e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended June 30, 2005
 
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   95-3518892
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
712 Fifth Avenue
New York, New York
(Address of principal executive offices)
  10019
(Zip Code)
Registrant’s telephone number, including area code
(212) 586-5666
      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes o          No þ
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o          No þ
      Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at November 30, 2005
     
Class A Common Stock par value $.01 per share
  75,687,055 shares
Class B Common Stock par value $.01 per share
  14,990,000 shares
 
 


Table of Contents

EXPLANATORY NOTE
      As previously reported, the Company formed a special committee of independent directors (the “Special Committee”) on June 17, 2003 to investigate related party transactions and other payments made to certain executives of the Company and its controlling stockholder, Hollinger Inc., and other affiliates in connection with the sale of certain of the Company’s assets and other transactions. The Company filed with the Securities and Exchange Commission (“SEC”) the full text of the report of the Special Committee on such investigation as an exhibit to a current report on Form 8-K on August 31, 2004, as amended by a current report on Form 8-K/ A filed with the SEC on December 15, 2004 (the “Report”).
      The Company previously made public its need to review the Special Committee’s final report before it could complete its Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 10-K”) and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 (collectively, the “2004 10-Qs”). The Company filed its 2003 10-K on January 18, 2005, its 2004 10-Qs on May 19-20, 2005 and its Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 10-K”) on November 3, 2005.
      The completion of the 2004 10-Qs and 2004 10-K required the diversion of a significant amount of resources from the completion of the Company’s consolidated interim financial statements for 2005 and resulted in a delay in the filing of the Company’s 2005 Quarterly Reports on Form 10-Q.

2


 

TABLE OF CONTENTS
INDEX
HOLLINGER INTERNATIONAL INC.
                 
        Page
         
 PART I FINANCIAL INFORMATION
 Item 1    Condensed Consolidated Financial Statements (Unaudited)     5  
 Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
 Item 3    Quantitative and Qualitative Disclosures about Market Risk     30  
 Item 4    Controls and Procedures     30  
 PART II OTHER INFORMATION
 Item 1    Legal Proceedings     32  
 Item 2    Unregistered Sales of Equity Securities and Use of Proceeds     33  
 Item 3    Defaults Upon Senior Securities     33  
 Item 4    Submission of Matters to a Vote of Security Holders     33  
 Item 5    Other Information     33  
 Item 6    Exhibits     33  
 Signatures     34  
Exhibits     35  
 Certification of Chief Executive Officer
 Certification of Chief Financial Officer
 Section 1350 Certification of Chief Executive Officer
 Section 1350 Certification of Chief Financial Officer

3


Table of Contents

FORWARD-LOOKING STATEMENTS
      This quarterly report on Form 10-Q 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 as they affect Chicago, Illinois and its metropolitan area;
 
  •  actions of the Company’s controlling stockholder;
 
  •  the impact of insolvency filings of The Ravelston Corporation Limited (“Ravelston”) and Ravelston Management, Inc. (“RMI”) and certain related entities and related matters;
 
  •  adverse developments in pending litigation involving the Company and its affiliates, and current and former directors and officers;
 
  •  actions arising from continuing investigations by the SEC and other government agencies in the United States and Canada principally of matters identified in the Report;
 
  •  the resolution of certain United States and foreign tax matters;
 
  •  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 costs 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; and
 
  •  changes in accounting principles or in the way such principles are applied.
      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. 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” in the Company’s 2004 10-K.
      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 any forward-looking statement made in this quarterly report on Form 10-Q might not occur.

4


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2005 and 2004
(Amounts in thousands, except per share data)
(Unaudited)
                                   
    Three Months Ended   Six Months Ended
    June 30, 2005   June 30, 2005
         
    2005   2004   2005   2004
                 
Operating revenue:
                               
 
Advertising
  $ 112,543     $ 112,287     $ 213,000     $ 210,819  
 
Circulation
    24,897       25,471       50,328       49,989  
 
Job printing
    5,055       4,418       9,240       8,302  
 
Other
    1,036       1,442       2,344       2,883  
                         
 
Total operating revenue
    143,531       143,618       274,912       271,993  
                         
Operating costs and expenses:
                               
 
Newsprint
    19,276       19,117       37,576       38,064  
 
Compensation
    58,049       60,451       117,464       120,892  
 
Other operating costs
    57,352       58,208       116,703       126,399  
 
Depreciation
    5,132       5,181       10,393       10,352  
 
Amortization
    3,065       2,954       5,717       5,688  
                         
 
Total operating costs and expenses
    142,874       145,911       287,853       301,395  
                         
Operating income (loss)
    657       (2,293 )     (12,941 )     (29,402 )
                         
Other income (expense):
                               
 
Interest expense
    (284 )     (20,186 )     (542 )     (15,902 )
 
Amortization of deferred financing costs
    (6 )     (372 )     (13 )     (744 )
 
Interest and dividend income
    2,481       3,799       7,558       7,881  
 
Other income (expense), net
    3,245       (8,497 )     2,850       (13,319 )
                         
Total other income (expense)
    5,436       (25,256 )     9,853       (22,084 )
                         
Earnings (loss) from continuing operations before income taxes and minority interest
    6,093       (27,549 )     (3,088 )     (51,486 )
Income tax expense (benefit)
    20,497       (7,159 )     29,374       2,859  
Minority interest
    1,138       585       1,589       1,031  
                         
Loss from continuing operations
    (15,542 )     (20,975 )     (34,051 )     (55,376 )
                         
Discontinued operations (net of income taxes)
          2,388             10,088  
                         
Net loss
  $ (15,542 )   $ (18,587 )   $ (34,051 )   $ (45,288 )
                         
Basic and diluted earnings (loss) per share:
                               
 
Weighted average shares outstanding
    90,878       90,507       90,868       89,631  
                         
 
Loss from continuing operations
  $ (0.17 )   $ (0.23 )   $ (0.37 )   $ (0.62 )
 
Discontinued operations
          0.02             0.11  
                         
 
Net loss
  $ (0.17 )   $ (0.21 )   $ (0.37 )   $ (0.51 )
                         
See accompanying notes to condensed consolidated financial statements.

5


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three and Six Months Ended June 30, 2005 and 2004
(Amounts in thousands)
(Unaudited)
                                   
    Three Months Ended   Six Months Ended
    June 30, 2005   June 30, 2005
         
    2005   2004   2005   2004
                 
Net loss
  $ (15,542 )   $ (18,587 )   $ (34,051 )   $ (45,288 )
Other comprehensive income (loss):
                               
 
Unrealized loss on securities available for sale, net of income taxes
    (1,687 )     (234 )     (3,256 )     (257 )
 
Adjustment of minimum pension liability, net of income taxes
    63       2,082       87       951  
 
Foreign currency translation adjustment
    3,724       3,033       5,607       15,265  
                         
Comprehensive loss
  $ (13,442 )   $ (13,706 )   $ (31,613 )   $ (29,329 )
                         
See accompanying notes to condensed consolidated financial statements.

6


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004
(Amounts in thousands, except share data)
                     
    June 30,   December 31,
    2005   2004
         
    (Unaudited)    
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 126,170     $ 395,926  
 
Short-term investments
    69,850       532,050  
 
Accounts receivable, net of allowance for doubtful accounts of $12,741 in 2005 and $13,187 in 2004
    100,372       99,490  
 
Inventories
    11,924       12,319  
 
Escrow deposits and restricted cash
    5,778       5,789  
 
Other current assets
    18,247       16,642  
             
Total current assets
    332,341       1,062,216  
Loan to affiliates
    27,304       25,457  
Investments
    25,810       33,184  
Property, plant and equipment, net of accumulated depreciation of $134,299 in 2005 and $124,393 in 2004
    206,323       209,303  
Intangible assets, net of accumulated amortization of $37,067 in 2005 and $34,894 in 2004
    99,160       101,339  
Goodwill
    185,112       185,779  
Prepaid pension benefit
    94,377       94,541  
Other assets
    27,801       27,079  
             
Total assets
  $ 998,228     $ 1,738,898  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
               
 
Current installments of long-term debt
  $ 6,530     $ 12,305  
 
Accounts payable and accrued expenses
    125,497       146,265  
 
Dividends payable
    4,534       231,226  
 
Amounts due to related parties
    7,861       8,173  
 
Income taxes payable and other tax liabilities
    522,623       689,728  
 
Deferred revenue
    17,169       15,504  
             
Total current liabilities
    684,214       1,103,201  
Long-term debt, less current installments
    1,678       2,053  
Deferred income taxes and other tax liabilities
    349,906       348,867  
Other liabilities
    103,624       102,746  
             
Total liabilities
    1,139,422       1,556,867  
             
Minority interest
    18,669       29,845  
             
Stockholders’ equity (deficit):
               
 
Class A common stock, $0.01 par value. Authorized 250,000,000 shares; 88,008,022 shares issued and 75,687,055 shares outstanding at June 30, 2005 and December 31, 2004
    880       880  
 
Class B common stock, $0.01 par value. Authorized 50,000,000 shares; 14,990,000 shares issued and outstanding at June 30, 2005 and December 31, 2004
    150       150  
 
Additional paid-in capital
    492,992       492,329  
 
Accumulated other comprehensive income:
               
   
Cumulative foreign currency translation adjustment
    41,676       36,069  
   
Unrealized gain on marketable securities
    87       3,343  
   
Minimum pension liability adjustment
    (17,869 )     (17,956 )
 
Accumulated deficit
    (528,970 )     (213,820 )
             
      (11,054 )     300,995  
 
Class A common stock in treasury, at cost — 12,320,967 shares at June 30, 2005 and December 31, 2004
    (148,809 )     (148,809 )
             
Total stockholders’ equity (deficit)
    (159,863 )     152,186  
             
Total liabilities and stockholders’ equity (deficit)
  $ 998,228     $ 1,738,898  
             
See accompanying notes to condensed consolidated financial statements.

