CanWest and The National Post Company v. Hollinger Inc., Hollinger International Inc., the Ravelston Corporation Limited and Ravelston Management Inc.

      On December 17, 2003, CanWest and The National Post Company brought an action in the Ontario Superior Court of Justice against the Company and others for approximately Cdn.$25.7 million plus interest in respect of issues arising from a letter agreement dated August 23, 2001 to transfer the Company’s remaining 50% interest in the National Post to CanWest. In August 2004, The National Post Company obtained an order for partial summary judgment ordering the Company to pay The National Post Company Cdn.$22.5 million plus costs and interest. On November 30, 2004 the Company settled the appeal of the partial summary judgment by paying The National Post Company the amount of Cdn.$26.5 million. This amount includes payment of the Cdn.$22.5 million in principal plus interest and related costs. The two remaining matters in this action consist of a claim for Cdn.$2.5 million for capital and operating requirements of The National Post Company and a claim for Cdn.$752,000 for newsprint rebates. Exchange of documents and examinations for discovery in respect of these remaining matters is expected to proceed in early 2005.

 
Other Actions

      The Company and members of the Special Committee have had a suit filed against them before the Ontario Superior Court of Justice by Boultbee, former Executive Vice-President with the Company whose position as an officer was terminated in November of 2003. In November 2003, the Special Committee found that Boultbee received approximately $600,000 of “non-competition” payments that had not been appropriately authorized by the Company. The Company was unable to reach a satisfactory agreement with Boultbee for, among other things, repayment of these amounts and as a result, terminated his position as an officer of the Company. Boultbee is asserting claims for wrongful termination, indemnification for legal fees, breach of contract relating to stock options and loss of reputation, and is seeking approximately Cdn.$16.1 million from the defendants. The action is in its preliminary stages, and it is not yet possible to determine its ultimate outcome. On November 18, 2004, the Company and Boultbee resolved Boultbee’s claim for advancement and

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indemnification of legal fees, as part of which Boultbee agreed to discontinue this portion of his claim. The Company is bringing a motion to stay this action until the litigation in Illinois involving the Company, Boultbee and others has been concluded. See “— Litigation Involving Controlling Stockholder, Senior Management and Directors.” Although the Company’s motion documents have not yet been served, time has been reserved with the court for the hearing of this motion on April 25, 2005.

      On November 3, 2004, Wells Fargo Bank Northwest, N.A. and Key Corporate Capital Inc. filed an action in the Supreme Court of the State of New York, in Albany County, against Sugra (Bermuda) Limited (“Sugra Bermuda”), which is a subsidiary of Publishing, and against Hollinger Inc. The action, alleges that Sugra Bermuda defaulted under the terms of a 1995 aircraft lease agreement, and that Hollinger Inc. is a guarantor of Sugra Bermuda’s obligations under the lease. Plaintiffs are seeking $5.1 million in damages, plus interest at the rate of 18 percent per annum and attorneys’ fees. On December 20, 2004, Hollinger Inc. removed the action from state court to the United States District Court for the Northern District of New York. This action, which is entitled Wells Fargo Bank Northwest, N.A. v. Sugra (Bermuda) Limited and Hollinger Inc., No. 1:04-cv-01436-GLD-DRH (N.D.N.Y.), is in a preliminary stage, and it is not yet possible to determine its ultimate outcome.

      During 2002, the largest customer of The Jerusalem Post, the Golden Pages, effectively terminated its agreement with The Jerusalem Post for publication of the Golden Pages by failing to submit orders as required. An action was commenced in the District Court of Tel Aviv by The Jerusalem Post in early 2003 alleging breach of contract. Although significant to The Jerusalem Post, the loss of revenue has not had a material impact on the Company’s business, as a whole. With the completion of the sale of The Palestine Post Limited on December 15, 2004, the Company no longer has pending claims or liabilities relating to this action.

      The Company becomes involved from time to time in various claims and lawsuits incidental to the ordinary course of business, including such matters as libel, defamation and privacy actions. In addition, the Company is involved from time to time in various governmental and administrative proceedings with respect to employee terminations and other labor matters, environmental compliance, tax and other matters.

      Management believes that the outcome of any pending claims or proceedings described under “Other Actions” will not have a material adverse effect on the Company taken as a whole.

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

      None.

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PART II

 
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

      The Company’s Class A Common Stock is listed on the New York Stock Exchange under the trading symbol “HLR.” At December 31, 2004 there were 75,687,055 shares of Class A Common Stock outstanding, excluding 12,320,967 shares held by the Company, and these shares were held by approximately 190 holders of record and approximately 4,500 beneficial owners. As of December 31, 2004, 14,990,000 shares of Class B Common Stock were outstanding, all of which were owned by Hollinger Inc.

      The following table sets forth for the periods indicated the high and low sales prices for shares of the Class A Common Stock as reported by the New York Stock Exchange Composite Transactions Tape for the period since January 1, 2002, and the cash dividends paid per share on the Class A Common Stock.

                         
Cash
Price Range Dividends

Paid Per
Calendar Period High Low Share




2002
                       
First Quarter
  $ 13.54     $ 11.00     $ 0.1375  
Second Quarter
    13.75       11.15       0.11  
Third Quarter
    12.10       9.04       0.11  
Fourth Quarter
    10.81       8.65       0.05  
2003
                       
First Quarter
  $ 10.73     $ 7.54     $ 0.05  
Second Quarter
    11.70       7.89       0.05  
Third Quarter
    13.65       10.45       0.05  
Fourth Quarter
    16.12       11.90       0.05  
2004
                       
First Quarter
  $ 19.81     $ 14.25     $ 0.05  
Second Quarter
    20.50       15.81       0.05  
Third Quarter
    17.75       15.60       0.05  
Fourth Quarter
    18.95       15.38       0.05  

      On December 31, 2004, the closing price of the Company’s Class A Common Stock was $15.68 per share.

      Each share of Class A Common Stock and Class B Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors of the Company. Dividends must be paid equally, share for share, on both the Class A Common Stock and the Class B Common Stock at any time that dividends are paid.

      As a holding company, the Company’s ability to declare and pay dividends in the future with respect to its Common Stock will be dependent, among other factors, upon its results of operations, financial condition and cash requirements, the ability of its United States and foreign subsidiaries to pay dividends and make payments to the Company under applicable law and subject to restrictions contained in future loan agreements and other financing obligations to third parties relating to such United States or foreign subsidiaries of the Company, as well as foreign and United States tax liabilities with respect to dividends and payments from those entities. The Company has paid all dividends that have been declared during 2003 and to date in 2004, except for the special and regular dividends declared on December 16, 2004 which are payable on January 18, 2005.

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Equity Compensation Plan Information

                           
Number of
Securities
Number of Remaining Available
Securities to Be for Future Issuance
Issued upon Weighted-Average Under Equity
Exercise of Exercise Price of Compensation Plans
Outstanding Outstanding (excluding
Options, Warrants Options, Warrants securities reflected
Plan Category and Rights and Rights in column (a))




(a)
Equity compensation plans approved by security holders
    9,674,113     $ 11.62       987,967  
Equity compensation plans not approved by security holders
                 
     
             
 
 
Total
    9,674,113     $ 11.62       987,967  
     
             
 

      See Note 15 to the Company’s Consolidated Financial Statements herein for the summarized information about the Company’s equity compensation plans.

Recent Sales of Unregistered Securities

      None.

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Item 6. Selected Financial Data
                                           
Year Ended December 31,

2003 2002 2001 2000 1999





(In thousands, except per share amounts)
Restated (6) Restated (6) Restated (6) Restated (6)
Statement of Operations Data(1):
                                       
Operating revenues:
                                       
 
Advertising
  $ 733,826     $ 710,849     $ 804,462     $ 1,543,882     $ 1,557,033  
 
Circulation
    277,264       247,175       278,321       447,050       487,002  
 
Job printing
    16,427       16,669       25,092       59,089       48,207  
 
Other
    33,686       31,469       38,446       45,998       55,160  
     
     
     
     
     
 
Total operating revenues
    1,061,203       1,006,162       1,146,321       2,096,019       2,147,402  
Operating costs and expenses
    996,333       891,903       1,108,576       1,751,637       1,809,192  
Depreciation and amortization(2)
    54,853       54,152       73,728       122,634       125,408  
     
     
     
     
     
 
Operating income (loss)
    10,017       60,107       (35,983 )     221,748       212,802  
Interest expense
    (55,559 )     (58,772 )     (78,639 )     (142,713 )     (131,600 )
Amortization of deferred financing costs
    (2,855 )     (5,585 )     (10,367 )     (10,469 )     (16,209 )
Interest and dividend income
    25,411       18,782       64,893       18,536       7,716  
Other income (expense), net(3)
    75,641       (172,783 )     (303,318 )     522,955       331,581  
     
     
     
     
     
 
Earnings (loss) before income taxes, minority interest, and cumulative effect of change in accounting principle
    52,655       (158,251 )     (363,414 )     610,057       404,290  
Income taxes (benefit)
    121,638       50,132       (23,038 )     408,423       151,850  
     
     
     
     
     
 
Earnings (loss) before minority interest and cumulative effect of change in accounting principle
    (68,983 )     (208,383 )     (340,376 )     201,634       252,440  
Minority interest
    5,325       2,167       (13,803 )     50,760       7,088  
     
     
     
     
     
 
Earnings (loss) before cumulative effect of change in accounting principle
    (74,308 )     (210,550 )     (326,573 )     150,874       245,352  
Cumulative effect of change in accounting principle
          (20,079 )                  
     
     
     
     
     
 
Net earnings (loss)
  $ (74,308 )   $ (230,629 )   $ (326,573 )   $ 150,874     $ 245,352  
     
     
     
     
     
 
Diluted earnings (loss) per share from operations(4)
  $ (0.85 )   $ (2.40 )   $ (3.31 )   $ 1.35     $ 2.09  
     
     
     
     
     
 
Cash dividends per share paid on Class A and Class B Common Stock
  $ 0.20     $ 0.41     $ 0.55     $ 0.55     $ 0.55  
     
     
     
     
     
 

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As of December 31,

2003 2002 2001 2000 1999





(In thousands)
Restated (6) Restated (6) Restated (6) Restated (6)
Balance Sheet Data(1):
                                       
 
Working capital (deficiency)
  $ (354,314 )   $ (197,450 )   $ 144,950     $ (259,493 )   $ (107,433 )
 
Total assets(5)
    1,800,179       2,185,772       2,083,741       2,831,889       3,503,024  
 
Minority interest
    28,255       17,097       16,084       89,228       155,901  
 
Long-term debt, less current installments
    522,547       574,658       809,652       807,495       1,613,241  
 
Redeemable preferred stock
          8,650       8,582       13,088       13,591  
 
Total stockholders’ equity
    36,776       149,783       377,506       901,145       911,869  
                                           
Year ended December 31,

2003 2002 2001 2000 1999





(In thousands)
Restated
(6)
Segment Data(1):
                                       
Operating revenues:
                                       
 
Chicago Group
  $ 450,789     $ 441,778     $ 442,884     $ 401,417     $ 390,473  
 
Community Group
    10,397       13,231       19,115       67,336       96,674  
 
U.K. Newspaper Group
    519,475       481,527       486,374       562,068       550,474  
 
Canadian Newspaper Group
    80,542       69,626       197,948       1,065,198       1,109,781  
     
     
     
     
     
 
Total operating revenues
  $ 1,061,203     $ 1,006,162     $ 1,146,321     $ 2,096,019     $ 2,147,402  
     
     
     
     
     
 
Operating income (loss):
                                       
 
Chicago Group
  $ 24,514     $ 38,598     $ 4,962     $ 29,215     $ 43,126  
 
Community Group
    (6,601 )     (5,218 )     (4,487 )     3,456       9,893  
 
U.K. Newspaper Group
    40,683       48,079       27,850       89,542       65,635  
 
Canadian Newspaper Group
    (4,983 )     (2,137 )     (45,954 )     115,619       109,416  
 
Investment and Corporate Group
    (43,596 )     (19,215 )     (18,354 )     (16,084 )     (15,268 )
     
     
     
     
     
 
Total operating income (loss)
  $ 10,017     $ 60,107     $ (35,983 )   $ 221,748     $ 212,802  
     
     
     
     
     
 


(1)  The financial data as of December 31, 2003 and 2002 and for each of the years in the three-year period ended December 31, 2003 are derived from, and should be read in conjunction with, the audited consolidated financial statements of the Company and the notes thereto appearing elsewhere herein. The financial data as of December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 are derived from audited financial statements not presented separately herein, which financial data have been adjusted as necessary for the effects of the restatements described in (6) below. The Company made several significant dispositions during the years 1999 to 2001. In 2001, the Company sold its remaining interest in the National Post to CanWest and several Canadian newspapers to Osprey Media. These dispositions account for the significant decrease in “Total operating revenues”, “Operating costs and expenses” and “Depreciation and amortization.”
 
(2)  Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) As a consequence, the Company no longer amortizes goodwill and intangible assets with indefinite useful lives. See Note 1(i) of Notes to Consolidated Financial Statements.

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(3)  The principal components of “Other income (expense), net” are presented below:
                                         
2003 2002 2001 2000 1999





(in thousands)
Foreign currency gains (losses), net
  $ 114,103     $ (86,858 )   $ (1,259 )   $ (16,048 )   $ 13,774  
Equity in losses of affiliates
    (6,247 )     (1,005 )     (15,098 )     (20,340 )     (2,106 )
Net gains (losses) on sales of publishing interests
    (6,251 )           (1,236 )     564,702       270,017  
Net gains (losses) on sale of investments
    3,578             (147,213 )     32,569        
Net gains (losses) on sale of property, plant and equipment
    (204 )     5,334       1,307       (697 )     3,561  
Write-down of investments
    (7,700 )     (40,536 )     (48,037 )     (20,621 )      
Write-down of property, plant and equipment
    (6,779 )           (1,343 )            
Gain related to dilution of investment in equity accounted company
                      17,008        
Gain related to dilution of Hollinger L.P. interest
                            77,297  
Losses on Total Return Equity Swap
          (15,237 )     (73,863 )     (16,334 )      
“Non-competition” payments
                (6,100 )            
Restitution under Restructuring Agreement
    31,547                          
Loss on extinguishment of debt
    (38,421 )     (35,460 )           (10,554 )     (8,536 )
Write-down of FDR Collection
    (6,796 )                        
Other
    (1,189 )     979       (10,476 )     (6,730 )     (22,426 )
     
     
     
     
     
 
    $ 75,641     $ (172,783 )   $ (303,318 )   $ 522,955     $ 331,581  
     
     
     
     
     
 

(4)  The Company’s diluted earnings per share is calculated on the following diluted number of shares outstanding (in thousands): 2003 - 87,311, 2002 - 96,066, 2001 - 100,128, 2000 - 111,510 and 1999 - 117,610.
 
(5)  Includes goodwill and intangible assets, net of accumulated amortization, of $684.8 million at December 31, 2003, of $650.9 million at December 31, 2002, of $658.2 million at December 31, 2001, of $938.3 million at December 31, 2000 and $2,031.6 million at December 31, 1999.
 
(6)  The Company has restated its consolidated financial statements as of and for the years ended December 31, 2002, 2001, 2000 and 1999. These restatements have been grouped into the following categories:

        (a) Restatements arising from the findings of the Special Committee. See “Item 1 — Business — Recent Developments — Report of the Special Committee” and Note 2 of Notes to Consolidated Financial Statements;
 
        (b) Correction of accounting errors in prior periods;
 
        (c) Reclassifications arising from the required adoption of a new FASB standard; and
 
        (d) Other, principally the effects of foreign currency translation adjustments.

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      The following table sets forth the net effect of the restatements and reclassifications on specific amounts presented in the Company’s Consolidated Statements of Operations:

                                   
Year Ended December 31,

2002 2001 2000 1999




(In thousands)
Operating income (loss), as previously reported
  $ 57,202     $ (35,983 )   $ 221,748     $ 212,802  
 
Correction of newsprint overaccrual (b(iii))
    2,905                    
     
     
     
     
 
Restated operating income (loss)
  $ 60,107     $ (35,983 )   $ 221,748     $ 212,802  
     
     
     
     
 
Earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of change in accounting principle, as previously reported
  $ (128,351 )   $ (357,233 )   $ 612,931     $ 412,826  
 
Correction of “non-competition” payments recorded in incorrect year (a(i))
          (6,100 )     6,100        
 
Correction of overaccruals recorded in 2000 (b(ii))
                1,580        
 
Correction of newsprint overaccrual (b(iii))
    2,905                    
 
Correction of equity accounting of affiliate (b(iv))
    2,714                    
 
Reclassification of extraordinary loss (c)
    (35,460 )           (10,554 )     (8,536 )
 
Other (d)
    (59 )     (81 )            
     
     
     
     
 
Restated earnings (loss) before income taxes, minority interest, extraordinary items and cumulative effect of change in accounting principle
  $ (158,251 )   $ (363,414 )   $ 610,057     $ 404,290  
     
     
     
     
 
Income taxes (benefit), as previously reported
  $ 66,950     $ (8,319 )   $ 398,452     $ 155,203  
 
Tax effect of correction of “non-competition” payments recorded in incorrect year (a(i))
          (2,440 )     2,440        
 
Tax on assumed additional proceeds from sale of newspaper properties (a(ii))
                20,239        
 
Other tax adjustments (a(iii))
    4,415       3,086       764        
 
Tax effect of correction of overaccruals recorded in 2000 (b(ii))
                632        
 
Tax effect of correction of newsprint overaccrual (b(iii))
    1,139                    
 
Correction of U.S. tax benefit on liquidation of Canadian operations (b(v))
    (20,116 )                  
 
Other corrections of tax accounts (b(vi))
    11,928       (15,330 )     (9,881 )      
 
Reclassification of tax benefit on extraordinary loss (c)
    (14,184 )           (4,222 )     (3,353 )
 
Other (d)
          (35 )     (1 )      
     
     
     
     
 
Restated income taxes (benefit)
  $ 50,132     $ (23,038 )   $ 408,423     $ 151,850  
     
     
     
     
 

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      The table below sets forth the effect of the restatements and reclassifications on the Consolidated Balance Sheet Data presented above.

