Hollinger International September 30, 2001
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


Table of Contents

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

FORM 10-Q

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

For the quarterly period ended September 30, 2001

OR

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

For the transition period from __________ to _____________

Commission File No. 0-24004

HOLLINGER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

     
Delaware
(State or other jurisdiction of
incorporation or organization)
  95-3518892
(I.R.S. Employer
Identification No.)

401 North Wabash Avenue, Suite 740, Chicago, Illinois 60611
(Address of Principal executive offices)        (Zip Code)

Registrant’s telephone number, including area code (312) 321-2299

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     (Check Mark)     No ____

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

         
Class Outstanding at November 9, 2001


Class A Common Stock par value $.01 per share
  86,051,368 shares
Class B Common Stock par value $.01 per share
  14,990,000 shares


Table of Contents

INDEX

HOLLINGER INTERNATIONAL INC.

         
        PAGE
       
PART I   FINANCIAL INFORMATION    
Item 1.   Condensed Financial Statements   1
Item 2.   Management’s Discussion and Analysis of Results of Operations and Financial Condition   11
Item 3   Quantitative and Qualitative Analysis about Market Risk   18
PART II   OTHER INFORMATION    
Item 6.   Exhibits and reports on Form 8-K   20
    Signatures   21


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended
September 30, 2001 and September 30, 2000
(Amounts in Thousands, Except Per Share Data)
(Unaudited)

                                     
        Three Months Ended September 30   Nine Months Ended September 30
       
 
        2001   2000   2001   2000
       
 
 
 
Operating revenues:
                               
   
Advertising
  $ 179,977     $ 373,732     $ 630,163     $ 1,203,922  
   
Circulation
    68,204       118,444       215,430       356,878  
   
Job printing
    5,478       14,169       19,319       44,354  
   
Other
    9,865       11,129       31,135       35,659  
 
   
     
     
     
 
   
Total operating revenues
    263,524       517,474       896,047       1,640,813  
 
   
     
     
     
 
Operating costs and expenses:
                               
   
Newsprint
    48,447       76,517       161,976       233,571  
   
Compensation costs
    87,490       172,449       285,560       526,561  
   
Stock-based compensation
    (486 )     1,652       (1,364 )     1,652  
   
Other operating costs
    128,460       198,837       415,433       609,843  
   
Infrequent items
    953       1,109       4,808       5,439  
   
Depreciation
    9,440       16,262       28,287       48,967  
   
Amortization
    8,769       15,630       27,506       46,737  
 
   
     
     
     
 
   
Total operating costs and expenses
    283,073       482,456       922,206       1,472,770  
 
   
     
     
     
 
Operating income (loss)
    (19,549 )     35,018       (26,159 )     168,043  
Other income (expense):
                               
 
Interest expense
    (19,659 )     (40,384 )     (59,505 )     (112,142 )
 
Amortization of debt issue costs
    (2,511 )     (2,622 )     (7,207 )     (7,781 )
 
Interest and dividend income
    18,749       3,042       64,293       5,497  
 
Other income (expense), net
    (158,090 )     5,992       (162,952 )     26,852  
 
   
     
     
     
 
Total other income (expense)
    (161,511 )     (33,972 )     (165,371 )     (87,574 )
 
   
     
     
     
 
Earnings (loss) before income taxes and minority interest
    (181,060 )     1,046       (191,530 )     80,469  
Provision for (recovery of) income taxes
    (39,020 )     2,769       (31,231 )     32,628  
 
   
     
     
     
 
Earnings (loss) before minority interest
    (142,040 )     (1,723 )     (160,299 )     47,841  
Minority interest
    (2,425 )     2,198       (6,535 )     18,875  
 
   
     
     
     
 
Net earnings (loss)
  $ (139,615 )   $ (3,921 )   $ (153,764 )   $ 28,966  
 
   
     
     
     
 
Basic earnings (loss) per share
  $ (1.37 )   $ (0.06 )   $ (1.57 )   $ 0.22  
 
   
     
     
     
 
Diluted earnings (loss) per share
  $ (1.37 )   $ (0.06 )   $ (1.57 )   $ 0.22  
 
   
     
     
     
 
Weighted average shares outstanding — basic
    101,677       98,705       100,861       98,594  
 
   
     
     
     
 
Weighted average shares outstanding — diluted
    101,677       98,705       100,861       102,943  
 
   
     
     
     
 

1


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2001 and September 30, 2000
(Amounts in Thousands)
(Unaudited)

                                   
      Three Months Ended September 30   Nine Months Ended September 30
     
 
      2001   2000   2001   2000
     
 
 
 
Net earnings (loss)
  $ (139,615 )   $ (3,921 )   $ (153,764 )   $ 28,966  
Other comprehensive income (loss):
                               
 
Unrealized loss on securities available for sale
    (84,034 )     (3,906 )     (45,193 )     (1,860 )
 
Foreign currency translation adjustment
    3,531       (30,322 )     (31,916 )     (86,031 )
 
   
     
     
     
 
Comprehensive income (loss)
  $ (220,118 )   $ (38,149 )   $ (230,873 )   $ (58,925 )
 
   
     
     
     
 

2


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2001 and December 31, 2000
(Amounts in Thousands)

                   
      September 30,   December 31,
      2001   2000
     
 
      (Unaudited)        
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 273,230     $ 137,671  
 
Accounts receivable, net
    225,838       275,826  
 
Due from affiliates
    54,796       39,692  
 
Inventories
    26,075       21,834  
 
Other current assets
    18,275       11,289  
 
   
     
 
Total current assets
    598,214       486,312  
Investments
    503,119       899,078  
Property, plant and equipment, net of accumulated depreciation
    317,939       360,596  
Intangible assets, net of accumulated amortization
    715,501       938,314  
Deferred financing costs and other assets
    36,785       66,697  
 
   
     
 
 
  $ 2,171,558     $ 2,750,997  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Current installments of long-term debt
  $ 3,346     $ 4,753  
 
Accounts payable and accrued expenses
    262,569       292,381  
 
Income taxes payable
    322,564       386,678  
 
Deferred revenue
    43,776       60,006  
 
   
     
 
Total current liabilities
    632,255       743,818  
Long-term debt, less current installments
    808,966       807,495  
Deferred income taxes
    139,720       185,846  
Other long-term liabilities
    90,592       54,325  
 
   
     
 
Total liabilities
    1,671,533       1,791,484  
 
   
     
 
Minority interest
    40,162       89,228  
 
   
     
 
Redeemable preferred stock
    8,651       13,088  
 
   
     
 
Stockholders’ equity:
               
 
Convertible preferred stock
           
 
Class A common stock
    988       1,060  
 
Class B common stock
    150       150  
 
Additional paid-in capital
    577,599       748,503  
 
Accumulated other comprehensive income
    (240,753 )     (163,644 )
 
Retained earnings
    336,072       531,156  
 
   
     
 
 
    674,056       1,117,225  
 
Class A common stock in treasury, at cost
    (179,906 )     (258,604 )
 
Class A common stock in escrow
    (42,938 )     (1,424 )
 
   
     
 
Total stockholders’ equity
    451,212       857,197  
 
   
     
 
 
  $ 2,171,558     $ 2,750,997  
 
   
     
 

3


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and September 30, 2000
(Amounts in Thousands)
(Unaudited)

                     
        2001   2000
       
 
Cash Flows From Operating Activities:
               