7


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
For the Six Months Ended June 30, 2005
(Amounts in thousands)
(Unaudited)
                                                 
            Accumulated            
    Common   Additional   Other            
    Stock   Paid-In   Comprehensive   Accumulated   Treasury    
    Class A & B   Capital   Income   Deficit   Stock   Total
                         
Balance at December 31, 2004
  $ 1,030     $ 492,329     $ 21,456     $ (213,820 )   $ (148,809 )   $ 152,186  
Dividends declared, payable in cash — Class A and Class B, $3.10 per share
                      (281,099 )           (281,099 )
Stock-based compensation
          663                         663  
Minimum pension liability adjustment
                87                   87  
Foreign currency translation adjustment
                5,607                   5,607  
Change in unrealized gain on securities, net
                (3,256 )                 (3,256 )
Net loss
                      (34,051 )           (34,051 )
                                     
Balance at June 30, 2005
  $ 1,030     $ 492,992     $ 23,894     $ (528,970 )   $ (148,809 )   $ (159,863 )
                                     
See accompanying notes to condensed consolidated financial statements.

8


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Amounts in thousands)
(Unaudited)
                     
    Six Months Ended
    June 30,
     
    2005   2004
         
Cash Flows From Continuing Operating Activities:
               
 
Net loss
  $ (34,051 )   $ (45,288 )
 
Earnings from discontinued operations
          (10,088 )
             
 
Loss from continuing operations
    (34,051 )     (55,376 )
 
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
               
   
Depreciation and amortization
    16,110       16,040  
   
Amortization of deferred financing costs
    13       744  
   
Minority interest
    1,589       1,031  
   
Gain on sales of property, plant and equipment
    (12 )     (1,317 )
   
Gain on sale of investments
    (2,549 )      
   
Non-cash interest income
          (4,167 )
   
Non-cash portion of foreign currency loss, net
          15,332  
   
Write-down of investments
    183        
   
Equity in losses of affiliates, net of dividends received
    895       1,475  
   
Other
    3,474       (1,326 )
 
Changes in working capital accounts, net
    (178,112 )     19,950  
             
Cash used in continuing operating activities
    (192,460 )     (7,614 )
             
Cash Flows From Investing Activities:
               
   
Purchase of property, plant and equipment
    (7,656 )     (7,674 )
   
Purchase of investments and other non-current assets
    (5,333 )     (8,929 )
   
Change in short-term investments, net
    462,200       14,850  
   
Proceeds on disposal of investments and other assets
    4,531       666  
   
Proceeds from sales of property, plant and equipment
    18       12,540  
             
Cash provided by investing activities
    453,760       11,453  
             
Cash Flows From Financing Activities:
               
   
Repayment of debt
    (6,102 )     (2,394 )
   
Changes in escrow deposits and restricted cash
          (4,264 )
   
Proceeds from issuance of equity securities
          36,946  
   
Changes in borrowings with related parties
    (2,705 )     10,569  
   
Dividends paid to minority interest
    (11,932 )      
   
Dividends paid
    (507,791 )     (9,028 )
             
Cash provided by (used in) financing activities
    (528,530 )     31,829  
             
Net cash used in discontinued operations
          (47,630 )
             
   
Effect of exchange rate changes on cash
    (2,526 )     (485 )
             
   
Net decrease in cash and cash equivalents
    (269,756 )     (12,447 )
Cash and cash equivalents at beginning of period
    395,926       66,589  
             
Cash and cash equivalents at end of period
  $ 126,170     $ 54,142  
             
Cash paid during the period for:
               
   
Interest
  $ 692     $ 10,954  
             
   
Taxes
  $ 183,245     $ 4,813  
             
See accompanying notes to condensed consolidated financial statements.

9


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — Unaudited Financial Statements
      The accompanying condensed consolidated financial statements of Hollinger International Inc. and subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in comprehensive annual financial statements presented in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules and regulations.
      Management believes that the accompanying condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial condition, results of operations and cash flows for the periods presented. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on November 3, 2005 (the “2004 10-K”).
Note 2 — Principles of Presentation and Consolidation
      At June 30, 2005, Hollinger Inc., a Canadian corporation, held, directly or indirectly, approximately 17.4% of the combined equity and approximately 66.8% of the combined voting power of the outstanding common stock of the Company. Due to matters discussed in the 2004 10-K, particularly “Risk Factors,” Hollinger Inc. is not able to exercise control over the Company.
      The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. At June 30, 2005, the Company’s interest in Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”) was approximately 87%. Dividends paid to minority unitholders of Hollinger L.P. of $11.9 million in May 2005 were charged to Minority Interest in the Condensed Consolidated Balance Sheet at June 30, 2005.
      All significant intercompany balances and transactions have been eliminated in consolidation. See Note 5 for a discussion of revisions in the 2004 financial statements related to discontinued operations.
      On March 31, 2005, the Company notified the SEC of the termination of the registration of the 9% Senior Notes under Section 12(g) of the Securities Exchange Act of 1934 and the suspension of the Company’s duty to file reports under Section 13 and 15(d) of the Securities Exchange Act of 1934 in respect of the 9% Senior Notes. Accordingly, the Company is no longer providing supplemental condensed consolidating financial information.
      Certain amounts in the 2004 financial statements have been reclassified to conform with the current year presentation.
Note 3 — Stock-Based Compensation
      The Company uses the intrinsic value based method of accounting for its stock-based compensation arrangements.

10


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
      Had the Company determined compensation costs based on the fair value of its stock options at the grant date under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s loss from continuing operations and loss from continuing operations per share would have been adjusted to the pro forma amounts indicated in the following tables:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands, except per share amounts)
Loss from continuing operations, as reported
  $ (15,542 )   $ (20,975 )   $ (34,051 )   $ (55,376 )
Add: stock-based compensation expense, as reported
    207       5,457       663       9,991  
Deduct: pro forma stock-based compensation expense
    (579 )     (2,184 )     (1,241 )     (3,642 )
                         
Pro forma loss from continuing operations
  $ (15,914 )   $ (17,702 )   $ (34,629 )   $ (49,027 )
                         
Basic loss from continuing operations per share, as reported
  $ (0.17 )   $ (0.23 )   $ (0.37 )   $ (0.62 )
Diluted loss from continuing operations per share, as reported
  $ (0.17 )   $ (0.23 )   $ (0.37 )   $ (0.62 )
Pro forma basic loss from continuing operations per share
  $ (0.18 )   $ (0.20 )   $ (0.38 )   $ (0.55 )
Pro forma diluted loss from continuing operations per share
  $ (0.18 )   $ (0.20 )   $ (0.38 )   $ (0.55 )
      As the Company has not granted any new stock options during 2004 or 2005, the expense recognized represents the variable expense of stock options modified in prior periods and the amortization of deferred stock units over the vesting period.
      On January 14, 2004, the Company issued 68,494 Deferred Stock Units (“DSU’s”) pursuant to the 1999 Stock Incentive Plan. Each DSU is convertible into one share of Class A Common Stock upon the earliest to occur of (i) the grantee’s resignation from the Company or termination of employment, (ii) the date falling one business day before the date of any change in control, as defined, or (iii) the death of the grantee. The value of the DSU’s on the date of issuance ($1.1 million) was recognized as employee compensation expense with an increase to additional paid-in capital. The DSU’s are reflected in the basic earnings per share computation upon vesting (immediately for all DSU’s issued in 2004). On January 26, 2005, the Company issued 105,500 DSU’s and on March 14, 2005, the Company issued 20,000 DSU’s that vest in 25% increments on each anniversary date with immediate vesting upon: a change in control as defined in the agreement; retirement (with certain restrictions); or death or permanent disability. These DSU’s, with a fair value on the dates granted of approximately $1.8 million, will be expensed over the vesting period or through the grantee’s eligible retirement date, if shorter. In addition, the Company plans to issue 100,764 DSU’s in January 2006 pursuant to an employment contract covering the year ending December 31, 2005, and is ratably expensing these DSU’s with an estimated fair value of approximately $1.0 million and expensed approximately $0.1 million in the first quarter of 2005 related to 12,424 DSU’s pursuant to this contract which are unconditionally issuable in November 2005.
      On December 16, 2004, from the proceeds of the sale of The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines (collectively, the “Telegraph Group”), the Board of Directors declared a special dividend of $2.50 per share on the Company’s Class A and Class B Common Stock paid on January 18, 2005 to holders of record of such shares on