                                   
As of December 31,

2002 2001 2000 1999




(in thousands)
Working capital (deficiency), as previously reported
  $ (191,903 )   $ 147,600     $ (257,506 )   $ (113,115 )
 
Correction of “non-competition” payments recorded in incorrect year (a(i))
                6,100        
 
Tax on assumed additional proceeds from sale of newspaper properties (a(ii))
    (19,494 )     (19,341 )     (20,541 )      
 
Other tax adjustments (a(iii))
    (1,599 )     (221 )            
 
Correction of overaccruals recorded prior to 1999 (b(i))
    5,193       5,153       5,472       5,682  
 
Correction of overaccruals recorded in 2000 (b(ii))
    1,580       1,580       1,580        
 
Correction of newsprint overaccrual (b(iii))
    2,848                    
 
Tax effect of correction of equity accounting of affiliate (b(iv))
    1,362                    
 
Correction of U.S. tax benefit on liquidation of Canadian operations (b(v))
    20,116                    
 
Other corrections of tax accounts (b(vi))
    (7,080 )     26,709       5,402        
 
Reclassifications affecting tax accounts (b(vii))
    (8,473 )     (16,530 )            
     
     
     
     
 
Restated working capital (deficiency)
  $ (197,450 )   $ 144,950     $ (259,493 )   $ (107,433 )
     
     
     
     
 
Total assets, as previously reported
  $ 2,188,132     $ 2,057,976     $ 2,802,030     $ 3,503,024  
 
Correction of “non-competition” payments recorded in incorrect year (a(i))
                5,500        
 
Correction of equity accounting of affiliate (b(iv))
    1,391                    
 
Reclassification to conform with current presentation
    (3,751 )     25,765       24,359        
     
     
     
     
 
Restated total assets
  $ 2,185,772     $ 2,083,741     $ 2,831,889     $ 3,503,024  
     
     
     
     
 
Total stockholders’ equity, as previously reported
  $ 119,875     $ 366,627     $ 898,109     $ 902,225  
 
Correction of “non-competition” payments recorded in incorrect year, net of tax benefit (a(i))
                3,660        
 
Tax on assumed additional proceeds from sale of newspaper properties (a(ii))
    (19,494 )     (19,341 )     (20,541 )      
 
Other tax adjustments (a(iii))
    (8,247 )     (3,849 )     (764 )      
 
Correction of overaccruals recorded prior to 1999, net of tax benefit (b(i))
    9,155       9,115       9,434       9,644  
 
Correction of overaccruals recorded in 2000, net of tax benefit (b(ii))
    948       948       948        
 
Correction of newsprint overaccrual, net of tax benefit (b(iii))
    1,709                    
 
Correction of equity accounting of affiliate, net of tax benefit (b(iv))
    2,753                    
 
Correction of U.S. tax benefit on liquidation of Canadian operations (b(v))
    20,116                    
 
Other corrections of tax accounts (b(vi))
    22,971       23,993       10,297        
 
Other (d)
    (3 )     13       2        
     
     
     
     
 
Restated total stockholders’ equity
  $ 149,783     $ 377,506     $ 901,145     $ 911,869  
     
     
     
     
 

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      Each category of the restatements and reclassifications and their effect on the consolidated financial statements is discussed below:

 
     (a) Restatements Arising from the Findings of the Special Committee

      Among other things, the Special Committee identified the following transactions that were, based on its findings, improperly reflected in the Company’s consolidated financial statements in prior periods.

        (i) The recording of “non-competition” payments in the incorrect year — The Special Committee identified $6.1 million of “non-competition” payments that the Company made in 2001 that were reflected in the consolidated financial statements as having been made or were otherwise accrued in 2000. Of the $6.1 million, $5.5 million related to “non-competition” payments paid by the Company in 2001 to Black, Atkinson, Radler and Boultbee pursuant to “non-competition” agreements with American Publishing Company (which owned virtually no newspaper assets as of February 2001). The payments were issued in 2001 and backdated to 2000. The remaining $600,000 relates to payments that were made in 2001 and recorded as reductions of excessive accruals that were previously established in 2000. According to the Report, the Audit Committee did not approve any of these payments. Accordingly, with respect to the 2000 Consolidated Statement of Operations, the Company has increased “Other income (expense), net” by $6.1 million and increased “Income taxes (benefit)” by $2.4 million, which resulted in an increase in net earnings of $3.7 million and a corresponding increase in stockholders’ equity. With respect to the 2001 Consolidated Statement of Operations, the Company has decreased “Other income (expense), net, by $6.1 million and decreased “Income taxes (benefit)” by $2.4 million, which resulted in an increase in net loss of $3.7 million and a corresponding decrease in total stockholders’ equity.
 
        (ii) Tax on assumed additional proceeds from sale of Canadian newspaper properties to CanWest — The Special Committee determined that “non-competition” payments that were made in connection with the sale of Canadian newspaper properties to CanWest in 2000 were not properly approved by the Company. According to the findings of the Special Committee, these “non-competition” payments, aggregating Cdn.$80.0 million, made to certain former directors and officers of the Company, effectively reduced the proceeds the Company received from the sale of the newspaper properties.
 
        The Special Committee also determined that the proceeds the Company received from the sale of Canadian properties to CanWest in 2000 were further reduced by Cdn.$60.0 million, as a consequence of an agreement between CanWest and Ravelston for the payment of an annual management fee of Cdn.$6.0 million in consideration for management services. The Special Committee determined that these proceeds should have been received by the Company.
 
        Had the Company received the assumed additional proceeds of Cdn.$140.0 million, the gain on the sale would have been greater by that amount with a consequent increase in income taxes that would have been provided for in 2000. The Company has recorded an additional $20.2 million of income taxes in 2000 to account for these unrecognized purchase proceeds.
 
        (iii) Other tax adjustments — The Company has recorded additional accruals for tax contingencies to cover interest that the Company may be required to pay, net of federal tax benefits of a portion thereof.
 
     (b) Correction of Accounting Errors

      During the course of the preparation of its financial statements for the year ended December 31, 2003, the Company determined that previously reported financial information required restatement for certain accounting errors identified. Below is a description of the adjustments made to correct these accounting errors.

        (i) Correction of overaccruals recorded prior to 1999 — In the review of its accounts, the Company identified that certain amounts had been overaccrued for in periods prior to 1999. Specifically, in 1997, when the Company’s parent, Hollinger Inc., transferred certain Canadian properties to the Company, accruals due to related parties were established to provide for expected costs of this transaction. The Company has reversed approximately $5.7 million of these accruals due to related parties that were considered to be excessive. There was no tax effect on the reversal of these accruals. In 1998, the Chicago

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  Sun-Times recorded approximately $6.6 million of pension costs in excess of amounts determined appropriate by the Company’s actuaries. This excess accrual has also been reversed, net of a tax benefit of $2.6 million.
 
        (ii) Correction of overaccruals recorded in 2000 — The Company also identified accruals that were established with respect to the disposition of Community Group properties in 2000 which were considered to be excessive by approximately $1.6 million. These excessive accruals have also been reversed and have been tax effected at an effective rate of 40% in the Consolidated Statement of Operations.
 
        (iii) Correction of overaccrual of newsprint costs at the Chicago Sun-Times in 2002 — In its review of past transactions, the Company identified an overaccrual relating to the Chicago Newspaper Group’s newsprint costs of approximately $2.9 million in 2002. This overaccrual has been reversed and is reflected as an adjustment to “Newsprint” and has been tax effected at an effective rate of 40% in the Consolidated Statement of Operations.
 
        (iv) Correction of equity accounting of affiliate in 2002 — The Company has identified errors with respect to its equity earnings from a joint venture affiliate in 2002. The Company previously had not recorded interest income from the joint venture on amounts that the Company had funded to the joint venture. The Company also did not record its 50% share of the joint venture affiliate’s income tax benefit. The effect of these adjustments is to decrease the Company’s equity losses in affiliates by approximately $2.7 million, which has been reflected through “Other income (expense), net” in the Consolidated Statement of Operations.
 
        The Company failed to record the effects of a tax sharing arrangement between the joint venture and the U.K. Newspaper Group. The effect of this arrangement has been reflected as a decrease of $1.4 million of “Income taxes payable and other tax liabilities.” in the Consolidated Balance Sheet.
 
        The net effect of the three foregoing adjustments has been reflected as a $1.4 million increase to “Investments” in the Consolidated Balance Sheet.
 
        (v) Correction of U.S. tax benefit on liquidation of Canadian operations — The Company identified an error with respect to the amount of taxes provided upon the substantial liquidation of Canadian operations. The Company had not recognized a tax benefit in the 2002 U.S. tax provision on the foreign exchange impact of this liquidation. Accordingly, the Company has recorded a tax benefit in “Income taxes (benefit)” on the Consolidated Statement of Operations and a decrease in “Income taxes payable and other tax liabilities” on the Consolidated Balance Sheet of $20.1 million.
 
        (vi) Other corrections of tax accounts — The Company has identified certain errors with respect to the amounts of income taxes (benefit) recorded in prior years. The Company’s Consolidated Financial Statements have been restated to give effect to corrections regarding: (a) the periods in which certain amounts should have been recognized in income taxes (benefit); (b) the appropriate level of the valuation allowance related to certain deferred tax assets; and (c) other factors that impacted the provision for income taxes (benefit). The Company has also corrected the manner in which it had maintained its accrual for income tax contingencies, which had affected the cumulative foreign currency translation account.
 
        The Consolidated Statements of Operations have been restated to increase the provision for income taxes by $11.9 million in 2002, and to increase the income tax benefit in each of 2001 and 2000 by $15.3 million and $9.9 million, respectively. With respect to the Consolidated Balance Sheets as of December 31, 2002, 2001 and 2000, the restatements resulted in a decrease of $7.1 million and increases of $26.7 million and $5.4 million, respectively, in working capital (deficiency). The effects of the restatements are also reflected in the tables and elsewhere in the note, “Income Taxes.” (Note 24 of Notes to Consolidated Financial Statements.)

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        (vii) Reclassifications affecting tax accounts — The Company has identified certain errors with respect to the classification of transactions between current and deferred income taxes (benefit) in prior years. These errors did not affect total income taxes (benefit) or net earnings (loss) in any year. The Company has reclassified certain amounts that are reflected in the tables presented in the note, “Income Taxes.” (Note 24 of Notes to Consolidated Financial Statements.) With respect to the Company’s Consolidated Balance Sheets, the reclassifications resulted in an increase of $8.5 million and $16.5 million to “Income taxes payable and other tax liabilities” and a corresponding decrease to “Deferred income taxes and other tax liabilities” as of December 31, 2002 and 2001, respectively.
 
        (viii) Correction of in-kind dividends — The Company has corrected certain assumptions used in error in the calculation of the fair value of stock options issued to employees of Ravelston. Stock options granted to employees of Ravelston are reflected in the Consolidated Statements of Stockholders’ Equity as in-kind dividends.
 
        The Company has corrected its calculation of the compensatory cost of stock options granted to the employees of Ravelston. Specifically, the Company has estimated that the life of options issued to Ravelston employees is expected to be nine years. In addition, the Company is now using volatility based on the average option life instead of using 12 months as was used in prior periods. The Company has restated prior periods to correct the assumptions used in the calculation.
 
        The table below outlines the effects of these corrections on the in-kind dividend:
 
In-Kind Dividend
                 
As
Previously
Restated Reported


(In thousands)
Year Ended December 31,
               
2003
  $ 3,906     $ 8,513  
2002
    4,376       6,111  
2001
    7,301       7,800  

      In 2003, the in-kind dividend was previously reported in the Company’s quarterly report on Form 10-Q for the three-months ended March 31, 2003.

 
(c)                     Reclassifications Arising from the Adoption of New Accounting Principles

      In April 2002, the 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”). 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 under Accounting Principles Board 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”. SFAS 145 became effective for fiscal years beginning after May 15, 2002. As a result of the Company’s adoption of SFAS No. 145, it was required to reclassify the Company’s loss on early extinguishment of debt of $21.3 million (approximately $35.5 million, pretax) in 2002, $6.3 million (approximately $10.6 million, pretax) in 2000 and $5.2 million (approximately $8.5 million, pretax) in 1999. Corresponding reclassification adjustments were made to “Other income (expense), net” and “Income taxes (benefit)” in the Company’s Consolidated Statements of Operations.

 
(d)                     Other

      Amounts described as “Other” reflect the effects of foreign currency translation and related items.

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

Overview

      During the three years ended December 31, 2003, the Company’s business was concentrated in the publication of newspapers in the United States, the United Kingdom, Canada and Israel. Operating revenues were derived principally from advertising, paid circulation and, to a lesser extent, job printing. Of the total operating revenues in 2003, approximately 42.5% were attributable to the Chicago Group, 49.0% to the U.K. Newspaper Group, 7.5% to the Canadian Newspaper Group and 1.0% to the Community Group. The Chicago Group consists of the Chicago Sun-Times and other daily and weekly newspapers in the greater Chicago metropolitan area. The U.K. Newspaper Group consists of the operations of The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines, and related subsidiaries and joint ventures. The Canadian Newspaper Group consists of several community newspapers, principally in Western Canada, and a trade magazine and business information group located in Toronto. The major portion of the Canadian operations are held by Hollinger L.P. The Community Group consists of The Jerusalem Post and related publications. In July 2004, the Company sold the Telegraph Group. See “Item 1 — Business — Recent Development — Sale of the Telegraph Group.” In December 2004, the Company sold The Jerusalem Post and its related publications. See “Item 1 — Recent Developments — Sale of The Jerusalem Post.” The results of operations and financial condition of the Company reflected herein include the Telegraph Group and The Jerusalem Post and its related publications for all periods presented. The Telegraph Group and The Jerusalem Post and its related publications will be presented as discontinued operations in the Company’s 2004 consolidated financial statements.

      The Company’s operating revenues are primarily derived from the sale of advertising space within the Company’s publications. Advertising revenues accounted for approximately 69.2% of the Company’s consolidated revenues for the year ended December 31, 2003. Advertising revenue is comprised of three primary sub-groups: retail, national and classified. Changes in advertising revenue are heavily correlated to the changes in the levels of economic activity. Advertising revenue is subject to changes in the economy on both a national and local level. The Company’s advertising revenue experiences seasonality with the third quarter revenues typically being the lowest and the fourth quarter revenue being the highest. Advertising revenue is recognized upon publication of the advertisement.

      In 2003, approximately 26.1% of the Company’s operating revenues were generated by sales of the Company’s publications. Circulation revenue includes sales of publications to individual subscribers or to sales outlets, which then re-sell the publications. The Company recognizes circulation revenue from subscriptions on a straight-line basis over the subscription term and on single-copy sales at the time of distribution.

      The Company also generates revenues through job printing and other activities. Job printing and other revenues are recognized upon delivery.

      Significant expenses for the Company are compensation and newsprint. Compensation expense, which includes benefits, was approximately 32.2% of the Company’s total operating costs in 2003. Newsprint costs represented approximately 14.1% of the Company’s total operating costs in 2003. Newsprint prices are subject to fluctuation as newsprint is a commodity. The cost of newsprint can vary significantly from year to year. These expenses are recognized as incurred. The Company capitalizes and amortizes costs associated with direct response advertising activities in accordance with Statement of Position 93-7. These costs are amortized over an 11-year period, with approximately 61% amortized in the first year, 17% in the second year and the remaining 22% on a declining basis over the following nine years.

      Management fees paid to Ravelston, RMI and other affiliated entities and costs related to corporate aircraft were incurred at the corporate level and allocated to the operating segments in 2003, 2002 and 2001. With the termination of the management services agreements effective June 1, 2004 and the sale of one aircraft and lease cancellation of the other, similar charges will not be incurred in future periods.

      The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and other controlled entities. The Company’s interest in Hollinger L.P. was 87% at December 31

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in each of the years 2003, 2002 and 2001. All significant intercompany balances and transactions have been eliminated on consolidation.
 
Developments Since December 31, 2003

      The following events will impact the Company’s consolidated financial statements for periods subsequent to those covered by this report.

      Disputes, Investigations and Legal Proceedings with Former Executive Officers and Certain Current and Former Directors — The Company is involved in a series of disputes, investigations and legal proceedings relating to transactions between the Company and certain former executive officers and certain current and former directors of the Company. See “Item 1 — Business — Recent Developments.” The potential impact of these disputes, investigations and legal proceedings on the Company’s financial condition and results of operations cannot currently be estimated. Costs of $10.1 million incurred as a result of the investigation of the Special Committee and related litigation involving Black, Radler and others were recorded as expenses through December 31, 2003. These costs are included in “Other operating costs” in the Consolidated Statement of Operations. These costs primarily consist of legal and other professional fees. The legal fees include those incurred directly by the Special Committee in its investigation, the costs of litigation initiated by the Special Committee on behalf of the Company, costs to defend the Company from litigation that has arisen as a result of the issues that the Special Committee was asked to investigate and fees advanced by the Company as a result of indemnification of current and former officers and directors paid pursuant to this undertaking.

      The Company has incurred substantial legal costs arising out of the actions of its controlling stockholder Hollinger Inc. and Black, the indirect controlling stockholder of the Company, in causing the Company to engage in a series of related party transactions that are the subject of litigation on behalf of the Company brought by the Special Committee to redress what the Special Committee has concluded to be repeated violations of the fiduciary duties of Hollinger Inc., Black and certain of their affiliates or associates. The costs from January 1, 2004 through September 30, 2004, have been approximately $46.3 million, discussed below, in addition to the $10.1 million of costs incurred for the year ended December 31, 2003.

      The total costs of $46.3 million have included approximately $17.3 million in costs and expenses arising from the Special Committee’s work. This amount includes the fees and costs of the Special Committee’s members, counsel, advisors and experts, including but not limited to fees and expenses of (i) conducting the investigation, (ii) preparing the Report, (iii) preparing, filing and pursuing litigation on behalf of the Company seeking more than $500 million in damages arising out of the actions of the Company’s controlling stockholders and other current and former officers and directors of the Company; (iv) defending the Court Order in the January 2004 SEC Action against challenges by Hollinger Inc.; (v) defending and defeating the counterclaims of Hollinger Inc. and Black in the Delaware litigation; and (vi) defending and defeating the anti-suit injunction motion brought by Ravelston and its affiliates in Canada to prevent prosecution in the United States of the Company’s claims.

      In addition to the $17.3 million in costs for the Special Committee’s work, the Company has incurred legal costs and other professional fees of $20.3 million. The legal and other professional costs are primarily comprised of costs to defend the Company in litigation that has arisen as a result of the issues the Special Committee has investigated, including costs to defend and defeat the counterclaims of Hollinger Inc. and Black in the Delaware litigation.