 
Net earnings (loss)
  (153,764 )   $ 28,966  
 
Items not involving cash:
               
   
Depreciation and amortization
    55,793       95,704  
   
Amortization of debt issue costs
    7,207       7,781  
   
Minority interest
    (6,535 )     18,875  
   
Loss on sale of investments
    29,157        
   
Gain on sale of assets
    (7,311 )     (42,650 )
   
Non-cash interest
    (45,255 )      
   
Other non-cash items
    37,419       14,016  
 
Changes in working capital, net
    (467 )     (47,309 )
 
   
     
 
   
Cash provided by (used in) operating activities
    (83,756 )     75,383  
 
   
     
 
Cash Flows From Investing Activities:
               
 
Capital expenditures
    (38,018 )     (58,890 )
 
Additions to investments
    (44,411 )     (57,976 )
 
Acquisitions, net
          (1,963 )
 
Proceeds from disposal of investments
    310,266       85,987  
 
Proceeds from disposal of assets
    226,989        
 
Other investing activities
          (1,345 )
 
   
     
 
   
Cash provided by (used in) investing activities
    454,826       (34,187 )
 
   
     
 
Cash Flows From Financing Activities:
               
 
Proceeds from long-term debt
    90,245       327,343  
 
Repayments of long-term debt
    (92,545 )     (155,420 )
 
Payment of debt issue costs
          (3,085 )
 
Repurchase of common shares and redemption of preferred shares
    (145,900 )      
 
Redemption of Special shares of subsidiary
          (58,164 )
 
Changes in amounts due from affiliates
    (15,504 )     (37,304 )
 
Dividends and distributions to minority interests
    (30,950 )     (10,923 )
 
Cash dividends paid
    (41,320 )     (47,779 )
 
Other financing activities
    6,026       (4,379 )
 
   
     
 
   
Cash provided by (used in) financing activities
    (229,948 )     10,289  
 
   
     
 
Effect of exchange rate changes on cash
    (5,563 )     (2,958 )
 
   
     
 
Net increase in cash and cash equivalents
    135,559       48,527  
Cash and cash equivalents at beginning of period
    137,671       39,903  
 
   
     
 
Cash and cash equivalents at end of period
  $ 273,230     $ 88,430  
 
   
     
 
Cash paid for interest
  $ 82,918     $ 135,491  
 
   
     
 
Cash paid for taxes
  $ 52,338     $ 24,929  
 
   
     
 

4


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Unaudited Financial Statements

     The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is presumed that the reader has already read the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

     In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

Note 2 — Principles of Presentation and Consolidation

     The Company is a subsidiary of Hollinger Inc., a Canadian corporation, which at September 30, 2001 owned approximately 34.4 % of the combined equity and approximately 72.7 % of the combined voting power of the outstanding Common Stock of the Company, without giving effect to the future issuance of Class A Common Stock upon conversion of the Company’s remaining Series E Redeemable Convertible Preferred Stock (“Series E Preferred Stock”).

     The Consolidated Financial Statements include the accounts of the Company and its majority owned subsidiaries and other controlled entities. At September 30, 2001 the Company’s interest in Hollinger Canadian Newspapers, Limited Partnership (“HCNLP”) was 87%.

     All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made in the 2000 financial statements to conform to the 2001 presentation.

5


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)

Note 3 — Earnings per share

     The following table reconciles the numerator and denominator for the calculation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2001 and 2000:

                           
      Three Months Ended September 30, 2001
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
              (in thousands)        
Net loss
  $ (139,615 )                
Add dividends:
                       
 
Convertible preferred stock
                     
 
Series E Preferred Stock
    (108 )                
 
   
                 
Basic EPS
 
Net loss available to common stockholders
    (139,723 )     101,677     $ (1.37 )
Effect of dilutive securities
 
 
None
                   
 
   
     
         
Diluted EPS
 
Net loss available to common stockholders and assumed conversions
  $ (139,723 )     101,677     $ (1.37 )
 
   
     
         
                           
      Three Months Ended September 30, 2000
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
              (in thousands)        
Net loss
  $ (3,921 )                
Deduct dividends:
                       
 
Convertible preferred stock
    (2,138 )                
 
Series E Preferred Stock
    (128 )                
 
   
                 
Basic EPS
 
Net income available to common stockholders
    (6,187 )     98,705     $ (0.06 )
Effect of dilutive securities
 
 
None
                   
 
   
     
         
Diluted EPS
 
Net income available to common stockholders and assumed conversions
  $ (6,187 )     98,705     $ (0.06 )
 
   
     
         

6


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)

                           
      Nine Months Ended September 30, 2001
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
              (in thousands)        
Net loss
  $ (153,764 )                
Add dividends:
                       
 
Convertible preferred stock
    (4,274 )                
 
Series E Preferred Stock
    (359 )                
 
     
                 
Basic EPS
 
Net loss available to common stockholders
    (158,397 )     100,861     $ (1.57 )
Effect of dilutive securities
 
 
None
                   
 
     
     
         
Diluted EPS
 
Net loss available to common stockholders and assumed conversions
  $ (158,397 )     100,861     $ (1.57 )
 
     
     
         
                           
      Nine Months Ended September 30, 2000
     
      Income   Shares   Per-Share
      (Numerator)   (Denominator)   Amount
     
 
 
            (in thousands)        
Net earnings
  $ 28,966                  
Deduct dividends:
                       
 
Convertible preferred stock
    (6,412 )                
 
Series E Preferred Stock
    (392 )                
 
     
                   
Basic EPS
 
Net income available to common stockholders
    22,162       98,594     $ 0.22  
Effect of dilutive securities
 
HCPH Special shares
          3,291          
 
Stock options
          1,058          
 
     
     
         
Diluted EPS
 
Net income available to common stockholders and assumed conversions
  $ 22,162       102,943     $ 0.22  
 
     
     
         

7


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)

Note 4 — Segment Information

     The Company operates principally in the business of publishing, printing and distribution of newspapers and magazines and holds investments principally in companies that operate in the same business as the Company. The Community Group includes the results of the Jerusalem Post. XSTM Holdings (2000) Inc. (formerly Southam Inc.), Hollinger Canadian Newspapers, Limited Partnership and The National Post Company make up the Canadian Newspaper Group. On September 1, 2001 the Company sold its interest in The National Post Company. Effective January 1, 2001 corporate overhead costs, which had previously been allocated, are disclosed separately in the Investment and Corporate Group. Segment information for both the three months and nine months ended September 30, 2000 has been restated to conform to the 2001 disclosure. The following is a summary of the segments of the Company:

                                                   
    Three months ended September 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
    (in thousands)
Revenues
  $ 109,982     $ 4,850     $ 111,340     $ 37,352     $     $ 263,524  
Depreciation and amortization
  $ 9,276     $ 611     $ 5,190     $ 2,675     $ 457     $ 18,209  
Operating income (loss), excluding infrequent
items and stock-based compensation
  $ 1,660     $ (436 )   $ (1,215 )   $ (14,972 )   $ (4,119 )   $ (19,082 )
Equity in loss of affiliates
  $ (628 )   $     $ (2,308 )   $     $     $ (2,936 )
                                                 