11


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
January 3, 2005, in an aggregate amount of approximately $226.7 million. On January 27, 2005, the Board of Directors declared a second special dividend of $3.00 per share on the Company’s Class A and Class B Common Stock paid on March 1, 2005 to holders of record of such shares on February 14, 2005, in an aggregate amount of approximately $272.0 million. Following the special dividends paid in 2005, pursuant to the underlying stock option plans, the outstanding grants under the Company’s stock incentive plans, including DSU’s, have been adjusted to take into account this return of cash to existing stockholders and its effect on the per share price of the Company’s Class A Common Stock. As a result, DSU’s increased from 262,488 to 355,543 units and the number of shares potentially issuable pursuant to outstanding options increased from approximately 3.2 million shares before the adjustment to approximately 4.6 million shares after the adjustment.
      Effective May 1, 2004, the Company suspended option exercises under its stock option plans until such time that the Company again becomes current with its reporting obligations under the Securities Exchange Act of 1934 and the Company’s registration statement with respect to these shares becomes effective (the “Suspension Period”). The suspension does not affect the vesting schedule with respect to previously granted options. In addition, the terms of the option plans generally provide that participants have 30 days following the date of termination of employment with the Company to exercise options that were exercisable on the date of termination. If the employment of a participant is terminated during the Suspension Period, the Company will extend the 30-day exercise period to provide participants with 30 days after the conclusion of the Suspension Period to exercise vested options. The extension of the exercise period constitutes a modification of the awards, but does not affect, or extend, the contractual life of the options.
      As a result of the Company’s inability to issue common stock upon the exercise of stock options during the Suspension Period, the exercise period with respect to those stock options which would have been forfeited during the Suspension Period has been extended to a date that is thirty days following the Suspension Period. These extensions constitute amendments to the life of the stock options, for those employees expected to benefit from the extension, as contemplated by Financial Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”). Under FIN 44, the Company is required to recognize compensation expense for the modification of the option grants. The additional compensation charge for the affected options, calculated as the difference between the intrinsic value on the award date and the intrinsic value on the modification date, amounted to $5.4 million for the three and six months ended June 30, 2004.
      Certain former non-employee directors and officers were granted similar extensions. The compensation charges for those modifications were calculated in accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The compensation charges for the affected options amounted to $1.9 million for the three and six months ended June 30, 2004.
Note 4 — Earnings (Loss) Per Share
      Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average number of common stock equivalents outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net earnings (loss) after assumed conversion of dilutive securities by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. In certain periods, diluted earnings (loss) per share is the same as basic net earnings (loss) per share due to the anti-dilutive effect (i.e. the effect of reducing basic loss per share) or immaterial effect of the Company’s stock options.

12


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
      The following tables reconcile the numerator and denominator for the calculation of basic and diluted loss per share from continuing operations for the three and six month periods ended June 30, 2005 and 2004:
                           
    Three Months Ended June 30, 2005
     
    Loss   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
             
    (In thousands, except per share amounts)
Basic EPS
                       
 
Loss from continuing operations
  $ (15,542 )     90,878     $ (0.17 )
 
Effect of dilutive securities
                 
                   
Diluted EPS
                       
 
Loss from continuing operations
  $ (15,542 )     90,878     $ (0.17 )
                   
                           
    Three Months Ended June 30, 2004
     
    Loss   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
             
    (In thousands, except per share amounts)
Basic EPS
                       
 
Loss from continuing operations
  $ (20,975 )     90,507     $ (0.23 )
 
Effect of dilutive securities
                 
                   
Diluted EPS
                       
 
Loss from continuing operations
  $ (20,975 )     90,507     $ (0.23 )
                   
                           
    Six Months Ended June 30, 2005
     
    Loss   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
             
    (In thousands, except per share amounts)
Basic EPS
                       
 
Loss from continuing operations
  $ (34,051 )     90,868     $ (0.37 )
 
Effect of dilutive securities
                 
                   
Diluted EPS
                       
 
Loss from continuing operations
  $ (34,051 )     90,868     $ (0.37 )
                   
                           
    Six Months Ended June 30, 2004
     
    Loss   Shares   Per-Share
    (Numerator)   (Denominator)   Amount
             
    (In thousands, except per share amounts)
Basic EPS
                       
 
Loss from continuing operations
  $ (55,376 )     89,631     $ (0.62 )
 
Effect of dilutive securities
                 
                   
Diluted EPS
                       
 
Loss from continuing operations
  $ (55,376 )     89,631     $ (0.62 )
                   
      The effect of stock options has been excluded from the calculations because they are anti-dilutive as a result of the loss from continuing operations. The number of potentially dilutive securities, comprised of shares issuable in respect of stock options at June 30, 2005 and 2004, was approximately 4.6 million and 3.2 million, respectively.

13


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Note 5 — Segment Information and Discontinued Operations
      The Company operates principally in the business of publishing, printing and distributing newspapers and magazines and holds investments principally in companies that operate in the same business as the Company. The Sun-Times News Group (formerly the Chicago Group) includes the Chicago Sun-Times, Post Tribune, Daily Southtown and other city and suburban newspapers in the Chicago metropolitan area. The Canadian Newspaper Group includes the operations of Hollinger Canadian Publishing Holdings Co. (“HCPH Co.”) and Hollinger L.P. The Company completed the sale of the Telegraph Group on July 30, 2004 and The Jerusalem Post, The Jerusalem Report and related publications (collectively, the “JP”) on December 15, 2004. The Telegraph Group comprised substantially all of the operations of the U.K. Newspaper Group and the JP represented substantially all of the assets and operations of the Community Group. The remainder of the U.K. Newspaper Group, consisting largely of the holding companies which held investments in the Telegraph Group, and the former Community Group are now included with the Investment and Corporate Group. The accompanying condensed consolidated financial statements for the three and six month periods ended June 30, 2004 have been revised to reflect the Telegraph Group and JP and discontinued operations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”
      The following is a summary of the segmented financial data of the Company:
                                 
    Three Months Ended June 30, 2005
     
    Sun-Times   Canadian   Investment and    
    News   Newspaper   Corporate    
    Group   Group   Group   Total
                 
    (In thousands)
Revenue
  $ 117,718     $ 25,813     $     $ 143,531  
Depreciation and amortization
  $ 7,557     $ 583     $ 57     $ 8,197  
Operating income (loss)
  $ 17,041     $ 3,188     $ (19,572 )   $ 657  
Equity in earnings (loss) of affiliates
  $ (416 )   $ 155     $     $ (261 )
                                 
    Three Months Ended June 30, 2004
     
    Sun-Times   Canadian   Investment and    
    News   Newspaper   Corporate    
    Group   Group   Group   Total
                 
    (In thousands)
Revenue
  $ 120,975     $ 22,643     $     $ 143,618  
Depreciation and amortization
  $ 7,497     $ 476     $ 162     $ 8,135  
Operating income (loss)
  $ 20,201     $ 991     $ (23,485 )   $ (2,293 )
Equity in earnings (loss) of affiliates
  $ (407 )   $ 165     $ (350 )   $ (592 )
                                 
    Six Months Ended June 30, 2005
     
    Sun-Times   Canadian   Investment and    
    News   Newspaper   Corporate    
    Group   Group   Group   Total
                 
    (In thousands)
Revenue
  $ 227,101     $ 47,811     $     $ 274,912  
Depreciation and amortization
  $ 14,726     $ 1,148     $ 236     $ 16,110  
Operating income (loss)
  $ 25,179     $ 4,330     $ (42,450 )   $ (12,941 )
Equity in earnings (loss) of affiliates
  $ (955 )   $ 392     $     $ (563 )
Total assets
  $ 521,262     $ 285,134     $ 191,832     $ 998,228  
Capital expenditures
  $ 6,619     $ 807     $ 230     $ 7,656  

14


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
                                 
    Six Months Ended June 30, 2004
     
    Sun-Times   Canadian   Investment and    
    News   Newspaper   Corporate    
    Group   Group   Group(1)   Total
                 
    (In thousands)
Revenue
  $ 229,746     $ 42,247     $     $ 271,993  
Depreciation and amortization
  $ 14,932     $ 932     $ 176     $ 16,040  
Operating income (loss)
  $ 25,243     $ (360 )   $ (54,285 )   $ (29,402 )
Equity in earnings (loss) of affiliates
  $ (861 )   $ 355     $ (700 )   $ (1,206 )
Total assets
  $ 536,017     $ 260,570     $ 989,844     $ 1,786,431  
Capital expenditures
  $ 6,650     $ 888     $ 136     $ 7,674  
(1)  Total assets includes $704,455 of assets of operations to be disposed of.
Note 6 — Other Operating Costs
      Included in “Other Operating Costs” are the following items that the Company believes may make meaningful comparisons of results between reporting periods difficult based on their nature, magnitude and infrequency.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands)
Special Committee and related costs(1)
  $ 10,418     $ 10,296     $ 22,430     $ 31,309  
Management fees
          200             500  
Aircraft costs
          135             502  
Severance expenses
    2       981       117       981  
Restitution and settlement costs — circulation matters(2)
                      2,880  
                         
    $ 10,420     $ 11,612     $ 22,547     $ 36,172  
                         
(1)  The Company has incurred costs related to the Special Committee process and investigation, and various litigation and government investigations that have resulted from the Special Committee process and investigation. These are explained more fully in Note 8.
 
(2)  On October 5, 2004, the Company’s Audit Committee announced the results of an internal review into practices that resulted in the overstatement of circulation figures for the Chicago Sun-Times. The Chicago Sun-Times announced a plan to make restitution to its advertisers. To cover the estimated cost of restitution and settlement of related lawsuits, the Company recorded pre-tax charges of $2.9 million in the first quarter of 2004 in addition to $24.1 million recorded in the year ended December 31, 2003.

15


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Note 7 — Other Income (Expense), Net
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands)
Equity in losses of affiliates
  $ (261 )   $ (592 )   $ (563 )   $ (1,206 )
Net gain on sale of non-operating property, plant and equipment
          1,127             1,127  
Write-down of investments
                (183 )      
Settlement with former officer and director
          1,718             1,718  
Gain on sale of investments
    2,549             2,549        
Foreign currency gain (loss), net(1)
    840       (10,699 )     971       (15,184 )
Other
    117       (51 )     76       226  
                         
    $ 3,245     $ (8,497 )   $ 2,850     $ (13,319 )
                         
(1)  The foreign currency impact of a special purpose participation trust, which held debentures issued by CanWest Global Communications Corp. and for which the Company retained foreign exchange rate risks between the Canadian and U.S. dollar, amounted to a loss of approximately $10.5 million and $15.3 million in the three and six months ended June 30, 2004. The trust was dissolved in November 2004.
Note 8 — 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 and their affiliates. 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 incurred as a result of the investigation of the Special Committee and related litigation involving Lord Conrad M. Black of Crossharbour (“Black”), F. David Radler (“Radler”) and others are reflected in “Other operating costs” in the Condensed Consolidated Statements of Operations. See Note 6. These costs primarily consist of legal and other professional fees as summarized in the following tables.
                                         
    Three Months Ended   Six Months Ended    
    June 30,   June 30,   Incurred Since
            Inception through
    2005   2004   2005   2004   June 30, 2005(4)
                     
    (In thousands)
Special Committee’s work(1)
  $ 4,373     $ 4,847     $ 11,072     $ 14,661     $ 44,749  
Litigation costs(2)
    1,432       1,993       2,738       10,137       19,706  
Indemnification fees and costs(3)
    4,613       3,456       8,620       6,511       28,246  
                               
    $ 10,418     $ 10,296     $ 22,430     $ 31,309     $ 92,701  
                               
(1)  Costs and expenses arising from the Special Committee’s work. These amounts include the fees and costs of the Special Committee’s members, counsel, advisors and experts.
 