      The Company has also incurred legal costs of approximately $8.7 million that the Company has been required to advance in fees and costs to indemnified parties, including the indirect controlling stockholders and their affiliates and associates who are defendants in the litigation brought by the Company. The Company would be entitled to repayment of certain funds advanced to Black in the event the Delaware Supreme Court affirms the Chancery Court’s finding that he repeatedly breached his fiduciary duties, and from Black and other defendants in the Illinois litigation if a final, nonappealable judgment is obtained in the Company’s favor in that action.

      During 2003, the Company received from its former executive officers, a total of $1.2 million in restitution in accordance with the terms of the Restructuring Agreement. Through September 30, 2004, the

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Company was paid additional amounts totaling $30.3 million, excluding interest, in restitution in accordance with the terms of the Restructuring Agreement. These amounts were reflected in the Company’s Consolidated Statement of Operations for the year ended December 31, 2003 as “Other income (expense), net.” Of these additional amounts, $23.7 million, excluding interest, paid by Hollinger Inc. and Black is the subject of an appeal by Hollinger Inc. and Black to the Delaware Supreme Court. See “Item 3 — Legal Proceedings — Hollinger International Inc. v. Conrad M. Black, Hollinger Inc., and 504468 N.B. Inc.” In addition, the Company will receive $2.4 million from Atkinson for “non-competition” payments and payments made under the Digital Incentive Plan Atkinson received plus interest, under the terms of a settlement with Atkinson upon court approval of the settlement with Atkinson. Included in the $2.4 million is approximately $253,000, which represents the balance, before interest, identified as attributable to Atkinson at December 31, 2003 in the Restructuring Agreement.

      Sale of the Telegraph Group — In November 2003, the Company retained Lazard as financial advisor to explore alternative strategic transactions, including the sale of the Company or of its specific businesses. As part of the Strategic Process, on July 30, 2004, the Company completed the sale of the Telegraph Group for a price of £729.6 million in cash (or approximately $1,323.9 million at an exchange rate of $1.8145 to £1 as of the date of sale). This price is subject to adjustment depending on actual working capital of the businesses sold. The Company does not expect any such adjustment, currently being calculated, to be material.

      Repayment of Senior Credit Facility — On July 30, 2004, the Company used approximately $213.4 million of the proceeds from the sale of the Telegraph Group to repay in full all amounts outstanding under its Senior Credit Facility and terminated all derivatives related to that facility. In addition, the Company paid approximately $2.1 million for premiums and fees related to the early repayment of the facility and $32.3 million in fees to cancel the cross-currency interest rate swaps the Company had in place with respect to amounts outstanding under the Senior Credit Facility. See “— Liquidity and Capital Resources.”

      Retirement of 9% Senior Notes — In June 2004, the Company commenced a tender offer and consent solicitation to retire all 9% Senior Notes. Approximately 97% of the principal amount of the 9% Senior Notes were tendered. The Company used approximately $344.8 million of the proceeds from the sale of the Telegraph Group to purchase and retire the 9% Senior Notes tendered and for related expenses. The cost to cancel the interest rate swaps the Company had in place on the 9% Senior Notes was approximately $10.5 million. See “— Liquidity and Capital Resources.” The tender closed on August 2, 2004. The Company has since purchased and retired an additional $3.4 million in principal amount of the 9% Senior Notes.

      Declaration of Special and Regular Dividend — On December 16, 2004, from the proceeds of the sale of the Telegraph Group, the Board of Directors declared a Special Dividend on the Company’s Class A and Class B Common Stock in an aggregate amount of approximately $227.0 million payable on January 18, 2005, this being the first tranche of a total amount of $500.0 million which the Board of Directors determined was in the best interest of the Company and its stockholders to be distributed to stockholders. The Board of Directors intends to distribute an additional amount of approximately $273.0 million of the proceeds from the sale of the Telegraph Group, this being the second tranche of the $500.0 million cash distribution, either by way of a tender offer or a second special dividend. There can be no assurance that the second distribution will be made or, if made, whether it will be in the form of a tender offer or a dividend, and if a tender offer, as to the price or form such offer will take. The Board of Directors believes that following the Special Dividend and the second distribution, the Company will have sufficient liquidity to fund its operations and obligations and to avail itself of strategic opportunities. Following the Special Dividend, it is expected that the outstanding grants under the Company’s stock incentive plans will be appropriately adjusted to take into account this return of cash to existing stockholders. On December 16, 2004, the Board of Directors also declared a regular quarterly dividend in the amount of $0.05 per share payable on the Company’s Class A and Class B Common Stock on January 18, 2005.

      The Chicago Sun-Times Circulation Overstatement — On October 5, 2004, the Company announced that its Audit Committee, after conducting an internal review, determined that weekday and Sunday average circulation of the Chicago Sun-Times, as reported in the audit reports issued by the ABC commencing in 1998, had been overstated. The Chicago Sun-Times announced a plan intended to make restitution to its

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advertisers. To cover the estimated cost of restitution and settlement of related lawsuits filed against the Company, the Company recorded a pre-tax charge of approximately $24.1 million for 2003 and approximately $2.9 million for the first quarter of 2004. The Company will evaluate the adequacy of the accruals as negotiations with advertisers proceed. See “Item 1 — Business — Recent Developments” and “— Risk Factors.”

      The Audit Committee also conducted a Company-wide review and found that circulation inflation practices were also employed at two other Chicago area newspapers, the Daily Southtown and The Star, as well as The Jerusalem Post. The overstatement practices have been discontinued at these papers, and the Company does not expect the impact of the practices at these three newspapers will have a material impact on the Company.

      Disposition of Interest in Trump Joint Venture — On June 21, 2004, the Company entered into an agreement to sell its 50% interest in the real estate joint venture for the development of the property on which a portion of the Chicago Sun-Times operations was then situated. Immediately prior to the sale of the interest in the joint venture, the Company contributed to the joint venture, its property in downtown Chicago where the Chicago Sun-Times had conducted its editorial, pre-press, marketing, sales and administrative activities. Under the terms of the agreement the Company received $4.0 million in cash upon signing of the sales agreement and the balance of approximately $66.7 million cash, net of closing costs and adjustments.

      As a result of the decision to sell its interest in the joint venture and related buildings, the Chicago Sun-Times entered into an operating lease for new office space. The new lease is for 15 years and will have an average annual expense of approximately $3.4 million. The Chicago Sun-Times relocated to the new office space in the fourth quarter of 2004 resulting in a significant amount of capital expenditure. See “— Liquidity and Capital Resources.”

      Hollinger L.P. Tender Offer — On August 6, 2004, the TSX suspended the listing of the units of Hollinger L.P. since the general partner of Hollinger L.P. does not have at least two independent directors as required by TSX listing requirements. On August 5, 2004, the Company expressed an interest in pursuing a tender for the units of Hollinger L.P. not held by affiliates of the Company. An independent committee of the general partner of Hollinger L.P., consisting of the sole independent director of the general partner, was formed and it retained independent legal counsel and financial advisors. Continuing liquidity for minority unit holders during the tender process has been provided through a listing of the units on a junior board of the TSX Venture Exchange. On December 10, 2004, it was announced that the Company would not pursue the tender until such time as Hollinger L.P. is current in its financial statement filings.

      CanWest Debentures — On October 7, 2004, the Company entered into an agreement with CanWest, pursuant to which the parties agreed to redeem the CanWest Debentures and dissolve the Trust. CanWest exchanged the Trust Notes for new debentures issued by CanWest. See “Item 1 Business — Recent Developments.” The CanWest Exchange Offer was completed on November 18, 2004. The Company received approximately $133.6 million in respect of CanWest Debentures beneficially owned and residual interests in the Participation Trust that was attributable to foreign currency exchange. As a consequence, all exposure the Company previously had to foreign exchange fluctuations under the Participation Trust was eliminated at that date. The Company was also relieved of the requirement to maintain cash on hand to satisfy needs of the Participation Trust, which removed the restrictions on the $16.7 million reflected as “Escrow deposits and restricted cash” on the Company’s Consolidated Balance Sheet at December 31, 2003. See “— Liquidity and Capital Resources — Off-Balance Sheet Arrangements.”

      Sale of The Jerusalem Post — On December 15, 2004, the Company announced that as part of the Strategic Process, it had completed the sale of The Palestine Post Limited. That company is the publisher of The Jerusalem Post, The Jerusalem Report and related publications. The transaction involved the sale by the Company of its debt and equity interests in The Palestine Post Limited for $13.2 million.

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Significant Transactions in 2003

      On March 10, 2003, the Company purchased 2,000,000 shares of its Class A Common Stock from Hollinger Inc. at $8.25 per share for $16.5 million. The Company also redeemed the remaining 93,206 shares of its Series E Redeemable Convertible Preferred Stock pursuant to a redemption request by Hollinger Inc. at the fixed price of Cdn. $146.63 per share for a total of $9.3 million. See Note 23(c) to the Company’s Consolidated Financial Statements.

      On April 10, 2003, CanWest notified the Company of its intention to redeem Cdn. $265.0 million of principal amount of the CanWest Debentures on May 11, 2003. Of the total proceeds received by the Company, $159.8 million related to CanWest 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 CanWest Debentures. See “— Liquidity and Capital Resources — Off-Balance Sheet Arrangements.”

 
Significant Transactions in 2002

      On December 23, 2002, the Company entered into a $310.0 million Senior Credit Facility with a group of financial institutions arranged by Wachovia Securities, Inc. On December 23, 2002, Publishing issued 9% Senior Notes in the aggregate principal amount of $300.0 million.

      Net proceeds from the placement of the 9% Senior Notes before expenses associated with the offering and borrowings under the Senior Credit Facility totaled $553.8 million. The proceeds along with available cash were used in January 2003 to retire the 9.25% Senior Subordinated Notes due 2006 and 2007 (the “9.25% Senior Subordinated Notes”) aggregating $504.9 million plus applicable premium and accrued interest, and to repay in December 2002 the $50.0 million of 10.5% financing from Trilon International placed in October 2002 and remaining obligations of $40.0 million under the Total Return Equity Swap (“TRES”) entered into with various banks pursuant to which Company shares acquired by those banks could be repurchased by the Company or sold in the open market. Earlier in 2002, the Company had retired $60.0 million of obligations under the TRES from the proceeds of the Trilon International loan and from cash on hand. The balance of proceeds was used for general corporate purposes. The Company recognized losses of $15.2 million and $73.9 million related to the TRES in 2002 and 2001, respectively. See Note 17 of Notes to Consolidated Financial Statements. Funds required for the retirement of the 9.25% Senior Subordinated Notes, including related premiums and accrued interest, were held in escrow at December 31, 2002.

 
Significant Transactions in 2001

      Some of the transactions discussed below have been investigated by the Special Committee and are subject to lawsuits related to the Special Committee’s investigations. See “Item 1 — Business — Recent Developments — Report of the Special Committee”, “Item 3 — Legal Proceedings” and “Item 13 — Certain Relationships and Related Transactions.”

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

      On June 1, 2001, the Company converted all the Series C Preferred Stock at the conversion ratio of 8.503 shares of Class A Common Stock per share of Series C Preferred Stock into 7,052,464 shares of Class A Common Stock. The Series C Preferred Stock was held by Hollinger Inc. On September 5, 2001, the Company purchased for cancellation, from Hollinger Inc., the 7,052,464 shares of Class A Common Stock for a total cost of $92.2 million.

      In two separate transactions in July and November 2001, the Company and Hollinger L.P. completed the sale of most of the remaining Canadian newspapers to Osprey Media for total sale proceeds of approximately Cdn. $255.0 million ($166.0 million) plus closing adjustments primarily for working capital. Included in these sales were community newspapers in Ontario such as The Kingston Whig-Standard, The Sault Star, the

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Peterborough Examiner, the Chatham Daily News and The Observer (Sarnia). Pre-tax gains of approximately $800,000 were recognized on these sales. The former CEO of Hollinger L.P. is a minority stockholder and CEO of Osprey.

      In August 2001, the Company sold to CanWest its 50% interest in the National Post. In accordance with the sale agreement, the Company’s representatives resigned from their executive positions at the National Post effective September 1, 2001. The results of operations of the National Post are included in the consolidated results to August 31, 2001. A pre-tax loss of approximately $78.2 million was recognized on the sale.

      In August and December 2001, the Company sold participation interests in Cdn. $540.0 million ($350.0 million) and Cdn. $216.8 million ($140.5 million), respectively, principal amounts of CanWest Debentures to the Participation Trust. Trust Notes were issued and sold by the Participation Trust to third parties. These transactions resulted in net proceeds to the Company of $401.2 million and have been accounted for as sales in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”). The net loss on these transactions, including realized holding losses on the underlying debentures, amounted to $62.1 million and has been recognized in “Other income (expense), net.”

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

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

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

Critical Accounting Policies and Estimates

      The preparation of the Company’s consolidated financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include bad debts, goodwill, intangible assets, income taxes, pensions and other post-retirement benefits, contingencies and litigation. The Company bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions.

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

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     Accruals for Contingent Tax Liabilities

      At December 31, 2003, the Company’s Consolidated Balance Sheet includes $748.8 million of accruals intended to cover contingent liabilities related to additional taxes and interest it may be required to pay in various tax jurisdictions. A substantial portion of the accruals relates to the tax treatment of gains on the sale of a portion of the Company’s non-U.S. operations. The accruals to cover contingent tax liabilities also relate to management fees, “non-competition” payments and other items that have been deducted in arriving at taxable income, which deductions may be disallowed by taxing authorities. If those deductions were to be disallowed, the Company would be required to pay additional taxes and interest since the dates such taxes would have been paid had the deductions not been taken, and it may be subject to penalties. The ultimate resolution of these tax contingencies will be dependent upon a number of factors, including discussions with taxing authorities and the nature, extent and timing of any restitution or reimbursement received by the Company.

      The Company believes that the accruals that have been recorded are adequate to cover the tax contingencies. If the ultimate resolution of the tax contingencies is more or less favorable than what has been assumed by management in determining the accruals, the accruals may ultimately be excessive or inadequate in amounts that are not presently determinable, but such amounts may be material to the Company’s consolidated financial position, results of operations, and cash flows.

     Allowance for Doubtful Accounts

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

     Potential Impairment of Goodwill

      The Company has significant goodwill recorded in its accounts. The Company is required to determine at least annually, whether or not there has been any permanent impairment in the value of these assets. Certain indicators of potential impairment that could impact the Company’s reporting units include, but are not limited to, the following: (i) a significant long-term adverse change in the business climate that is expected to cause a substantial decline in advertising spending, (ii) a permanent significant decline in a reporting unit’s newspaper readership, (iii) a significant adverse long-term negative change in the demographics of a reporting unit’s newspaper readership and (iv) a significant technological change that results in a substantially more cost effective method of advertising than newspapers.

     Valuation Allowance — Deferred Tax Assets

      The Company records a valuation allowance to reduce the deferred tax assets to the amount which, the Company estimates, is more likely than not to be realized. While the Company has considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, if the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, the resulting adjustment to deferred tax assets would increase net earnings in the period such a determination was made. Similarly, should the Company determine that it would not be able to realize all or part of the deferred tax assets in the future, an adjustment to deferred tax assets would decrease net earnings in the period that such a determination was made.

     Defined Benefit Pension Plans

      The Company sponsors several defined benefit pension and post-retirement benefit plans for domestic and foreign employees. These defined benefit plans include pension and post-retirement benefit obligations, which are calculated based on actuarial valuations. In determining these obligations and related expenses, key assumptions are made concerning expected rates of return on plan assets and discount rates. In making these assumptions, the Company evaluates, among other things, input from actuaries, expected long-term market returns and current high-quality bond rates. The Company will continue to evaluate the expected long-term

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rates of return on plan assets and discount rates at least annually and make adjustments as necessary, which could change the pension and post-retirement obligations and expenses in the future.

      Unrecognized actuarial gains and losses are recognized by the Company over a period of approximately 12 years, which represents the weighted-average remaining service life of the employee group. Unrecognized actuarial gains and losses arise from several factors including experience, changes in assumptions and from differences between expected returns and actual returns on assets. At the end of 2003, the Company had unrecognized net actuarial losses of $101.2 million. These unrecognized amounts could result in an increase to pension expenses in future years depending on several factors, including whether such losses exceed the corridor in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”).

      The estimated accumulated benefit obligations for the defined benefit plans exceeded the fair value of the plan assets at December 31, 2003, 2002, and 2001 as a result of the negative impact that declines in global capital markets and interest rates had on the assets and obligations of the Company’s pension plans. Accordingly, a non-cash charge of $1.6 million ($1.7 million, net of tax and minority interest) was recorded in other comprehensive loss for the increase in minimum pension liability in 2003, $43.6 million ($27.7 million net of tax) in 2002 and $22.5 million ($14.9 million, net of tax) in 2001. Similar charges may be required in future years as the impact of changes in global capital markets and interest rates on the value of the Company’s pension plan assets and obligations is measured.

      During 2003, the Company made contributions of $10.2 million ($9.2 million in 2002) to defined benefit plans. Global capital market and interest rate fluctuations could impact future funding requirements for such plans. If the actual operation of the plans differs from the assumptions, additional Company contributions may be required. If the Company is required to make significant contributions to fund the defined benefit plans, reported results could be adversely affected, and the Company’s cash flow available for other uses would be reduced.

Restatements and Reclassifications

      As described in footnote 6 to “Item 6 — Selected Financial Data” and in Note 2 of Notes to Consolidated Financial Statements, the Company has restated certain of the financial data for prior periods and has reclassified certain prior period amounts due to the required adoption of a new FASB standard. The following discussion and analysis of results of operations and financial condition are based upon such restated and reclassified financial data.

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Results of Operations for the Years ended December 31, 2003, 2002 and 2001

      The following table sets forth, for the Company’s operating segments, for the periods indicated, certain items and related percentage relationships derived from the Consolidated Statements of Operations.