    Nine months ended September 30, 2001
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
    (in thousands)
Revenues
  $ 333,580     $ 15,131     $ 371,161     $ 176,175     $     $ 896,047  
Depreciation and amortization
  $ 27,374     $ 1,647     $ 14,473     $ 10,873     $ 1,426     $ 55,793  
Operating income (loss), excluding infrequent
items and stock-based compensation
  $ 6,878     $ (2,480 )   $ 24,841     $ (38,065 )   $ (13,889 )   $ (22,715 )
Equity in loss of affiliates
  $ (2,893 )   $     $ (10,411 )   $     $     $ (13,304 )
Total assets
  $ 612,030     $ 69,474     $ 546,397     $ 645,109     $ 298,548     $ 2,171,558  
Capital expenditures
  $ 9,503     $ 11,951     $ 13,869     $ 2,525     $ 170     $ 38,018  

8


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)

                                                 
    Three months ended September 30, 2000
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
    (in thousands)
Revenues
  $ 96,863     $ 17,540     $ 128,845     $ 274,226     $     $ 517,474  
Depreciation and amortization
  $ 5,743     $ 1,580     $ 4,087     $ 20,045     $ 437     $ 31,892  
Operating income (loss), excluding infrequent
items and stock-based compensation
  $ 8,118     $ 209     $ 13,740     $ 19,501     $ (3,789 )   $ 37,779  
Equity in earnings (loss) of affiliates
  $ (45 )   $     $ (899 )   $ 161     $     $ (783 )

                                                 
    Nine months ended September 30, 2000
   
                    U.K.   Canadian   Investment        
    Chicago   Community   Newspaper   Newspaper   and Corporate        
    Group   Group   Group   Group   Group   Total
   
    (in thousands)
Revenues
  $ 291,124     $ 59,155     $ 429,692     $ 860,842     $     $ 1,640,813  
Depreciation and amortization
  $ 15,907     $ 5,437     $ 12,924     $ 60,123     $ 1,313     $ 95,704  
Operating income (loss), excluding infrequent items and stock-based compensation
  $ 29,842     $ 4,196     $ 71,641     $ 79,864     $ (10,409 )   $ 175,134  
Equity in earnings (loss) of affiliates
  $ (135 )   $     $ (4,289 )   $ 515     $     $ (3,909 )
Total assets
  $ 481,300     $ 147,831     $ 529,354     $ 2,060,936     $ 225,144     $ 3,444,565  
Capital expenditures
  $ 20,626     $ 2,782     $ 9,928     $ 25,149     $ 405     $ 58,890  

Note 5 — Capital Stock

On May 31, 2001 the Company redeemed all 829,409 shares of Series C Preferred Stock for 7,052,464 shares of Class A Common Stock. The Series C Preferred Stock was held by Hollinger Inc. On September 6, 2001 the Company purchased for cancellation, from Hollinger Inc., the 7,052,464 shares of Class A Common Stock for a total cost of $92.2 million.

9


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)

Note 6 — Investments

In August 2001, the Company sold a participation interest in Cdn. $540 million ($350 million) principal amount of 12 1/8% Fixed Rate Subordinated Debentures due 2010 (debentures) issued by a subsidiary of CanWest Global Communication Corp. (CanWest) to a special purpose trust (the “Participation Trust”). This transaction resulted in proceeds to the Company of $297.5 million and has been accounted for as a sale in accordance with SFAS 140. The net loss on the transaction, including the realized holding losses on the underlying debentures, amounted to $43.9 million and has been included in Other expenses. The net cash proceeds were used to repay amounts borrowed under the Company’s bank credit facility and for general corporate purposes.

Under the terms of the Participation Trust, the interest payments received by the Company in respect of the underlying CanWest debentures will be paid to the Participation Trust. However, after May 15, 2003 the Company may be required to deliver, to the Participation Trust, CanWest debentures with a face value equivalent to $350 million. Given that the CanWest debentures are denominated in Canadian dollars, the Company has entered into a forward foreign exchange contract to mitigate its currency exposure. The mark to market gain on the forward contract and the foreign exchange loss on the residual obligation have been charged to earnings for the period.

In addition, in accordance with the Participation Agreement, the Company cannot transfer to an unaffiliated third party, until at least May 15, 2003, the equivalent of $50 million principal amount of CanWest debentures. The Participation Trust and its investors have no recourse to the Company’s other assets in the event that CanWest defaults on its debentures.

Note 7 — The National Post Company

In August 2001, the Company entered into an agreement to sell to CanWest its 50% interest in The National Post Company (National Post). In accordance with the agreement, the Company’s representatives resigned from their executive positions at the National Post effective September 1, 2001.

Accordingly, since with effect from September 1, 2001, the Company has no influence over the operations of the National Post, the Company no longer consolidates or records on an equity basis its share of earnings or losses. The results of operations of the National Post are included in the consolidated results to August 31, 2001.

Note 8 — Sale of Canadian Properties

Effective August 31, 2001 the Company completed the sale of most of its remaining Canadian newspapers for sale proceeds of approximately Cdn.$220 million, subject to adjustment. Included in this sale were community newspapers in Ontario such as The Kingston Whig-Standard, The Sault Star and the Peterborough Examiner. The consideration for this sale was paid in cash.

10


Table of Contents

HOLLINGER INTERNATIONAL INC. AND SUBSIDIARIES

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

OVERVIEW

     The Company’s business is concentrated in the publishing, printing and distribution of newspapers and includes the Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group. The Chicago Group includes the Chicago Sun-Times, Post Tribune and city and suburban newspapers in the Chicago metropolitan area. The Community Group includes one U.S. community newspaper, which was sold during the third quarter, and The Jerusalem Post. The U.K. Newspaper Group includes the operating results of the Telegraph. The Canadian Newspaper Group includes results of XSTM Holdings (2000) Inc. (“Southam”), Hollinger Canadian Newspapers, Limited Partnership (“Hollinger L.P.”) and The National Post Company (“National Post”), which was sold September 1, 2001.

CONSOLIDATED RESULTS OF OPERATIONS

A net loss in the third quarter of 2001 amounted to $139.6 million or a loss of $1.37 per share compared with a net loss of $3.9 million or a loss of $0.06 per share, in 2000. A net loss in the nine months ended September 30, 2001 amounted to $153.8 million or a loss of $1.57 per share compared to net earnings of $29.0 million or earnings of $0.22 per share in 2000.

There were a number of infrequent and non-recurring items affecting the results of both years. In the third quarter of 2001 infrequent and non-recurring items amounted to a net loss of $127.0 million after income tax and minority interest and primarily consisted of gains and losses on sales of certain Canadian properties, an accounting loss in respect of the total return equity swap, gains and losses on sales of investments, duplicative start-up costs related to the new printing facility in Chicago and the write-off of investments. In the third quarter of 2000, infrequent and non-recurring items amounted to a net loss of $0.7 million after income tax and minority interest and primarily included duplicative start-up costs related to the new printing facility in Chicago, severance costs in Canada, gains on assets sales, equity losses at Interactive Investor International plc (III) and stock-based compensation cost.

In the nine months ended September 30, 2001, infrequent and non-recurring items amounted to a net loss of $144.7 million after income tax and minority interest and primarily consisted of gains and losses on sales of Canadian properties, an accounting loss in respect of the total return equity swap, gains and losses on sales of investments, duplicative start-up costs related to the new printing facility in Chicago, equity losses at Internet related investments and the write-off of investments. In the nine months ended September 30, 2000, infrequent and non-recurring items amounted to a net loss of $1.8 million after income tax and minority interest and primarily consisted of duplicative start-up costs related to the new printing facility in Chicago, severance costs in Canada, gains on assets sales, including Trip.com and the partial interest in III, the amount paid on mandatory retirement of HCPH Special shares in excess of the recorded book amount and stock-based compensation cost.