(2)  Largely represents legal and other professional fees to defend the Company in litigation that has arisen as a result of the issues the Special Committee has investigated, including costs to defend the counterclaims of Hollinger Inc. and Black in the Delaware litigation.

16


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
(3)  Represents amounts 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 largely brought by the Company.
 
(4)  The Special Committee was formed on June 17, 2003. These amounts represent the cumulative costs of the Special Committee investigation.
      As a result of the Delaware Supreme Court’s April 19, 2005 affirmation of the Chancery Court’s finding that Black repeatedly breached his fiduciary duty, the Company believes Black is obligated to repay the Company all amounts advanced to him relating to this, and potentially other, proceedings. Recoverability of such amounts is uncertain and has not been recognized. Through June 30, 2005, the Company has paid or accrued approximately $7.7 million on behalf of Black.
Note 9 — Pension and Post-retirement Benefits
     (a) Components of Net Periodic Benefit Cost
                                 
    Three Months Ended June 30,
     
    2005   2004   2005   2004
                 
    Pension Benefits   Other Benefits
         
    (In thousands)
Service cost
  $ 534     $ 467     $ 28     $ 24  
Interest cost
    4,496       4,382       352       328  
Expected return on plan assets
    (5,483 )     (4,970 )            
Amortization of transition obligation
    28       28              
Amortization of prior service cost
    47       19              
Amortization of net (gain) loss
    805       1,256       (46 )     (63 )
                         
Net periodic benefit cost
  $ 427     $ 1,182     $ 334     $ 289  
                         
                                 
    Six Months Ended June 30,
     
    2005   2004   2005   2004
                 
    Pension Benefits   Other Benefits
         
    (In thousands)
Service cost
  $ 1,073     $ 941     $ 57     $ 48  
Interest cost
    9,044       8,858       708       666  
Expected return on plan assets
    (11,030 )     (10,055 )            
Amortization of transition obligation
    56       56              
Amortization of prior service cost
    94       37              
Amortization of net (gain) loss
    1,619       2,541       (92 )     (128 )
                         
Net periodic benefit cost
  $ 856     $ 2,378     $ 673     $ 586  
                         
     (b) Employer Contributions
Defined Benefit Plans
      During the six months ended June 30, 2005, $1.4 million of contributions have been made to both domestic and foreign defined benefit plans, all in cash. The Company contributed a total of $4.8 million to fund its defined benefit pension plans in 2004 and expects to contribute approximately $5.5 million in 2005.

17


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements — (Continued)
(Unaudited)
Defined Contribution Plans
      During the six months ended June 30, 2005, $2.7 million of contributions have been made to the Company’s defined contribution benefit plans, all in cash. The Company contributed approximately $2.8 million to its domestic and foreign defined contribution plans in 2004 and expects to contribute approximately $3.0 million in 2005.
Post-Retirement Plans
      During the six months ended June 30, 2005, $1.2 million of contributions have been made to the Company’s post-retirement plans, all in cash. The Company contributed a total of $2.2 million to fund its post-retirement plans in 2004 and expects to contribute approximately $2.3 million in 2005.
Note 10 — Commitments and Contingencies
      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 such pending claims or proceedings incidental to the ordinary course of business will not have a material adverse effect on the Company taken as a whole.
      As discussed in Note 8, the Company is also subject to numerous disputes, investigations and legal proceedings with former executive officers and certain current and former directors. For a detailed discussion of these legal proceedings, see “Item 3 — Legal Proceedings” of the Company’s 2004 10-K.
      In connection with the Company’s insurance programs, letters of credit are required to support certain projected workers’ compensation obligations and reimbursement of claims paid by a third party administrator. At June 30, 2005, letters of credit in the amount of $9.2 million were outstanding.
Note 11 — Subsequent Event
      On December 7, 2005, the Company entered into a settlement with Torys LLP, under which Torys will pay the Company approximately $30.3 million to settle the Company’s potential claims against Torys. Under the terms of the agreement, Torys is required to make the payment to the Company before December 31, 2005.

18


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES
Item 2 — Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
OVERVIEW
      The Company’s business is concentrated in the publishing, printing and distribution of newspapers and includes the Sun-Times News Group (previously the Chicago Group) and the Canadian Newspaper Group. The Sun-Times News Group represented approximately 83% of the Company’s revenue for the six months ended June 30, 2005 and includes the Chicago Sun-Times, Post Tribune, Daily Southtown and other city and suburban newspapers in the Chicago metropolitan area. The Canadian Newspaper Group consists primarily of its magazine and business information group and community newspapers in western Canada, the major portion of which is held through the Company’s approximately 87% interest in Hollinger L.P.
      The Company’s advertising revenue experiences seasonality with the first quarter typically being the lowest and the fourth quarter being the highest. The Company’s revenue is primarily derived from the sale of advertising space within the Company’s publications. Advertising revenue accounted for approximately 77% of the Company’s consolidated revenue for the six months ended June 30, 2005. Advertising revenue is comprised of three primary sub-groups: retail, national and classified. Advertising revenue is subject to changes in the economy on both a national and local level and in individual business sectors. Advertising revenue is recognized upon publication of the advertisement.
      Approximately 18% of the Company’s revenue for the six months ended June 30, 2005 was generated by circulation of the Company’s publications. This includes sales of publications to individuals on a single copy or subscription basis and 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 single-copy sales at the time of distribution. The Company also generates revenue from job printing and other activities which are recognized upon delivery.
      Significant expenses for the Company are compensation and newsprint. Compensation expense, which includes benefits, was approximately 41% of the Company’s total operating costs for the six months ended June 30, 2005. Compensation costs are recognized as employment services are rendered. Newsprint costs represented approximately 13% of the Company’s total operating costs for the six months ended June 30, 2005. Newsprint prices are subject to fluctuation as newsprint is a commodity. Newsprint costs are recognized upon consumption.
RECENT BUSINESS DEVELOPMENTS
Significant Developments in 2005
      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 and their affiliates. The potential impact of these disputes, investigations and legal proceedings on the Company’s financial condition and results of operations cannot currently be estimated. See Note 8 to the condensed consolidated financial statements.
      On December 16, 2004, the Board of Directors declared a special dividend of $2.50 per share on the Company’s Class A and Class B Common Stock paid on January 18, 2005 to holders of record of such shares on January 3, 2005, in an aggregate amount of approximately $226.7 million. On January 27, 2005, the Board of Directors declared a second special dividend of $3.00 per share on the Company’s Class A and Class B Common Stock paid on March 1, 2005 to holders of record of such shares on February 14, 2005, in an aggregate amount of approximately $272.0 million. Following the special dividends in 2005, the outstanding grants under the Company’s stock incentive plans have been adjusted to take into account this return of cash to existing stockholders and its effect on the per share price of the Company’s Class A Common Stock. On each of December 16, 2004, March 31, 2005, June 23, 2005 and September 22, 2005, the Board of Directors also declared a regular quarterly dividend in the amount of $0.05 per share on the Company’s Class A and

19


Table of Contents

Class B Common Stock which were paid on January 18, 2005, April 20, 2005, July 15, 2005 and October 17, 2005, respectively.
      On April 20, 2005, Hollinger L.P. declared a special dividend of approximately $91.8 million to its unitholders of record on May 3, 2005. Approximately 13% or $11.9 million, of this dividend was paid to the minority unitholders on May 9, 2005.
      On May 3, 2005, certain of the Company’s current and former independent directors agreed to settle claims brought against them in Cardinal Value Equity Partners, L.P. v. Black, et al. The settlement provides for $50.0 million to be paid to the Company. The settlement, which is conditioned upon funding of the settlement amount by proceeds from certain of the Company’s directors and officers liability insurance policies, is also subject to court approval.
      On May 13, 2005, Black commenced a lawsuit against the Company in Delaware Chancery Court seeking reimbursement of approximately $6.8 million in legal fees and expenses allegedly incurred by one law firm representing Black in connection with investigations by the U.S. Department of Justice and the SEC, as well as in connection with a civil fraud lawsuit initiated by the SEC against Black and others.
      On December 7, 2005, the Company entered into a settlement with Torys LLP, under which Torys will pay the Company approximately $30.3 million to settle the Company’s potential claims against Torys. Under the terms of the agreement, Torys is required to make the payment to the Company before December 31, 2005.
Critical Accounting Policies and Estimates
      The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing 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. There have been no significant changes in the Company’s critical accounting policies and estimates in the six-month period ended June 30, 2005. For a discussion of these policies and estimates, refer to the Company’s 2004 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
General
      During July 2004 and December 2004, respectively, the Company sold The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines (collectively, the “Telegraph Group”) and The Jerusalem Post, The Jerusalem Report and related publications (collectively the “JP”). In this quarterly report, the Telegraph Group and JP are reported as discontinued operations. All amounts relate to continuing operations unless otherwise noted. See Note 5 to the condensed consolidated financial statements.
Loss from Continuing Operations
      Loss from continuing operations in the second quarter of 2005 amounted to $15.5 million, or a loss of $0.17 per share, compared to a loss of $21.0 million in the second quarter of 2004, or a $0.23 loss per share. The loss from continuing operations for the six months ended June 30, 2005 was $34.1 million, or a loss of $0.37 per share, compared to a loss of $55.4 million, or $0.62 per share, for the six months ended June 30, 2004. During the three and six month periods ended June 30, 2005, the Company incurred costs of