                                                   
Year Ended December 31,

2003 2002 2001 2003 2002 2001






(Dollars in thousands) (Percentage)
Operating revenues:
                                               
 
Chicago Group
  $ 450,789     $ 441,778     $ 442,884       42.5 %     43.9 %     38.6 %
 
Community Group
    10,397       13,231       19,115       1.0       1.3       1.7  
 
U.K. Newspaper Group
    519,475       481,527       486,374       49.0       47.9       42.4  
 
Canadian Newspaper Group
    80,542       69,626       197,948       7.5       6.9       17.3  
     
     
     
     
     
     
 
Total operating revenues
  $ 1,061,203     $ 1,006,162     $ 1,146,321       100.0 %     100.0 %     100.0 %
     
     
     
     
     
     
 
Operating income (loss):
                                               
 
Chicago Group
  $ 24,514     $ 38,598     $ 4,962       244.7 %     64.2 %     (13.8 )%
 
Community Group
    (6,601 )     (5,218 )     (4,487 )     (65.9 )     (8.7 )     12.5  
 
U.K. Newspaper Group
    40,683       48,079       27,850       406.1       80.0       (77.4 )
 
Canadian Newspaper Group
    (4,983 )     (2,137 )     (45,954 )     (49.7 )     (3.6 )     127.7  
 
Investment and Corporate Group
    (43,596 )     (19,215 )     (18,354 )     (435.2 )     (31.9 )     51.0  
     
     
     
     
     
     
 
Total operating income (loss)
  $ 10,017     $ 60,107     $ (35,983 )     100.0 %     100.0 %     100.0 %
     
     
     
     
     
     
 

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Year Ended December 31,

2003 2002 2001



(In thousands, except per share amounts)
Statement of Operations Data:
                       
Operating revenues:
                       
 
Advertising
  $ 733,826     $ 710,849     $ 804,462  
 
Circulation
    277,264       247,175       278,321  
 
Job printing
    16,427       16,669       25,092  
 
Other
    33,686       31,469       38,446  
     
     
     
 
Total operating revenues
    1,061,203       1,006,162       1,146,321  
Operating costs and expenses
    996,333       891,903       1,108,576  
Depreciation and amortization
    54,853       54,152       73,728  
     
     
     
 
Operating income (loss)
    10,017       60,107       (35,983 )
Interest expense
    (55,559 )     (58,772 )     (78,639 )
Amortization of deferred financing costs
    (2,855 )     (5,585 )     (10,367 )
Interest and dividend income
    25,411       18,782       64,893  
Other income (expense), net
    75,641       (172,783 )     (303,318 )
     
     
     
 
Earnings (loss) before income taxes, minority interest, and cumulative effect of change in accounting principle
    52,655       (158,251 )     (363,414 )
Income taxes (benefit)
    121,638       50,132       (23,038 )
     
     
     
 
Loss before minority interest, and cumulative effect of change in accounting principle
    (68,983 )     (208,383 )     (340,376 )
Minority interest
    5,325       2,167       (13,803 )
     
     
     
 
Loss before cumulative effect of change in accounting principle
    (74,308 )     (210,550 )     (326,573 )
Cumulative effect of change in accounting principle
          (20,079 )      
     
     
     
 
Net loss
  $ (74,308 )   $ (230,629 )   $ (326,573 )
     
     
     
 
Diluted loss per share
  $ (0.85 )   $ (2.40 )   $ (3.31 )
     
     
     
 
 
2003 Compared with 2002
 
Net Loss

      The net loss for the year ended December 31, 2003 amounted to $74.3 million or $0.85 per diluted share compared to a net loss of $230.6 million for the year ended December 31, 2002 or a net loss of $2.40 per share. The net losses in 2003 and 2002 included a large number of infrequent and unusual items. Infrequent items are included in “Operating costs and expenses” and unusual items are included in “Other income (expense), net.”

 
Operating Revenues and Operating Income

      Operating revenues and operating income in 2003 were $1,061.2 million and $10.0 million, respectively, compared with $1,006.2 million and $60.1 million, respectively, in 2002. The increase in operating revenues of $55.0 million was principally due to an increase in revenue at the U.K. Newspaper Group in U.S. dollar terms, as a consequence of the strengthening of the British pound against the U.S. dollar, and smaller revenue gains at both the Chicago and Canadian Newspaper Groups. The decrease in operating income of $50.1 million was largely due to increased operating costs in the U.K., costs of $24.1 million related to restitution to and settlement of litigation with advertisers at the Chicago Sun-Times for previous overstatements of circulation levels, an increase in expenses related to stock-based compensation of $6.7 million and the costs related to the Special Committee investigation and related litigation involving Black, Radler and others of $10.1 million.

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Operating Costs and Expenses

      Operating costs and expenses increased by $104.4 million to $996.3 million in 2003 from $891.9 million in 2002. The increase in total operating cost was principally due to an increase in costs at the U.K. Newspaper Group in U.S. dollar terms, as a consequence of the strengthening of the British pound against the U.S. dollar. In addition to the effects of foreign currency fluctuations, costs increased due to stock-based compensation and several other items that are infrequent in nature. Included as infrequent items are the previously described costs of approximately $10.1 million related to the Special Committee investigation and related litigation involving Black, Radler and others and approximately $24.1 million of costs related to restitution to and settlement of litigation with advertisers in the Chicago Sun-Times for previous overstatements of circulation levels. These costs were partially offset by the reversal of excess accruals for provisions for doubtful accounts at the Chicago Group.

 
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

      EBITDA is a financial measure of operational profitability and is presented to assist in understanding the Company’s operating results. However, it is not intended to represent cash flow or results of operations in accordance with U.S. GAAP. The Company monitors EBITDA to isolate the impact of financial structure and major capital expenditures at the business unit level as the impact of those matters is largely a consequence of decisions made by the corporate office. Further, valuation of the Company’s separate business units on asset sales has historically been predicated on multiples of EBITDA. The table below presents a reconciliation of EBITDA to operating income (loss) and net loss on a consolidated basis. The Company’s definition and calculation of EBITDA may be different from the definitions and calculations presented by other companies, including competitors, and therefore EBITDA results may not be comparable among companies.

                             
Year Ended December 31,

2003 2002 2001



(Amounts in thousands)
EBITDA
  $ 64,870     $ 114,259     $ 37,745  
Less: Depreciation
    38,499       37,001       37,968  
   
  Amortization of intangible assets
    9,738       9,797       28,630  
   
  Amortization of capitalized telemarketing costs
    6,616       7,354       7,130  
     
     
     
 
Operating income (loss)
    10,017       60,107       (35,983 )
Other income (expense):
                       
 
Interest expense
    (55,559 )     (58,772 )     (78,639 )
 
Amortization of deferred financing costs
    (2,855 )     (5,585 )     (10,367 )
 
Interest and dividend income
    25,411       18,782       64,893  
 
Other income (expense), net
    75,641       (172,783 )     (303,318 )
     
     
     
 
 
Total other income (expense)
    42,638       (218,358 )     (327,431 )
     
     
     
 
Earnings (loss) before income taxes, minority interest and cumulative effect of change in accounting principle
    52,655       (158,251 )     (363,414 )
Income taxes (benefit)
    121,638       50,132       (23,038 )
     
     
     
 
Loss before minority interest and cumulative effect of change in accounting principle
    (68,983 )     (208,383 )     (340,376 )
Minority interest
    5,325       2,167       (13,803 )
     
     
     
 
Loss before cumulative effect of change in accounting principle
    (74,308 )     (210,550 )     (326,573 )
Cumulative effect of change in accounting principle
          (20,079 )      
     
     
     
 
Net loss
  $ (74,308 )   $ (230,629 )   $ (326,573 )
     
     
     
 

      EBITDA for the year ended December 31, 2003 was $64.9 million compared to $114.3 million for the year ended December 31, 2002. The decrease in EBITDA for 2003 compared to 2002 is due primarily to the

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overall increase in revenue, offset by increases in stock-based compensation, costs incurred with respect to the Special Committee investigation, costs related to restitution to and settlement of litigation with advertisers at The Chicago Sun-Times and by increases in operating costs.
 
Interest Expense

      Interest expense totaled $55.6 million and $58.8 million for the years ended December 31, 2003 and 2002, respectively. Interest expense in 2003 included the mark-to-market losses on the value of the $250.0 million interest rate swaps on the 9% Senior Notes. In 2003, the mark-to-market valuation of these swaps resulted in a net loss of $5.6 million. Excluding the impact of the mark-to-market valuation of these swaps, interest expense reflected lower average interest rates on long-term debt for 2003. The effective rates of interest on long-term debt were reduced through the use of a fixed to floating interest rate swap on $250.0 million of the 9% Senior Notes, partially offset by a cross-currency floating to fixed interest rate swap on the Senior Credit Facility. The mark-to-market effect of the cross-currency floating to fixed interest rate swap is reflected in “— Other Income (Expense), Net,” below. See “ — Liquidity and Capital Resources.”

 
Interest and Dividend Income

      Interest and dividend income was $25.4 million in 2003 compared with $18.8 million in 2002. The increase of $6.6 million arose primarily from interest that accrued on amounts receivable identified in the Restructuring Agreement. This increase was partially offset as the Company ceased recognizing interest on amounts due from CanWest, pending resolution of the arbitration (See Note 22 of Notes to Consolidated Financial Statements herein), and reflected lower average cash deposits throughout 2003.

 
Other Income (Expense), Net

      Other income (expense), net in 2003 was income of $75.6 million compared to a net expense of $172.8 million in 2002. Included in the income in 2003 was 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 and the $1.1 million write-off of deferred financing costs recognized on the $45.0 million partial repayment of term loans advanced under the Senior Credit Facility. The Company also recognized a write-down of approximately $6.8 million relating to the FDR Collection. See “Item 1 — Business — Recent Developments — Report of the Special Committee.” These costs were partially offset by $31.5 million of restitution received or receivable from certain officers and directors of the Company under the terms of the Restructuring Agreement. Of these amounts, $1.2 million was received in 2003 and the remaining $30.3 million has been collected in 2004. The recovery of $602,500 from Boultbee has not been recognized in the Company’s consolidated financial statements and is a component of a lawsuit pending before the courts. For 2002, the other expense, net of $172.8 million primarily consisted of the write down of investments of $40.5 million, the loss of $15.2 million related to the TRES and losses incurred on the early extinguishment of debt of approximately $35.5 million.

      Also included in Other income (expense), net is the net effect of foreign currency gains and losses, which, in 2003, amounted to net foreign currency gains of $114.1 million compared with net foreign currency losses of $86.9 million in 2002. Foreign exchange gains on the Participation Trust obligations were $122.3 million and were primarily responsible for the net gain in 2003, while 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 loss in 2002. Gains on the Participation Trust obligation were partially offset by mark-to-market losses of $21.7 million on the cross-currency interest rate swap on the Senior Credit Facility during 2003.

 
Income Taxes

      Income tax expense in 2003 was $121.6 million compared to an expense of $50.1 million in 2002. In each year, income tax expense varies substantially from the amount of income tax expense (benefit) that would be “expected” by applying the U.S. Federal income tax rate to earnings (loss) before income taxes, minority

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interest, and cumulative effect of change in accounting principle; a reconciliation of these amounts is presented in Note 24 of Notes to Consolidated Financial Statements. In both 2003 and 2002, the principal variances from “expected” tax expense (benefit) result from provisions for contingent liabilities to cover additional taxes and interest that the Company may be required to pay in various tax jurisdictions; such provisions aggregated $108.2 million in 2003 and $45.3 million in 2002. Also in 2002, the Company recorded a provision of $38.9 million for the tax impacts of the disposition and liquidation of its Canadian operations. In both years, the Company recorded changes in the valuation allowance related to its deferred tax assets to give effect to its assessment of the prospective realization of certain future tax benefits; the allowance was increased by $17.4 million in 2002 and decreased by $12.3 million in 2003.
 
Minority Interest

      Minority interest in 2003 was $5.3 million compared to $2.2 million in 2002. Minority interest represents the minority share of net earnings of Hollinger L.P. The increase primarily reflected the minority interest’s share of foreign exchange gains in Hollinger L.P. relating to the exchange exposure to the Participation Trust, as a result of the strengthening of the Canadian dollar.

 
2002 Compared with 2001
 
Net Loss

      The Company had a net loss of $230.6 million in 2002 compared with a net loss of $326.6 million in 2001. The net losses in 2002 and 2001 included a large number of infrequent and unusual items as well as an adjustment to reflect the cumulative effect of a change in accounting principle. Infrequent items are included in “Other operating costs and expenses” and unusual items are included in “Other income (expense), net.”

 
Operating Revenues and Operating Income (Loss)

      Operating revenues and operating income in 2002 were $1,006.2 million and $60.1 million, respectively, compared with operating revenues of $1,146.3 million and an operating loss of $36.0 million in 2001. The decrease in operating revenues was primarily due to the sale of most of the remaining Canadian newspapers to Osprey Media and the sale of the Company’s remaining 50% interest in the National Post. These declines were partially offset by increases in revenue in the U.K. Newspaper Group, in U.S. dollar terms, as a consequence of the strengthening of the British pound against the U.S. dollar. The increase in operating income was primarily due to the disposition of the Company’s remaining 50% interest in the National Post in August 2001, lower consumption of and prices for newsprint throughout the year, reduced compensation costs, lower operating costs in general, reduced amortization charges largely as a consequence of the adoption of SFAS No. 142 and fewer infrequent items.

 
Operating Expenses

      Operating costs and expenses were $891.9 million in 2002 compared with $1,108.6 million in 2001, a decrease of $216.7 million. Newsprint expense was $147.5 million in 2002 compared with $204.4 million in 2001, a decrease of $56.9 million or 27.8%. The decrease was primarily due to lower consumption at the U.K. Newspaper Group, the sales of Canadian newspaper properties in 2001 and declining newsprint prices. Average newsprint prices at both the U.K. Newspaper Group and Chicago Group year over year were lower. Compensation costs were $309.0 million in 2002 compared to $361.7 million in 2001, representing a year-over-year decrease of $52.7 million or 14.6%. Other operating costs of $435.3 million in 2002 decreased year-over-year by $107.2 million or 19.8% from $542.5 million in 2001. These reductions were mainly due to both the sales of publishing properties and concerted efforts to reduce costs in the face of a difficult advertising market. Infrequent items in 2002 amounted to $1.0 million compared with $21.7 million in 2001. Infrequent items in 2001 included a one-time expense related to a pension and post-retirement plan liability adjustment of $12.4 million as well as $4.7 million of duplicated costs resulting from operating two printing plants during start-up of the new plant in Chicago.

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Interest Expense

      Interest expense was $58.8 million in 2002 compared to $78.6 million in 2001, a decrease of $19.8 million. The decrease was largely a consequence of the retirement of a portion of long-term debt in 2001 and a partial repayment of the Company’s 8.625% senior notes in March 2002. The source of the cash for repayment was the sale of the participation interests in the CanWest Debentures in 2001.

 
Interest and Dividend Income

      Interest and dividend income in 2002 was $18.8 million compared with $64.9 million in 2001, a decrease of $46.1 million. Interest and dividend income in 2001 included interest on the CanWest Debentures until the sale of participation interests in August and December, interest on the remaining CanWest Debentures, dividends on CanWest shares and bank interest on the significant cash balance primarily accumulated from the proceeds of the sale in 2001 of Canadian newspaper properties and the sales of CanWest shares and participations in CanWest Debentures. Most of the proceeds from the disposal of the CanWest investments were retained as short-term investments at low rates of interest until March 2002 when a portion of the Company’s long-term debt was retired.

 
Other Income (Expense), Net

      Other expense of $172.8 million in 2002 included charges in respect of writedowns of investments of $40.5 million and a loss of $15.2 million relating to the TRES. The TRES arrangements were retired in their entirety in December 2002. In addition, the Company incurred a cost of $35.5 million in relation to the early termination of outstanding debt. Other expense in 2001 amounted to $303.3 million and included a net loss on the sale of investments of $147.2 million, being primarily the loss on sale of participations in CanWest Debentures and a loss on sale of CanWest shares, a net loss of $1.2 million on sale of publishing interests, including a $78.2 million loss on the sale of the National Post offset primarily by gains on sales of Canadian properties, a $48.0 million write-down of investments, a $73.9 million loss in respect of the TRES and $15.1 million in losses from equity accounted companies.

      Included in other income (expense), net were foreign currency losses in 2002 of $86.9 million compared with $1.3 million in 2001. The 2002 loss principally consisted of a $78.2 million loss incurred as a result of the substantial liquidation of the Company’s investment in the Canadian Newspaper Group and the related repatriation of funds to the United States. Prior to 2002, the cumulative foreign exchange losses associated with the Canadian investment were included in the accumulated other comprehensive loss component of stockholders’ equity.

 
Income Taxes

      Income tax expense in 2002 was $50.1 million compared to a tax benefit of $23.0 million in 2001. In each year, income tax expense (benefit) varies substantially from the amount of income tax benefit that would be “expected” by applying the U.S. Federal income tax rate to the loss before income taxes, minority interest, and cumulative effect of change in accounting principle; a reconciliation of these amounts is presented in Note 24 of Notes to Consolidated Financial Statements. In both 2002 and 2001, the principal variances from the “expected” tax benefit result from provisions for contingent liabilities to cover additional taxes and interest that the Company may be required to pay in various tax jurisdictions; such provisions aggregated $45.3 million in 2002 and $31.2 million in 2001. The Company increased the valuation allowance with respect to its net deferred tax assets by $17.4 million in 2002 and $27.2 million in 2001. The Company also recorded provisions of $38.9 million in 2002 and $5.1 million in 2001 for the tax impacts of the disposition and liquidation of its Canadian operations. The losses related to the TRES are not deductible for tax purposes; variances attributable to the TRES losses were $5.3 million in 2002 and $28.1 million in 2001.

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Minority Interest

      Minority interest in 2002 was $2.2 million, compared to a credit of $13.8 million in 2001. The credit in 2001 resulted primarily from the minority stockholders’ share of National Post losses to August 31, 2001, offset by the minority interest’s share of earnings of Hollinger L.P.

 
Change in Accounting Principle

      The transitional provisions of SFAS No. 142 required the Company to assess whether goodwill was impaired as of January 1, 2002. The fair values of the Company’s reporting units are determined primarily using a multiple of maintainable normalized cash earnings. As a result of this transitional impairment test, and based on the methodology adopted, the Company determined that the carrying amount of The Jerusalem Post properties was in excess of its estimated fair value. Accordingly, the value of goodwill attributable to The Jerusalem Post was written down in its entirety. The write-down of $20.1 million (net of tax of nil) was reflected in the Consolidated Statement of Operations as of January 1, 2002 as a cumulative effect of a change in accounting principle. The Company determined that the fair value of each of the other reporting units was in excess of its respective carrying amount, both on adoption and at year end for purposes of the annual impairment test. See Note 1(i) of Notes to Consolidated Financial Statements herein.