Net earnings from comparable operations, which excludes infrequent and non-recurring items amounted to a net loss of $12.6 million or a loss of $0.13 per diluted share in the third quarter of 2001 compared with a net loss of $3.2 million or a loss of $0.03 per diluted share in 2000. Net earnings from comparable operations amounted to a loss of $9.0 million or a loss of $0.09 per diluted share in the nine months ended September 30, 2001 compared with net earnings of $30.7 million or earnings of $0.27 per diluted share in 2000. In determining diluted earnings per share from comparable operations in 2001 the weighted average common shares issuable prior to actual conversion of the Company’s Series C preferred stock were included. This instrument was anti-dilutive in 2001. In 2000 common shares issuable on exercise of stock options and on conversion of convertible instruments were included whether or not dilutive.

Operating revenue and operating income for the third quarter of 2001 was $263.5 million and a loss of $19.5 million compared with $517.5 million and operating income of $35.0 million in 2000. Operating revenue and operating income for the nine months ended September 30, 2001 was $896.0 million and a loss of $26.2 million compared with $1,640.8 million and operating income of $168.0 million in 2000. The significant decrease in both operating revenue and operating income in the third quarter and nine months ended September 30 was largely the result of the sales of Canadian properties in both 2000 and 2001 and the sale of US Community properties in 2000 but also is due to lower operating results at Chicago Group (excluding the impact of the acquisition of Copley Group), the U.K. Newspaper Group and the remaining Canadian properties.

EBITDA for the third quarter of 2001 was a loss of $1.3 million compared with EBITDA of $66.9 million in 2000, a decrease of $68.2 million. EBITDA for the nine months ended September 30, 2001 was $29.6 million compared with $263.7 million in 2000, a decrease of $234.1 million. Approximately $52.5 million of the third quarter decrease in EBITDA and $175.9 million of the decrease in EBITDA in the nine months ended September 30 were due to assets sold. The balance of the reduction in EBITDA in both the third quarter and the nine months was mainly due to lower operating results at Chicago Group (excluding the impact of the acquisition of Copley Group), the U.K. Newspaper Group and the remaining Canadian properties.

Lower EBITDA in both the third quarter and nine months ended September 30, 2001, was offset in part, by lower interest costs and increased interest and dividend income. Lower interest expense results from significantly lower debt levels in 2001 compared with 2000 as the Company’s Bank Credit Facility, which totaled $972.0 million, was repaid in November 2000 with part of the cash proceeds from the sale of properties to CanWest. Additional reductions in borrowings and increased positive cash resulted from the third quarter sale of participation interests in the CanWest debentures. The increased interest and dividend income primarily results from interest on the CanWest debentures, prior to the sale of participation interests, and a dividend on CanWest shares. Both the CanWest shares and debentures were received as part of the proceeds from the sale of properties to CanWest in November 2000.

Interest expense for the third quarter and nine months ended September 30, 2001, was $19.7 million and $59.5 million versus $40.4 million and $112.1 million in 2000, reductions of $20.7 million and $52.6 million, respectively. Interest and dividend income was $18.7 million and $64.3 million, respectively, for the third quarter and nine months ended September 30, 2001, compared to $3.0 million and $5.5 million in 2000, increases of $15.7 million and $58.8 million respectively. The proceeds from both the sales of operations and the participation interests in the CanWest debentures allowed for the combined $36.4 million and $111.4 million of increased interest and dividend income and interest expense reduction in the third quarter and nine months ended September 30, 2001, respectively.

Net other expense in the third quarter of 2001 amounted to $158.1 million and primarily included gains and losses on sales of certain Canadian properties, an accounting loss in respect of the total return equity swap, gains and losses on sales of investments and the write-off of investments. Net other income in the third quarter of 2000 amounted to $6.0 million and primarily included gains on asset sales, losses from equity accounted companies and foreign currency losses. Net other expense in the nine months ended September 30, 2001 amounted to $163.0 million and primarily included gains and losses on sales of certain Canadian properties, an accounting loss in respect of the total return equity swap, equity losses at Internet related investments, gains and losses on sales of investments and the write-off of investments. Net other income in the nine months ended September 30, 2000 amounted to $26.9 million and primarily included gains on asset sales, losses from equity accounted companies and foreign currency losses.

Minority interest for the nine months ended September 30, 2001 amounted to earnings of $6.5 million and primarily included the minority’s share of the National Post losses from operations to August 31, 2001, offset in part by the minority share of net earnings of Hollinger L.P., including the minority’s share of the gains on sales of Canadian properties by Hollinger L.P.. In 2000 minority interest amounted to an expense of $18.9 million and primarily included the minority’s share of net earnings of Hollinger L.P. and $10.9 million related to the amount paid on mandatory retirement of HCPH Special shares in excess of the recorded book amount.

11


Table of Contents

                                   
      Three Months Ended September 30,   Nine Months Ended September 30,
     
 
      2001   2000   2001   2000
     
 
 
 
      (dollar amounts in thousands)   (dollar amounts in thousands)
Operating revenues:
                               
 
Chicago Group
  $ 109,982     $ 96,863     $ 333,580     $ 291,124  
 
Community Group
    4,850       17,540       15,131       59,155  
 
U.K. Newspaper Group
    111,340       128,845       371,161       429,692  
 
Canadian Newspaper Group
    37,352       274,226       176,175       860,842  
 
Investment and Corporate Group
                       
 
   
     
     
     
 
Total operating revenue
  $ 263,524     $ 517,474     $ 896,047     $ 1,640,813  
 
   
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation:
                               
 
Chicago Group
  $ 1,660     $ 8,118     $ 6,878     $ 29,842  
 
Community Group
    (436 )     209       (2,480 )     4,196  
 
U.K. Newspaper Group
    (1,215 )     13,740       24,841       71,641  
 
Canadian Newspaper Group
    (14,972 )     19,501       (38,065 )     79,864  
 
Investment and Corporate Group
    (4,119 )     (3,789 )     (13,889 )     (10,409 )
 
   
     
     
     
 
Total operating income (loss), excluding infrequent items and stock-based compensation
  $ (19,082 )   $ 37,779     $ (22,715 )   $ 175,134  
 
   
     
     
     
 
EBITDA:
                               
 
Chicago Group
  $ 10,936     $ 13,861     $ 34,252     $ 45,749  
 
Community Group
    175       1,789       (833 )     9,633  
 
U.K. Newspaper Group
    3,975       17,827       39,314       84,565  
 
Canadian Newspaper Group
    (12,297 )     39,546       (27,192 )     139,987  
 
Investment and Corporate Group
    (3,662 )     (3,352 )     (12,463 )     (9,096 )
 
   
     
     
     
 
Total EBITDA
  $ (873 )   $ 69,671     $ 33,078     $ 270,838  
 
   
     
     
     
 
 
Operating revenues:
                               
 
  Chicago Group
    41.7 %     18.7 %     37.2 %     17.7 %
 
  Community Group
    1.8 %     3.4 %     1.7 %     3.6 %
 
  U.K. Newspaper Group
    42.3 %     24.9 %     41.4 %     26.2 %
 
  Canadian Newspaper Group
    14.2 %     53.0 %     19.7 %     52.5 %
 
  Investment and Corporate Group
    0.0 %     0.0 %     0.0 %     0.0 %
 
   
     
