Hollinger Inc. is the continuing company, under the laws of Canada,
resulting from the 1985 amalgamation of Argcen Holdings Inc., Hollinger Argus
Limited (incorporated June 28, 1910) and Labmin Resources Limited. The Company's
corporate offices are located at 10 Toronto Street, Toronto, Ontario, M5C 2B7,
(416) 363-8721.
The Company is effectively controlled by Lord Black, Chairman of the Board
and Chief Executive Officer of the Company, through Ravelston, a privately-held
investment company, which Lord Black controls and whose principal asset is its
direct and indirect ownership of the Company's securities.
B. BUSINESS OVERVIEW
The Company, through our operating subsidiaries, has in the past acquired
underperforming newspaper properties with a view to improving the operation and
enhancing profitability and value. Generally, it was our intention to control
the business and to realize profits from the continued ownership, operation and
improvement of the business along with profits from the periodic disposal of all
or part of our holding in an operation. Our emphasis has been on daily
newspapers and usually those that are dominant in their respective markets. Our
purchases generally have been of newspaper businesses that are underperforming
either through weak operating management or as a result of an inability to
access necessary capital. We also concentrated on acquisitions and disposals
that increased the average size of our newspapers or that had significant
potential synergies with our other newspapers.
13
In recent years, we have focused more on selling mature newspaper franchises
with considerably less emphasis on acquisitions. Management's current intention
is to concentrate on a few core assets to maximize their potential.
The Company's principal asset is its approximately 30.3% equity
(approximately 72.8% voting) interest in International, a publisher of
English-language newspapers in the United States, the United Kingdom and Israel
with a smaller publishing presence in Canada. In addition to the investment in
International, the Company also has interests through wholly-owned subsidiaries
in various other properties that do not, in the aggregate, contribute materially
to our revenue or earnings. These properties include a 40% interest in a daily
newspaper in the Cayman Islands and Canadian commercial real estate properties,
including our head office at 10 Toronto Street, Toronto, Canada. International's
23 paid daily newspapers have a worldwide combined circulation of approximately
two million. In addition, International owns or has an interest in over 250
other publications, including non-daily newspapers and magazines. Included among
International's 144 paid newspapers are the following premier titles:
- the Chicago Group's Chicago Sun-Times, which has the highest daily
readership and second highest circulation of any newspaper in the
Chicago metropolitan area and has the fifth highest daily readership of
any metropolitan daily newspaper in the United States;
- the U.K. Newspaper Group's The Daily Telegraph, which is the leading
daily broadsheet newspaper in the U.K. with a 36% share of circulation
in its domestic market and approximately 300,000 greater circulation
than that of its nearest competitor; and
- the Community Group's Jerusalem Post, which is the most widely read
English-language daily newspaper published in the Middle East and is
highly regarded regionally and internationally.
International's operations consist principally of the Chicago Group, the
U.K. Newspaper Group, the Canadian Newspaper Group and the Community Group, as
well as minority investments in various Internet and media-related companies and
an investment in debentures of a subsidiary of CanWest held by the Partnership.
CHICAGO GROUP
The Chicago Group consists of more than 100 newspapers in the greater
Chicago metropolitan area. The group's primary newspaper is the Chicago
Sun-Times, which was founded in 1948 and is Chicago's most widely read
newspaper. The Chicago Sun-Times is published in a tabloid format, has a daily
circulation of approximately 480,000 and continues to have the leading daily
readership in the 16 county Chicago metropolitan area, attracting 1.7 million
readers daily. International pursues a clustering strategy in the greater
Chicago metropolitan market, covering all of Chicago's major suburbs as well as
its surrounding high growth counties. This strategy enables International to
rationalize duplicative back office functions and printing facilities as well as
offer joint selling programs to advertisers.
In December 2000, International acquired Fox Valley Publications Inc. which
publishes four daily newspapers, one paid non-daily and twelve free distribution
publications in the Chicago suburbs for total cash consideration of $166.7
million (US$111.0 million).
U.K. NEWSPAPER GROUP
The U.K. Newspaper Group's operations include The Daily Telegraph, The
Sunday Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and
Apollo magazines. The Daily Telegraph was launched in 1855 and is based in
London, the dominant financial center in Europe. It is the largest circulation
broadsheet daily newspaper in the U.K. as well as in all of Europe with an
average daily circulation of approximately 980,000. The Daily Telegraph's
Saturday edition has the highest average daily circulation (approximately 1.2
million) among broadsheet daily newspapers in the U.K. The Sunday Telegraph is
the second highest circulation broadsheet Sunday newspaper in the U.K. with an
average circulation of approximately 778,000. The Daily Telegraph's market
leadership and national reach have allowed it to maintain the leading share of
advertising among broadsheet daily newspapers in the U.K. over the last decade.
In addition, International has leveraged The Daily Telegraph's strong reader
loyalty, trusted brand name and proprietary customer database to generate
incremental revenue from the sale of ancillary products and services to its
readers.