 
Segment Results

      The Company divides its business into five principal segments; the Chicago Group, the Community Group, the U.K. Newspaper Group, the Canadian Newspaper Group, and the Investment and Corporate Group.

      Below is a discussion of the results of operations of the Company by operating segment.

 
Chicago Group

      The following table sets forth, for the Chicago Group, for the periods indicated, certain results of operations items and related percentage relationships.

                                                   
Year Ended December 31,

2003 2002 2001 2003 2002 2001






(Dollars in thousands) (Percentage)
Operating revenues:
                                               
 
Advertising
  $ 352,029     $ 341,262     $ 338,521       78.1 %     77.2 %     76.4 %
 
Circulation
    86,532       89,427       92,716       19.2       20.2       20.9  
 
Job printing and other
    12,228       11,089       11,647       2.7       2.6       2.7  
     
     
     
     
     
     
 
Total operating revenues
    450,789       441,778       442,884       100.0       100.0       100.0  
     
     
     
     
     
     
 
Operating costs:
                                               
 
Newsprint
    65,109       60,146       76,399       14.4       13.6       17.3  
 
Compensation costs
    170,483       170,895       178,672       37.8       38.7       40.3  
 
Other operating costs
    154,985       136,141       144,963       34.5       30.8       32.7  
 
Depreciation
    19,344       18,847       17,955       4.3       4.3       4.1  
 
Amortization
    16,354       17,151       19,933       3.6       3.9       4.5  
     
     
     
     
     
     
 
Total operating costs
    426,275       403,180       437,922       94.6       91.3       98.9  
     
     
     
     
     
     
 
Operating income
  $ 24,514     $ 38,598     $ 4,962       5.4 %     8.7 %     1.1 %
     
     
     
     
     
     
 
 
2003 Compared with 2002

      Operating revenues for the Chicago Group were $450.8 million in 2003 compared to $441.8 million in 2002, which is an increase of $9.0 million or 2.0%.

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      Advertising revenue was $352.0 million in 2003 compared with $341.3 million in 2002, an increase of $10.7 million or 3.1%. The overall increase was a result of higher advertising revenue in each of retail (3.8%) and national advertising (6.3%).

      Circulation revenue was $86.5 million in 2003 compared with $89.4 million in 2002, a decrease of $2.9 million or 3.2%. The decline in circulation revenue was attributable primarily to volume declines in the single copy market. Sunday single copy sales declined, and although the volume of Sunday home delivery increased, the increased volume was achieved at discounted price levels.

      Although the Company’s investigation of the inflation of circulation figures revealed the source of the declines in circulation revenues, the inflation of circulation figures itself did not result in the misstatement of circulation revenues recognized by the Chicago Group. See discussion of “Other operating costs”, below and “Item 1 — Business — Recent Developments — The Chicago Sun-Times Circulation Overstatement.”

      Printing and other revenue was $12.2 million in 2003 compared with $11.1 million in 2002, an increase of $1.1 million or 9.9%.

      Total operating costs in 2003 were $426.3 million compared with $403.2 million in 2002, an increase of $23.1 million or 5.7%.

      Newsprint expense was $65.1 million for 2003, compared with $60.1 million in 2002, an increase of $5.0 million or 8.3%. Total newsprint consumption in 2003 increased approximately 4% compared with 2002, and the average cost per tonne of newsprint in 2003 was approximately 7% higher than in 2002. Reflected in newsprint costs for 2003 was a favorable recovery against a previously recorded allowance for unusable newsprint, which reduced newsprint expense by $2.2 million.

      Compensation costs in 2003 were $170.5 million compared with $170.9 million in 2002, a decrease of $400,000 or 0.2%. In 2003, labor cost savings were achieved in production and circulation with the implementation of new technology and further consolidation of the distribution network. These declines were partially offset by a 3% increase in employee benefit costs.

      Other operating costs in 2003 were $155.0 million compared with $136.1 million in 2002, an increase of $18.9 million or 13.9%. Other operating costs, excluding infrequent items discussed below, decreased in 2003 primarily as a result of a decrease in the provisions for doubtful accounts. During 2003, the Chicago Group updated underlying assumptions used for estimating its allowance for doubtful accounts and determined it could reduce the allowance by approximately $5.0 million. This reduction was partially offset by cost increases due to the launch of a free distribution newspaper during the fourth quarter of 2002 and increases in insurance costs. These increases were partially offset by savings achieved in facilities rental and a reduction in distribution costs.

      Also included in other operating costs in 2003 were infrequent items of $24.1 million compared to $0.5 million in 2002. In 2003, the Chicago Group recorded costs of $24.1 million for restitution to and settlement of litigation with advertisers as a result of the overstatement of circulation levels in the current and prior years. Infrequent items in 2002 were remaining pre-operating costs from the start-up of the new printing facility.

      Depreciation and amortization in 2003 was $35.7 million compared with $36.0 million in 2002, a reduction of $300,000. The Chicago Sun-Times moved its headquarters in 2004. This resulted in significant capital expenditures in 2004. See “— Liquidity and Capital Resources”.

      Operating income in 2003 was $24.5 million compared with $38.6 million in 2002, a decrease of $14.1 million or 36.5%. The change reflected the combined impact of the items noted above.

     2002 Compared with 2001

      Operating revenues for 2002 were $441.8 million compared with $442.9 million in 2001, a negligible change from the prior year. Advertising revenue of $341.3 million in 2002 increased marginally by $2.8 million over 2001 advertising revenue of $338.5 million. Declines in circulation revenue of $3.3 million or, 3.6% from

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$92.7 million in 2001 to $89.4 million in 2002 reflected both price discounting and a decline in circulation copies.

      Total operating costs and expenses were $403.2 million in 2002, a decrease of $34.7 million or 7.9% from $437.9 million in 2001. Cost savings were achieved across the board with reductions in compensation costs of $7.8 million to $170.9 million, in newsprint costs of $16.3 million to $60.1 million and in other operating costs of $8.8 million to $136.1 million. Reductions in compensation and other operating costs were the consequence of cost management initiatives undertaken during the course of 2002 and 2001. Newsprint cost reductions were the consequence of commodity price decreases as well as reductions in per copy consumption. Consumption savings were partially offset by increased requirements for bulk sale programs. Average newsprint unit price was approximately 21% lower in 2002 than in 2001. Infrequent items in 2002 were $0.5 million compared to $4.8 million in 2001. These costs, in both years, related primarily to pre-operating costs associated with the new printing facility which became fully operational in 2002.

      At $18.8 million in 2002, depreciation was up by $800,000 over 2001. Amortization, largely as a consequence of the implementation of SFAS No. 142, was down by $2.7 million from $19.9 million in 2001 to $17.2 million in 2002.

      Operating income for the Chicago Group was $38.6 million in 2002, an increase of $33.6 million over 2001. The improvement reflected the above cost savings, as well as a $4.3 million reduction in infrequent items in 2002, which were partially offset by small revenue declines.

 
Community Group

      The following table sets forth, for the Community Group, for the periods indicated, certain results of operations items and related percentage relationships.

                                                   
Year Ended December 31,

2003 2002 2001 2003 2002 2001






(Dollars in thousands) (Percentage)
Operating revenues:
                                               
 
Advertising
  $ 3,585     $ 3,937     $ 5,806       34.5 %     29.8 %     30.4 %
 
Circulation
    5,717       6,082       7,751       55.0       46.0       40.5  
 
Job printing and other
    1,095       3,212       5,558       10.5       24.2       29.1  
     
     
     
     
     
     
 
Total operating revenues
    10,397       13,231       19,115       100.0       100.0       100.0  
     
     
     
     
     
     
 
Operating costs:
                                               
 
Newsprint
    949       1,501       2,031       9.1       11.3       10.6  
 
Compensation costs
    6,735       7,161       9,817       64.8       54.1       51.4  
 
Other operating costs
    7,969       7,417       9,613       76.7       56.1       50.3  
 
Depreciation
    1,345       2,370       1,268       12.9       17.9       6.6  
 
Amortization
                873                   4.6  
     
     
     
     
     
     
 
Total operating costs
    16,998       18,449       23,602       163.5       139.4       123.5  
     
     
     
     
     
     
 
Operating loss
  $ (6,601 )   $ (5,218 )   $ (4,487 )     (63.5 )%     (39.4 )%     (23.5 )%
     
     
     
     
     
     
 

     2003 Compared to 2002

      Operating revenue and operating costs for the Community Group were $10.4 million and $17.0 million, respectively, in 2003 compared with $13.2 million and $18.4 million, respectively, in 2002. The decline in revenue and increase in operating loss was primarily attributable to the loss of business under a contract for the printing of the Golden Pages, a commercial telephone directory. Subsequent to 2003, the publisher at The Jerusalem Post was replaced.

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     2002 Compared with 2001

      Operating revenues and operating costs were $13.2 million and $18.4 million in 2002, respectively, compared to $19.1 million and $23.6 million in 2001, respectively. During the third quarter of 2001, the sole remaining U.S. Community Group newspaper was sold, affecting comparative revenue by $800,000 with a minimal impact on operating loss. Operating losses in 2002 and 2001 amounted to $5.2 million and $4.5 million, respectively.

 
U.K. Newspaper Group

      The following table sets forth, for the U.K. Newspaper Group, for the periods indicated, certain results of operations items and related percentage relationships.

                                                   
Year Ended December 31,

2003 2002 2001 2003 2002 2001






(Dollars in thousands) (Percentage)
Operating revenues:
                                               
 
Advertising
  $ 319,358     $ 316,295     $ 329,758       61.5 %     65.7 %     67.8 %
 
Circulation
    173,327       140,802       136,093       33.4       29.2       28.0  
 
Job printing and other
    26,790       24,430       20,523       5.1       5.1       4.2  
     
     
     
     
     
     
 
Total operating revenues
    519,475       481,527       486,374       100.0       100.0       100.0  
     
     
     
     
     
     
 
Operating costs:
                                               
 
Newsprint
    75,402       80,667       93,225       14.5 %     16.8       19.2  
 
Compensation costs
    107,488       94,092       93,409       20.7       19.5       19.2  
 
Other operating costs
    281,469       245,926       252,056       54.2       51.1       51.8  
 
Depreciation
    14,433       12,763       10,728       2.8       2.6       2.2  
 
Amortization
                9,106                   1.9  
     
     
     
     
     
     
 
Total operating costs
    478,792       433,448       458,524       92.2       90.0       94.3  
     
     
     
     
     
     
 
Operating income
  $ 40,683     $ 48,079     $ 27,850       7.8 %     10.0 %     5.7 %
     
     
     
     
     
     
 

     2003 Compared to 2002

      Operating revenues for the U.K. Newspaper Group were $519.5 million in 2003 compared with $481.5 million in 2002, an increase of $38.0 million or 7.9%. In pounds sterling, operating revenues in 2003 were £317.8 million compared with £320.9 million in 2002, a decrease of £3.1 million or 1.0%.

      Advertising revenue, in local currency, was £195.5 million in 2003 compared with £211.0 million in 2002, a decrease of £15.5 million or 7.4%. Recruitment advertising revenue decreased by 18.3% and display-advertising revenue decreased 6.7%. Financial advertising was also particularly affected in 2003, decreasing approximately £3.5 million or 13.8% from 2002, due to the continuing advertising recession in the U.K., a reflection of the effect of the weak economy on employment, corporate financings and mergers and acquisitions.

      Circulation revenue, in local currency, was £106.0 million in 2003 compared with £93.6 million in 2002, an increase of £12.4 million or 13.2%. Circulation revenues increased as a consequence of increases in the price of daily and Sunday newspapers. The increases were in September 2003 for the daily paper (£0.05 on Monday to Friday) and May 2003 for the Sunday paper (£0.20). In October 2003, there was a price increase for the Saturday paper (£0.10). Circulation volume declined during 2003 from that in the prior year period primarily as a result of management’s decision to reduce both bulk and foreign print sales and to reinvest the significant associated cost savings in developing the newspapers.

      Total operating costs in 2003 were $478.8 million compared with $433.4 million in 2002, an increase of $45.4 million or 10.5%. In local currency, total operating costs in 2003 were £292.5 million compared to

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£288.3 million in 2002, an increase of £4.2 million or 1.5%. Total operating costs in dollar terms in 2003 increased over 2002 largely due to a strengthening of the British pound.

      Newsprint costs for 2003, in local currency, were £46.2 million compared with £53.8 million in 2002, a decrease of £7.6 million or 14.1%. The decrease resulted from a 7.1% reduction in consumption due to lower pagination as a result of lower advertising revenue and the reduction of bulk and foreign production, and a 7.5% reduction in the average price per tonne of newsprint. Newsprint prices negotiated for 2004 are consistent with prices in 2003.

      Compensation costs for 2003, in local currency, were £65.7 million compared with £62.6 million in 2002, an increase of £3.1 million or 4.9%. Compensation costs increased due to a combination of salary increases and higher employment related expenses.

      Other operating costs, in local currency, were £171.9 million in 2003 compared with £163.5 million in 2002, an increase of £8.4 million or 5.1%. The year-over-year increase in costs related primarily to the cost of commissioning new printing presses at Trafford Park, pension fund adjustments and the impact of the strategy to develop and market newspapers, partly offset by reductions to bulk and foreign supplies.

      Also included in other operating costs in 2003 were infrequent items, in local currency, of £2.5 million and £0.4 million in 2002. In both 2003 and 2002, these costs were comprised primarily of severance for positions that were permanently eliminated.

      Depreciation and amortization for 2003 was £8.8 million compared with £8.5 million in 2002. Depreciation and amortization levels are expected to decrease in 2004 due to a significant number of assets becoming fully depreciated during the year.

      Operating income was $40.7 million for the year ended December 31, 2003, down $7.4 million from $48.1 million in 2002. This decrease reflected the changes discussed.

 
2002 Compared with 2001

      Operating revenues for the U.K. Newspaper Group in 2002 were $481.5 million, a $4.9 million or 1.0% decrease from the $486.4 million generated in 2001. In pounds sterling, there was a £16.6 million decrease in 2002 to £320.9 million from £337.5 million in 2001. That decrease was largely mitigated upon translation into U.S. dollars by favorable changes in foreign exchange rates during the year. The decrease largely related to declining advertising revenues, down by £17.7 million to £211.0 million in 2002 from £228.7 million in 2001, a 7.7% decline. Advertising revenues were particularly hard hit by declining linage in the high rate areas of recruitment and financial. With single copy rate increases of 5p in each of September of 2002 and 2001, circulation revenue was relatively stable at £93.6 million compared to £94.5 million in 2001. Other operating revenues, largely contract printing, increased by 14% or £2.0 to £16.3 million from £14.3 million in 2001.

      Total operating costs and expenses in 2002 were $433.4 million, a reduction of $25.1 million or 5.5% from $458.5 million. In local currency, total operating costs were £288.4, a decrease of £29.9 million or 9.4% from £318.3 in 2001. Newsprint costs accounted for the largest portion of the decrease, with costs down by £11.0 million to £53.8 million in 2002, a decrease of 16.9%. Average newsprint unit costs declined by 9.9% with the balance of savings generated by reduced consumption, in part as a consequence of reduced advertising revenues. Compensation costs were down by £2.3 million to £62.6 million, a 3.5% reduction.

      Operating income showed a substantial improvement of $20.2 million to $48.1 million in 2002 from $27.9 million in 2001 with operating profit margin increasing to 10.0% from 5.7%. Operating income continued to be affected by the decline in advertising revenue, which started in 2001 and continued through 2002. Exchange rates had a favorable impact in 2002, however, with the average exchange rate of pounds sterling into U.S. dollars improving from 1.44 in 2001 to 1.50 in 2002.

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Canadian Newspaper Group

      The following table sets forth, for the Canadian Newspaper Group, for the periods indicated, certain results of operations items and related percentage relationships.

                                                   
Year Ended December 31,

2003 2002 2001 2003 2002 2001






(Dollars in thousands) (Percentage)
Operating revenues:
                                               
 
Advertising
  $ 58,854     $ 49,355     $ 130,377       73.1 %     70.9 %     65.9 %
 
Circulation
    11,688       10,864       41,761       14.5       15.6       21.1  
 
Job printing and other
    10,000       9,407       25,810       12.4       13.5       13.0  
     
     
     
     
     
     
 
Total operating revenues
    80,542       69,626       197,948       100.0       100.0       100.0  
     
     
     
     
     
     
 
Operating costs:
                                               
 
Newsprint
    6,810       5,210       32,769       8.5       7.5       16.6  
 
Compensation costs
    43,511       33,713       77,005       54.0       48.4       38.9  
 
Other operating costs
    33,648       31,539       122,300       41.8       45.3       61.7  
 
Depreciation
    1,556       1,301       6,661       1.9       1.9       3.4  
 
Amortization
                5,167                   2.6  
     
     
     
     
     
     
 
Total operating costs
    85,525       71,763       243,902       106.2       103.1       123.2  
     
     
     
     
     
     
 
Operating loss
  $ (4,983 )   $ (2,137 )   $ (45,954 )     (6.2 )%     (3.1 )%     (23.2 )%
     
     
     
     
     
     
 

     2003 Compared with 2002

      Operating revenues in the Canadian Newspaper Group in 2003 were $80.5 million compared with $69.6 million in 2002. The increase in revenue was primarily a reflection of the strengthening Canadian dollar against the U.S. dollar, although there were increases in revenue in local currency. During 2003, advertising revenue was higher primarily due to growth of the economy in general. This growth was partly offset by a reduction of advertising during the fourth quarter in the automobile sector. Circulation levels remained relatively constant in 2003 compared to 2002.

      The operating loss of the Canadian Newspaper Group was $5.0 million in 2003 compared to $2.1 million in 2002. The 2003 results for the Canadian Newspaper Group included an increase in pension and post-retirement obligation expense of Cdn. $5.8 million primarily relating to employees formerly employed by Southam Inc. and in respect of whom the obligations were not assumed by CanWest, purchaser of the related newspapers. In addition, the cost of newsprint increased slightly, but this was partially offset by management of the amount of newsprint used. The effect of the increase in foreign exchange rates on operating costs was approximately offset by the increase in revenue.