20


Table of Contents

$10.4 million and $22.4 million, respectively, with respect to the Special Committee and its investigation and related litigation compared to $10.3 million and $31.3 million in the three and six months ended June 30, 2004, respectively. Special Committee costs include: 1) costs and expenses arising from the Special Committee’s work; 2) legal and professional fees to defend the Company in litigation as a result of the Special Committee’s investigation; and 3) costs the Company has been required to advance to indemnified parties. See Note 8 to the condensed consolidated financial statements. Interest expense decreased by $19.9 million and $15.4 million in the three and six months ended June 30, 2005, respectively, as compared to 2004. As discussed further below, these decreases are largely attributable to the retirement of debt in the third quarter of 2004. During the three and six months ended June 30, 2004, the Company’s other income (expense), net amounted to net expense of $8.5 million and $13.3 million, respectively, including foreign exchange losses (largely related to a special purpose participation trust, or the “Participation Trust”, which held debentures issued by CanWest Global Communications Corp., or “CanWest” and for which the Company retained foreign exchange rate risks between the Canadian and U.S. dollar) of $10.7 million and $15.2 million, respectively, all on a before tax basis. The trust was liquidated in the fourth quarter of 2004. As discussed further below, income tax expense increased $27.7 million and $26.5 million for the three and six months ended June 30, 2005 compared to the same periods in 2004, respectively.
Operating Revenue and Operating Income (Loss)
      Operating revenue and operating income in the second quarter of 2005 were $143.5 million and $0.7 million, respectively, compared with operating revenue of $143.6 million and an operating loss of $2.3 million in the second quarter of 2004. The $3.0 million improvement in operating income in the second quarter of 2005 is primarily due to lower compensation costs of $2.4 million, which includes lower stock-based compensation expense of $5.3 million, lower legal and professional fees of $1.1 million and lower severance costs of $1.0 million, partially offset by an increase of $2.3 million in insurance premiums primarily related to directors and officers liability. Operating revenue and operating loss for the six months ended June 30, 2005 were $274.9 million and $12.9 million, respectively, compared with $272.0 million and $29.4 million, respectively, for the six months ended June 30, 2004. The $2.9 million increase in revenue is largely due to increased advertising and job printing revenue for the Canadian Newspaper Group of $5.0 million and $0.6 million, respectively, partially offset by a $2.8 million decrease in advertising revenue in the Sun-Times News Group. The decrease in operating loss of $16.5 million is largely due to a decrease in the above referenced costs incurred with respect to the Special Committee of $8.9 million, lower compensation costs of $3.4 million, including lower stock-based compensation costs of $9.3 million, a decrease in circulation restitution costs of $2.9 million, the previously mentioned increase in operating revenue of $2.9 million, lower severance costs of $0.9 million and lower legal and professional fees of $0.6 million, partially offset by an increase in insurance premiums, largely related to directors and officers liability, of $4.8 million.
Operating Costs and Expenses
      Total operating costs and expenses decreased by $3.0 million to $142.9 million for the three months ended June 30, 2005 from $145.9 million for the same period in 2004. The decrease is primarily a result of the previously mentioned lower compensation costs of $2.4 million, a decrease in legal and professional fees of $1.1 million, lower severance costs of $1.0 million and lower advertising and marketing expenditures of $0.3 million in the Sun-Times News Group, partially offset by the previously mentioned increased insurance costs of $2.3 million. In addition, there was a decrease in management fees of approximately $0.2 million resulting from the cancellation of management services with RMI and related companies and a reduction in corporate aircraft costs of $0.1 million. For the six months ended June 30, 2005, operating costs and expenses decreased by $13.5 million to $287.9 million from $301.4 million in 2004, largely due to a decrease in Special Committee costs of $8.9 million, the previously mentioned decrease in compensation expense of $3.4 million, decreased expenses related to Chicago Sun-Times circulation restitution of $2.9 million, lower severance costs of $0.9 million, decreased legal and professional fees of $0.6 million, decreases in management fees of approximately $0.5 million and corporate aircraft costs of $0.5 million and lower newsprint costs of $0.5 million, partially offset by the previously mentioned increase of $4.8 million for insurance premiums.

21


Table of Contents

Other Income (Expense)
      Interest expense was $0.3 million and $20.2 million for the three months ended June 30, 2005 and 2004, respectively. The decrease in interest expense reflects the retirement of the 9% Senior Notes in 2004, which decreased expense by $5.6 million and lower expense for mark-to-market adjustments on the related interest rate swaps of $14.5 million. Interest expense was $0.5 million and $15.9 million for the six months ended June 30, 2005 and 2004, respectively. This decrease in interest expense reflects the retirement of the 9% Senior Notes, which decreased interest expense by $10.2 million and lower expense on the mark-to-market adjustments on the related interest rate swaps of $5.2 million.
      Interest and dividend income for the three months ended June 30, 2005 was $2.5 million compared with $3.8 million for the same period in 2004 and $7.6 million compared with $7.9 million for the six months ended June 30, 2005 and 2004, respectively. These decreases are due to a reduction in interest income in respect of CanWest debentures in 2004 of $1.7 million and $3.5 million for the three and six months ended June 30, 2004, respectively, partially offset by increased interest income on short-term investments. The Participation Trust and remaining owned CanWest debentures were liquidated in the fourth quarter of 2004.
      Other income (expense), net, in the second quarter of 2005 increased by $11.7 million to income of $3.2 million from expense of $8.5 million in the same period in 2004, primarily due to a decrease in foreign currency losses of $11.5 million, largely related to the Participation Trust. For the six months ended June 30, 2005, other income (expense), net, improved by $16.2 million to income of $2.9 million in 2005 from an expense of $13.3 million for the same period in 2004. This change was primarily due to a decrease in foreign currency losses of $16.2 million, largely related to the Participation Trust. See Note 7 to the condensed consolidated financial statements.
      Income taxes were an expense of $20.5 million and a benefit of $7.2 million for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005, the income tax expense was $29.4 million compared to an expense of $2.9 million for the six months ended June 30, 2004. The Company’s income tax expense (benefit) varies substantially from the U.S. Federal statutory rate primarily due to provisions for contingent liabilities to cover additional interest the Company may be required to pay in various tax jurisdictions. Such provisions amounted to $13.0 million and $10.0 million for the three months ended June 30, 2005 and 2004, respectively, and $25.1 million and $20.0 million for the six months ended June 30, 2005 and 2004, respectively. In addition, the Company recorded income tax expense of $12.5 million for the three and six months ended June 30, 2005, related to the cash distribution by Hollinger L.P. and the Company recorded an income tax benefit of $7.5 million for the three and six months ended June 30, 2005, related to certain contingent tax liabilities which were no longer deemed to be necessary at June 30, 2005.
      Minority interest in the second quarter of 2005 totaled $1.1 million compared to $0.6 million in 2004 and $1.6 million compared to $1.0 million for the six months ended June 30, 2005 and 2004, respectively. Minority interest primarily represents the minority share of net earnings of Hollinger L.P. The increase for the three and six months ended June 30, 2005 is due to the improved operating results of Hollinger L.P. and foreign exchange gains due to the strengthening of the Canadian dollar.
SEGMENT RESULTS
      The Company divides its business into three principal segments: the Sun-Times News Group, the Canadian Newspaper Group, and the Investment and Corporate Group.

22


Table of Contents

      Following is a discussion of the results of operations of the Company by operating segment.
                                   
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (Dollars in thousands)
Operating revenue:
                               
 
Sun-Times News Group
  $ 117,718     $ 120,975     $ 227,101     $ 229,746  
 
Canadian Newspaper Group
    25,813       22,643       47,811       42,247  
 
Investment and Corporate Group
                       
                         
Total operating revenue
  $ 143,531     $ 143,618     $ 274,912     $ 271,993  
                         
Operating income (loss):
                               
 
Sun-Times News Group
  $ 17,041     $ 20,201     $ 25,179     $ 25,243  
 
Canadian Newspaper Group
    3,188       991       4,330       (360 )
 
Investment and Corporate Group
    (19,572 )     (23,485 )     (42,450 )     (54,285 )
                         
Total operating income (loss)
  $ 657     $ (2,293 )   $ (12,941 )   $ (29,402 )
                         
Operating revenue:
                               
 
Sun-Times News Group
    82.0 %     84.2 %     82.6 %     84.5 %
 
Canadian Newspaper Group
    18.0 %     15.8 %     17.4 %     15.5 %
 
Investment and Corporate Group
    0.0 %     0.0 %     0.0 %     0.0 %
                         
Total operating revenue
    100 %     100 %     100 %     100 %
                         
Operating income (loss) margin:
                               
 
Sun-Times News Group
    14.5 %     16.7 %     11.1 %     11.0 %
                         
 
Canadian Newspaper Group
    12.4 %     4.4 %     9.1 %     (0.1 )%
                         
 
Total operating income (loss) margin
    0.0 %     (1.6 )%     (4.7 )%     (10.8 )%
                         
Sun-Times News Group
      The following table summarizes certain results of operations for the periods indicated.
                                   