CANADIAN NEWSPAPER GROUP
At December 31, 2002, International's Canadian Newspaper Group primarily
consisted of HCPH Co. and an
14
87% interest in the Partnership. During 2001 HCPH Co. (formerly Hollinger
Canadian Publishing Holdings Inc.) became the successor to the operations of
XSTM. As of April 30, 2003, HCPH Co. and the Partnership owned ten daily and
twenty-three non-daily newspaper properties and the Business Information Group
(formerly Southam Magazine and Information Group) which publishes Canadian
business magazines and tabloids for the automotive, trucking, construction,
natural resources, manufacturing and other industries.
In January 2001, the Partnership completed the sale of UniMedia Company to
Gesca Limited, a subsidiary of Power Corporation of Canada. The publications
sold represented the French language newspapers of the Partnership including
three paid circulation dailies and 15 weeklies published in Quebec and Ontario.
A pre-tax gain of approximately $75.1 million was recognized on this sale.
In two separate transactions in July and November 2001, International and
the Partnership completed the sale of most of the remaining Canadian newspapers
to Osprey Media Group Inc. ("Osprey") for total cash proceeds of approximately
$255.0 million plus closing adjustments primarily for working capital. Included
in these sales were community newspapers in Ontario such as The Kingston
Whig-Standard, The Sault Star, the Peterborough Examiner, the Chatham Daily News
and The Observer (Sarnia). The former Chief Executive Officer of the Partnership
is a minority shareholder of Osprey.
In connection with the two sales of Canadian newspaper properties to Osprey
in 2001, to satisfy a closing condition, the Company, International, Lord Black
of Crossharbour PC(C), OC, KCSG and three senior executives entered into
non-competition agreements with Osprey pursuant to which each agreed not to
compete directly or indirectly in Canada with the Canadian businesses sold to
Osprey for a five-year period, subject to certain limited exceptions, for
aggregate consideration of $7.9 million. Such consideration was paid to Lord
Black and the three senior executives and was approved by International's
independent directors.
In August 2001, International entered into an agreement to sell to CanWest
its remaining 50% interest in the 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, from September 1,
2001, the Company had no influence over the operations of the National Post and
the Company ceased to consolidate or record 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.
On November 16, 2000, International and its affiliates, XSTM and the
Partnership, completed the sale of most of their Canadian newspapers and related
assets to CanWest for total sale proceeds, at fair value, of approximately $2.8
billion. Included in the sale was a 50% interest in National Post, all of the
metropolitan newspapers, including the Ottawa Citizen, The Gazette (Montreal),
the Calgary Herald, the Edmonton Journal, The Vancouver Sun and The Province
(Vancouver), a large number of community newspapers, including The Windsor Star,
the Regina Leader Post, the Star Phoenix and the Times-Colonist (Victoria) and
operating Canadian Internet properties, including canada.com. In connection with
the sale to CanWest, Ravelston entered into a management services agreement with
CanWest and National Post pursuant to which it agreed to continue to provide
management services to the Canadian businesses sold to CanWest in consideration
for an annual fee of $6 million. In addition, CanWest will be obligated to pay
Ravelston a termination fee of $45 million, in the event that CanWest chooses to
terminate the management services agreement, or $22.5 million, in the event that
Ravelston chooses to terminate the agreement. Also, as required by CanWest as a
condition to the transaction, the Company, International, Ravelston, Lord Black
and Messrs. Boultbee, Radler and Atkinson, entered into non-competition
agreements with CanWest pursuant to which each agreed not to compete directly or
indirectly in Canada with the Canadian businesses sold to CanWest for a
five-year period, subject to certain limited exceptions, for aggregate
consideration of $80 million paid by CanWest in addition to the purchase price
referred to above. Of that consideration, $38 million was paid to Ravelston and
$42 million was paid to Lord Black and the three senior executives.
International's independent directors approved the terms of these payments.
In November 2000, XSTM converted its convertible promissory note in the
Partnership in the amount of $225.8 million into 22,575,324 units of the
Partnership, thereby increasing its interest in the Partnership to 87%.
In November 2000, following the completion of the transaction with CanWest,
the Partnership made a special cash distribution to its unitholders. The amount
of the distribution was $3.10 per unit payable on December 1, 2000. In March
2001, following the completion of the transaction with Gesca Limited, the
Partnership made a second special cash distribution to its unitholders. The
amount of the distribution was $0.70 per unit payable on March 30,
15
2001. In August 2001, the Partnership made a third special cash distribution to
its unitholders. The amount of the distribution was $1.18 per unit payable on
August 20, 2001. In December 2001, the Partnership made a fourth special cash
distribution to its unitholders. The amount of the distribution was $1.45 per
unit payable on December 28, 2001. No special cash distributions were made by
the Partnership to unitholders during 2002.
COMMUNITY GROUP
The Community Group consists of The Jerusalem Post, the most widely read
English-language daily newspaper published in the Middle East with a daily and
weekend readership of 223,000. The paid circulation of all The Jerusalem Post
products, including English and French-language international weekly editions,
is over 110,000.
During 2001, the Company sold its last remaining United States community
newspaper. For accounting and management purposes, the Community Group continues
to include the Company's wholly-owned subsidiary Jerusalem Post which publishes
The Jerusalem Post. In addition, International transferred two Community Group
publications to Horizon Publications Inc. in exchange for net working capital.
Horizon Publications Inc. is managed by former Community Group executives and
controlled by certain members of International's board of directors. The terms
of these transactions were approved by the independent directors of
International.