     
     
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
Operating income (loss), excluding infrequent items and stock-based compensation:
                               
 
Chicago Group
    -8.7 %     21.5 %     -30.3 %     17.0 %
 
Community Group
    2.3 %     0.5 %     10.9 %     2.4 %
 
U.K. Newspaper Group
    6.4 %     36.4 %     -109.3 %     40.9 %
 
Canadian Newspaper Group
    78.5 %     51.6 %     167.6 %     45.6 %
 
Investment and Corporate Group
    21.5 %     -10.0 %     61.1 %     -5.9 %
 
   
     
     
     
 
Total operating income (loss), excluding infrequent items and stock-based compensation
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
EBITDA:
                               
 
Chicago Group
    -1252.7 %     19.9 %     103.5 %     16.9 %
 
Community Group
    -20.1 %     2.6 %     -2.5 %     3.6 %
 
U.K. Newspaper Group
    -455.3 %     25.6 %     118.9 %     31.2 %
 
Canadian Newspaper Group
    1408.6 %     56.7 %     -82.2 %     51.7 %
 
Investment and Corporate Group
    419.5 %     -4.8 %     -37.7 %     -3.4 %
 
   
     
     
     
 
Total EBITDA
    100.0 %     100.0 %     100.0 %     100.0 %
 
   
     
     
     
 
EBITDA Margin:
                               
 
Chicago Group
    9.9 %     14.3 %     10.3 %     15.7 %
 
Community Group
    3.6 %     10.2 %     n/a       16.3 %
 
U.K. Newspaper Group
    3.6 %     13.8 %     10.6 %     19.7 %
 
Canadian Newspaper Group
    n/a       14.4 %     n/a       16.3 %
 
Investment and Corporate Group
    n/a       n/a       n/a       n/a  
Total EBITDA Margin
    n/a       13.5 %     3.7 %     16.5 %

See Notes on page 14

12


Table of Contents

                                     
        Three Months Ended September 30,   Nine Months Ended September 30,
       
 
        2001   2000   2001   2000
       
 
 
 
        (dollar amounts in thousands)   (dollar amounts in thousands)
Chicago Group
 
Operating revenue
   
Advertising
  $ 84,092     $ 73,270     $ 254,407     $ 219,970  
   
Circulation
    22,950       19,528       69,626       59,386  
   
Job printing and other
    2,940       4,065       9,547       11,768  
 
   
     
     
     
 
 
Total operating revenue
    109,982       96,863       333,580       291,124  
 
   
     
     
     
 
 
Operating costs
   
Newsprint
    19,321       16,460       57,747       47,899  
   
Compensation costs
    44,940       35,573       136,122       110,121  
   
Other operating costs
    34,785       30,969       105,459       87,355  
   
Depreciation
    4,303       2,151       12,491       6,469  
   
Amortization
    4,973       3,592       14,883       9,438  
 
   
     
     
     
 
 
Total operating costs
    108,322       88,745       326,702       261,282  
 
   
     
     
     
 
 
Operating income, excluding infrequent items and
stock-based compensation
  $ 1,660     $ 8,118     $ 6,878     $ 29,842  
 
   
     
     
     
 
Community Group
 
Operating revenue
   
Advertising
  $ 1,276     $ 10,275     $ 4,604     $ 34,556  
   
Circulation
    1,966       4,929       5,953       16,612  
   
Job printing and other
    1,608       2,336       4,574       7,987  
 
   
     
     
     
 
 
Total operating revenue
    4,850       17,540       15,131       59,155  
 
   
     
     
     
 
 
Operating costs
   
Newsprint
    619       1,657       1,661       5,321  
   
Compensation costs
    1,694       6,588       6,450       21,880  
   
Other operating costs
    2,362       7,506       7,853       22,321  
   
Depreciation
    392       837       957       2,519  
   
Amortization
    219       743       690       2,918  
 
   
     
     
     
 
 
Total operating costs
    5,286       17,331       17,611       54,959  
 
   
     
     
     
 
Operating income (loss), excluding infrequent items and
stock-based compensation
  $ (436 )   $ 209     $ (2,480 )   $ 4,196  
 
   
     
     
     
 
U.K. Newspaper Group
 
Operating revenue
   
Advertising
  $ 71,280     $ 84,821     $ 254,921     $ 296,819  
   
Circulation
    34,835       37,430       101,431       112,248  
   
Job printing and other
    5,225       6,594       14,809       20,625  
 
   
     
     
     
 
 
Total operating revenue
    111,340       128,845       371,161       429,692  
 
   
     
     
     
 
 
Operating costs
   
Newsprint
    22,341       21,867       71,781       70,238  
   
Compensation costs
    23,212       22,881       70,237       71,478  
   
Other operating costs
    61,812       66,270       189,829       203,411  
   
Depreciation
    2,916       1,752       7,647       5,625  
   
Amortization
    2,274       2,335       6,826       7,299  
 
   
     
     
     
 
 
Total operating costs
    112,555       115,105       346,320       358,051  
 
   
     
     
     
 
 
Operating income, excluding infrequent items and
stock-based compensation
  $ (1,215 )   $ 13,740     $ 24,841     $ 71,641  
 
   
     
     
     
 
Canadian Newspaper Group
 
Operating revenue
   
Advertising
  $ 23,329     $ 205,366     $ 116,231     $ 652,577  
   
Circulation
    8,453       56,557       38,420       168,632  
   
Job printing and other
    5,570       12,303       21,524       39,633  
 
   
     
     
     
 
 
Total operating revenue
    37,352       274,226       176,175       860,842  
 
   
     
     
     
 
 
Operating costs
   
Newsprint
    6,166       36,533       30,787       110,113  
   
Compensation costs
    16,584       106,486       69,776       320,179  
   
Other operating costs
    26,899       91,661       102,804       290,563  
   
Depreciation
    1,543       11,281       6,277       33,632  
   
Amortization
    1,132       8,764       4,596       26,491  
 
   
     
     
     
 
 
Total operating costs
    52,324       254,725       214,240       780,978  
 
   
     
     
     
 
 
Operating income (loss), excluding infrequent items and
stock-based compensation
  $ (14,972 )   $ 19,501     $ (38,065 )   $ 79,864  
 
   
     
     
     
 
Investment and Corporate Group
 
Operating revenue
   
Advertising
  $     $     $     $  
   
Circulation
                       
   
Job printing and other
                       
 
   
     
     
     
 
 
Total operating revenue
                       
 
   
     
     
     
 
 
Operating costs
   
Newsprint
                       
   
Compensation costs
    1,060       921       2,975       2,903  
   
Other operating costs
    2,602       2,431       9,488       6,193  
   
Depreciation
    286       241       915       722  
   
Amortization
    171       196       511       591  
 
   
     
     
     
 
 
Total operating costs
    4,119       3,789       13,889       10,409  
 
   
     
     
     
 
 
Operating loss, excluding infrequent items and
stock-based compensation
  $ (4,119 )   $ (3,789 )   $ (13,889 )   $ (10,409 )
 
   
     
     
     
 

See Notes on page 14

13


Table of Contents

                                   
      Three Months Ended September 30,   Nine Months Ended September 30,
     
 
      2001   2000   2001   2000
     
 
 
 
      Percentage   Percentage   Percentage   Percentage
     
 
 