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands)
Operating revenue:
                               
 
Advertising
  $ 92,634     $ 95,107     $ 176,596     $ 179,441  
 
Circulation
    22,079       22,773       44,767       44,391  
 
Job printing and other
    3,005       3,095       5,738       5,914  
                         
Total operating revenue
    117,718       120,975       227,101       229,746  
                         
Operating costs and expenses:
                               
 
Newsprint
    17,085       17,188       33,544       34,408  
 
Compensation
    44,326       43,263       89,491       86,843  
 
Other operating costs
    31,709       32,826       64,161       68,320  
 
Depreciation
    4,492       4,543       9,009       9,244  
 
Amortization
    3,065       2,954       5,717       5,688  
                         
Total operating costs and expenses
    100,677       100,774       201,922       204,503  
                         
Operating income
  $ 17,041     $ 20,201     $ 25,179     $ 25,243  
                         

23


Table of Contents

      Operating revenue for the Sun-Times News Group was $117.7 million and $121.0 million for the three month periods ended June 30, 2005 and 2004, respectively, which is a decrease of $3.3 million. For the six months ended June 30, 2005, operating revenue decreased $2.6 million to $227.1 million from $229.7 million for the same period in 2004.
      Advertising revenue was $92.6 million for the second quarter of 2005 and $176.6 million for the six months ended June 30, 2005, compared with $95.1 million and $179.4 million for the comparable periods in 2004. The $2.5 million decrease in advertising revenue for the three months ended June 30, 2005 primarily reflects decreases in classified advertising of $1.2 million, retail advertising of $1.1 million and national advertising of $0.7 million, slightly offset by a $0.8 million increase in internet advertising revenue. For the six months ended June 30, 2005, the $2.8 million decrease in advertising revenue primarily reflects decreases of $2.0 million in classified advertising and $1.8 million in retail advertising, partially offset by a $1.4 million increase in internet advertising revenue.
      Circulation revenue was $22.1 million and $44.8 million for the three month and six month periods ended June 30, 2005, compared with $22.8 million and $44.4 million for the same periods in 2004, which is a decrease of $0.7 million for the quarter and an increase of $0.4 million for the six month period. The decrease in circulation revenue for the quarter ended June 30, 2005 is due to a decrease in daily and Sunday circulation. The increase in circulation revenue for the six months ended June 30, 2005 is attributable to the $0.15 single copy price increase, to $0.50, at the Chicago Sun-Times which took effect in April 2004 as the increase in price slightly more than offset the resulting decline in volume.
      Job printing and other revenue was generally comparable between periods amounting to $3.0 million in the second quarter of 2005 compared with $3.1 million in 2004 and $5.7 million for the six months ended June 30, 2005 compared with $5.9 million for the comparable period in 2004.
      Total operating costs and expenses for the second quarter of 2005 were $100.7 million compared with $100.8 million for the same period in 2004, a decrease of $0.1 million, and $201.9 million and $204.5 million for the six months ended June 30, 2005 and 2004, respectively, a decrease of $2.6 million.
      Newsprint expense for the second quarter of 2005 was $17.1 million compared with $17.2 million in the second quarter of 2004, a decrease of $0.1 million. For the six months ended June 30, 2005 and 2004, newsprint expense was $33.5 million and $34.4 million, respectively. Total newsprint consumption for the three month and six month periods decreased approximately 10% and 12%, respectively, with the average cost per tonne of newsprint approximately 10% higher in the three months and six months ended June 30, 2005. Declines in consumption reflect the previously discussed volume declines.
      Compensation costs in the second quarter of 2005 were $44.3 million compared with $43.3 million in the second quarter of 2004, an increase of $1.1 million, including increased benefit costs of $0.3 million. For the six months ended June 30, 2005, compensation costs increased $2.6 million to $89.5 million from $86.8 million from the same period in 2004, including $1.2 million of increased benefit costs. Remaining increases in 2005 largely represent annual merit and union pay increases.
      Other operating costs were $31.7 million and $64.2 million for the three and six months ended June 30, 2005, compared with $32.8 million and $68.3 million for the same periods in 2004, a decrease of $1.1 million and $4.2 million, respectively. The decrease in other operating costs for the quarter of $1.1 million was largely due to lower severance of $0.6 million, $0.3 million in decreased marketing and promotional spending and a decrease of $0.2 million in distribution costs. For the six month period, the decrease of $4.2 million is reflective of circulation restitution charges in 2004 of $2.9 million, lower severance expense of $0.5 million, $1.6 million in decreased marketing and promotional spending and a decrease of $0.5 million in insurance costs, primarily director and officer insurance which is no longer allocated (included in the Investment and Corporate Group). These decreases were somewhat offset by increased distribution expenses of $0.4 million and increased legal and professional fees of $0.4 million.
      Depreciation and amortization expense for the second quarter of 2005 was $7.6 million compared with $7.5 million in 2004 and for the six months ended June 30, 2005 was $14.7 million compared to $14.9 million

24


Table of Contents

for the same period in 2004. The decrease in depreciation and amortization expense for the six month period reflects assets that became fully depreciated in 2004.
      Operating income for the second quarter of 2005 totaled $17.0 million compared with $20.2 million in 2004, a decrease of $3.2 million, largely as a result of the decline in revenue. Operating income remained unchanged at $25.2 million for the six months ended June 30, 2005 and 2004, respectively, as the decline in revenue approximated the declines in operating expenses.
Canadian Newspaper Group
      The following table summarizes certain results of operations for the periods indicated.
                                   
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands)
Operating revenue:
                               
 
Advertising
  $ 19,909     $ 17,180     $ 36,404     $ 31,378  
 
Circulation
    2,818       2,698       5,561       5,598  
 
Job printing and other
    3,086       2,765       5,846       5,271  
                         
Total operating revenue
    25,813       22,643       47,811       42,247  
                         
Operating costs and expenses:
                               
 
Newsprint
    2,191       1,929       4,032       3,656  
 
Compensation
    10,882       10,105       21,415       21,026  
 
Other operating costs
    8,969       9,142       16,886       16,993  
 
Depreciation
    583       476       1,148       932  
                         
Total operating costs and expenses
    22,625       21,652       43,481       42,607  
                         
Operating income (loss)
  $ 3,188     $ 991     $ 4,330     $ (360 )
                         
      Operating revenue for the Canadian Newspaper Group was $25.8 million in the second quarter of 2005 compared with $22.6 million in 2004 and for the six months ended June 30, 2005 was $47.8 million compared with $42.2 million in 2004. The increases of $3.2 million for the second quarter and $5.6 million for the six month period are primarily due to increased advertising revenue of $2.7 million and $5.0 million for the three and six month periods ended June 30, 2005, respectively. The strengthening of the Canadian dollar accounted for approximately $2.2 million and $3.7 million of the increase in operating revenue for the three and six month periods ended June 30, 2005, respectively.
      The operating income of the Canadian Newspaper Group was $3.2 million in the second quarter of 2005 compared with $1.0 million in 2004 and for the six months ended June 30, 2005 operating income was $4.3 million compared to an operating loss of $0.4 million in 2004. Second quarter 2005 operating costs and expenses have increased $1.0 million, compared to the second quarter 2004, primarily due to higher compensation costs of $0.8 million, including increased wages of approximately $0.1 million and a non-recurring $1.4 million refund of surplus benefit payments in the second quarter of 2004, partially offset by lower pension and post-retirement costs of $0.7 million from $0.9 million in 2004 to $0.2 million in 2005. As reflected by the increase in newsprint costs, newsprint consumption for the quarter increased by approximately 5% and cost per average tonne increased approximately 8%. For the six months ended June 30, 2005, operating costs increased $0.9 million compared to 2004, primarily because of higher newsprint costs of $0.4 million and higher compensation costs of $0.4 million. Newsprint consumption increased approximately 3% and cost per average tonne increased approximately 7%, compared to the six months ended June 30, 2004. The higher compensation costs are due to increased wages of approximately $0.4 million and the $1.4 million benefit refund previously mentioned, partially offset by lower pension and post-retirement costs of $1.5 million from $1.8 million in 2004 to $0.3 million in 2005. A majority of the pension and post-retirement obligations relate to

25


Table of Contents

liabilities to retired employees not assumed by the purchasers of the related businesses in prior years. The strengthening of the Canadian dollar increased operating income for the three and six months ended June 30, 2005 by $0.3 million and $0.4 million, respectively.
Investment and Corporate Group
      The following table summarizes certain results of operations for the periods indicated.
                                   