During 2000, International sold most of its remaining U.S. community
newspaper properties, including 11 paid dailies, three paid non-dailies and 31
free distribution publications for total proceeds of approximately
US$215,000,000 ($325,166,000). Pre-tax gains totalling $75,114,000 were
recognized on these sales. Included in these dispositions, International sold
four U.S. community newspapers for an aggregate consideration of US$38.0 million
($56.5 million) to Bradford Publishing Company, a company formed by a former
U.S. Community Group executive and in which some of International's directors
are shareholders. The terms of this transaction were approved by the independent
directors of International.
In connection with the sales of United States newspaper properties in 2000,
to satisfy a closing condition, International, Lord Black and three senior
executives entered into non-competition agreements with the purchasers, pursuant
to which each agreed not to compete directly or indirectly in the United States
with the United States businesses sold to the purchasers for a fixed period,
subject to certain limited exceptions, for aggregate consideration of US$15.6
million ($23.4 million), a portion of which was paid in 2001 and a portion of
which was paid in 2000. All such amounts were paid to Lord Black and the three
senior executives. The independent directors of International have approved the
terms of these payments.
DISPOSITIONS OF INVESTMENTS
In November 2001, International sold 27,405,000 non-voting shares in CanWest
(including 405,000 shares issued on conversion of 2,700,000 multiple voting
preferred shares), received as part of the proceeds on the 2000 CanWest sale as
previously described, for total proceeds of approximately $271.3 million. The
sale resulted in a pre-tax loss of $157.5 million.
In August and December 2001, International and the Partnership sold
Participations in $540.0 million and $216.8 million principal amounts,
respectively, of debentures issued by a subsidiary of CanWest to the
Participation Trust. Units of the Participation Trust were sold by the
Participation Trust to arm's length third parties. These transactions resulted
in net proceeds to International of $621.8 million and have been accounted for
as sales of CanWest debentures. The net loss on these transactions amounted to
$97.4 million.
International has not retained an interest in the Participation Trust nor
does it have any ongoing involvement in the Participation Trust. The
Participation Trust and its investors have no recourse to International's other
assets in the event that CanWest defaults on its debentures. Under the terms of
the Participation Trust, the interest, principal and redemption payments
received by International in respect of the underlying CanWest debentures will
be paid to the Participation Trust in U.S. dollars on the basis of a fixed
exchange rate. In addition, in accordance with the terms of the participation
agreement, International cannot transfer to an unaffiliated third party the
equivalent of US$50.0 million ($79.0 million at December 31, 2002) principal
amount of CanWest debentures or proceeds received from those debentures.
On February 17, 2000, Interactive Investor International, in which
International owned 51.7 million shares or a 47% equity interest, completed its
initial public offering issuing 52 million shares and raising L78 million ($181
16
million). The offering reduced International's equity ownership to 33% and
resulted in a dilution gain of $25.8 million for accounting purposes.
Subsequently, International sold five million shares of its holding, reducing
its equity interest to 28.5% and resulting in a pre-tax gain in 2000 of $2.4
million. The balance of the investment was sold in 2001 resulting in an
additional pre-tax gain in 2001 of $14.7 million.
C. NEWSPAPER INDUSTRY OVERVIEW
Newspaper publishing is one of the oldest and largest segments of the media
industry and the only remaining mass medium that has not become fragmented.
Newspapers are generally viewed as the best medium for retail advertising, which
emphasizes the price of goods, in contrast to television, which is generally
used for image-oriented advertising. According to the Newspaper Association of
America ("NAA"), daily newspaper readers include 60% of college graduates and
64% of households with income greater than US$75,000. Due to their significant
readership and household penetration, newspapers continue to be the most cost
effective means for advertisers to reach this highly sought after demographic
group. Additionally, management believes newspaper advertising is more cost
effective than television and radio advertising.
Most newspapers rely on advertising (70-80% of total revenue) and
circulation (20-30% of total revenue) for their revenues; by contrast,
television and radio rely almost entirely on advertising revenue. Newspaper
advertising is sold in several ways: full-run (printed on a newspaper page and
included in all editions, known as "run of press"), zoned part-run (printed on a
page and included in editions slated for a specific local geographic area), or
as preprints or inserts (advertising that is printed separately and inserted in
a newspaper). Department stores traditionally have been a major source of
display advertising, filling pages with pictures of their merchandise.
Classified advertising is also a significant component of revenue for
newspapers, usually accounting for about one-third of total advertising sales.
The circulation and demographic information verified by the Audit Bureau of
Circulations is the basis for the ad rates that newspapers charge to
advertisers.
U.S. NEWSPAPER INDUSTRY
In 2001, daily newspaper advertising expenditures in the U.S. were
approximately US$44.3 billion, representing a compounded annual growth rate
("CAGR") of 3.9% since 1991. In addition total morning daily and Sunday
circulation has increased nationally from 29.4 million and 54.7 million in 1980
to 46.8 million and 59.1 million in 2001, respectively. While there are a few
newspapers that have national circulation, most U.S. newspapers operate in
regional markets with limited local competition. Display and classified
advertising are sold to both local and national advertisers. Newspapers account
for 30% of total U.S. advertising spending. Because newspapers reach 56% of U.S.
adults daily, advertisers utilize newspapers to reach the broadest possible
number of potential customers for their products and services.