 
Chicago Group
                               
Operating revenue
                               
 
Advertising
  76.4 %     75.6 %     76.3 %     75.6 %
 
Circulation
    20.9 %     20.2 %     20.9 %     20.4 %
 
Job printing and other
    2.7 %     4.2 %     2.8 %     4.0 %
     
   
   
   
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
     
   
   
   
 
Operating costs
                               
 
Newsprint
  17.6 %     17.0 %     17.3 %     16.5 %
 
Compensation costs
    40.9 %     36.7 %     40.8 %     37.8 %
 
Other operating costs
    31.6 %     32.0 %     31.6 %     30.0 %
 
Depreciation
    3.9 %     2.2 %     3.7 %     2.2 %
 
Amortization
    4.5 %     3.7 %     4.5 %     3.2 %
     
   
   
   
 
Total operating costs
    98.5 %     91.6 %     97.9 %     89.7 %
     
   
   
   
 
Operating income, excluding infrequent items and stock-based compensation
    1.5 %     8.4 %     2.1 %     10.3 %
     
   
   
   
Community Group
                               
Operating revenue
                               
 
Advertising
  26.3 %     58.6 %     30.4 %     58.4 %
 
Circulation
    40.5 %     28.1 %     39.4 %     28.1 %
 
Job printing and other
    33.2 %     13.3 %     30.2 %     13.5 %
     
   
   
   
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
     
   
   
   
Operating costs
                               
 
Newsprint
  12.8 %     9.4 %     11.0 %     9.0 %
 
Compensation costs
    34.9 %     37.6 %     42.6 %     37.0 %
 
Other operating costs
    48.7 %     42.8 %     51.9 %     37.7 %
 
Depreciation
    8.1 %     4.8 %     6.3 %     4.3 %
 
Amortization
    4.5 %     4.2 %     4.6 %     4.9 %
     
   
   
   
 
Total operating costs
    109.0 %     98.8 %     116.4 %     92.9 %
     
   
   
   
Operating income (loss), excluding infrequent items and stock-based compensation
    -9.0 %     1.2 %     -16.4 %     7.1 %
     
   
   
   
U.K. Newspaper Group
                               
Operating revenue
                               
 
Advertising
  64.0 %     65.8 %     68.7 %     69.1 %
 
Circulation
    31.3 %     29.1 %     27.3 %     26.1 %
 
Job printing and other
    4.7 %     5.1 %     4.0 %     4.8 %
     
   
   
   
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
     
   
   
   
Operating costs
                               
 
Newsprint
  20.1 %     17.0 %     19.3 %     16.4 %
 
Compensation costs
    20.9 %     17.8 %     18.9 %     16.6 %
 
Other operating costs
    55.5 %     51.4 %     51.2 %     47.3 %
 
Depreciation
    2.6 %     1.3 %     2.1 %     1.3 %
 
Amortization
    2.0 %     1.8 %     1.8 %     1.7 %
     
   
   
   
 
Total operating costs
    101.1 %     89.3 %     93.3 %     83.3 %
     
   
   
   
Operating income, excluding infrequent items and stock-based compensation
    -1.1 %     10.7 %     6.7 %     16.7 %
     
   
   
   
Canadian Newspaper Group
                               
Operating revenue
                               
 
Advertising
  62.5 %     74.9 %     66.0 %     75.8 %
 
Circulation
    22.6 %     20.6 %     21.8 %     19.6 %
 
Job printing and other
    14.9 %     4.5 %     12.2 %     4.6 %
     
   
   
   
 
Total operating revenue
    100.0 %     100.0 %     100.0 %     100.0 %
     
   
   
   
Operating costs
                               
 
Newsprint
  16.5 %     13.3 %     17.5 %     12.8 %
 
Compensation costs
    44.4 %     38.9 %     39.6 %     37.2 %
 
Other operating costs
    72.0 %     33.4 %     58.3 %     33.7 %
 
Depreciation
    4.2 %     4.1 %     3.6 %     3.9 %
 
Amortization
    3.0 %     3.2 %     2.6 %     3.1 %
     
   
   
   
 
Total operating costs
    140.1 %     92.9 %     121.6 %     90.7 %
     
   
   
   
Operating income (loss), excluding infrequent items and stock-based compensation
    -40.1 %     7.1 %     -21.6 %     9.3 %
     
   
   
   
 
Notes: 1)   EBITDA and operating income excludes infrequent items and stock-based compensation.
 
  2)   Results for three and nine months ended September 30, 2000 have been restated to reflect the 2001 disclosure of Investment and Corporate Group. Corporate overhead costs which had previously been allocated are now disclosed as Investment and Corporate Group.

14


Table of Contents

GROUP OPERATING RESULTS

Chicago Group

Operating revenues for the Chicago Group were $110.0 million in the third quarter of 2001 and $333.6 million in the nine months ended September 30, 2001 compared with $96.9 million and $291.1 million in 2000, increases of $13.1 million and $42.5 million respectively. The Copley Group, which was acquired in December 2000 added $19.7 million to operating revenue in the third quarter of 2001 and $60.0 million in the first nine months of 2001. Operating revenue for operations owned in both years (“same store”) was $90.2 million in the third quarter of 2001 compared with $96.8 million in 2000, a decrease of $6.6 million. For the nine months ended September 30, 2001 same store operating revenue was $273.6 million compared with $291.1 million in 2000, a decrease of $17.5 million. Advertising revenue on a same store basis was $69.0 million in the third quarter of 2001 compared with $73.3 million in 2000 a decrease of $4.3 million. Retail advertising was 2.1% lower and accounted for $0.7 million of the decrease. Classified advertising revenues were down $2.3 million or 7.5% during the quarter, almost entirely the result of lower recruitment advertising. National advertising revenues during the third quarter were flat compared with 2000. Advertising revenue on a same store basis was $208.5 million for the nine months ended September 30, 2001 compared with $220.0 million in 2000 a decrease of $11.5 million.

Circulation revenue, on a same store basis, was $18.7 million in the third quarter of 2001 and $56.8 million in the nine months ended September 30, 2001 compared with $19.5 million and $59.4 million in 2000, decreases of $0.8 million and $2.6 million respectively. The decreases are primarily at the Chicago Sun-Times where circulation revenue from both the daily and Sunday newspapers was lower. Circulation volume in the Sunday paper increased compared with the third quarter of 2000 primarily as a result of the events of September 11. However, Sunday circulation revenue was down as a result of price discounting. Daily average circulation volume at the Chicago Sun-Times increased 3.4% compared with the third quarter of 2000, but as a result of discounting and elimination of the Chicago Sun-Times unprofitable “Midwest Editionwhich was distributed to outlying communities, daily circulation revenue was also lower.

Total operating costs, excluding infrequent items, in the third quarter of 2001 were $108.3 million and in the nine months ended September 30, 2001 were $326.7 million compared with $88.7 million and $261.3 million respectively in 2000. On a same store basis, total operating costs, excluding infrequent items, were $87.1 million in the third quarter and $263.6 million in the nine months ended September 30, 2001 compared with $88.7 million and $261.3 million in 2000, a decrease of $1.6 million in the third quarter and an increase of $2.3 million in the nine months.

Newsprint expense, on a same store basis, was up $0.6 million in the quarter and $3.0 million in the nine months. Actual third quarter consumption was down by approximately 10.0%, but the average cost-per-ton of newsprint increased 14% from the third quarter of 2000. Compensation costs, on a same store basis, were basically flat in the quarter and $2.0 million lower in the nine months. Other operating costs , on a same store basis, were $3.5 million lower in the quarter and $3.2 million lower in the nine months. Depreciation charges in 2001 were higher than in 2000, primarily as a result of the new printing facility.

