Edgar Filing: HOLLINGER INTERNATIONAL INC

e10vq

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 September 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

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.

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		20
Item 3	Quantitative and Qualitative Disclosures about Market Risk		31
Item 4	Controls and Procedures		32

PART II OTHER INFORMATION
Item 1	Legal Proceedings		33
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3	Defaults Upon Senior Securities		35
Item 4	Submission of Matters to a Vote of Security Holders		35
Item 5	Other Information		35
Item 6	Exhibits		35
Signatures			36
Exhibits
Certification of the CEO
Certification of the CFO
Certification of the CEO
Certification of the CFO

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.

PART I. FINANCIAL INFORMATION


Item 1.	*Condensed Consolidated Financial Statements*

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2005 and 2004

(Amounts in thousands, except per share data)

(Unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

Operating revenue:
	Advertising	$	106,723		$	106,142		$	319,723		$	316,961
	Circulation		25,367			26,093			75,695			76,082
	Job printing		5,066			4,162			14,306			12,464
	Other		1,207			1,246			3,551			4,129

	Total operating revenue		138,363			137,643			413,275			409,636

Operating costs and expenses:
	Newsprint		19,322			18,530			56,898			56,594
	Compensation		58,328			55,747			175,792			176,639
	Other operating costs		56,276			70,226			172,979			196,625
	Depreciation		5,406			5,250			15,799			15,602
	Amortization		3,203			3,160			8,920			8,848

	Total operating costs and expenses		142,535			152,913			430,388			454,308

Operating loss			(4,172	)		(15,270	)		(17,113	)		(44,672	)

Other income (expense):
	Interest expense		(83	)		(2,446	)		(625	)		(18,348	)
	Amortization of deferred financing costs		(7	)		(30	)		(20	)		(774	)
	Interest and dividend income		2,614			5,925			10,172			13,806
	Other income (expense), net		(3,213	)		(24,549	)		(363	)		(37,868	)

Total other income (expense)			(689	)		(21,100	)		9,164			(43,184	)

Loss from continuing operations before income taxes and minority interest			(4,861	)		(36,370	)		(7,949	)		(87,856	)
Income tax expense (benefit)			3,820			(8,409	)		33,194			(5,550	)
Minority interest			443			1,631			2,032			2,662

Loss from continuing operations			(9,124	)		(29,592	)		(43,175	)		(84,968	)

Discontinued operations (net of income taxes):
	Earnings from operations of business segments disposed of		—			9,886			—			19,974
	Gain from disposal of business segment		—			354,644			—			354,644

	Earnings from discontinued operations		—			364,530			—			374,618

Net earnings (loss)		$	(9,124	)	$	334,938		$	(43,175	)	$	289,650

Basic and diluted earnings (loss) per share:
	Weighted average shares outstanding		90,878			90,746			90,871			90,373

	Loss from continuing operations	$	(0.10	)	$	(0.33	)	$	(0.48	)	$	(0.94	)
	Discontinued operations		—			4.02			—			4.15

	Net earnings (loss)	$	(0.10	)	$	3.69		$	(0.48	)	$	3.21

See accompanying notes to condensed consolidated financial statements.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended September 30, 2005 and 2004

(Amounts in thousands)

(Unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

Net earnings (loss)		$	(9,124	)	$	334,938		$	(43,175	)	$	289,650
Other comprehensive income (loss):
	Unrealized loss on securities available for sale, net of income taxes		(99	)		(1,423	)		(3,355	)		(1,680	)
	Adjustment of minimum pension liability, net of income taxes		(263	)		30,387			(176	)		31,338
	Foreign currency translation adjustment		(23,107	)		91,669			(17,500	)		106,934

Comprehensive income (loss)		$	(32,593	)	$	455,571		$	(64,206	)	$	426,242

See accompanying notes to condensed consolidated financial statements.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2005 and December 31, 2004

(Amounts in thousands, except share data)


			September 30,			December 31,
			2005			2004

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	129,477		$	395,926
	Short-term investments			57,400			532,050
	Accounts receivable, net of allowance for doubtful accounts of $12,526 in 2005 and $13,187 in 2004			101,582			99,490
	Inventories			11,478			12,319
	Escrow deposits and restricted cash			5,289			5,789
	Other current assets			15,261			16,642

Total current assets				320,487			1,062,216
Loan to affiliates				28,276			25,457
Investments				24,951			33,184
Property, plant and equipment, net of accumulated depreciation of $141,169 in 2005 and $124,393 in 2004				209,130			209,303
Intangible assets, net of accumulated amortization of $38,174 in 2005 and $34,894 in 2004				98,071			101,339
Goodwill				191,515			185,779
Prepaid pension benefit				100,373			94,541
Other assets				27,874			27,079

Total assets			$	1,000,677		$	1,738,898


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Current installments of long-term debt		$	7,222		$	12,305
	Accounts payable and accrued expenses			127,861			146,265
	Dividends payable			4,534			231,226
	Amounts due to related parties			8,007			8,173
	Income taxes payable and other tax liabilities			552,184			689,728
	Deferred revenue			16,306			15,504

Total current liabilities				716,114			1,103,201
Long-term debt, less current installments				958			2,053
Deferred income taxes and other tax liabilities				353,564			348,867
Other liabilities				106,675			102,746

Total liabilities				1,177,311			1,556,867

Minority interest				20,160			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 September 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 September 30, 2005 and December 31, 2004			150			150
	Additional paid-in capital			493,188			492,329
	Accumulated other comprehensive income:
		Cumulative foreign currency translation adjustment		18,569			36,069
		Unrealized gain (loss) on marketable securities		(12	)		3,343
		Minimum pension liability adjustment		(18,132	)		(17,956	)
	Accumulated deficit			(542,628	)		(213,820	)