Over the last several years, newspapers have used a clustering strategy
consisting of owning and managing papers with geographic proximity in order to
achieve both revenue and cost benefits. Newspaper clusters are able to offer
advertisers broader, bundled purchasing compared to the narrower reach of a
single newspaper. Clusters can also facilitate cost efficiencies by
consolidating printing facilities, distribution channels, sharing editorial
resources and other types of centralized cost savings.
U.K. NEWSPAPER INDUSTRY
British national newspapers more closely resemble North American magazines
in that they have broad distribution and readership across the country and
derive a much larger portion of their advertising revenue from national
advertisers, unlike North American newspapers which, because of their relatively
small geographic distribution areas, derive a substantial portion of their
advertising from local advertisers. National newspapers in the U.K. reach 70% of
the adult population, the second highest reach of all U.K. media behind only
television.
The U.K. newspaper market is segmented and, within each segment, highly
competitive. The U.K. newspaper market consists of 10 national daily and 11
national Sunday newspapers, 1,593 regional and local newspapers, 3,174 consumer
magazines, and 5,713 business magazines. There are nine national U.K. newspaper
owners and three newspaper segments, the quality, mid-market and popular
segments. The market segment in which The Daily Telegraph competes is generally
known as the quality daily newspaper segment, consisting of all the broadsheets.
The Daily Telegraph and its competitors in this market segment appeal to the
middle and upper end of the demographic scale. In 2001, newspapers received a
30% share of the total advertising spending in the U.K., which is
17
the largest percentage of any medium. In addition, national newspaper
advertising spending has increased in nine of the last 10 years and has grown at
a CAGR of 6.3% since 1991.
D. BUSINESS STRATEGY
The Company's revenue, on a consolidated basis, is dependent upon the
financial performance of the underlying assets, principally the assets of
International. Through the control of International's strategic direction and
management, we intend to pursue the following strategies:
Pursue Revenue Growth by Leveraging International's Leading Market Position.
International will continue to leverage its leading position in daily readership
in the attractive Chicago and U.K. markets in order to drive revenue growth. For
the Chicago Group, International will continue to build revenues by taking
advantage of the extensive cluster of its combined Chicago Group publications,
which allows International to offer local advertisers geographically and
demographically targeted advertising solutions and national advertisers an
efficient one-stop vehicle to reach the entire Chicago market. For the U.K.
Newspaper Group, International will continue to focus on retaining The Daily
Telegraph's national circulation dominance and increasing circulation of The
Sunday Telegraph, introduce new sections to the newspaper in order to help
advertisers target specific reader demographics, and periodically implement
cover price increases. In addition, International believes that The Daily
Telegraph's successful prepaid subscription program will continue to enhance
revenue opportunities.
Continue to Maximize Operating Efficiency of Underlying Assets.
International has extensive expertise in introducing and maintaining operating
efficiencies, producing superior newspapers and increasing revenues.
Historically, these efficiencies have resulted from centralized newsprint
purchasing, clustering and consolidating duplicative functions and facilities at
its acquired newspaper publications, and investing in technology and production
equipment. For example, in April 2001, International completed the installation
of a U.S.$115 million, state-of-the-art printing facility in Chicago which has
lowered its production costs, enhanced product quality, and increased the
availability of color printing which generates higher advertising yields. In
response to the recent economic downturn, International has reduced total
compensation and other operating costs (other than newsprint) during fiscal year
2002 as compared to the corresponding period in 2001, which has positioned
International to significantly benefit as the advertising market recovers.
International will continue to aggressively manage its cost structure in the
future in order to optimize cash flow.
Publish Relevant and Trusted High Quality Newspapers. International is
committed to maintaining the high quality of its newspaper product and editorial
integrity so as to ensure continued reader loyalty, which is the foundation of
its newspaper franchises. The Chicago Sun-Times has been recognized for its
editorial quality with several Pulitzer Prize-winning writers and awards for
excellence from Illinois' major press organizations. The Daily Telegraph and The
Sunday Telegraph are known for their quality content and superior product and
have in recent times been voted "National Newspaper of the Year", Britain's most
coveted industry award. In addition, International is focused on maintaining its
relevance in the United States in its urban and suburban markets by continuing
to provide leading local news coverage, while providing in-depth national and
international news coverage in the U.K. market. International believes that this
is a key strategy in maintaining and building upon the entrenched readership
base of its leading newspaper properties.
Prudent Asset Management. In addition to pursuing revenue growth from its
existing publications and maximizing operating efficiencies, International may
from time to time pursue selective, complementary newspaper acquisitions and
non-core divestitures. Management has a successful track record of identifying
value-enhancing acquisitions and underperforming newspaper properties,
integrating and optimizing these acquisitions, and opportunistically divesting
assets for optimal value to achieve debt reduction. Since International's
formation in 1986, the existing senior management team has built, primarily
through acquisitions, and managed up to 400 newspapers and related publications.