On a same store basis, operating income in the third quarter of 2001 was $3.1 million compared to $8.1 million in 2000, a decrease of $5.0 million and in the first nine months of 2001 was $10.0 million compared to $29.8 million in 2000 , a decrease of $19.8 million. These decreases result primarily from lower operating revenue, higher newsprint costs and the higher depreciation charge, offset in part by lower other operating costs.

The Copley Group, which was acquired in December 2000, added $60.0 million to revenue and $3.9 million to EBITDA in 2001. It is expected that Copley’s operating results will improve as cost saving strategies and efficiencies are implemented.

U.K. Newspaper Group

Third quarter operating revenue for the U.K. Newspaper Group was $111.3 million in 2001 compared with $128.8 million in 2000. Operating revenue for the nine months ended September 30, 2001 was $371.2 million compared with $429.7 million in 2000. In pounds sterling operating revenue for the third quarter of 2001 decreased 11.6% and for the nine months ended September 30, 2001 decreased 7.7%.

The decrease in operating revenue primarily resulted from lower advertising revenue. Advertising revenue for the third quarter of 2001, in local currency, was £49.5 million compared to £57.6 million in 2000, a decrease of £8.1 million or 14.1% year on year. For the nine months advertising revenue, in local currency, was £176.8 million compared to £192.6 million in 2000, a decrease of £15.8 million or 8.2% year on year. Display advertising was down 18.0% and classified advertising in total was down 15.8%, compared with the third quarter of 2000. Recruitment advertising in the third quarter was down 30.8% but property advertising revenue increased year-on-year by 10.3%. Within the Display sector, financial advertising decreased 34.5% year on year.

In local currency, circulation revenue in the third quarter decreased £1.1 million or 4.5%, from £25.3 million in 2000 to £24.2 in 2001. On September 5, 2001 the price of The Daily Telegraph on Monday to Friday increased from 45p to 50p and on September 8, 2001, the price of The Daily Telegraph on Saturday increased from 75p to 85p. These increases will likely result in improved circulation revenue for the balance of the year.

In local currency, the UK Group’s newsprint expenses have increased year-on-year in the quarter by 4.7% and in the nine months by 9.3%. A year on year newsprint price increase of 12.0% in the third quarter has been partly offset by reduced consumption due to lower paginations as a result of the lower advertising revenue. Management anticipates that these newsprint price increases should be partially rolled back during the first half of the coming year.

EBITDA in the third quarter of 2001, in local currency, was £2.8 million versus £12.1 million in 2000, a decrease of £9.3 million, primarily the result of lower revenue and newsprint cost increases. After currency conversion, EBITDA for the third quarter of 2001 was $4.0 million versus $17.8 million in 2000, a decrease of $13.8 million. For the nine months ended September 30, 2001 EBITDA was £27.2 million versus £54.5 million in 2000, a decrease of £27.3 million, primarily the result of lower revenue and newsprint cost increases. After currency conversion, EBITDA for the nine months was $39.3 million in 2001 versus $84.5 million in 2000, a decrease of $45.2 million.

Canadian Newspaper Group

Operating revenue and operating income in the Canadian Newspaper Group were $37.4 million and a loss of $15.0 million in the third quarter of 2001, compared with $274.2 million and operating income of $19.5 million in 2000. In the nine months ended September 30, 2001 operating revenue and operating income were $176.2 million and a loss of $38.1 million, compared with $860.8 million and operating income of $79.9 million in 2000. The significant decrease in both operating revenue and operating income results primarily from the sale of operations in 2000 to CanWest, the sale of UniMedia Company completed in January 2001, the August sale of operations to Osprey Media Holdings Inc. and the September 1, 2001 sale of the National Post. The National Post represents a substantial portion of the reported Canadian Newspaper Group operating loss in 2001. The National Post operating loss for the third quarter was $9.1 million in 2001 (July and August) and $13.4 million in 2000 and for the nine months ended September 30, was $37.0 million in 2001 (January to August) and $33.9 million in 2000.

On a same store basis, operating revenue and operating income of the remaining operations were Cdn. $28.7 million and a loss of Cdn. $9.7 million in the third quarter of 2001, compared with Cdn. $30.2 million and a loss of Cdn. $7.8 million in 2000. For the nine months ended September 30, 2001 same store operating revenue and operating income were Cdn. $93.8 million and a loss of Cdn. $14.8 million, compared with Cdn. $96.6 million and a loss of Cdn. $13.3 million in 2000.

Community Group

Revenue and operating income in the third quarter of 2001 were $4.9 million and a loss of $0.4 million, compared to $17.5 million and operating income of $0.2 million in 2000. For the first nine months of 2001, revenue and operating income were $15.1 million and a loss of $2.5 million, compared to $59.2 million and operating income of $4.2 million in 2000. The significant decrease in both revenue and operating income results almost entirely from the sales of Community Group properties that occurred primarily during 2000. During the third quarter 2001 the last remaining U.S. Community Group property was sold. At September 30, 2001 only The Jerusalem Post was still owned by the Company.

Investment and Corporate Group

Operating costs, excluding infrequent items and stock-based compensation, of the Investment and Corporate Group were $4.1 million in the third quarter of 2001, compared with $3.8 million in 2000, an increase of $0.3 million. For the nine months ended September 30, 2001, operating costs, excluding infrequent items and stock-based compensation, were $13.9 million, compared with $10.4 million in 2000, an increase of $3.5 million.

15


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Working capital consists of current assets less current liabilities. At September 30, 2001, working capital, excluding debt obligations, was a deficiency of $30.7 million compared to a deficiency of $252.8 million at December 31, 2000. Current assets were $598.2 million at September 30, 2001 and $486.3 million at December 31, 2000. Current liabilities, excluding debt obligations, were $628.9 million at September 30, 2001, compared with $739.1 million at December 31, 2000. The $222.1 million reduction in working capital deficiency from December 31, 2000 to September 30, 2001 results primarily from an increase in cash and cash equivalents due to the 2001 sales of Canadian newspaper properties and sale of participation interests in CanWest debentures and from a reclassification from current income taxes payable to deferred taxes payable.

Debt

Long-term debt, including the current portion, was $812.3 million at September 30, 2001 compared with $812.2 million at December 31, 2000.

EBITDA

EBITDA, which is the Company’s earnings before interest expense, amortization of debt issue costs, interest and dividend income, income taxes, depreciation and amortization, minority interest and other income (expense), net, was a loss of $1.3 million for the third quarter of 2001 compared with $66.9 million for the third quarter of 2000 and $29.6 million for the nine months ended September 30, 2001 compared to $263.7 million in 2000. The significant reduction in EBITDA results from both the sale of Canadian Newspaper Group properties and Community Group properties in 2000 and 2001 and from lower operating results at the Chicago Group, the U.K. Newspaper Group and the remaining Canadian properties. Approximately $52.5 million in the third quarter and $175.9 million in the nine months, of the reduced EBITDA, was due to the assets sold. EBITDA is not intended to represent an alternative to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company’s operating performance, or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity.

Because of all the changes during the past year, EBITDA is no longer as important in measuring the performance and value of the Company as it once was. For example, EBITDA includes all the National Post losses (to August 31, 2001 when it was sold) while only half of them were the responsibility of the Company, and EBITDA ignores the interest and investment income on the CanWest debentures and shares and the substantial reduction in debt and related interest expense reductions.