				(47,985	)		300,995

	Class A common stock in treasury, at cost — 12,320,967 shares at September 30, 2005 and December 31, 2004			(148,809	)		(148,809	)

Total stockholders’ equity (deficit)				(196,794	)		152,186

Total liabilities and stockholders’ equity (deficit)			$	1,000,677		$	1,738,898

See accompanying notes to condensed consolidated financial statements.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the Nine Months Ended September 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, $3.15 per share		—		—		—			(285,633	)		—			(285,633	)
Stock-based compensation		—		859		—			—			—			859
Minimum pension liability adjustment		—		—		(176	)		—			—			(176	)
Foreign currency translation adjustments		—		—		(17,500	)		—			—			(17,500	)
Change in unrealized gain (loss) on securities, net		—		—		(3,355	)		—			—			(3,355	)
Net loss		—		—		—			(43,175	)		—			(43,175	)

Balance at September 30, 2005	$	1,030	$	493,188	$	425		$	(542,628	)	$	(148,809	)	$	(196,794	)

See accompanying notes to condensed consolidated financial statements

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2005 and 2004

(Amounts in thousands)

(Unaudited)


			Nine Months Ended
			September 30,

			2005			2004

Cash Flows From Continuing Operating Activities:
	Net earnings (loss)		$	(43,175	)	$	289,650
	Earnings from discontinued operations			—			(374,618	)

	Loss from continuing operations			(43,175	)		(84,968	)
	Adjustments to reconcile loss from continuing operations to net cash provided by (used in) continuing operating activities:
		Depreciation and amortization		24,719			24,450
		Amortization of deferred financing costs		20			774
		Minority interest		2,032			2,662
		Premium on debt extinguishments		—			50,617
		Gain on sales of property, plant and equipment		(12	)		(1,602	)
		Gain on sale of investments		(2,791	)		—
		Non-cash interest income		—			(6,811	)
		Non-cash portion of foreign currency gain, net		—			(21,526	)
		Write-down of investments		183			365
		Equity in losses of affiliates, net of dividends received		957			2,108
		Other		7,262			16,121
	Changes in working capital accounts, net			(177,223	)		25,194

Cash provided by (used in) continuing operating activities				(188,028	)		7,384

Cash Flows From Investing Activities:
		Purchase of property, plant and equipment		(14,968	)		(20,148	)
		Investments and other non-current assets		(10,750	)		(14,189	)
		(Purchases) redemptions of short-term investments, net		474,650			(211,500	)
		Proceeds on disposal of investments and other assets		6,176			4,174
		Proceeds from sales of property, plant and equipment		18			12,735
		Proceeds from the sale of newspaper operations, net of cash disposed		—			1,191,200
		Other		—			158

Cash provided by investing activities				455,126			962,430

Cash Flows From Financing Activities:
		Repayment of debt		(6,222	)		(341,588	)
		Changes in escrow deposits and restricted cash		536			(9,267	)
		Proceeds from issuance of equity securities		—			36,946
		Changes in borrowings with related parties		(4,996	)		26,860
		Dividends paid to minority interest		(11,932	)		—
		Dividends paid		(512,325	)		(13,562	)

Cash used in financing activities				(534,939	)		(300,611	)

Net cash used in discontinued operations				—			(224,992	)

		Effect of exchange rate changes on cash		1,392			932

		Net increase (decrease) in cash and cash equivalents		(266,449	)		445,143
Cash and cash equivalents at beginning of period				395,926			66,589

Cash and cash equivalents at end of period			$	129,477		$	511,732

Cash paid during the period for:
		Interest	$	712		$	14,691

		Taxes	$	184,783		$	5,084

See accompanying notes to condensed consolidated financial statements.

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 September 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 September 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 were charged to Minority Interest and reflected in the Condensed Consolidated Balance Sheet at September 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.

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 table:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2005			2004			2005			2004

	(In thousands, except per share amounts)
Loss from continuing operations, as reported	$	(9,124	)	$	(29,592	)	$	(43,175	)	$	(84,968	)
Add: stock-based compensation expense, as reported		197			93			859			10,084
Deduct: pro forma stock-based compensation expense		(575	)		(316	)		(1,816	)		(3,962	)

Pro forma loss from continuing operations	$	(9,502	)	$	(29,815	)	$	(44,132	)	$	(78,846	)

Basic loss from continuing operations per share, as reported	$	(0.10	)	$	(0.33	)	$	(0.48	)	$	(0.94	)
Diluted loss from continuing operations per share, as reported	$	(0.10	)	$	(0.33	)	$	(0.48	)	$	(0.94	)
Pro forma basic loss from continuing operations per share	$	(0.10	)	$	(0.33	)	$	(0.49	)	$	(0.87	)
Pro forma diluted loss from continuing operations per share	$	(0.10	)	$	(0.33	)	$	(0.49	)	$	(0.87	)

As the Company has not granted any new stock options during 2004 or 2005, the expense recognized represents the variable expense of the 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. The Company was ratably expensing 100,764 DSU’s during 2005, which were to be issued in January 2006 with an estimated value of $1.0 million, pursuant to an employment contract covering the year ending December 31, 2005. The employment contract was amended in December 2005, such that the DSU’s will no longer be issued. The Company will reverse the expense associated with these DSU’s in the fourth quarter of 2005. In addition, the Company expensed approximately $0.1 million in the first quarter of 2005 related to 12,424 DSU’s pursuant to this contract, which were 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

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)

“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 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 nil and $5.4 million for the three and nine months ended September 30, 2004, respectively.

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 nil and $1.9 million for the three and nine months ended September 30, 2004, respectively.


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.