After acquiring control of The Daily Telegraph in 1986, International
significantly modernized the Telegraph's printing plants, negotiated a
two-thirds reduction in work force, and revitalized its titles. In 1994, it
acquired the Chicago Sun-Times and has since doubled its operating profits. More
recently, International divested its U.S. community newspaper operations and the
majority of its Canadian newspaper assets, which were monetized at attractive
cash flow multiples. This strategy has positioned International to emerge from
the current downturn with reduced leverage, efficient and focused operations,
and solid operating platforms for growth.
E. BUSINESS OF THE COMPANY
18
The Company's most important property in terms of revenue and earnings is
International. Of International's reported total operating revenue in 2002,
approximately 44% was attributable to the Chicago Group, 48% to the U.K.
Newspaper Group, 7% to the Canadian Newspaper Group and 1% to the Community
Group. In 2001, the Chicago Group, the U.K. Newspaper Group, the Canadian
Newspaper Group and the Community Group accounted for 39%, 42%, 17% and 2%,
respectively, of International's reported total operating revenues.
The Company also has interests through wholly-owned subsidiaries in various
other assets that do not, in the aggregate, contribute materially to the
Company's revenue or earnings. These assets include a 40% interest in a daily
newspaper in the Cayman Islands and Canadian commercial real estate properties.
CHICAGO GROUP
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage such sources represent of total revenues for the Chicago
Group during the past three years.
The Chicago Group consists of more than 100 titles in the greater Chicago
metropolitan area including the Chicago Sun-Times, the Post Tribune in northwest
Indiana and Chicago's Daily Southtown. International's other newspaper
properties in the greater Chicago metropolitan area include:
- Pioneer Newspapers Inc., which currently publishes 56 weekly newspapers in
Chicago's north and northwest suburbs;
- Midwest Suburban Publishing Inc., which in addition to the Daily Southtown,
publishes 23 biweekly newspapers, 13 weekly newspapers and four free
distribution papers primarily in Chicago's south and southwest suburbs; and
- Fox Valley Publications Inc., which is doing business as Chicago Suburban
Newspapers, publishes four daily newspapers, The Herald News, The Beacon
News, The Courier News and The News Sun, 12 free distribution newspapers and
six free total market coverage products ("TMC") in the fast growing counties
surrounding Chicago and Cook County.
ADVERTISING. Substantially all advertising revenues are derived from local
and national retailers and classified advertisers. Advertising rates and rate
structures vary among the publications and are based, among other things, on
circulation, penetration and type of advertising (whether classified, national
or retail). In 2002, retail advertising accounted for the largest share of
advertising revenues (47%), followed by classified (39%) and national (14%). The
Chicago Sun-Times offers a variety of advertising alternatives, including
full-run advertisements, geographically zoned issues, special interest pull-out
sections and advertising supplements in addition to regular sections of the
newspaper targeted to different readers, such as arts, food, real estate, TV
listings, weekend, travel and special sections. The Chicago area suburban
newspapers also offer similar alternatives to the Chicago Sun-Times platform for
their daily and weekly publications. The Chicago Group operates the Reach
Chicago Newspaper Network, an advertising vehicle that can reach the combined
readership base of all the Chicago Group publications and allows International
to offer local advertisers geographically and demographically targeted
advertising solutions and national advertisers an efficient one-stop vehicle to
reach the entire Chicago market.
CIRCULATION. Circulation revenues are derived from single copy newspaper
sales made through retailers and vending racks and home delivery newspaper sales
to subscribers. In 2002, approximately 69% of the copies of the Chicago
Sun-Times sold and 61% of the circulation revenues were single copy sales.
Approximately 80% of 2002 circulation revenues of the Chicago area suburban
newspapers were derived from subscription sales. The average paid daily and
Sunday circulation of the Chicago Sun-Times is approximately 481,000 and
383,000, respectively.
19
The Chicago Sun-Times has had consecutive increases over the past two years in
paid daily circulation. The daily and Sunday paid circulation of the Daily
Southtown is approximately 48,000 and 53,000, respectively. The daily and Sunday
paid circulation of the Post-Tribune is approximately 65,000 and 70,000,
respectively. The aggregate daily and Sunday paid circulation of the Chicago
Suburban Newspapers is approximately 100,000 and 114,000, respectively. The
aggregate circulation for the free TMC products is approximately 296,000 and the
circulation of the free distribution newspapers and bi-weekly paid circulation
of the Chicago Suburban Newspapers is approximately 227,000 and 21,000,
respectively.
OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Chicago Group continues to
strengthen its online dominance. Suntimes.com and the related Group websites
have approximately 1.4 million unique users with some 25 million page
impressions per month. The www.classifiedschicago.com regional
classified-advertising website, which was created through a partnership with
Paddock Publications, pools classified advertisements from all Chicago Group
publications, as well as Paddock Publications' metropolitan daily to create a
valuable new venue for advertisers, readers and on-line users. Additionally,
www.DriveChicago.com continues to be a leader in automotive websites. During
2000, the Chicago Group joined Paddock Publications and the Chicago Automobile
Trade Association to create this website that pools the automotive classified
advertising of three of the Chicago metropolitan area's biggest dailies with the
automotive inventories of many of Chicago's metropolitan new car dealerships.