      The Canadian Newspaper Group experienced an increase in competition in certain markets where the Company has publications. This did not have a significant effect on results in 2003, but may become a factor in 2004 as competing newspaper groups are aggressively entering markets, both where the Company publishes and where it does not currently publish.

 
2002 Compared with 2001

      Operating revenues were $69.6 million in 2002 and $197.9 million in 2001, a decline of $128.3 million. The primary reason for the decline was the sale of the Company’s remaining 50% interest in the National Post to CanWest at the end of August 2001 and the sale of a large number of the Canadian community newspaper properties to Osprey Media in July and November of 2001. Beyond that, advertising revenues at operations owned in both years declined during the year, particularly for the magazine group. Same store revenues were

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Cdn.$108.8 million in 2002 compared with Cdn. $114.1 million in 2001. Exchange rates had a small adverse impact on revenues.

      Operating loss in 2002 was $2.1 million compared to $46.0 million in 2001. The reduction in operating loss was largely due to the sale of the remaining 50% interest in the National Post. Operating income in 2001 was also adversely affected by overhead costs of Cdn.$3.8 million that were not incurred in 2002 as well as a charge of Cdn.$2.6 million relating to retired employee obligations of the newspaper properties sold to CanWest in 2000, which obligations were retained by the Company. The comparable expense in 2002 was Cdn.$4.4 million.

 
Investment and Corporate Group

      The following table sets forth, for the Investment and Corporate Group, for the periods indicated, certain results of operations items.

                           
Year Ended December 31,

2003 2002 2001



(Dollars in thousands)
Operating costs:
                       
 
Compensation costs
  $ 10,686     $ 3,171     $ 2,773  
 
Other operating costs
    31,089       14,324       13,544  
 
Depreciation
    1,821       1,720       1,356  
 
Amortization
                681  
     
     
     
 
Total operating costs
    43,596       19,215       18,354  
     
     
     
 
Operating loss
  $ (43,596 )   $ (19,215 )   $ (18,354 )
     
     
     
 
 
2003 Compared with 2002

      Operating costs of the Investment and Corporate Group were $43.6 million in 2003 compared with $19.2 million in 2002. Included in the costs for the Investment and Corporate Group in 2003 was $10.1 million relating to the investigation and review being conducted by the Special Committee and related litigation. These costs were reflected as other operating costs in the Company’s Consolidated Statement of Operations. Included in the $10.1 million are legal fees and other professional fees related to the Special Committee investigation and related litigation and legal fees of approximately $1.6 million advanced by the Company on behalf of current and former directors and officers. The Company also incurred stock-based compensation charges of approximately $6.7 million in 2003. These costs were incurred as a result of modifications made to options granted to individuals that lengthened the period of time that their options would be exercisable after their employment with the Company was terminated and the impact of repriced options. Included in the $6.7 million is a charge of approximately $800,000 related to the extension of the option exercise period granted to Radler as part of the Restructuring Agreement.

      As noted in the description of the Special Committee Report (“Item 1 — Business — Recent Developments — Report of the Special Committee”), the Company terminated the management services agreements with RMI, Moffat and Black-Amiel effective June 1, 2004. Under the Restructuring Agreement, the Company proposed to pay fees totalling approximately $500,000 for the five-month period ended June 1, 2004. RMI did not respond to the proposal except to assert that the previously existing level of fees should be maintained. During 2003, the Company incurred costs of approximately $7.5 million related to the maintenance and use of the corporate aircraft. Of this amount, approximately $1.2 million was charged to Hollinger Inc. Both the management fees and aircraft costs were incurred at the corporate group level and allocated, in part, to the operating segments in 2003, 2002 and 2001. With the termination of the management services agreement and the sale of one aircraft and lease cancellation of the other, similar charges will not be incurred in future periods. While the Company is expecting to see savings as a result of the above changes, it has also incurred new costs in relation to relocating part of its corporate office function from Toronto, Ontario

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to Chicago, Illinois, as well as costs in relation to developing and strengthening the Company’s systems of internal controls.
 
2002 Compared with 2001

      Operating costs of the Investment and Corporate Group were $19.2 million, compared with $18.4 million in 2001, an increase of $800,000.

Liquidity and Capital Resources

      The Company believes it has sufficient liquidity to meet its financial obligations for the foreseeable future with liquidity available from cash on hand, the sale of assets, operating cash flows and debt financing.

      Using proceeds from the sale of the Telegraph Group on July 30, 2004, the Company fully repaid and cancelled its Senior Credit Facility and purchased and retired substantially all of its 9% Senior Notes through a tender offer and consent solicitation. All but $9.4 million of the $300.0 million in principal amount of the 9% Senior Notes were purchased through the tender and all covenants were removed on the untendered 9% Senior Notes. The Company has since purchased in the open market and retired an additional $3.4 million in principal amount of the 9% Senior Notes. After the sale of the Telegraph Group and debt reduction, as of September 30, 2004, the Company had $747.6 million in cash and $14.4 million in long-term debt.

      With the sale of the Telegraph Group, the Company is heavily dependent upon the Chicago Group for cash flow. That cash flow in turn is dependent on the Chicago Group’s ability to sell advertising in its market. The Company’s cash flow is expected to continue to be cyclical, reflecting changes in economic conditions.

      The following table summarizes the Company’s cash and debt positions as of the dates indicated:

                 
September 30, 2004 December 31, 2003


(In thousands)
Cash and cash equivalents
  $ 747,611     $ 134,494  
     
     
 
8.625% Senior Notes, due 2005
    5,082       5,082  
9% Senior Notes due 2010
    6,000       300,000  
Senior Credit Facility (including current portion)
          217,129  
Obligations under capital lease
          1,944  
Other
    3,314       5,117  
     
     
 
Total long-term debt
  $ 14,396     $ 529,272  
     
     
 

      Currently, there are activities underway or under consideration that will reduce the Company’s cash position as compared to the cash position as of September 30, 2004. The Company is attempting to purchase the remaining $6.0 million in principal amount of the 9% Senior Notes. On December 16, 2004, the Board of Directors declared a Special Dividend on the Company’s Class A and Class B Common Stock in an aggregate amount of approximately $227.0 million payable on January 18, 2005. The Board of Directors intends to distribute an additional amount of approximately $273.0 million either by way of a tender offer or a second special dividend. There can be no assurance that the second distribution will be made or, if made, whether it will be in the form of a tender offer or a dividend, and if a tender offer, as to the price or form such offer will take. On December 16, 2004, the Board of Directors also declared a regular quarterly dividend in the amount of $0.05 per share payable on the Company’s Class A and Class B Common Stock on January 18, 2005.

      On November 30, 2004, the Company paid the National Post Company Cdn.$26.5 million (including interest and costs) in full satisfaction of a judgment obtained against the Company. The judgment was in relation to a dispute arising from CanWest’s purchase of the Company’s remaining 50% interest in the National Post. On December 15, 2004, the Company completed the sale of The Palestine Post Limited, the publisher of The Jerusalem Post and related publications for $13.2 million. On November 19, 2004, the Company received approximately $133.6 million from the sale to CanWest of its beneficial interest in the CanWest Debentures held by the Company and residual interests in the Participation Trust that was

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attributable to foreign currency exchange. The Company also recently completed the sale of its 50% real estate joint venture interest in Chicago and related real estate for net proceeds of $70.7 million.

      The Company also recognizes that there may be significant cash requirements in the future regarding certain currently unresolved tax issues (both U.S. and foreign). As of December 31, 2003, the Company has recorded accruals to cover contingent liabilities for income taxes, which are presented as other tax liabilities classified as follows in the Company’s Consolidated Balance Sheet:

         
December 31, 2003

(In thousands)
Classified as current liabilities
  $ 455,599  
Classified as non-current liabilities
    293,211  
     
 
    $ 748,810  
     
 

      The accruals are intended to cover contingent liabilities related to additional taxes and interest the Company may be required to pay. See Note 24 of Notes to Consolidated Financial Statements. In periods subsequent to December 31, 2003, the Company will continue to record provisions to cover contingent liabilities for additional interest it may be required to pay in various tax jurisdictions.

      A substantial portion of the accruals to cover contingent liabilities for income taxes relate to the tax treatment of gains on the sale of a portion of the Company’s non-U.S. operations. Strategies have been and may be implemented that may also defer and/or reduce these taxes, but the effects of these strategies have not been reflected in the accounts. The accruals to cover contingent tax liabilities also relate to management fees, “non-competition” payments and other items that have been deducted in arriving at taxable income, which deductions may be disallowed by taxing authorities. If those deductions were to be disallowed, the Company would be required to pay additional taxes and interest since the dates such taxes would have been paid had the deductions not been taken, and it may be subject to penalties. The timing and amounts of any payments the Company may be required to make is uncertain.

      As discussed under “Item 3 — Legal Proceedings”, the Company is currently involved in several legal actions as both plaintiff and defendant. These actions are in preliminary stages and it is not yet possible to determine their ultimate outcome. At this time the Company cannot estimate the impact these actions may have on its future cash requirements.

 
Cash Flows

      Cash flows provided by operating activities were $100.9 million for 2003, compared with $56.4 million in 2002, an increase of $44.5 million or 78.9%. The comparison of operating cash flows between years is affected by several key factors. First, the net loss before the cumulative effect of the change in accounting principle of $20.1 million (a non-cash item) has decreased by $136.3 million from $210.6 million in 2002 to $74.3 million in 2003. The single most important reason for the reduced loss was that the Company had a foreign exchange gain of $114.1 million in 2003 as compared to a foreign exchange loss of $86.9 million in 2002, resulting in a variance of $201.0 million between years; the non-cash portion of the variance in foreign currency exchange items was $189.2 million. Second, the Company increased its accounts payable and accrued expenses in 2003 by $33.3 million ($24.1 million of which was due to the accrual of restitution and settlement costs associated with the circulation matters at the Chicago Sun-Times) as compared to a decrease of $27.0 million in 2002, resulting in a variance of $60.3 million. Other than the restitution and settlement cost accrual, the variance was largely attributable to changes in the timing of cash payments of payables and accruals. Other significant variances in cash flow items between years were related to reduced levels of non-cash write-downs of investments and property, plant and equipment, and to increased levels of non-cash provisions for deferred income taxes and other tax liabilities.

      Working capital consists of current assets less current liabilities. At December 31, 2003, working capital, excluding debt obligations and escrow funds and restricted cash was a deficiency of $364.3 million compared to a deficiency of $233.7 million at December 31, 2002, excluding debt obligations, restricted cash and funds

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held in escrow to repay debt. Current assets, excluding escrow funds and restricted cash, were $427.2 million at December 31, 2003 and $371.5 million at December 31, 2002. Current liabilities, excluding debt obligations, were $791.5 million at December 31, 2003, compared with $605.2 million at December 31, 2002.

      Cash flows used in investing activities in 2003 were $0.6 million compared with cash flows used in investing activities of $27.4 million in 2002. The decrease in cash used in investing activities is primarily the result of proceeds the Company received as a result of the early redemption of CanWest Debentures that occurred during 2003. This cash inflow was partially offset by purchases of property, plant and equipment of approximately $14.7 million. The Company has incurred capital expenditures of approximately $10.3 million through September 30, 2004 in relation to the relocation of the offices of the Chicago Sun-Times. See “— Capital Expenditures.”

      Cash flows used in financing activities were $113.9 million in 2003 and $404.9 million in 2002. The cash used in financing activities decreased primarily due to the timing of borrowings in late 2002 used for the repayment of debt in early 2003. At year-end 2002, the Company had a significant amount of cash on hand that was restricted to be used for the repayment of debt. This repayment happened during the first quarter of 2003. The other significant cash outflow from financing activities was the payment of the quarterly dividends. The Company’s regular dividend payments in 2004 remained at a level similar to 2003.

      During 2003, the Company repaid $543.8 million of its 9.25% Senior Subordinated Notes due in 2006 and 2007, including early redemption premiums and accrued interest. These notes were classified as current at December 31, 2002 and repaid with some of the proceeds which were held in escrow at December 31, 2002, from the issuance of 9% Senior Notes and the Senior Credit Facility. Most proceeds from the issuance of the 9% Senior Notes and drawings under the Senior Credit Facility were held in escrow at December 31, 2002 and used in 2003 for the repayments.

 
Debt

      Long-term debt, including the current portion, was $529.3 million at December 31, 2003 compared with $1,084.4 million at December 31, 2002. During 2003, the Company retired $504.9 million principal amount of the 9.25% Senior Subordinated Notes due in 2006 and 2007. The Company also repaid $2.9 million of debt due under its Senior Credit Facility as scheduled, and reduced other debt by $3.1 million. In addition, the Company made an unscheduled repayment of approximately $45.0 million under its Senior Credit Facility on September 30, 2003. Interest rate and foreign currency swaps entered into to manage interest rate and currency risk associated with the borrowings under the Senior Credit Facility and the 9% Senior Notes were adjusted to reflect the unscheduled $45.0 million repayment at a cost of approximately $700,000. This amount was not paid in cash but was factored into the revised swap rates.

      As discussed earlier, the Company completed its sale of the Telegraph Group on July 30, 2004 and received proceeds of approximately $1,323.9 million (£729.6 million at US $1.8145 to £1 as of the date of sale). The Company used approximately $213.4 million of these proceeds to fully repay and cancel the Company’s Senior Credit Facility. In addition, the Company paid approximately $2.1 million in fees related to this early repayment and $32.3 million in fees to terminate the cross-currency interest rate swaps the Company had in place with respect to the Senior Credit Facility.

      In June 2004, the Company commenced a tender offer and consent solicitation to purchase and retire, and eliminate the covenants with respect to, the 9% Senior Notes. Upon the tender offer closing on July 30, 2004, approximately 97% of the 9% Senior Notes were tendered and the covenants were removed from the 9% Senior Notes that remained outstanding. The Company used proceeds from the sale of the Telegraph Group to purchase and retire approximately $294.0 million in principal and interest of the 9% Senior Notes. The Company incurred costs of approximately $61.2 million related to premiums to retire the debt, interest rate swap cancellation costs and other fees. During September 2004, the Company purchased another $3.4 million in principal amount of the 9% Senior Notes on the open market and retired them for a total cost (principal, accrued interest, premium and fees) of approximately $3.9 million.

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Leases

      The Company is party to several leases for facilities and equipment. These leases are primarily operating leases in nature. In 2004, the Company entered into a new 15-year operating lease related to the relocation of the offices of the Chicago Sun-Times. See “— Capital Expenditures.”

 
Capital Expenditures

      The Chicago 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 for the foreseeable future. In 2004, the Chicago Sun-Times entered into a 15-year operating lease for new office space and incurred costs of approximately $10.3 million related to leasehold improvements and other capital expenditures through September 30, 2004. During 2003, the Chicago Group spent approximately $7.9 million on telemarketing costs and expects to spend approximately $7.6 million in 2004 on these costs.

 
Dividends and Other Commitments

      On December 16, 2004, from the proceeds of the sale of the Telegraph Group, the Board of Directors declared a Special Dividend on the Company’s Class A and Class B Common Stock in an aggregate amount of approximately $227.0 million payable on January 18, 2005, this being the first tranche of a total amount of $500.0 million which the Board of Directors determined was in the best interest of the Company and its stockholders to be distributed to its stockholders. The Board of Directors intends to distribute approximately $273.0 million of the proceeds from the sale of the Telegraph Group, this being the second tranche of the $500.0 million cash distribution, either by way of a tender offer or a second special dividend. There can be no assurance that the second distribution will be made or, if made, whether it will be in the form of a tender offer or a dividend, and if a tender offer, as to the price or form such offer will take. The Board of Directors believes that following the Special Dividend and the second distribution, the Company will have sufficient liquidity to fund its operations and obligations and to avail itself of strategic opportunities.

      On December 16, 2004, the Board of Directors also declared a regular quarterly dividend in the amount of $0.05 per share payable on the Company’s Class A and Class B Common Stock on January 18, 2005.

      The Company expects its internal cash flow and cash on hand to be adequate to meet its foreseeable dividend requirements.

 
Off-Balance Sheet Arrangements

      Hollinger Participation Trust — As part of the November 16, 2000 purchase and sale agreement with CanWest, the Company was prohibited from selling the CanWest Debentures received in partial consideration prior to March 15, 2003. In order to monetize this investment, the Company entered into a participation agreement in August 2001 pursuant to which the Company sold participation interests in Cdn.$540.0 million (US $350.0 million) principal amount of CanWest Debentures to the Participation Trust, administered by an independent trustee. The sale of participation interests was supplemented by an additional sale of Cdn. $216.8 million (US $140.5 million) in December 2001. The Company remained the record owner of the participated CanWest Debentures and was required to make payments to the Participation Trust with respect to those debentures if and to the extent the Company received payments in cash or in kind on the debentures from CanWest. Coincident with the Participation Trust’s purchase of the participation interests, the Participation Trust issued and sold Trust Notes to third parties in an arm’s length transaction to finance the purchase of the participation interests. These transactions resulted in net proceeds to the Company of $401.2 million and for accounting purposes were accounted for as sales in accordance with SFAS No. 140. The net loss on the transactions, including realized holding losses on the debentures, amounted to $62.1 million and were included in “Other income (expense), net” for the year ended December 31, 2001.

      On April 10, 2003, CanWest notified the Company of its intention to redeem Cdn.$265.0 million of the CanWest Debentures on May 11, 2003. On May 11, 2003, CanWest redeemed Cdn.$265.0 million principal

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amount of the CanWest Debentures plus interest accrued to the redemption date of Cdn.$8.8 million for a total of Cdn.$273.8 million ($197.2 million), of which Cdn.$246.6 million was payable to the Participation Trust. This amount, converted at the contractual fixed rate of $0.6482 for each Canadian dollar, totaled $159.8 million and was delivered to the Participation Trust on May 11, 2003. The balance of the proceeds of $37.4 million, less the amounts paid under a cross currency swap of $9.8 million, or $27.6 million, was retained by the Company in respect of its interest in the CanWest Debentures. Of the proceeds retained by the Company, an estimated $16.7 million was restricted cash under the terms of the Participation Trust and unavailable for general corporate purposes as of December 31, 2003.