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 nine month periods ended September 30, 2005 and 2004:


		Three Months Ended September 30, 2005

		Loss			Shares		Per-Share
		(Numerator)			(Denominator)		Amount

		(In thousands, except per share amounts)
Basic EPS
	Loss from continuing operations	$	(9,124	)		90,878	$	(0.10	)
	Effect of dilutive securities		—			—		—

Diluted EPS
	Loss from continuing operations	$	(9,124	)		90,878	$	(0.10	)


		Three Months Ended September 30, 2004

		Loss			Shares		Per-Share
		(Numerator)			(Denominator)		Amount

		(In thousands, except per share amounts)
Basic EPS
	Loss from continuing operations	$	(29,592	)		90,746	$	(0.33	)
	Effect of dilutive securities		—			—		—

Diluted EPS
	Loss from continuing operations	$	(29,592	)		90,746	$	(0.33	)


		Nine Months Ended September 30, 2005

		Loss			Shares		Per-Share
		(Numerator)			(Denominator)		Amount

		(In thousands, except per share amounts)
Basic EPS
	Loss from continuing operations	$	(43,175	)		90,871	$	(0,48	)
	Effect of dilutive securities		—			—		—

Diluted EPS
	Loss from continuing operations	$	(43,175	)		90,871	$	(0.48	)


		Nine Months Ended September 30, 2004

		Loss			Shares		Per-Share
		(Numerator)			(Denominator)		Amount

		(In thousands, except per share amounts)
Basic EPS
	Loss from continuing operations	$	(84,968	)		90,373	$	(0.94	)
	Effect of dilutive securities		—			—		—

Diluted EPS
	Loss from continuing operations	$	(84,968	)		90,373	$	(0.94	)

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 September 30, 2005 and 2004, was approximately 4.6 million and 3.2 million, respectively.

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. In June 2004, the Company agreed to terms and signed an agreement to sell The Daily Telegraph, The Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines (collectively, the “Telegraph Group”). Under the terms of the agreement, Press Acquisitions Limited acquired all of the outstanding shares of the Telegraph Group, representing substantially all of the Company’s U.K. operations, for a purchase price of £729.6 million in cash (or approximately $1,323.9 million at an exchange rate of $1.8145 to £1). This purchase price was subject to adjustment depending on certain working capital levels in the Telegraph Group, but such adjustment was not material (less than 1% of the purchase price). The transaction closed on July 30, 2004. For the three and nine months ended September 30, 2004, the Company recognized a gain on the sale of the Telegraph Group of $354.6 million, net of taxes of $221.0 million. The Company completed the sale of The Jerusalem Post, The Jerusalem Report and related publications (collectively, the “JP”) on December 15, 2004. 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 nine month periods ended September 30, 2004 have been revised to reflect the Telegraph Group and JP as discontinued operations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The Company, through a 70% owned subsidiary, acquired a 90% ownership interest in five newspapers in Alberta, Canada on September 30, 2005 for approximately Cdn.$3.9 million. This acquisition is not considered material and the Company does not expect it to have a significant impact on its consolidated financial position or results of operations. These newspapers will be included in the sale of the Great West Newspaper Group LTD, which is expected to close by December 31, 2005. See Note 11.

The following is a summary of the segmented financial data of the Company:


	Three Months Ended September 30, 2005

	Sun-Times			Canadian		Investment and
	News			Newspaper		Corporate
	Group			Group		Group			Total

	(In thousands)
Revenue	$	113,590		$	24,773	$	—		$	138,363
Depreciation and amortization	$	7,798		$	743	$	68		$	8,609
Operating income (loss)	$	11,868		$	2,017	$	(18,057	)	$	(4,172	)
Equity in earnings (loss) of affiliates	$	(75	)	$	212	$	—		$	137

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)


	Three Months Ended September 30, 2004

	Sun-Times			Canadian		Investment and
	News			Newspaper		Corporate
	Group			Group		Group			Total

	(In thousands)
Revenue	$	116,009		$	21,634	$	—		$	137,643
Depreciation and amortization	$	7,676		$	507	$	227		$	8,410
Operating income (loss)	$	12,544		$	788	$	(28,602	)	$	(15,270	)
Equity in earnings (loss) of affiliates	$	(362	)	$	232	$	(350	)	$	(480	)


	Nine Months Ended September 30, 2005

	Sun-Times			Canadian		Investment and
	News			Newspaper		Corporate
	Group			Group		Group			Total

	(In thousands)
Revenue	$	340,691		$	72,584	$	—		$	413,275
Depreciation and amortization	$	22,524		$	1,891	$	304		$	24,719
Operating income (loss)	$	37,047		$	6,347	$	(60,507	)	$	(17,113	)
Equity in earnings (loss) of affiliates	$	(1,030	)	$	604	$	—		$	(426	)
Total assets	$	524,177		$	298,895	$	177,605		$	1,000,677
Capital expenditures	$	12,416		$	2,289	$	263		$	14,968


	Nine Months Ended September 30, 2004

	Sun-Times			Canadian		Investment and
	News			Newspaper		Corporate
	Group			Group		Group(1)			Total

	(In thousands)
Revenue	$	345,755		$	63,881	$	—		$	409,636
Depreciation and amortization	$	22,608		$	1,439	$	403		$	24,450
Operating income (loss)	$	37,787		$	428	$	(82,887	)	$	(44,672	)
Equity in earnings (loss) of affiliates	$	(1,224	)	$	565	$	(1,027	)	$	(1,686	)
Total assets	$	549,856		$	288,595	$	982,482		$	1,820,933
Capital expenditures	$	18,173		$	1,813	$	162		$	20,148


(1)	Total assets includes $16,996 of assets of operations to be disposed of.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)

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				Nine Months Ended
	September 30,				September 30,

	2005		2004		2005		2004

	(In thousands)
Special Committee and related costs(1)	$	9,387	$	13,318	$	31,817	$	44,627
Management fees		—		—		—		500
Severance expenses		—		744		117		1,725
Aircraft costs		—		5		—		507
Directors and officers insurance fees(2)		—		5,400		—		5,400
Restitution and settlement costs — circulation matters(3)		—		—		—		2,880

	$	9,387	$	19,467	$	31,934	$	55,639


(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)	Represents premium in respect of additional directors and officers liability coverage for years prior to 2004.