SALES AND MARKETING. Each newspaper or operating subsidiary in the Chicago
Group has had its own marketing department which works closely with both
advertising and circulation sales and marketing teams to introduce new readers
to the Group's newspapers through various initiatives. The Chicago Sun-Times
marketing department uses strategic partnerships, such as major event
productions and sporting venues, for on-site promotion and to generate
subscription sales. The Chicago Sun-Times has also formed a marketing and media
partnership with local TV and radio outlets for targeted audience exposure.
Similarly at Fox Valley Publications and Midwest Suburban Publishing, marketing
professionals work closely with circulation sales professionals to determine
circulation promotional activities, including special offers, sampling programs,
in-store kiosks, sporting event promotions, dealer promotions and community
event participation. In-house printing capabilities allow the Fox Valley
marketing department to offer direct mail as an enhancement to customers' run of
press advertising programs. Midwest Suburban Publishing, like the other
newspapers, generally targets readers by zip code. Midwest Suburban Publishing
owns its existing customer list of 120,000 names along with the Penny Saver
address list containing 435,000 household names. The Post-Tribune marketing
department focuses on attracting readers in the top 20 zip codes that major
advertisers have identified as being the most attractive.
DISTRIBUTION. The Chicago Group has gained benefits from International's
clustering strategy. In recent years, International has succeeded in combining
distribution networks within the Chicago Group where circulation overlaps. The
Chicago Sun-Times is distributed through both an employee and contractor network
depending upon the geographic location. The Chicago Sun-Times takes advantage of
a joint distribution program with its sister publication, Fox Valley
Publications, in which Fox Valley Publications distributes the Chicago Sun-Times
in areas outside of Cook County. The Chicago Sun-Times has approximately 8,000
street newspaper boxes and more than 8,500 newsstands and over the counter
outlets from which single copy newspapers are sold, as well as approximately 250
street "hawkers" selling the newspapers in high-traffic urban areas. Of the
total circulation, approximately 69% is sold through single copy outlets, and
31% through home delivery subscriptions. Midwest Suburban Publishing's Daily
Southtown is distributed primarily by Chicago Sun-Times independent contractors.
Additionally, in certain western suburbs, the Daily Southtown also has a joint
distribution program with Fox Valley Publications. The Daily Southtown and its
sister publication, The Star, are also distributed in approximately 1,600
outlets and newspaper boxes in Chicago's southern suburbs and Chicago's south
side and downtown areas. Midwest's Penny Saver is distributed through the post
office and through independent contractors. Approximately 83% of Fox Valley
Publication's circulation is from home delivery subscriptions. While 85% of the
Post-Tribune's circulation is by home delivery, it also distributes newspapers
to 635 retail outlets and approximately 420 single copy newspaper boxes. Pioneer
has a solid home delivery base that represents 94% of its circulation. Pioneer
is also distributed to more than 350 newspaper boxes and is in more than 1,200
newsstand locations.
PRINTING. The Chicago Sun-Times' Ashland Avenue printing facility became
fully operational in April 2001 and gives the Chicago Group printing presses
that have the quality and speed necessary to effectively compete with the other
regional newspaper publishers. Fox Valley Publications' 100,000 sq. ft. plant,
which was completed in 1992, houses a state-of-the-art printing facility in
Plainfield, Illinois, which prints all of its products. Midwest Suburban
Publishing prints all of its publications at its South Harlem Avenue facility in
Chicago. Pioneer prints the
20
main body of its weekly newspapers at its Northfield production facility. In
order to provide advertisers with more color capacity, certain of Pioneer's
sections are printed at the Chicago Sun-Times Ashland Avenue facility. The
Post-Tribune has one press facility in Gary, Indiana.
COMPETITION. Each of the Chicago area newspapers competes in varying degrees
with radio, broadcast and cable television, direct marketing and other
communications and advertising media as well as with other newspapers having
local, regional or national circulation. The Chicago metropolitan region
comprises Cook County and six surrounding counties and is served by eight local
daily newspapers of which International owns six. The Chicago Sun-Times competes
in the Chicago region with the Chicago Tribune, a large established metropolitan
daily and Sunday newspaper, which is the fifth largest metropolitan daily
newspaper in the United States based on circulation. In addition, the Chicago
Sun-Times and other Chicago Group newspapers face competition from other
newspapers published in adjacent or nearby locations and circulated in the
Chicago metropolitan area market.
RAW MATERIALS. The basic raw material for newspapers is newsprint. In 2002
approximately 132,000 tons were consumed. Newsprint costs equaled approximately
14.3% of the Chicago Group's revenues. Average newsprint prices for the Chicago
Group decreased about 21% in 2002 from 2001. The Chicago Group is not dependent
upon any single newsprint supplier. The Chicago Group's access to Canadian,
United States and offshore newsprint producers ensures an adequate supply of
newsprint. The Chicago Group, like other newspaper publishers in North America,
has not entered into any long-term fixed price newsprint supply contracts. The
Chicago Group believes that its sources of supply for newsprint are adequate for
its anticipated needs.
U.K. NEWSPAPER GROUP
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and their percentage of total revenues for The Telegraph during the past three
years.