    Three Months Ended   Six Months Ended
    June 30,   June 30,
         
    2005   2004   2005   2004
                 
    (In thousands)
Operating costs and expenses:
                               
 
Compensation
  $ 2,841     $ 7,083     $ 6,558     $ 13,023  
 
Other operating costs
    16,674       16,240       35,656       41,086  
 
Depreciation
    57       162       236       176  
                         
Total operating costs and expenses
    19,572       23,485       42,450       54,285  
                         
Operating loss
  $ (19,572 )   $ (23,485 )   $ (42,450 )   $ (54,285 )
                         
      Operating costs and expenses of the Investment and Corporate Group were $19.6 million in the second quarter of 2005 compared with $23.5 million in 2004, a decrease of $3.9 million. For the six months ended June 30, 2005, the operating costs and expenses decreased $11.8 million to $42.5 million in 2005 from $54.3 million in 2004. The decrease in operating costs and expenses in the quarter is largely a result of lower compensation costs of $4.2 million, including lower stock-based compensation of $5.3 million, a decrease in legal and professional fees of $1.3 million, lower severance costs of $0.4 million and a reduction in RMI management fees of $0.2 million and corporate aircraft costs of $0.1 million, partially offset by an increase in insurance premiums of $2.4 million, primarily for directors and officers liability. The decrease in operating costs and expenses for the six month period ended June 30, 2005 of $11.8 million is largely a result of a decrease of $8.9 million related to the Special Committee investigation, decreased compensation costs of $6.5 million, including a decrease in stock-based compensation charges of $9.3 million, a decrease in other legal and professional fees of $1.0 million, lower severance expense of $0.4 million, a reduction in RMI management fees of $0.5 million and corporate aircraft costs of $0.5 million, partially offset by increased insurance premiums, primarily for directors and officers liability, of $5.3 million.
LIQUIDITY AND CAPITAL RESOURCES
      The Company is a holding company and its assets consist primarily of investments in its subsidiaries and affiliated companies. As a result, the Company’s ability to meet its future financial obligations is dependent upon the availability of cash flows from its United States and foreign subsidiaries through dividends, intercompany advances, and other payments. The Company’s right to participate in the distribution of assets of any subsidiary or affiliated company in the event of liquidation or reorganization will be subject to the prior claims of the creditors of such subsidiary or affiliated company, including trade creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary or affiliated company.
      The Company is heavily dependent upon the Sun-Times News Group for cash flow. That cash flow in turn is dependent on the Sun-Times News 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 Company repaid the remaining $5.1 million of its 8.625% Senior Notes, due 2005 (“8.625% Senior Notes”), upon their maturity in March 2005.

26


Table of Contents

      The following table outlines the Company’s cash and cash equivalents, short-term investment and debt positions as of the dates indicated.
                 
    June 30,   December 31,
    2005   2004
         
    (In thousands)
Cash and cash equivalents
  $ 126,170     $ 395,926  
Short-term investments
    69,850       532,050  
             
Total cash and cash equivalents and short-term investments
  $ 196,020     $ 927,976  
             
8.625% Senior Notes due 2005
  $     $ 5,082  
9% Senior Notes due 2010
    6,000       6,000  
Other debt
    2,208       3,276  
             
Total debt
  $ 8,208     $ 14,358  
             
      Cash and cash equivalents and short-term investments decreased to $196.0 million at June 30, 2005 from $928.0 million at December 31, 2004, a decrease of $732.0 million. This decrease was primarily the result of payments of approximately $519.7 million in dividends, $183.2 million in income taxes and $6.1 million for the repayment of debt. The dividend payments include the special dividends declared in both 2005 and 2004, in addition to the regular quarterly dividends. The tax payments of $183.2 million were largely the result of taxes on the gain on sale of the Telegraph Group.
      On April 20, 2005, Hollinger L.P. declared a special dividend of approximately $91.8 million to its unitholders of record on May 3, 2005. On May 9, 2005, approximately 13% (or $11.9 million) of this dividend was paid to the minority unitholders.
      The Company has the following income tax liabilities recorded in its Condensed Consolidated Balance Sheets:
                 
    June 30,   December 31,
    2005   2004
         
    (In thousands)
Classified as current liabilities
  $ 522,623     $ 689,728  
Classified as non-current liabilities
    349,906       348,867  
             
    $ 872,529     $ 1,038,595  
             
      There may be significant cash requirements in the future regarding certain currently unresolved tax issues (both U.S. and foreign). The Company has recorded accruals to cover contingent liabilities related to additional taxes and interest it may be required to pay in various tax jurisdictions. Such accruals, included in the amounts listed above, reflect additional interest and penalties that may become payable in respect to the contingent liabilities.
      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 condensed consolidated financial statements. 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, that may be disallowed by taxing authorities. If those deductions were to be disallowed, the Company would be required to pay additional taxes and interest from the dates such taxes would have been paid had the deductions not been taken, and the Company may be subject to penalties. The timing and amounts of any payments the Company may be required to make are uncertain.
      The Company is currently involved in several legal actions as both plaintiff and defendant. These actions are in various stages and it is not yet possible to determine their ultimate outcome. At this time the Company

27


Table of Contents

cannot estimate the impact these actions and the related legal and other fees may have on its future cash position.
      Discussions are underway for a new credit facility to be used for general corporate purposes and to provide continued liquidity. Based on responses to date and historical access to bank and bond markets, the Company expects that it can complete a financing to meet its needs in the event those needs exceed currently available liquidity.
Cash Flows and Working Capital
      Working capital consists of current assets less current liabilities. At June 30, 2005, working capital, excluding current debt obligations and restricted cash and escrow deposits, was a deficiency of $351.1 million compared to a deficiency of $34.5 million at December 31, 2004. The $316.7 million change is primarily due to the declaration and payment of the regular quarterly and second special dividend of $281.1 million.
      Cash used in continuing operating activities was $192.5 million for the six months ended June 30, 2005, compared with $7.6 million used in continuing operating activities for the six months ended June 30, 2004. The use of cash as reflected in changes in working capital accounts, net of $178.1 million for the six months ended June 30, 2005 is largely due to lower income taxes payable of $167.1 million, reflecting the $183.2 million payment of taxes. During the six months ended June 30, 2004, the use of cash as reflected in changes in working capital accounts net, increased $20.0 million, largely due to an increase in income taxes payable of $35.9 million, partially offset by changes in other items, including net assets to be disposed of. In addition, the loss from continuing operations improved by $21.3 million to a loss of $34.1 million for the six months ended June 30, 2005 compared to $55.4 million for the same period in 2004.
      Cash provided by investing activities for the six months ended June 30, 2005 was $453.8 million compared with cash provided by investing activities of $11.5 million in 2004. The improvement of $442.3 million largely reflects an increase in proceeds from the sale of short-term investments of $447.4 million and lower purchases of investments and other non-current assets of $3.6 million, partially offset by lower proceeds from sales and disposals of property, plant and equipment and investments of $8.7 million.
      Cash used in financing activities for the six months ended June 30, 2005 was $528.5 million, compared to $31.8 million provided by financing activities in 2004, an increase of $560.4 million. Cash used in financing activities largely reflects the payment of the regular quarterly and special dividends and dividends to minority unitholders of Hollinger L.P. of $519.7 million and the $5.1 million retirement of the 8.625% Senior Notes on March 15, 2005. Cash from financing activities in 2004 included $36.9 million in proceeds from exercise of options, which did not reoccur in 2005.
Debt
      Long-term debt, including the current portion, was $8.2 million at June 30, 2005 compared with $14.4 million at December 31, 2004. On March 15 2005, the Company retired the remaining $5.1 million of 8.625% Senior Notes upon their maturity.
      On March 31, 2005, the Company notified the SEC of the termination of the registration of the 9% Senior Notes under Section 12(g) of the Securities Exchange Act of 1934 and the suspension of the Company’s duty to file reports under Section 13 and 15(d) of the Securities Exchange Act of 1934 in respect of the 9% Senior Notes. Accordingly, the Company is no longer providing supplemental condensed consolidating financial information.
Capital Expenditures
      The Company does not have material commitments to acquire capital assets and expects its cash on hand and future cash flow provided by its operating subsidiaries to be sufficient to fund its recurring capital expenditures.

28


Table of Contents

Dividends and Other Commitments
      See “Declaration of Special and Regular Dividends” under the caption “Recent Business Development — Significant Developments in 2005”. The Company expects its internal cash flow and cash on hand to be adequate to meet its foreseeable dividend expectations.
Off Balance Sheet Arrangements
Commercial Commitments and Contractual Obligations
      In connection with the Company’s insurance program, letters of credits are required primarily to support certain projected workers’ compensation obligations and reimbursement of claims paid by a third party claims administrator. At June 30, 2005, letters of credit in the amount of $9.2 million were outstanding.
      Set out below is a summary of the amounts due and committed under contractual cash obligations at June 30, 2005 (unless otherwise noted):
                                         
        Due in            
        1 Year or   Due Between   Due Between   Due Over
    Total   Less   1 and 3 Years   4 and 5 Years   5 Years
                     
    (In thousands)
9% Senior Notes(1)
  $ 6,000     $ 6,000     $     $  —     $  
Other long-term debt
    2,208       530       1,655       23        
Operating leases(2)
    66,877       5,459       12,280       10,514       38,624  
                               
Total contractual cash obligations
  $ 75,085     $ 11,989     $ 13,935     $ 10,537     $ 38,624  
                               
 
(1)  The Company intends to purchase the remaining outstanding 9% Senior Notes as they become available on the open market. Accordingly, the 9% Senior Notes have been reflected as a “Current Liability” in the accompanying Condensed Consolidated Balance Sheet.
 