(3)	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.


Note 7 —	Other Income (Expense), Net


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2005			2004			2005			2004

	(In thousands)
Equity in earnings (losses) of affiliates	$	137		$	(480	)	$	(426	)	$	(1,686	)
Gain on sale of non-operating assets		—			—			—			1,127
Write-down of investments		—			(365	)		(183	)		(365	)
Settlement with former officer and director		—			—			—			1,718
Legal settlement(1)		(800	)		—			(800	)		—
Loss on extinguishment of debt		—			(60,381	)		—			(60,381	)
Gain on sale of investments		242			—			2,791			—
Foreign currency gain (loss), net(2)		(2,821	)		36,633			(1,850	)		21,449
Other		29			44			105			270

	$	(3,213	)	$	(24,549	)	$	(363	)	$	(37,868	)

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)


(1)	On December 22, 2005, the Company settled litigation with Wells Fargo Bank N.A. and Key Corporate Capital N.A., regarding a 1995 aircraft lease for $800,000 and the parties have agreed to dismiss all claims, cross claims, and third-party claims against one another. See Note 23 — “Commitments and Contingencies” of the Company’s 2004 10-K.

(2)	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 gain of approximately $36.9 million and $21.5 million for the three and nine months ended September 30, 2004, respectively. 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 table.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Incurred Since
									Inception Through
	2005		2004		2005		2004		September 30, 2005(4)

	(In thousands)
Special Committee’s work(1)	$	4,749	$	5,735	$	15,821	$	20,396	$	49,498
Litigation costs(2)		976		5,356		3,714		15,493		20,682
Indemnification fees and costs(3)		3,662		2,227		12,282		8,738		31,908

	$	9,387	$	13,318	$	31,817	$	44,627	$	102,088


(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.

(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 September 30, 2005, the Company has paid or accrued approximately $9.0 million on behalf of Black.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)


Note 9 —	Pension and Post-retirement Benefits


*(a)*	*Components of Net Periodic Benefit Cost*


	Three Months Ended September 30,

	2005			2004			2005			2004

	Pension Benefits						Other Benefits

	(In thousands)
Service cost	$	546		$	476		$	29		$	24
Interest cost		4,613			4,495			363			341
Expected return on plan assets		(5,634	)		(5,114	)		—			—
Amortization of transition obligation		28			28			—			—
Amortization of prior service cost		48			20			—			—
Amortization of net (gain) loss		823			1,293			(48	)		(66	)

Net periodic benefit cost	$	424		$	1,198		$	344		$	299


	Nine Months Ended September 30,

	2005			2004			2005			2004

	Pension Benefits						Other Benefits

	(In thousands)
Service cost	$	1,619		$	1,417		$	86		$	72
Interest cost		13,657			13,353			1,071			1,008
Expected return on plan assets		(16,664	)		(15,169	)		—			—
Amortization of transition obligation		84			84			—			—
Amortization of prior service cost		142			57			—			—
Amortization of net (gain) loss		2,442			3,834			(140	)		(194	)

Net periodic benefit cost	$	1,280		$	3,576		$	1,017		$	886


*(b)*	*Employer Contributions*


	Defined Benefit Plans

For the nine months ended September 30, 2005, $4.0 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.


	Defined Contribution Plans

For the nine months ended September 30, 2005, $2.8 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

For the nine months ended September 30, 2005, $1.5 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.

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

(Unaudited)


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 September 30, 2005, letters of credit in the amount of $9.2 million were outstanding.


Note 11 —	Subsequent Events

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. The Company has received the funds related to the settlement.

On December 19, 2005, the Company announced that its subsidiary, Hollinger Canadian Publishing Holdings Co., entered into agreements to sell its 70 percent interest in Great West Newspaper Group Ltd. and its 50 percent interest in Fundata Canada Inc. (“Fundata”) for approximately $40.5 million. The Company expects the transactions to close by December 31, 2005.

Great West Newspaper Group Ltd. is a Canadian community newspaper publishing company which publishes 16 titles, mostly in Alberta. Fundata is a Toronto-based provider of mutual fund data and analysis.

The Company is in discussions concerning the possible sale of its remaining Canadian assets. No agreement has been reached concerning the sale of these assets and there can be no assurance that an agreement will ultimately be reached.

On December 22, 2005, the Company settled litigation with Wells Fargo Bank N.A. and Key Corporate Capital N.A., regarding a 1995 aircraft lease for $800,000 and the parties have agreed to dismiss all claims, cross claims, and third-party claims against one another. The Company has recognized the expense under the caption “Other income (expense), net” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005. See Note 7. See Note 23 — “Commitments and Contingencies” of the Company’s 2004 10-K.

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 82% of the Company’s revenue for the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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*

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, September 22, 2005 and December 14, 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 Class B Common Stock which were payable on January 18, 2005, April 20, 2005, July 15, 2005, October 17, 2005 and January 16, 2006, 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 19, 2005, the Company announced that its subsidiary, Hollinger Canadian Publishing Holdings Co., entered into agreements to sell its 70 percent interest in Great West Newspaper Group Ltd. and its 50 percent interest in Fundata Canada Inc. for approximately $40.5 million. The Company expects the transactions to close by December 31, 2005.

On December 22, 2005, the Company settled litigation with Wells Fargo Bank N.A. and Key Corporate Capital N.A., regarding a 1995 aircraft lease for $800,000 and the parties have agreed to dismiss all claims, cross claims, and third-party claims against one another. The Company has recognized the expense under the caption “Other income (expense), net” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005. See Note 7 to the condensed consolidated financial statements and “Item 3 — Legal Proceedings” of the Company’s 2004 10-K.