Cash Flows

Cash flows used in operating activities were $83.8 million in the nine months ended September 30, 2001, compared with cash flows provided by operating activities of $75.4 million in 2000. Excluding changes in working capital (other than cash), cash flows used in operating activities were $83.3 million in 2001 and cash flows provided by operating activities were $122.7 million in 2000. The reduction in cash flows provided by operating activities compared with 2000 primarily results from the sales of Canadian Newspaper Group properties and Community Group properties and lower operating results at the Company’s remaining operations.

Cash flows provided by investing activities were $454.8 million in 2001, and cash flows used in investing activities were $34.2 million in 2000. The cash flows provided by investing activities in 2001 resulted primarily from the sales of Canadian newspaper properties, the sale of participation interests in CanWest debentures offset, in part, by capital expenditures and additions to investments.

16


Table of Contents

Cash flows used in financing activities were $229.9 million in 2001 and cash flows provided by financing activities were $10.3 million in 2000. The cash flows used in financing activities in 2001 included cash dividends paid of $41.3 million, distributions to minority interests in HCNLP of $31.0 million and the repurchase of Class A common shares and the redemption of preferred shares totalling $145.9 million. During 2001 the Company utilized approximately $88.0 million of a new bank credit facility. This bank credit facility was repaid in full in August 2001 with part of the proceeds of the sale of participation interests in CanWest debentures.

Total Return Equity Swap

During the third quarter of 2001 the Company purchased 3.6 million of its own Class A common shares, which had previously been subject to a Total Return Equity Swap, at an average price per share of $13.88 for a total consideration of $50.0 million. These shares are included in treasury at September 30, 2001. During November 2001, a party to the Total Return Equity Swap sold in the open market approximately 3.6 million of the Company’s Class A common shares, which were subject to the Total Return Equity Swap, for an average price of approximately $9.70 per share or an accounting loss to the Company of $15.5 million. Approximately $12.6 million of this loss had been recognized at September 30, 2001.

Capital Expenditures and Acquisition Financing

The Chicago Group, the Community Group, the U.K. Newspaper Group and the Canadian Newspaper Group have funded their capital expenditures and acquisition activities out of cash provided by asset sales, operating activities and borrowings under the Company’s credit facility.

Dividends and Other Commitments

The amount available for the payment of dividends and other obligations by the Company at any time is a function of (i) restrictions in agreements binding the Company limiting its ability to pay dividends, management fees and other payments and (ii) restrictions in agreements binding the Company’s subsidiaries limiting their ability to pay dividends, management fees and other payments to the Company. The Company is party to a debt agreement that permits the payment of dividends at the present rate. However, certain agreements binding Hollinger International Publishing Inc. (Publishing) and other subsidiaries of the Company contain such restrictive provisions. As of September 30, 2001, Publishing and its subsidiary companies were not permitted to pay dividends due to restrictions under its debt instruments.

The amount available for the payment of dividends and other obligations by the Company at any time is limited by a number of binding agreements, but the Company expects its internal cash flow and financing resources to be adequate to meet its foreseeable requirements.

17


Table of Contents

Other

Certain of the statements in this Form 10-Q may be deemed to be “forward looking” statements. Refer to the Company’s Annual Report on Form 10-K for a discussion of factors that may affect such statements.

Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations and No. 142 Goodwill and Other Intangible Assets. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Business combinations accounted for as poolings-of-interests and initiated prior to June 30, 2001 are grandfathered. SFAS 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS 142 also requires an evaluation of intangible assets and their useful lives and transitional impairment tests for goodwill and certain intangible assets upon adoption. After transition, the impairment tests will be performed annually. SFAS 142 is effective for fiscal years beginning after December 15, 2001, as of the beginning of the year.

In August 2001, the FASB issued SFAS No. 143, Asset Retirement Obligations and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 143 requires that an asset retirement liability be recorded at fair value when an enterprise incurs the legal obligation to retire a long-lived asset. The statement is effective for fiscal years beginning after June 15, 2002. SFAS 144 retains the fundamental recognition and measurement principles of current accounting standards for assets to be held and used and the fundamental measurement principles for assets to be held for sale. The new standard introduces recognition principles for assets held for sale and for those to be disposed of other than by sale. The statement is effective for fiscal years beginning after December 15, 2001.

The Company has not yet determined the impact of the above new accounting standards on its financial reporting.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

     Newsprint Newsprint prices continued to fluctuate and on a consolidated basis newsprint expense amounted to $162.0 million in 2001 and $233.6 million in 2000. Management believes that while newsprint prices could continue to show wide price variations in the future, prices for the balance of 2001 in North America are not expected to increase significantly from current levels. In the United Kingdom, newsprint prices payable by the Company in 2001, which are subject to longer-term contracts, have increased from prices paid in 2000 because the contracts in effect for much of 2000 were booked at prices that were well below North American prices. Management believes that newsprint prices in the United Kingdom for the balance of 2001 will not vary significantly from those currently payable and could be partially rolled back during the first half of 2002. Operating divisions take steps to ensure that they have sufficient supply of newsprint and have mitigated cost increases by adjusting pagination and page sizes and printing and distributing practices. Based on levels of usage during the nine months ended September 30, 2001 and based on ownership levels at September 30, 2001, a change in the price of newsprint of $50 per tonne would increase or decrease year to date net earnings by about $8.2 million.

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

     Interest Rates At September 30, 2001 the Company has $150.0 million of debt under the Total Return Equity Swap on which interest is calculated at floating rates. As a result the Company is vulnerable to changes in interest rates. Increases in interest rates will reduce net earnings and declines in interest rates can result in increased earnings. Based on debt at September 30, 2001 which is subject to floating interest rates and September 30, 2001 ownership levels and foreign exchanges rates, a 1% change in the floating interest rates would increase or decrease the Company’s year to date net earnings by approximately $0.7 million.

     Foreign Exchange Rates A substantial portion of the Company’s income is earned outside of the United States in currencies other than the United States dollar. As a result the Company’s income is vulnerable to changes in the value of the United States dollar. Increases in the value of the United States dollar can reduce net earnings and declines can result in increased earnings. Based on year to date 2001 earnings and ownership levels, a $0.05 change in the important foreign currencies would have the following effect on the Company’s reported year to date net earnings:

18


Table of Contents

                 
    Actual Average        
    2001 Rate   Increase/Decrease

United Kingdom
  $ 1.44/£     $507,000
Canada
  $0.65/Cdn.$   $4,100,000

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

     General Economic Outlook The Company's dependence on advertising sales, which generally have a short lead-time, means that it has only a limited ability to predict results for the fiscal year. Newspaper advertising revenue has been negatively impacted by the softening and uncertain economic environment especially so following the events of September 11. At this time, the Company is unable to predict whether the current advertising slowdown represents a short-term deferral of demand that will be reversed in the next six months, or whether, instead, reduced demand will continue for an extended period. If the current slowdown continues, the Company expects that overall newsprint demand would decline and the Company's usage and costs would also decline.

19


Table of Contents

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

  (a)   Exhibits

       None

  (b)   Reports on Form 8-K

       None

20


Table of Contents

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOLLINGER INTERNATIONAL INC.
Registrant

             
Date:   November 13, 2001   By:   /S/ Jack A. Boultbee

Jack A. Boultbee

Executive Vice President

21