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 2001 2002
------------------------------------------------------------------------
(IN THOUSANDS OF BRITISH POUNDS STERLING)
Advertising............ L255,945 69% L228,715 68% L211,045 66%
Circulation............ 95,690 26 94,502 28 93,640 29
Other.................. 19,020 5 14,252 4 16,261 5
------------------------------------------------------------------------
Total.................. L370,655 100% L337,469 100% L320,946 100%
========================================================================
(1) Financial data is in accordance with U.K. generally accepted accounting
principles.
The U.K. Newspaper Group's operations include The Daily Telegraph, The Sunday
Telegraph, The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo
magazines.
ADVERTISING. Advertising is the largest source of revenue at The Telegraph.
The Telegraph's display advertising strengths are in the financial, automobile
and travel sections. The level of classified advertisements, especially
recruitment advertisements, fluctuates with the economy. The Telegraph's
strategy with respect to classified advertising is to improve volume and yield
in four sectors: recruitment, property, travel and automobiles. Classified
advertising revenue represents 27% of total advertising revenue. Recruitment
advertising is the largest classified advertising category, representing about
36% of all classified advertising in terms of revenue in 2002.
CIRCULATION. The target audience of The Telegraph's newspapers is generally
conservative, middle and upper income readers, with a continuing emphasis on
gaining new younger readers. The editorial strengths of The Telegraph's
newspapers are national, international, financial news and features and
comprehensive sports coverage. In May 1996, The Telegraph introduced the first
national advance purchase subscription program in the United Kingdom. The
program has proven successful in driving circulation increases although there
has been some inevitable cannibalization of single copy sales. By the end of
1996, the plan had about 100,000 weekday and 200,000 Sunday average sales and
the average prepaid subscription was for a period of about 40 weeks. In order to
gain broad acceptance of this revolutionary plan, the subscriptions were offered
at a significant discount. The
21
amount of that discount was reduced throughout 1997 and continued to be reduced
thereafter. The program currently has approximately 315,000 subscribers.
OTHER PUBLICATIONS AND BUSINESS ENTERPRISES. The Telegraph is involved in
several other publications and business enterprises, including The Spectator,
Apollo, The Weekly Telegraph and telegraph.co.uk (formerly Electronic
Telegraph). Telegraph.co.uk has over 3.2 million unique users with some 30
million page impressions per month. The Telegraph uses its brand in developing
ancillary revenue streams such as reader offers including travel promotions,
financial services, household products and books. During 1999, The Telegraph, in
conjunction with The Boots Company plc, the United Kingdom's leading beauty and
health retailer, launched a new web site focusing on the women's on-line market,
www.handbag.com. The site deals with, among other things, health, beauty and the
arts.
SALES AND MARKETING. The Telegraph's marketing department helps introduce
new readers to our newspapers through strategic marketing initiatives. The
Telegraph has research groups that seek the views of readers. This provides
useful information to better target editorial, promotional and commercial
activities. The Telegraph's marketing and prospect database, which contains
information about the newspaper readership, purchasing, and lifestyles of
readers, is used to selectively target customers. In addition, the direct
marketing department is responsible for the development of a customer contact
strategy, circulation initiatives such as subscription programs, discount
vouchers supporting the launch of new sections and supplements, and various
support promotions.
DISTRIBUTION. Since 1988, The Telegraph's newspapers have been distributed
to wholesalers by truck under a contract with a subsidiary of TNT Express (U.K.)
Limited ("TNT"). The Telegraph's arrangements with wholesalers contain
performance provisions to ensure minimum standards of copy availability while
controlling the number of unsold copies. On May 25, 2001, a new contract with
TNT was entered into by each of the major publishers at West Ferry Printers, a
joint venture owned equally by The Telegraph and another British newspaper
publisher. That contract is for a minimum term of five years and six months and
commenced on May 27, 2001.
Wholesalers distribute newspapers to retail news outlets. The number of
retail news outlets throughout the United Kingdom has increased as a result of a
1994 ruling by the British Department of Trade and Industry that prohibits
wholesalers from limiting the number of outlets in a particular area. More
outlets do not necessarily mean more sales and The Telegraph's circulation
department has continued to develop its control of wastage while taking steps to
ensure that copies remain in those outlets with high single copy sales. In
addition to single copy sales, many retail news outlets offer home delivery
services. In 2002 home deliveries accounted for 40% of sales of both The Daily
Telegraph and The Sunday Telegraph.
Historically, wholesalers and retailers have been paid commissions based on
a percentage of the cover price. Prior to June 1994 when competitive pressures
caused The Telegraph to reduce its cover price, wholesaler and retailer
commissions amounted to approximately 34% of the then cover price.
Notwithstanding the reduction of the cover price, the commissions paid were not
reduced. In line with other national newspapers, The Telegraph has moved away
from a commission paid on a percentage of cover price to a fixed amount per
copy.
PRINTING. The majority of copies of The Daily Telegraph and The Sunday
Telegraph are printed by The Telegraph's two 50% owned joint venture printing
companies, West Ferry Printers and Trafford Park Printers. The Telegraph has a
very close involvement in the management of the joint venture companies and
regards them as being important to The Telegraph's day-to-day operations. The
magazine sections of the Saturday edition of The Daily Telegraph and of The
Sunday Telegraph are printed under contract by external magazine printers. The
Telegraph also prints the majority of its overseas copies under contracts with
external printers in Northern Ireland, Spain and Belgium.