	*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 nine-month period ended September 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 third quarter of 2005 amounted to $9.1 million, or a loss of $0.10 per share compared to a loss of $29.6 million in the third quarter of 2004, or a $0.33 loss per share. The loss from continuing operations for the nine months ended September 30, 2005 was $43.2 million or a $0.48 loss per share compared with a loss of $85.0 million or $0.94 loss per share for the nine months ended September 30, 2004. During the three and nine month periods ended September 30, 2005, the Company incurred costs of $9.4 million and $31.8 million, respectively, with respect to the Special Committee and its investigation and related litigation compared to $13.3 million and $44.6 million in the three and nine months ended September 30, 2004. 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 $2.4 million and $17.7 million in the three and nine months ended September 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. The Company’s prior year loss from continuing operations contained certain significant, non-recurring items. During the three and nine months ended September 30, 2004, the Company’s other income (expense), net was an expense of $24.5 million and $37.9 million, respectively, largely related to the loss on extinguishment of the 9% Senior Notes of $60.4 million in the third quarter of 2004, partially offset by foreign exchange gains (largely related to a special purpose 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 $36.6 million and $21.4 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 $12.2 million and $38.7 million for the three and nine months ended September 30, 2005 compared to the same respective periods in 2004.


	*Operating Revenue and Operating Loss*

Operating revenue and operating loss in the third quarter of 2005 were $138.4 million and $4.2 million, respectively, compared with operating revenue of $137.6 million and an operating loss of $15.3 million in the third quarter of 2004. The increase in operating revenue of $0.7 million over the prior year quarter is a reflection of an increase in revenue at the Canadian Newspaper Group of $3.1 million, largely offset by lower revenue at the Sun-Times News Group of $2.4 million. The $11.1 million decrease in operating loss in the third quarter of 2005 is primarily due to a decrease in the above referenced costs incurred with respect to the Special Committee of $3.9 million, lower insurance premiums, primarily directors and officers liability insurance, of $6.0 million, lower legal and professional fees of $3.1 million, and improved operating results of the Canadian Newspaper Group of $1.2 million, partially offset by increased wages and benefits of $1.3 million at the Sun-Times News Group and $1.0 million at the Corporate and Investment Group. Operating revenue and operating loss for the nine months ended September 30, 2005 was $413.3 million and $17.1 million, respectively, compared with $409.6 million and $44.7 million, respectively, for the nine months ended September 30, 2004. The $3.6 million increase in revenue is due to increased revenue for the Canadian Newspaper Group of $8.7 million, partially offset by lower revenue at the Sun-Times News Group of $5.1 million. The decrease in operating loss of $27.6 million is largely due to the decrease in the above referenced costs incurred with respect to the Special Committee of $12.8 million, lower stock-based compensation of $9.2 million, lower legal and professional fees of $3.7 million, lower insurance premiums of $1.2 million, the non-recurring charge for circulation restitution in 2004 of $2.9 million and improved results of the Canadian Newspaper Group of $5.9 million, partially offset by increases in wages and benefits at the Sun-Times News Group of $3.9 million and the Corporate and Investment Group of $3.9 million, reflective of

the transition of the finance function from Toronto to Chicago, resulting in year over year staffing increases and retention and duplicative costs in 2005.


	*Operating Costs and Expenses*

Total operating costs and expenses decreased by $10.4 million to $142.5 million for the three months ended September 30, 2005 from $152.9 million for the same period in 2004. The decrease is primarily a result of lower operating costs at the Corporate Group of $10.5 million, largely related to a decrease in costs with respect to the Special Committee of $3.9 million, lower insurance premiums, largely directors and officers liability insurance of $5.0 million and lower legal and other professional fees of $3.2 million, partially offset by an increase in compensation costs of $1.2 million. Increased operating costs and expenses in the Canadian Newspaper Group of $1.9 million were largely offset by decreased costs for the Sun-Times News Group of $1.7 million. For the nine months ended September 30, 2005, operating costs and expenses decreased by $23.9 million to $430.4 million from $454.3 million in 2004, largely due to the decrease in Special Committee costs of $12.8 million, lower legal and other professional fees of $3.7 million, lower stock-based compensation of $9.2 million, decreased expense related to Chicago Sun-Times circulation restitution of $2.9 million, lower insurance premiums of $1.2 million, and a decrease in management fees of approximately $0.5 million and corporate aircraft costs of $0.5 million, partially offset by increased wages and benefit costs of $8.4 million and increases in operating costs and expenses associated with increased operating revenue, including newsprint of $0.3 million.


	*Other Income (Expense)*

Interest expense was $0.1 million and $2.4 million for the three months ended September 30, 2005 and 2004, respectively. The decrease in interest expense reflects the retirement of the 9% Senior Notes in 2004, resulting in lower interest expense of $2.4 million. Interest expense was $0.6 million and $18.3 million for the nine months ended September 30, 2005 and 2004, respectively. This decrease reflects a $12.7 million decrease in expense for the 9% Senior Notes and a $4.9 million decrease in expense for mark-to-market adjustments on the related interest rate swaps.

Interest and dividend income for the three months ended September 30, 2005 was $2.6 million compared with $5.9 million for the same period in 2004 and $10.2 million compared with $13.8 million for the nine months ended September 30, 2005 and 2004, respectively. These decreases are largely due to a reduction of interest income in respect of CanWest debentures in 2004 of $3.0 million and $6.5 million for the three and nine months ended September 30, 2004, respectively. The CanWest debentures were sold in the fourth quarter of 2004. The Company also had higher average cash and short-term investment balances for the nine months ended September 30, 2005 resulting in increased interest income of $2.7 million.