      On October 7, 2004, the Company entered into an agreement with CanWest, pursuant to which the parties agreed to redeem the CanWest Debentures and dissolve the Trust. CanWest exchanged the Trust Notes for new debentures issued by CanWest. The CanWest Exchange Offer was completed on November 18, 2004. The Company received approximately $133.6 million in respect of the CanWest Debentures beneficially owned and the residual interests in the Participation Trust, attributable to foreign currency exchange. The CanWest Exchange Offer resulted in the exchange of all outstanding Trust Notes issued by the Participation Trust with debentures issued by a wholly-owned subsidiary of CanWest and the unwinding of the Participation Trust. As a consequence, all exposure the Company previously had to foreign exchange fluctuations under the Participation Trust was fixed at that date. The Company was also relieved of all its obligations under the Participation Trust Agreement including the requirement to maintain cash on hand to satisfy needs of the Participation Trust, which removed the restrictions on the $16.7 million reflected as “Escrow deposits and restricted cash” on the Company’s Consolidated Balance Sheet at December 31, 2003.

      Joint Venture Arrangements — The Company was a venture partner in two joint ventures in the U.K. These ventures were created for the purpose of realizing synergies and cost reductions by combining the production process of the U.K. Newspaper Group and the joint venture partners. The joint ventures were operated to break-even over the long term and provided printing services to the Company and its venture partner, and charged the Company based on the amount of printing done. As reported in “Newsprint incurred through joint ventures,” the Company’s newsprint costs in relation to publications produced at the joint ventures were $75.4 million in 2003 ($60.6 million in 2002). During 2003, the Company incurred charges of $49.7 million ($46.7 million in 2002). These charges are included in “Other operating costs incurred through joint ventures” in the Consolidated Statements of Operations. The Company’s interest in these joint ventures was sold in connection with the sale of the Telegraph Group on July 30, 2004.

      At December 31, 2003, pursuant to a joint venture agreement in the U.K., the Company has agreed to guarantee up to £500,000, if required, in connection with borrowing by the joint venture. The Company was released from this guarantee upon completion of the sale of the Telegraph Group in 2004.

      Derivatives — The Company used swap agreements to address currency and interest rate risks associated with the 9% Senior Notes and the Senior Credit Facility.

      The Company entered into two cross-currency interest rate swap transactions to hedge principal and interest payments on U.S. dollar borrowings under the Senior Credit Facility. The Company marked-to-market the value of the swaps on a quarterly basis, with the gains or losses recorded as a component of “Other income (expense), net” in the Consolidated Statements of Operations.

      Publishing entered into interest rate swaps to convert $150.0 million and $100.0 million principal amount of its 9% Senior Notes issued in December 2002 to floating rates. The Company marked-to-market the value of the swaps on a quarterly basis, with the gains or losses recorded as a component of “Interest expense” in the Consolidated Statements of Operations. The fair value of these contracts and swaps as of December 31, 2003 and December 31, 2002 is included in the Consolidated Balance Sheets in “Other liabilities.”

      As discussed under “— Liquidity and Capital Resources — Debt” above, in 2004 the Company terminated the swap agreements related to the Senior Credit Facility and the 9% Senior Notes when these debts were repaid, or substantially retired, using the proceeds from the sale of the Telegraph Group. The Company incurred $32.3 million of fees to cancel the cross-currency interest rate swaps on the Senior Credit Facility, and $10.5 million related to the interest rate swaps on the 9% Senior Notes.

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Commercial Commitments and Contractual Obligations

      In connection with the Company’s insurance program, letters of credits are required to support certain projected workers’ compensation obligations. At December 31, 2003, letters of credit in the amount of $4.2 million were outstanding.

      Set out below is a summary of the amounts due and committed under the Company’s contractual cash obligations at December 31, 2003:

                                         
Due in
1 Year or Due Between 1 Due Between 3 Due Over
Total Less and 3 Years and 5 Years 5 Years





(Dollars in thousands)
Existing Senior and Senior Subordinated Notes(1)
  $ 5,082     $     $ 5,082     $     $  
9% Senior Notes(2)
    300,000                         300,000  
Senior Credit Facility(3)
    217,129       2,748       6,298       6,899       201,184  
Other long-term debt
    5,117       2,033       2,558       524       2  
Capital lease obligations(4)
    1,944       1,944                    
Operating leases(5)
    13,253       4,250       4,825       2,786       1,392  
Operating leases(6)
    131,379       9,907       19,599       19,416       82,457  
     
     
     
     
     
 
Total contractual cash obligations
  $ 673,904     $ 20,882     $ 38,362     $ 29,625     $ 585,035  
     
     
     
     
     
 


(1)  The notes that remain outstanding will mature in 2005.
 
(2)  In August 2004, using proceeds from the sale of the Telegraph Group, the Company retired approximately $294.0 million of principal and interest of the 9% Senior Notes by way of a tender offer. The Company incurred costs of approximately $61.2 million related to premiums to retire the debt, interest rate swap cancellation costs and other fees. During September 2004, the Company purchased another $3.4 million in principal amount of the 9% Senior Notes on the open market and retired such notes for a total cost (principal, accrued interest, premium and fees) of approximately $3.9 million. See “— Liquidity and Capital Resources.”
 
(3)  The Company used approximately $213.4 million of the proceeds from the sale of the Telegraph Group to repay all amounts outstanding under the Senior Credit Facility. In addition, the Company paid approximately $2.1 million in fees related to this early repayment and $32.3 million in fees to cancel cross-currency interest rate swaps the Company had in place with respect to amounts outstanding under the Senior Credit Facility.
 
(4)  The capital lease obligation was held at the Telegraph Group. This obligation remained with the Telegraph Group upon its sale.
 
(5)  In 2004, the Chicago Sun-Times sold its interest in the property on which a portion of its operations were situated and moved those operations to new premises. In connection with this move, the Chicago Sun-Times entered into a 15-year operating lease for new office space. The new lease payments, which average amount approximates $3.4 million per year, are not reflected in the above table.
 
(6)  Amounts represent operating leases at the Telegraph Group and The Jerusalem Post, both of which were sold in 2004. See Note 28(c) of Notes to Consolidated Financial Statements.

      In addition to amounts committed under its contractual cash obligations, the Company also assumed a number of contingent obligations by way of guarantees and indemnities in relation to the conduct of its business and disposition of its assets. In addition, the Company is involved in various matters in litigation. For more information on the Company’s contingent obligations, see “Item 3 — Legal Proceedings” and Note 22 of Notes to Consolidated Financial Statements.

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Recent Accounting Pronouncements

      In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 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” (“SFAS No. 133”). 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 meaning of “underlying” to conform it to the language used in the FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34” (“FIN 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 adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

      In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Some provisions of this Statement are consistent with the FASB’s proposal to revise the definition of liabilities in FASB Concepts Statement No. 6, “Elements of Financial Statements”, to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 as of July 1, 2003. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

      In December 2003, the FASB issued SFAS No. 132, (revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132R”). This Statement retains the disclosures required by Statement 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable, and required additional information on changes in the benefit obligations and fair values of plan assets. Additional disclosures have been added in response to concerns expressed by users of financial statements; those disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.

      In December 2003, the FASB issued a revised version of Financial Interpretation No. 46, “Variable Interest Entities” (“FIN 46R”). FIN 46R requires an entity to evaluate investments that are held to determine firstly, whether or not the entity invested in is a variable interest entity, as defined, and secondly, if the investing entity is the primary beneficiary of the variable interest entity. The results of this analysis will determine if an entity will be required to consolidate the results of the investee, regardless of the actual ownership percentage. The Company does not expect that the adoption of FIN 46R will have a material effect on the Company’s consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”). SFAS 123R addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services. It also addresses transactions in which an enterprise incurs liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of those equity instruments in exchange for employee services. For public entities, the cost of employee services received in exchange for equity instruments, including employee stock options, is to be measured on the grant-date fair value of those instruments. That cost is to be recognized as compensation expense over the service period, which would normally be the vesting period. SFAS 123R is effective as of the first interim or annual reporting period that begins after June 15, 2005; the Company will adopt SFAS 123R in the third quarter of fiscal 2005. The Company has not yet determined the impact SFAS 123R will have on its results of operations.

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Item 7A. Quantitative and Qualitative Disclosure About Market Risk

      Newsprint. On a consolidated basis, newsprint expense for the years ended December 31, 2003, 2002 and 2001 amounted to $148.3 million, $147.5 million and $204.4 million, respectively. Newsprint prices have varied widely from time to time and management believes they could continue to show significant price variations in the future. During the first half of 2001, newsprint prices in North America were at their highest price per tonne since 1994 and 1995. However, the economic environment in 2001 caused a significant decline in industry consumption and this, coupled with an abundant supply of competitively priced newsprint, resulted in a downward trend in prices during the second half of 2001. This downward trend continued into 2002. Newsprint prices fluctuated during 2003. Management believes that newsprint prices will continue to show significant price variation in the future. Suppliers implemented a newsprint increase of $35.00 per tonne during the second quarter and another $25.00 per tonne in the fourth quarter of 2003, the effects of which were limited to the Chicago Group and Canadian Group operations. In the United Kingdom, the Company negotiated prices for one-year periods. 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 2003, a change in the price of newsprint of $50.00 per tonne would have increased or decreased 2003 net loss by approximately $8.9 million.

      Interest Rates. At December 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 reset every six months in arrears on June 15 and December 15. A 1% change in interest rate would have resulted in a change in interest costs in respect of such debt of approximately $2.5 million.

      Foreign Exchange Rates. During 2003, a substantial portion of the Company’s income was earned outside of the United States in currencies other than the United States dollar. In addition, in 2001, the Company sold participations in Canadian dollar-denominated CanWest Debentures to the Participation Trust in exchange for U.S. dollars. The Company retained certain foreign exchange exposure in respect of this transaction. As a result, the Company’s earnings have been vulnerable to changes in the value of the United States dollar relative to the U.K. pound and the Canadian 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 2003, a 5 percent change in the key foreign currencies would have had the following effect on the Company’s reported net loss for 2003:

                 
Actual
Average 2003
Rate Increase/Decrease


(In thousands)
United Kingdom
  $ 1.6348/£     $ 281  
Canada(1)
  $ 0.7157/Cdn$     $ 26,195  


(1)  Included in the exposure relating to the Canadian dollar noted above is $28.4 million attributable to the CanWest Debentures held by the Participation Trust described below.

      In 2001, the Company sold participation interests in Cdn.$756.8 million principal amount of CanWest Debentures to the Participation Trust at an exchange rate of $0.6482 to each Canadian dollar, which translated into $490.5 million. Prior to the unwinding of the Participation Trust in November 2004, under the terms of the Participation Trust documents, the Company was required to deliver to the Participation Trust $490.5 million of the CanWest Debentures at then current exchange rates plus interest received. In addition, until November 5, 2005, CanWest was entitled to elect to pay interest on the debentures in kind or by the issuance of shares.

      As the CanWest Debentures were denominated in Canadian dollars, the Company entered into forward foreign exchange contracts in 2001 to mitigate the currency exposure. The foreign currency contracts required the Company to sell Cdn.$666.6 million on May 15, 2003 at a forward rate of $0.6423. In 2002, the Company sold certain of its foreign currency contracts and subsequently entered into additional foreign currency contracts. However, on September 30, 2002, all of the outstanding contracts were unwound resulting in the net

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cash receipt of $6.3 million by the Company after discounting for early settlement. This amount was included in “Other income (expense), net” for 2002. The Company discontinued the hedging of this foreign exchange exposure, due to constraints under the Company’s then outstanding debt facilities.

      On April 10, 2003, CanWest notified the Company of its intention to redeem Cdn.$265.0 million of the CanWest Debentures on May 11, 2003. On May 11, 2003, CanWest redeemed Cdn.$265.0 million principal amount of the CanWest Debentures plus interest accrued to the redemption date of Cdn.$8.8 million for a total of Cdn.$273.8 million ($197.2 million), of which Cdn.$246.6 million was payable to the Participation Trust. This amount, converted at the fixed rate of $0.6482 for each Canadian dollar, totaled $159.8 million and was delivered to the Participation Trust on May 11, 2003. The balance of the proceeds of $37.4 million, less the amounts paid under a cross currency swap of $9.8 million, or $27.6 million, was retained by the Company in respect of its interest in Debentures, in which participations were not sold to the Participation Trust. Of the proceeds retained by the Company, an estimated $16.7 million was restricted cash under the terms of the Participation Trust and unavailable for general corporate purposes as of December 31, 2003.

      A $0.05 change in the U.S. dollar to Canadian dollar exchange rate applied to the Cdn.$733.3 million principal amount of the CanWest Debentures at December 31, 2003 would result in a $36.7 million loss or gain to the Company.

      On October 7, 2004, the Company entered into an agreement with CanWest, pursuant to which the parties agreed to redeem the CanWest Debentures and dissolve the Trust. CanWest exchanged the Trust Notes for new debentures issued by CanWest. The CanWest Exchange Offer was completed on November 18, 2004. The Company received approximately $133.6 million in respect of CanWest Debentures beneficially owned and residual interests in the Participation Trust attributable to foreign currency exchange. As a consequence, all exposure the Company previously had to foreign exchange fluctuations under the Participation Trust was eliminated at that date. The Company was also relieved of all of its obligations under the Participation Trust Agreement including the requirement to maintain cash on hand to satisfy needs of the Participation Trust, which removed the restrictions on the $16.7 million reflected as “Escrow deposits and restricted cash” on the Company’s Consolidated Balance Sheet at December 31, 2003. See “— Liquidity and Capital Resources — Off-Balance Sheet Arrangements.”

      Given the sale of the Telegraph Group in July 2004, the Company’s exposure to changes in the value of the British pound has been significantly reduced, effective as of the sale date.

 
Item 8. Financial Statements and Supplementary Data

      The information required by this item appears beginning at page 123 of this Form 10-K.

 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      Not applicable.

 
Item 9A. Controls and Procedures

      Pursuant to Rule 13a-15 under the Exchange Act, the Company’s management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with the participation of its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”). Based on that evaluation, for the reasons and in respect of the matters noted below, management concluded that the disclosure controls and procedures were ineffective as of December 31, 2003 in providing reasonable assurance that material information requiring disclosure was brought to management’s attention on a timely basis and that the Company’s financial reporting was reliable. Consequently, substantial additional procedures were undertaken and changes in disclosure controls and procedures effected in order that management could conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of financial statements contained in this filing.

      On June 17, 2003, the Board of Directors established a Special Committee ultimately comprising three new independent directors to investigate, among other things, certain allegations regarding various related

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party transactions, all as more fully disclosed under “Item 1 — Business — Recent Developments.” The Special Committee was further empowered to take any action, including the initiation of litigation, that the Special Committee deemed appropriate in its sole discretion including litigation against any director, officer or employee of the Company. One of the independent director members of the Special Committee, Paris, was subsequently appointed Interim Chairman and Interim CEO and President of the Company. Although he is an executive officer of the Company, his continued participation as a member of the Special Committee is not regarded by the Company as an impediment to the discharge of the Special Committee’s responsibilities or a matter that would otherwise affect the design and operation of the Company’s disclosure controls and procedures or a material weakness in internal controls.

      After the preliminary conclusions of the Special Committee were presented to the Board of Directors in November 2003, three steps in particular were undertaken that partially mitigated the effects of noted weaknesses in controls and procedures:

  •  The preliminary findings led to an agreement on November 15, 2003 which provided for, among other things: the retirement of Black as CEO of the Company; the resignations of Radler as an officer and director of the Company and Atkinson as a director of the Company; and the termination of Boultbee’s position as an officer of the Company.
 
  •  A payment approval process was established, under which all payments by the Company to related parties and third party payments in excess of specified dollar amounts were reviewed by an independent third party, Richard C. Breeden & Co., that serves as an advisor to counsel to the Special Committee.
 
  •  The Company consented to the entry of a partial final judgment and order of permanent injunction in an action brought by the SEC in the U.S. District Court for the Northern District of Illinois. The Court Order enjoins the Company from violating provisions of the Exchange Act, including the requirements to file accurate annual reports on Form 10-K and quarterly reports on Form 10-Q and to keep accurate books and records. The Court Order requires the Company to have the Special Committee complete its investigation and to permit the Special Committee to take whatever actions it, in its sole discretion, thinks necessary to fulfill its mandate. The Court Order also provides for the automatic appointment of Breeden as Special Monitor of the Company in order to complete the ongoing Special Committee investigation and protect the Company’s assets if certain actions are taken by the Board of Directors or stockholders of the Company that would interfere with the Special Committee’s investigation.

      In early 2004, the Company, through the Special Committee, commenced legal actions based upon the findings of further investigations by the Special Committee. See “Item 3 — Legal Proceedings” and Note 22 of Notes to Consolidated Financial Statements.

      On August 30, 2004, the Special Committee released its Report setting out the scope and results of its investigations . The Report was delivered to the SEC and the U.S. District Court for the Northern District of Illinois. In addition, on August 31, 2004, the Company filed a copy of the full Report with the SEC as an exhibit to a current report on Form 8-K, as amended by a current report on Form 8-K/ A filed with the SEC on December 15, 2004. See “Item 1 — Business — Recent Developments.”

      On November 15, 2004, the SEC filed a complaint with the federal courts in Illinois naming Black, Radler and Hollinger Inc. as defendants alleging that from at least 1999 through at least 2003 Black, Radler and Hollinger Inc. were liable for the Company’s failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP. The SEC also alleges that Black, Radler and Hollinger Inc., directly and indirectly, falsified or caused to be falsified books, records, and accounts of the Company in order to conceal their self-dealing from the Company’s public stockholders.

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      The Company’s management concluded that the following material weaknesses in the Company’s internal controls and ineffectiveness in the design and operation of the Company’s disclosure controls and procedures, among others, existed during the year ended or as of December 31, 2003:

  •  The “tone from the top” established by the former executive officers was inappropriate to the establishment of an environment in which strong systems of internal controls and disclosure controls and procedures are encouraged.
 
  •  Certain former executive officers of the Company, who were also executive officers at the Company’s various controlling stockholders, did not participate in open and timely communication with those responsible for the preparation of corporate reports or with the Board of Directors, in particular its independent members.
 
  •  The management and corporate organizational structures facilitated extraction of assets from the Company by way of related party transactions to benefit direct and indirect controlling stockholders.
 
  •  Common directorships, among certain former executive officers, at the Company and its direct and indirect parent companies and their affiliates, facilitated inappropriate related party transactions between the Company and those entities.
 