(2)  Commitments as of December 31, 2004.
      In addition to amounts committed under contractual cash obligations, the Company has also assumed a number of contingent obligations by way of guarantees and indemnities in relation to the conduct of its business and disposition of assets. The Company is also involved in various matters in litigation. For more information on the Company’s contingent obligations, see Notes 8 and 10 to the Company’s condensed consolidated financial statements herein.
Recent Accounting Pronouncements
      In December 2004, the Financial Standards Accounting Board (“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 was to be effective as of the first interim or annual reporting period that begins after June 15, 2005. On April 14, 2005, the compliance date was changed by the SEC such that SFAS 123R is effective at the start of the next fiscal year beginning after June 15, 2005, which is January 1, 2006 for the Company. The Company has not yet determined the impact that SFAS 123R will have on its results of operations and expects to adopt SFAS 123R on January 1, 2006.
      In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting

29


Table of Contents

Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires that a voluntary change in an accounting principle be applied retrospectively with all prior period financial statements presented using the new accounting principle. SFAS 154 also requires that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate, and corrections of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS 154 is not expected to have a material impact on the Company’s consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
      Newsprint. Newsprint expense amounted to $37.6 million in the first six months of 2005 and $38.1 million during the same period in 2004. Management believes that newsprint prices may continue to show significant price variation in the future. Suppliers implemented newsprint price increases of $25.00 per tonne in each of the second quarter and fourth quarter of 2004, and increases of $30.00 per tonne in each of June and September 2005. Operating divisions take steps to ensure that they have sufficient supply of newsprint and have mitigated cost increases by adjusting pagination and page sizes and printing and distributing practices. Based on levels of usage during the six months ended June 30, 2005, a change in the price of newsprint of $50.00 per tonne would have increased or decreased the loss from continuing operations for the six months ended June 30, 2005 by approximately $1.9 million. The average price per tonne of newsprint was approximately $585 for the six months ended June 30, 2005 versus approximately $530 for the same period in 2004.
      Inflation. During the past three years, inflation has not had a material effect on the Company’s newspaper businesses.
      Interest Rates. At June 30, 2005, the Company has no debt that is subject to interest calculated at floating rates and a change in interest rates would not have a material effect on the Company’s results of operations.
      Foreign Exchange Rates. A portion of the Company’s income is earned outside of the United States in currencies other than the United States dollar (primarily the Canadian dollar). As a result, the Company’s operations are subject to changes in foreign exchange rates. Increases in the value of the United States dollar against other currencies can reduce net earnings and declines can result in increased earnings. Based on earnings and ownership levels for the six months ended June 30, 2005, a $0.05 change in the Canadian dollar exchange rate would have the following effect on the Company’s reported net loss for the six months ended June 30, 2005:
                 
    Actual Average    
    2005 Rate   Increase/Decrease
         
        (In thousands)
Canada
  $ 0.8096/Cdn.     $ (355 )
      Reference should be made to “Risk Factors” in the Company’s 2004 10-K for a discussion on the potential impact changes in foreign exchange rates may have related to taxes that may be paid to foreign jurisdictions.
Item 4. Controls and Procedures
      (a) Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Disclosure controls include components of internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the

30


Table of Contents

reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.
      As reported in the 2004 10-K, as of December 31, 2004, the Company’s management identified material weaknesses in its internal control over financial reporting relating to 1) an ineffective control environment that did not sufficiently promote effective internal control over financial reporting, 2) ineffectively designed information technology general controls over program development, program changes, computer operations, and access to programs and data, 3) the lack of a formal strategic risk assessment process, 4) ineffective controls over the preparation of interim and year-end financial statements and reconciliation of key accounts, and 5) ineffective policies and procedures relating to the preparation of current and deferred income tax provisions and related balance sheet accounts. Largely as a result of material weaknesses in these areas, management concluded in its 2004 Form 10-K that the Company’s disclosure controls and procedures were ineffective as of December 31, 2004.
      During 2005, and as discussed further below, the Company has taken actions to remediate the material weaknesses discussed above, and it is continuing to assess additional controls that may be required to remediate these weaknesses. The Company’s management, under the supervision of and with the participation of the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2005, pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). As part of its evaluation, management has evaluated whether the control deficiencies related to the reported material weaknesses in internal control over financial reporting continue to exist. As of June 30, 2005, the Company has not completed implementation and testing of the changes in controls and procedures that it believes are necessary to conclude that the material weaknesses have been remediated and therefore, the Company’s management has concluded that it cannot assert that the control deficiencies relating to the reported material weaknesses have been effectively remediated. As a result, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were ineffective as of June 30, 2005.
      Procedures were undertaken in order that management could conclude that reasonable assurance exists regarding the reliability of financial reporting and the preparation of the condensed consolidated financial statements contained in this filing. Accordingly, management believes that the condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented.
      (b) Changes in Internal Control Over Financial Reporting. During 2005, management has taken the following actions that materially affect, or are reasonably likely to materially affect, the Company’s internal control over financial reporting and to remediate the material weaknesses described in the Company’s 2004 10-K.
      During the three months ended March 31, 2005:
  •  The Company increased the size and capabilities of its tax department.
      During the three months ended June 30, 2005:
  •  The Company commenced a comprehensive strategic planning process and related strategic enterprise risk management assessment.
      During the three months ended September 30, 2005:
  •  A function dedicated to internal control documentation, testing and implementation was created and staffed. Outside service providers were retained to supplement this function’s capabilities for the remainder of 2005.
 
  •  The Company engaged an outside service provider to staff the internal audit function and to assist in developing, implementing and executing a comprehensive internal audit plan.
 
  •  The Company hired a director of internal control and a manager of financial reporting, and began the recruiting process for a vice-president of information technology and a director of internal audit.

31


Table of Contents

  •  The Company began a comprehensive analysis of its IT control systems, using an outside service provider in order to identify and prioritize those controls requiring remediation. Remediation has commenced and will continue into 2006.
 
  •  The Company has engaged an outside service provider to assist in the design and documentation of appropriate tax controls.
      In addition to the above changes in internal control over financial reporting, management believes that inadequate staffing in the accounting, finance and tax departments, which contributed to the material weaknesses described above, will abate with the passage of time in part due to decreasing complexity as a result of the sale of significant components of the Company’s operations, the completion or winding down of investigations, the resolution of certain complex tax matters, the expected simplification of the Company’s corporate structure, and the progression of legal matters into phases that are less time consuming for Company personnel.
      Other than as discussed above, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
      The following is a discussion of developments since November 2, 2005 in the legal proceedings the Company has reported in its 2004 10-K. For a detailed discussion of these legal proceedings see “Item 3 — Legal Proceedings” in the Company’s 2004 10-K.
Receivership and CCAA Proceedings in Canada involving the Ravelston Entities
      On November 10, 2005, a panel of the Ontario Court of Appeal quashed Black’s appeal of the October 4, 2005 order of the Ontario Superior Court of Justice which had allowed the Receiver, on behalf of Ravelston, to accept service and to voluntarily appear and enter a plea of not guilty in relation to the federal indictment. On November 16, 2005, Black served a motion to stay the Ontario Court of Appeal’s order quashing Black’s appeal, pending an application for leave to appeal to the Supreme Court of Canada. On November 21, 2005, Black served a notice of abandonment, abandoning his stay motion. Immediately after the stay motion was abandoned, the Receiver advised that it had instructed its U.S. criminal counsel to accept service of the federal indictment, and on November 22, 2005, Ravelston entered a not guilty plea.
      On November 21, 2005, the Ontario Superior Court of Justice entered an order that, among other things, permits the Receiver to use Cdn.$9.25 million from the settlement between the Receiver and CanWest in relation to the dispute over the termination of the management services agreement among Ravelston, CanWest and The National Post Company dated November 15, 2000, to fund the costs of the receivership in which the Company had a security interest. As part of the order, the Company was granted a replacement lien on Ravelston’s assets in the amount of Cdn.$9.25 million. This lien is subordinate to certain other liens on Ravelston’s assets, including liens in favor of the Receiver.
Federal Indictment of Ravelston and Former Company Officials
      On November 17, 2005, the federal grand jury in Chicago returned an expanded indictment naming new defendants and adding additional fraud charges. The new defendants named in the expanded indictment are Black, as well as John A. (Jack) Boultbee (“Boultbee”) and Peter Y. Atkinson (“Atkinson”), both of whom are former executive vice presidents of the Company. The new indictment alleges two new fraud schemes in addition to realleging the scheme in the initial indictment. The indictment alleges that, in the first new scheme, defendants fraudulently diverted an additional $51.8 million from the Company’s multibillion-dollar sale of assets to CanWest in 2000. In the second new scheme, the indictment alleges that Black fraudulently misused corporate perquisites. The indictment also alleges that Black, with Boultbee’s assistance, defrauded

32


Table of Contents

the Company of millions of dollars in connection with the Company’s renovation of a New York city apartment for Black and Black’s purchase from the Company of another apartment in the same building.
      On November 22, 2005, Ravelston entered a not guilty plea; on November 29, 2005, Mark Kipnis entered a not guilty plea; on December 1, 2005, Black and Atkinson entered not guilty pleas; and on December 7, 2005, Boultbee entered a not guilty plea.
      On December 15, 2005, the grand jury returned another expanded indictment alleging four new charges against Black and one new charge against Boultbee. The additional charges against Black include one count each of racketeering, obstruction of justice, money laundering, and wire fraud. Boultbee is charged with an additional count of wire fraud. The new indictment also adds a claim for forfeiture that includes Black’s ownership interests in Ravelston and Hollinger Inc. On December 16, 2005, Black and Boultbee entered not guilty pleas to the additional charges.
Wells Fargo Bank Northwest, N.A. v. Sugra (Bermuda) Limited and Hollinger Inc.
      On November 30, 2005, the court granted the motions of plaintiffs and Hollinger Inc. for leave to amend their complaints, thus permitting them to add the Company and Hollinger International Publishing Inc. as defendants on plaintiffs’ claims and on Hollinger Inc.’s cross claims. Plaintiffs and Hollinger Inc. filed their amended pleadings on December 1, 2005 and December 2, 2005, respectively.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
      None.
Item 3. Defaults Upon Senior Securities
      None.
Item 4. Submission of Matters to a Vote of Security Holders
      None.
Item 5. Other Information
      None.
Item 6. Exhibits
      (a) Exhibits
         
  31 .1   Certification of Chief Executive Officer pursuant to Rule 13a-14
 
  31 .2   Certification of Chief Financial Officer pursuant to Rule 13a-14
 
  32 .1   Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
 
  32 .2   Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

33


Table of Contents

SIGNATURES
      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  HOLLINGER INTERNATIONAL INC.
  Registrant
  By:  /s/ Gordon A. Paris
 
 
  Gordon A. Paris
  Chairman and President and
  Chief Executive Officer
Date: December 16, 2005
  By:  /s/ Gregory A. Stoklosa
 
 
  Gregory A. Stoklosa
  Vice President and Chief Financial Officer
Date: December 16, 2005

34