Other income (expense), net, in the third quarter of 2005 improved by $21.3 million to an expense of $3.2 million from an expense of $24.5 million in the same period in 2004, primarily due to debt extinguishment costs of $60.4 million in 2004, partially offset by a decrease in foreign currency gains, largely related to the Participation Trust, of $39.5 million. For the nine months ended September 30, 2005, other income (expense) improved by $37.5 million to an expense of $0.4 million in 2005 from an expense of $37.9 million in 2004. This change was primarily due to non-recurring items in 2004, including the cost of debt retirement of $60.4 million, partially offset by foreign currency gains, largely related to the Participation Trust, of $21.4 million. See Note 7 to the condensed consolidated financial statements.

Income taxes were an expense of $3.8 million and a benefit of $8.4 million for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005, income taxes were an expense of $33.2 million compared to a benefit of $5.6 million for the nine months ended September 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 $13.8 million and $9.5 million in the three months ended September 30, 2005 and 2004, respectively, and $38.9 million and $29.5 million for the nine months ended September 30, 2005 and 2004, respectively. In addition, the Company recorded income

tax expense of $0.6 million and $13.0 million in the three and nine months ended September 30, 2005, respectively, related to the cash distribution by Hollinger L.P. and the Company recorded an income tax benefit of $8.8 million and $16.3 million for the three and nine months ended September 30, 2005, respectively, related to certain contingent tax liabilities which were no longer deemed to be necessary at September 30, 2005.

Minority interest in the third quarter of 2005 totaled $0.4 million compared to $1.6 million in 2004 and $2.0 million compared to $2.7 million for the nine months ended September 30, 2005 and 2004, respectively. Minority interest primarily represents the minority share of net earnings of Hollinger L.P. The decrease for the three and nine months ended September 30, 2005 is due primarily to the lower operating results of Hollinger L.P.

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.

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

		(Dollars in thousands)
Operating revenue:
	Sun-Times News Group	$	113,590		$	116,009		$	340,691		$	345,755
	Canadian Newspaper Group		24,773			21,634			72,584			63,881
	Investment and Corporate Group		—			—			—			—

Total operating revenue		$	138,363		$	137,643		$	413,275		$	409,636

Operating loss:
	Sun-Times News Group	$	11,868		$	12,544		$	37,047		$	37,787
	Canadian Newspaper Group		2,017			788			6,347			428
	Investment and Corporate Group		(18,057	)		(28,602	)		(60,507	)		(82,887	)

Total operating loss		$	(4,172	)	$	(15,270	)	$	(17,113	)	$	(44,672	)

Operating revenue:
	Sun-Times News Group		82.1	%		84.3	%		82.4	%		84.4	%
	Canadian Newspaper Group		17.9	%		15.7	%		17.6	%		15.6	%
	Investment and Corporate Group		0.0	%		0.0	%		0.0	%		0.0	%

Total operating revenue			100	%		100	%		100	%		100	%

Operating loss margin:
	Sun-Times News Group		10.4	%		10.8	%		10.9	%		10.9	%

	Canadian Newspaper Group		8.1	%		3.6	%		8.7	%		0.7	%

	Total operating loss margin		(3.0	)%		(11.1	)%		(4.1	)%		(10.9	)%


	*Sun-Times News Group*

The following table summarizes certain results of operations for the periods indicated.


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2005		2004		2005		2004

		(In thousands)
Operating revenue:
	Advertising	$	88,918	$	90,488	$	265,513	$	269,929
	Circulation		21,577		22,605		66,344		66,996
	Job printing and other		3,095		2,916		8,834		8,830

Total operating revenue		$	113,590	$	116,009	$	340,691	$	345,755

Operating costs and expenses:
	Newsprint		17,201		16,644		50,745		51,052
	Compensation		44,069		42,783		133,560		129,626
	Other operating costs		32,654		36,362		96,815		104,682
	Depreciation		4,595		4,568		13,604		13,812
	Amortization		3,203		3,108		8,920		8,796

Total operating costs and expenses			101,722		103,465		303,644		307,968

Operating income		$	11,868	$	12,544	$	37,047	$	37,787

Operating revenue for the Sun-Times News Group was $113.6 million and $116.0 million for the three month periods ended September 30, 2005 and 2004, respectively, which is a decrease of $2.4 million. For the nine months ended September 30, 2005, operating revenue decreased $5.1 million to $340.7 million from $345.8 million compared to the same period in 2004.

Advertising revenue was $88.9 million for the three months ended September 30, 2005, compared to $90.5 million for the three months ended September 30, 2004. The $1.6 million decrease in advertising revenue for the three months ended September 30, 2005 primarily reflects decreases in retail advertising of $1.3 million, national advertising of $0.7 million and classified advertising revenue of $0.4 million, partially offset by an increase in internet advertising of $0.8 million. Advertising revenue was $265.5 million for the nine month period ended September 30, 2005, compared to $269.9 million for the same period in 2004. The $4.4 million decrease in advertising revenue primarily reflects decreases of $2.4 million in classified advertising, $3.5 million in retail advertising and $0.7 in national advertising, partially offset by an increase of $2.2 million in internet advertising.

Circulation revenue was $21.6 million and $22.6 million for the three month periods ended September 30, 2005 and 2004, respectively. The $1.0 million decrease in circulation revenue for the three months ended September 30, 2005 is largely attributable to a decrease in single copy sales. Circulation revenue was $66.3 million and $67.0 million for the nine months ended September 30, 2005 and 2004, respectively. Declines in volume at the Chicago Sun-Times more than offset the impact of the single copy price increase of $0.15 to $0.50 in April 2004.

Total operating costs and expenses for the third quarter were $101.7 million in 2005, compared with $103.5 million in 2004, a decrease of $1.7 million, and $303.6 million and $308.0 million for the nine months ended September 30, 2005 and 2004, respectively, a decrease of $4.3 million.