  •  The management and reporting structures fostered and maintained the perception of Ravelston and its direct and indirect subsidiaries being one consolidated corporate group, thus blurring the distinction between the interests of individual entities and their respective unaffiliated stockholders.
 
  •  The procedures for providing information to the Audit and Compensation Committees were inadequate.
 
  •  The Company and its direct and indirect parent companies and controlling stockholders did not retain separate legal counsel when appropriate.
 
  •  Clear and appropriate policies for the identification, reporting, approval and disclosure of related party and other significant transactions did not exist.
 
  •  Inadequate communication to employees of recourse they might have to report illegal or unethical activity without fear of retribution inhibited the identification and mitigation of inappropriate conduct.

      The above pervasive weaknesses directly or indirectly led to other material weaknesses or significant deficiencies in internal controls, such as inadequate documentation of business processes and internal controls.

      There have been a number of responses by the Company subsequent to December 31, 2003 to the material weaknesses in internal controls and ineffectiveness in the design and operation of disclosure controls and procedures identified above. Steps taken by the Company to strengthen the design and operation of its disclosure controls and procedures and systems of internal controls include:

  •  the segregation of the Company’s accounting function from that of its controlling stockholders;
 
  •  the Company’s retention of outside legal counsel independent of that of its controlling stockholders and hiring of a new in-house General Counsel;
 
  •  the termination of Black’s role as Chairman of the Board of Directors and all other executive roles;
 
  •  expansion of the internal audit group and clarification of its role;
 
  •  ongoing documentation of internal controls;
 
  •  communication to employees of the importance of the control environment, the Company’s code of ethics and the existence of “whistleblower” procedures; and
 
  •  the addition of an experienced, independent member of the Board of Directors to the Audit Committee.

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      In addition to the above, subsequent to December 31, 2003, the Company became aware that circulation figures for the Chicago Sun-Times and certain other publications had been overstated for a number of years starting in 1997. The failures to detect the practices that led to the overstatements can largely be attributed to the material weaknesses noted above insofar as the Company’s environment inhibited the establishment and functioning of proper systems of internal control. The Audit Committee completed its review of this matter and presented its findings to the Board of Directors on October 5, 2004. The Audit Committee made several recommendations to strengthen controls over the reporting of circulation, all of which will be implemented by the Company. See “Item 1 — Business — Recent Developments — The Chicago Sun-Times Circulation” and “— Description of Historical Business — Chicago Group — Circulation.”

      As noted in Item 6 — Selected Financial Data and Note 2 of Notes to Consolidated Financial Statements herein, the Company has restated its Consolidated Financial Statements with respect to income tax related assets, accruals, expenses and benefits. The Company’s management believes that such restatements indicate a material weakness in the procedures followed to calculate the Company’s current and deferred income tax provisions. The Company considers historical staffing levels inadequate to address the complexity of the Company’s corporate structure and related income tax calculations to be the primary underlying circumstance giving rise to the need for the income tax restatements. Subsequent to the years to which the restatements pertain and prior to the identification of the need for restatements, the Company had taken steps to bolster the size and capabilities of its tax department. The sale of the Telegraph Group and The Palestine Post Limited in 2004 have also served to reduce the complexity referred to. The Company will be undertaking a review of its corporate structure to identify further opportunities to reduce the complexity that exists.

      The combined impact of the events since June 2003, including the investigation by the Special Committee, the Strategic Process culminating in the sale of the Telegraph Group and The Palestine Post Limited, the move of the Chicago Sun-Times to new offices, the separation of the Company’s accounting function from that of its controlling stockholder, the retention of the Company’s books and records by its controlling stockholder, the investigation of circulation overstatements at the Chicago Group and preparation for the implementation of Section 404 of the Sarbanes-Oxley Act regarding internal controls, have strained the resources of the Company’s corporate and divisional finance and accounting groups and will continue to do so for a period of time. The Company has hired and continues to hire qualified individuals, either on a permanent or contract basis, to address the various demands on the accounting and finance staff; however, there is no assurance that the Company will not continue to experience disruption in the normal functioning of accounting and finance functions for a further period of time. The Company’s disclosure and internal controls are improving. However, the effectiveness of any system of controls and procedures, including the Company’s own, is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures and the inability to eliminate misconduct completely.

 
Item 9B. Other Information

      Not applicable.

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PART III

 
Item 10. Directors and Executive Officers of the Registrant

      The name, age and position held of each of the directors and executive officers of the Company as of December 31, 2004 are set forth below. All directors are elected on an annual basis.

     
Name and Age Position(s) with the Company


Barbara Amiel Black, 64
  Director
Conrad M. Black, 60
  Director
Richard R. Burt, 57
  Director
Daniel W. Colson, 57
  Director
John D. Cruickshank, 51
  Chief Operating Officer — Chicago Group
Paul B. Healy, 41
  Vice President, Corporate Development and Investor Relations
Henry A. Kissinger, 81
  Director
Peter K. Lane, 51
  Vice President and Chief Financial Officer
Shmuel Meitar, 61
  Director
Gordon A. Paris, 51
  Interim Chairman of the Board of Directors, Interim President and Chief Executive Officer
Richard N. Perle, 63
  Director
Graham W. Savage, 55
  Director
Raymond G.H. Seitz, 64
  Director
Robert T. Smith, 61
  Treasurer
James R. Thompson, 68
  Director
James R. Van Horn, 48
  Vice President, General Counsel and Secretary

      The name, principal occupation, business experience and tenure as a director of the Company and current directorships is set forth below. Unless otherwise indicated, all principal occupations have been held for more than five years.

      Barbara Amiel Black, Director. Barbara Amiel Black has served as a director of the Company since 1996. She served as Vice President, Editorial from September 1995 until March 18, 2004. Amiel Black is the wife of Black. After an extensive career in both on and off-camera television production, she was Editor of The Toronto Sun from 1983 to 1985; columnist of The Times and senior political columnist of The Sunday Times of London from 1986 to 1994; a columnist of The Telegraph from 1994 to 2004; and a columnist of Maclean’s magazine from 1977 to 2004. Amiel Black also served as a director of Hollinger Inc. until November 2004.

      Conrad M. Black, Director. Black has served as a director of the Company since 1990. He is Chief Executive Officer and Director of Argus Corporation Ltd., Toronto. Black has held these or similar positions since 1978. Black served as Chairman of the Board of Directors of the Company from 1978 until January 20, 2004 and as Chief Executive Officer of the Company from 1978 until November 2003. Black is the husband of Amiel Black. He served as a Director of Telegraph Group Limited, London, U.K., where he was Chairman, until March 2004. Black is Chairman of the Advisory Board of The National Interest (Washington) and a member of the International Advisory Board of The Council on Foreign Relations (New York). He sits in the British House of Lords as Lord Black of Crossharbour.

      Richard R. Burt, Director. Mr. Burt has served as a director since 1994. Mr. Burt has served as Chairman of Diligence, LLC, an information and security firm since 2001. He was a partner with McKinsey & Company, Inc. from 1991 to 1994. Mr. Burt served as Chief Negotiator in Strategic Arms Reduction Talks from 1989 to 1991 and as the United States Ambassador to the Federal Republic of Germany from 1985 to 1989. Mr. Burt currently serves as a director of IGT, Inc., EADS North America, Inc., and is a trustee of the Deutsche Scudder (New York) and the UBS Brinson mutual fund complexes.

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      Daniel W. Colson, Director. Colson has served as a director of the Company since 1995 and served as Chief Operating Officer from November 2003 to March 2004. He served as Vice Chairman from May 1998 to March 2004. He served as Deputy Chairman of The Telegraph from 1995 and as Chief Executive Officer of The Telegraph from 1994 to March 2004, and was Vice Chairman of The Telegraph from 1992 to 1995. Colson also served as Vice Chairman and as a director of the Company’s parent, Hollinger Inc., until December 2003 and serves as a director of Molson Inc. and Macyro Group (Canada) Inc., all of which are Canadian public reporting companies.

      John D. Cruickshank, Chief Operating Officer — Chicago Group. Mr. Cruickshank has served as the Chief Operating Officer — Chicago Group and Publisher of the Chicago Sun-Times since November 2003. Mr. Cruickshank served as Vice President Editorial and co-editor of the Chicago Sun-Times from 2000 to November 2003. Prior to joining the Chicago Sun-Times, Mr. Cruickshank served as Editor-in-Chief of The Vancouver Sun from 1995 to 2000. He had previously been Managing Editor of The Globe and Mail in Canada.

      Paul B. Healy, Vice President, Corporate Development and Investor Relations. Mr. Healy has served as Vice President, Corporate Development and Investor Relations since 1995. Prior thereto, Mr. Healy was a Vice President of The Chase Manhattan Bank, N.A. for more than five years prior to October 1995, serving as a corporate finance specialist in the media and communications sector.

      Henry A. Kissinger, Director. Mr. Kissinger has served as a director since 1996. Mr. Kissinger has served as Chairman of Kissinger Associates Inc., an international consulting firm, since 1982. Mr. Kissinger served as the 56th Secretary of State from 1973 to 1977. He also served as Assistant to the President for National Security Affairs from 1969 to 1975 and as a member of the President’s Foreign Intelligence Advisory Board from 1984 to 1990. Mr. Kissinger currently serves on the Advisory Board of American Express Company and the JP Morgan International Advisory Council. He currently serves as Chairman of the International Advisory Board of American International Group, Inc., and Director Emeritus of Freeport-McMoran Copper and Gold Inc., all of which are United States public reporting companies, and as a director of ContiGroup Companies, Inc.

      Peter K. Lane, Vice President and Chief Financial Officer. Mr. Lane has served as Vice President and Chief Financial Officer since October 2002. Mr. Lane was Chief Financial Officer of Southam Publications from 2000 to 2002, and prior to that as Chief Financial Officer of Philip Utilities Management Corporation.

      Shmuel Meitar, Director. Mr. Meitar has served as a director since 1996. Mr. Meitar also serves as Vice Chairman of Aurec Ltd., a leading provider of communications, media and information services. Mr. Meitar was a director of The Jerusalem Post from 1992 to 2002 and also serves as a director of Golden Pages Publications Ltd., an Israeli company.

      Gordon A. Paris, Interim Chairman of the Board of Directors, Interim President and Chief Executive Officer. Paris has served as a director since May 2003. He was appointed Interim Chairman in January 2004 and as Interim President and Chief Executive Officer in November 2003. Paris is also a Managing Director and Head of the Media and Telecommunications and Restructuring Groups at Berenson & Company, a private investment bank. Prior to joining Berenson & Company in February 2002, Paris was Head of Investment Banking at TD Securities (USA) Inc., a subsidiary of The Toronto-Dominion Bank. Paris joined TD Securities (USA) Inc. as Managing Director and Group Head of High Yield Origination and Capital Markets in March 1996 and became a Senior Vice President of The Toronto-Dominion Bank in 2000.

      Richard N. Perle, Director. Perle has served as a director since 1994. Perle has been a resident fellow of the American Enterprise Institute for Public Policy Research, since 1987. He was the Assistant Secretary for the United States Department of Defense, International Security Policy from 1981 to 1987. He was co-chairman of Hollinger Digital and a director of The Jerusalem Post, both of which are subsidiaries of the Company. Perle serves as a director of Tapestry Pharmaceuticals and Autonomy Inc., both of which are United States public reporting companies.

      Graham W. Savage, Director. Mr. Savage has served as a director since July 2003. Mr. Savage served for 21 years, seven years as the Chief Financial Officer, at Rogers Communications Inc., a major Toronto-based

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media and communications company. Mr. Savage currently serves as Executive Chairman of Callisto Capital LP, a merchant banking firm based in Toronto, as a director and a member of the audit committee of Canadian Tire Corp., as a director and member of the audit committee of Canadian Tire Bank (a subsidiary of Canadian Tire Corp.), as a director of Vitran Corp., where he serves as Chairman of the audit committee and as a director of Leitch Technology Corp. where he also chairs the audit committee. All of the above companies, except Canadian Tire Bank, are Canadian public reporting companies.

      Raymond G.H. Seitz, Director. Mr. Seitz has served as a director since July 2003. Mr. Seitz served as Vice Chairman of Lehman Brothers (Europe) until April 2003. He was the American Ambassador to the Court of St. James’s from 1991 to 1995, and from 1989 to 1991 Assistant Secretary of State for Europe and Canada. Mr. Seitz currently serves as a director of the Chubb Corporation and PCCW.

      Robert T. Smith, Treasurer. Mr. Smith has served as Treasurer since May 1998. Prior thereto, he was Vice President of Chase Securities, Inc. and The Chase Manhattan Bank in the Media and Telecommunications Group.

      James R. Thompson, Director. Mr. Thompson has served as a director since 1994. Mr. Thompson has served as the Chairman of Winston & Strawn, attorneys at law, since 1991. Mr. Thompson served as the Governor of the State of Illinois from 1977 to 1991. Mr. Thompson currently serves as a director of FMC Corporation, FMC Technologies, Navigant Consulting Inc. and Maximus, Inc., all of which are United States public reporting companies.

      James R. Van Horn, Vice President, General Counsel and Secretary. Mr. Van Horn has served as Vice President, General Counsel and Secretary since June 2004. From March 2004 until June 2004 he served as Corporate Counsel to the Company. Prior thereto, he served as Chief Administrative Officer, General Counsel and Secretary of NUI Corporation.

      See “Item 3 — Legal Proceedings” for a description of certain legal proceedings involving the Company and certain of its officers and directors.

Audit Committee

      The Company’s audit committee currently consists of Mr. Thompson, Chairman, Mr. Burt and Mr. Savage. The Board of Directors has determined that Mr. Savage, who became a member of the Audit Committee in November 2003, is an audit committee financial expert with the relevant accounting or related financial management expertise as described in Mr. Savage’s biography above and all members meet the independence requirements of the listing standards of the New York Stock Exchange.

Code of Ethics

      The Company has adopted a code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Company’s code of ethics is posted on the Company’s website. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of its code of ethics by posting such information on its website at www.hollingerinternational.com. The Company’s code of ethics was amended by the Board of Directors on November 29, 2004. The amendments were disclosed in, and the revised code of ethics was furnished as an exhibit to, the current report on Form 8-K filed with the SEC on December 3, 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

      Under the federal securities laws, the directors and executive officers and any persons holding more than 10% of any equity security of the Company are required to report their initial ownership of any equity security and any subsequent changes in that ownership to the Commission. Specific due dates for these reports have been established by the SEC and the Company is required to disclose in this report any failure to file such reports by those dates during 2003. To the Company’s knowledge, based upon a review of the copies of the reports furnished to the Company and written representations that no other reports were required, these filing requirements were satisfied during the 2003 fiscal year.

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Item 11. Executive Compensation

Summary Compensation Table

      The following table sets forth compensation information for the three fiscal years ended December 31, 2003 for certain named executive officers of the Company.

                                                   
Long Term
Compensation

Annual Compensation(4) Securities

Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options(2) Compensation(1)







GORDON A. PARIS
    2003     $ 220,625     $     $           $ 290,750  
 
Interim Chairman, Interim
    2002                                
 
President and Chief
    2001                                
 
Executive Officer(3)
                                               
DANIEL W. COLSON(5)
    2003     $ 301,261     $             268,500     $ 179,183  
 
Chief Operating Officer
    2002       256,514                   280,000       184,209  
 
and Chief Executive
    2001       260,851       1,123,719             300,000       116,125  
 
Officer of The Telegraph
                                               
PETER Y. ATKINSON(6)
    2003     $     $             110,000     $ 9,483  
 
Executive Vice President
    2002                         117,000       22,574  
        2001             100,000             125,000       414,553  
PAUL B. HEALY
    2003     $ 345,000     $ 235,000             43,500     $ 7,175  
 
Vice President,
    2002       316,000       175,000             45,000       7,000  
 
Investor Relations
    2001       301,000       230,000             50,000       5,100  
PETER K. LANE
    2003     $ 339,956     $                 $  
 
Vice President
    2002       74,812                          
 
Chief Financial Officer
    2001                                
CONRAD M. BLACK(7)
    2003     $ 523,345     $             360,000     $ 640,949  
        2002       462,460                   375,000       635,023  
        2001       443,283       250,000             400,000       5,748,867  
F. DAVID RADLER(8)
    2003     $     $             360,000     $ 120,590  
        2002                         375,000       147,372  
        2001             150,000             400,000       5,382,912  
J. A. BOULTBEE(9)
    2003     $     $             60,000     $ 9,483  
        2002                         117,000       9,551  
        2001             50,000             125,000       414,553  


  (1)  With respect to Paris, includes director fees paid to him for service on the Board of Directors from May 2003 until his appointment as Interim President and Chief Executive Officer in November 2003.

  With respect to Mr. Healy, includes Company contributions under the Company’s 401(k) plan.
 
  With respect to Black, includes director fees paid for service on the Boards of Directors of the Company, HCPH Co., The Jerusalem Post, Sun-Times Company, The Telegraph, Hollinger L.P., and American Publishing Company (2001 only); also includes a portion of the cost of maintaining his New York condominium, an allocation of the cost of automobiles and a driver, a portion of the cost of his personal staff in homes where he maintains an office, and the cost of certain medical coverage. Also, for 2001 includes (i) “non-competition” payments from the Osprey Media transaction; (ii) payments pursuant to a “non-competition” agreement with American Publishing Company; and (iii) payments that were made in 2001 and recorded as a reduction of excessive accruals that were recorded in 2000. Does not include any allocation of costs associated with his private use of Company aircraft.
 
  With respect to Radler, includes director fees paid for service on the Boards of Directors of the Company, HCPH Co., The Jerusalem Post, Sun-Times Company, The Telegraph, Hollinger L.P., American Publishing Company (2001 only) and APAC-95 (2001 only); also includes a portion of the cost of maintaining his Chicago condominium and property taxes on the condominium; also includes certain automobile costs and club dues. Also, for 2001 includes (i) “non-competition” payments from the Osprey Media transaction; (ii) payments pursuant to a “non-competition” agreement with

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  American Publishing Company; and (iii) payments that were made in 2001 and recorded as a reduction of excessive accruals that were recorded in 2000. Does not include any allocation of costs associated with his private use of Company aircraft.
 
  With respect to Colson, includes director fees paid for service on the Boards of Directors of the Company, HCPH Co., The Telegraph, and Hollinger L.P. (2002 and 2003 only).