Newsprint expense for the third quarter of 2005 was $17.2 million, compared with $16.6 million in the third quarter of 2004, an increase of $0.6 million. For the three months ended September 30, 2005, newsprint consumption decreased approximately 6% and the average cost per tonne of newsprint increased by approximately 10% compared to the same period in 2004. For the nine months ended September 30, 2005 and 2004, newsprint expense was $50.7 million and $51.1 million, respectively. For the nine months ended

September 30, 2005, newsprint consumption decreased 10% and the average cost per tonne increased approximately 10% compared to the same period in 2004. Declines in consumption generally reflect the volume declines.

Compensation costs in 2005 for the third quarter were $44.1 million, compared with $42.8 million in the third quarter of 2004, an increase of $1.3 million. For the nine months ended September 30, 2005, compensation costs increased $3.9 million to $133.6 million from $129.6 million, compared to the same period in 2004. These increases were largely due to higher benefits costs of $0.8 million and $2.0 million for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Remaining increases in 2005 largely represent annual merit and union pay increases.

Other operating costs were $32.7 million and $96.8 million for the three and nine months ended September 30, 2005, compared with $36.4 million and $104.7 million for the same periods in 2004, a decrease of $3.7 million and $7.9 million, respectively. The decrease in other operating costs for the quarter was largely due to lower severance of $0.7 million, $2.3 million in decreased marketing and promotional spending and a decrease of $1.0 million in insurance costs, primarily director and officer liability insurance which is no longer allocated (included in the Investment and Corporate Group). For the nine month period, the decrease is reflective of circulation restitution charges in 2004 of $2.9 million, lower severance expense of $1.2 million, $3.8 million in decreased marketing and promotional spending, and a decrease of $1.5 million in insurance costs, primarily director and officer liability insurance, as previously discussed. These decreases were somewhat offset by an increase in professional fees of $0.4 million and higher circulation expenses of $0.4 million.

Operating income for the third quarter of 2005 totaled $11.9 million, compared with $12.5 million in 2004, a decrease of $0.7 million and was $37.0 million, compared with $37.8 million for the nine months ended September 30, 2005 and 2004, respectively. The decreases reflect the previously noted lower revenue and increased compensation costs, partially offset by the decrease in other operating costs.


	*Canadian Newspaper Group*

The following table summarizes certain results of operations for the periods indicated.


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2005		2004		2005		2004

		(In thousands)
Operating revenue:
	Advertising	$	17,806	$	15,654	$	54,210	$	47,032
	Circulation		3,790		3,488		9,351		9,086
	Job printing and other		3,177		2,492		9,023		7,763

Total operating revenue		$	24,773	$	21,634		72,584		63,881

Operating costs and expenses:
	Newsprint		2,121		1,886		6,153		5,542
	Compensation		11,277		11,134		32,692		32,160
	Other operating costs		8,615		7,319		25,501		24,312
	Depreciation		743		507		1,891		1,439

Total operating costs and expenses			22,756		20,846		66,237		63,453

Operating income		$	2,017	$	788	$	6,347	$	428

Operating revenue in the Canadian Newspaper Group for the third quarter of 2005 was $24.8 million, compared with $21.6 million in 2004 and for the nine months ended September 30, 2005 was $72.6 million, compared with $63.9 million in 2004. The increase of $3.1 million for the third quarter and $8.7 million for the nine month period primarily reflects increased advertising revenue of $2.2 million and $0.7 million of

increased job printing revenue in the third quarter of 2005, compared to the same period in 2004, and a $7.2 million increase in advertising revenue and a $1.3 million increase in job printing revenue for the nine month period ended September 30, 2005, compared to the same period in 2004. The strengthening of the Canadian dollar accounted for approximately $2.0 million and $5.8 million of the increase in operating revenue for the three and nine month periods ended September 30, 2005, respectively.

Operating income for the Canadian Newspaper Group was $2.0 million for the third quarter of 2005, compared to $0.8 million for the same period in 2004 and for the nine months ended September 30, 2005 operating income was $6.3 million, compared to $0.4 million for the same period in 2004. Operating costs in the three months ended September 30, 2005, increased $1.9 million, compared to third quarter 2004, primarily due to an increase in other operating costs of $1.3 million, made up primarily of an increase in legal and other professional fees of $0.2 million. Increased newsprint costs of $0.2 million reflect a 7% increase in average cost per tonne of newsprint and increased consumption of 5%. Higher compensation costs were caused by merit increases, partially offset by a decrease in pension and post retirement obligations of $0.7 million. For the nine months ended September 30, 2005, operating costs increased $2.8 million compared to 2004, primarily because of higher other operating costs of $1.2 million, largely due to higher legal and other professional fees of $0.8 million. Increased newsprint costs of $0.6 million largely reflect a 7% higher average cost per tonne. Increased compensation costs reflect higher wages and benefits costs of $1.3 million and a non-recurring refund of benefit costs in 2004 of $1.4 million, partially offset by a decrease in pension and post-retirement obligations of $2.2 million. A majority of the pension and post-retirement obligations relate to liabilities to retired employees not assumed by the purchasers of the related businesses in prior years. The strengthening of the Canadian dollar accounted for increased operating income of $0.2 million and $0.6 million for the three and nine months ended September 30, 2005, respectively.


	*Investment and Corporate Group*

The following table summarizes certain results of operations for the periods indicated.


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2005			2004			2005			2004

		(In thousands)
Operating costs and expenses:
	Compensation	$	2,982		$	1,830		$	9,540		$	14,853
	Other operating costs		15,007			26,545			50,663			67,631
	Depreciation		68			227			304			403

Total operating costs and expenses			18,057			28,602			60,507			82,887

Operating loss		$	(18,057	)	$	(28,602	)	$	(60,507	)	$	(82,887	)

Operating costs and expenses of the Investment and Corporate Group were $18.1 million for third quarter of 2005, compared with $28.6 million for the same period in 2004, a decrease of $10.5 million. The decrease in operating costs in the quarter is largely a result of a decrease of $3.9 million related to the Special Committee investigation, lower insurance premiums of $5.0 million, primarily director and officer liability insurance, due to additional coverage purchased in the third quarter of 2004, and decreases in other legal and professional fees of $3.2 million, somewhat offset by an increase in corporate staffing costs of $1.0 million. For the nine months ended September 30, 2005, the operating costs decreased $22.4 million to $60.5 million for 2005 from $82.9 million in 2004. The decrease in operating costs for the nine month period ended September 30, 2005 is largely a result of a decrease of $12.8 million related to the Special Committee investigation, a decrease in stock-based compensation charges of $9.2 million and decreases in other legal and professional fees of $4.1 million, somewhat offset by increases in corporate staffing costs of $3.9 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, upon their maturity in March 2005.

The following table outlines the Company’s cash and cash equivalents, short-term investment and debt positions as of the dates indicated.


	September 30,		December 31,
	2005		2004

	(In thousands)
Cash and cash equivalents	$	129,477	$	395,926
Short-term investments		57,400		532,050

Total cash and cash equivalents and short-term investments	$	186,877	$	927,976

8.625% Senior Notes due 2005	$	—	$	5,082
9% Senior Notes due 2010		6,000		6,000
Other debt		2,180		3,276

Total debt	$	8,180	$	14,358

Cash and cash equivalents and short-term investments decreased to $186.9 million at September 30, 2005 from $928.0 million at December 31, 2004, a decrease of $741.1 million. This decrease was primarily the result of payments of approximately $524.3 million in dividends, $184.8 million in income taxes and $6.2 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 $184.8 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:


	September 30,		December 31,
	2005		2004

	(In thousands)
Classified as current liabilities	$	552,184	$	689,728
Classified as non-current liabilities		353,564		348,867

	$	905,748	$	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 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 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 September 30, 2005, working capital, excluding current debt obligations and restricted cash and escrow deposits, was a deficiency of $393.7 million compared to a deficiency of $34.5 million at December 31, 2004. The $359.2 million change is primarily due to the declaration and payment of the regular quarterly and second special dividends of $285.6 million and the payment of dividends to the minority unitholders of Hollinger L.P. of $11.9 million.

Cash used in continuing operating activities was $188.0 million for the nine months ended September 30, 2005, compared with $7.4 million provided by continuing operating activities for the nine month period ended September 30, 2004. The use of cash as reflected in changes in working capital accounts, net of $177.2 million for the nine months ended September 30, 2005 is largely due to lower income taxes payable of $137.5 million, reflecting the payment of taxes. During the nine months ended September 30, 2004, the use of cash as reflected in changes in working capital accounts, net increased $25.2 million, largely in accounts payable and accrued expenses. Loss from continuing operations improved by $41.8 million to a loss of $43.2 million for the nine months ended September 30, 2005 compared to $85.0 million for the same period in 2004.

Cash provided by investing activities was $455.1 million in 2005 compared with $962.4 million in 2004. The decrease of $507.3 million largely reflects the cash received of $1,191.2 million from the sale of the Telegraph Group in 2004, which was used to reduce debt and also increased short-term investments. In 2005, the redemption of short-term investments, net of $474.7 million was used to partially fund the dividends and tax payments.

Cash used in financing activities was $534.9 million in 2005, compared to $300.6 million used in financing activities in 2004, an increase of $234.3 million. The period to period change in 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. aggregating $524.3 million and cash provided from the issuance of stock (from the exercise of stock options) of $36.9 million in 2004, which did not reoccur in 2005, partially offset by lower repayment of debt of $335.4 million largely related to the repayment of the 9% Senior Notes in 2004.


	*Debt*

Long-term debt, including the current portion, was $8.2 million at September 30, 2005 compared with $14.4 million at December 31, 2004. On March 15, 2005, the Company retired the $5.1 million of 8.625% Senior Notes upon their maturity.


	*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.


	*Dividends and Other Commitments*

See “Declaration of Special and Regular Dividends” under the caption “Recent Business Developments — 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 credit are required to support certain projected workers’ compensation obligations and reimbursement of claims paid by a third party claims administrator. At September 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 September 30, 2005 (unless otherwise noted):


			Due in		Due Between		Due Between		Due Over
	Total		1 Year or 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		2,180		1,222		945		13		—
Operating leases(2)		66,877		5,459		12,280		10,514		38,624

Total contractual cash obligations	$	75,057	$	12,681	$	13,225	$	10,527	$	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 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 correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and correction 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 $56.9 million in the first nine months of 2005 and $56.6 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 nine months ended September 30, 2005, a change in the price of newsprint of $50 per tonne would have increased or decreased the loss from continuing operations for the nine months ended September 30, 2005 by approximately $2.9 million. The average price per tonne of newsprint was approximately $590 for the nine months ended September 30, 2005 versus approximately $540 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 September 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 nine months ended September 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 nine months ended September 30, 2005:


	Actual Average
	2005 Rate		Increase/Decrease

			(In thousands)
Canada		0.8172/Cdn.	$	(474	)

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 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 September 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 September 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 September 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 Form 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.

	•	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 September 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 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.

On December 22, 2005, the Company settled litigation with Wells Fargo Bank N.A. and Key Corporate Capital N.A., regarding a 1995 aircraft lease for $800,000 and the parties have agreed to dismiss all claims, cross claims, and third-party claims against one another. The Company has recognized the expense under the caption “Other income (expense), net” in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005. See Note 7 to the condensed consolidated financial statements and “Item 3 — Legal Proceedings” of the Company’s 2004 10-K.


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

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 28, 2005


	By:	/s/ Gregory A. Stoklosa


	Gregory A. Stoklosa
	Vice President and Chief Financial Officer

Date: December 28, 2005

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