Management of each joint venture printing company continually seeks to
improve production performance. Major capital expenditures require the approval
of the boards of directors of the joint venture partners. There is high
utilization of the plants at West Ferry and Trafford Park Printers, with little
spare capacity. At Trafford Park Printers, revenue earned from contract printing
for third parties has a marginal effect on The Telegraph's printing costs. West
Ferry Printers also undertakes some contract printing for third parties, which
results in increased profitability.
22
West Ferry Printers has 18 presses, six of which are configured for The
Telegraph's newspapers, eight are used for the newspapers published by The
Telegraph's joint venture partner, Express Newspapers, and the remaining four
are used by contract printing customers. Trafford Park Printers has six presses,
two of which are used primarily for The Telegraph's newspapers.
COMPETITION. In common with other national newspapers in the United Kingdom,
The Telegraph's newspapers compete for advertising revenue with other forms of
media, particularly television, magazine, direct mail, posters and radio. In
addition, total gross advertising expenditures, including financial, display and
recruitment classified advertising, are affected by economic conditions in the
United Kingdom. The Telegraph's primary competition in the United Kingdom is The
Times, however The Daily Telegraph has 42% greater circulation than The Times.
There have been no strikes or general work stoppages involving employees of
The Telegraph or the joint venture printing companies in the past five years.
Management of The Telegraph believes that its relationships with its employees
and the relationships of the joint venture printing companies with their
employees are generally good.
RAW MATERIALS. Newsprint represents the single largest raw material expense
of The Telegraph's newspapers and, next to employee costs, is the most
significant operating cost. Approximately 157,000 metric tons are consumed
annually. In 2002, the total cost was approximately 17% of the U.K. Newspaper
Group's revenues. Prices were fixed throughout 2002 at levels some 9.9% below
the average price paid during 2001. Inventory held at each printing location is
sufficient for three to four days production and in addition, suppliers' stock
held in the United Kingdom normally represents a further four to five weeks
consumption. Recently negotiated contracts for 2003 are at prices 7.1% below
those for 2002.
On October 17, 2001, Paper Purchase and Management Limited was established
as a joint venture between The Telegraph and Guardian Media Group plc. The main
purpose of the joint venture is to control the specifications and sourcing, as
well as monitoring the usage, of newsprint throughout the printing plants
operated by one or both of the joint venture partners and at other locations
where the joint venture partners' publications are printed on a contract basis.
Further, by combining the purchasing power of the joint venturers, The Telegraph
is able to negotiate better prices. The Telegraph purchases newsprint from a
number of different suppliers located primarily in Canada, the United Kingdom,
Scandinavia and continental Europe. With many sources of newsprint accessible to
it, The Telegraph is neither reliant on any single supplier nor is availability
of newsprint a concern.
CANADIAN NEWSPAPER GROUP
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the revenue mix of the total Canadian Newspaper Group, during the past three
years, including revenue of operations sold up to the date of sale. Operations
sold in the past three years include: the Canadian metropolitan newspapers and a
large number of community papers to CanWest in 2000; the sale of the French
language newspapers to Gesca in 2001; the sale of Ontario community newspapers
to Osprey in 2001; and the sale of International's remaining 50% interest in the
National Post to CanWest in 2001.
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 2001 2002
---------------------------------------------------------------
(IN THOUSANDS OF CANADIAN DOLLARS)
Newspapers:
Advertising............. $1,158,678 73% $171,032 56% $ 47,215 43%
Circulation............. 287,513 18 53,030 17 6,611 6
Job printing and other.. 70,809 5 35,249 12 11,883 11
Business
Communications.... 62,193 4 45,763 15 43,412 40
---------------------------------------------------------------
Total...................... $1,579,193 100% $305,074 100% $109,121 100%
===============================================================
At December 31, 2002 International's Canadian Newspaper Group primarily
consisted of HCPH Co. and an 87% interest in the Partnership. During 2001, HCPH
Co. became the successor to the operations of XSTM.
23
HCPH Co. and the Partnership own ten daily and twenty-three non-daily
newspaper properties and the Business Information Group (formerly Southam
Magazine and Information Group) which publishes Canadian business magazines and
tabloids for the transportation, construction, natural resources, manufacturing
and other industries.
ADVERTISING. Newspaper advertising revenue in 2002 totaled $47.2 million.
Advertisements are carried either within the body of the newspapers, and
referred to as run-of-press ("ROP") advertising, or as inserts. ROP, which
represented 91% of total advertising revenue in 2002 is categorized as either
retail, classified or national. The three categories represented 72%, 12% and
16%, respectively, of ROP advertising revenue in 2002.
CIRCULATION. Virtually all newspaper circulation revenue in 2002 was from
subscription sales.
COMPETITION. The majority of revenue is from advertising. Advertising
lineage in the newspapers is affected by a variety of factors including
competition from print, electronic and other media as well as general economic
performance and the level of consumer confidence. Specific advertising segments
such as real estate, automotive and help wanted will be significantly affected
by local factors.
RAW MATERIALS. The basic raw material for newspapers is newsprint. Newsprint
consumption in 2002 was approximately 10,900 tons. The newspapers within the
Canadian Newspaper Group have access to adequate supplies to meet anticipated
production needs. They are not dependent upon any single newsprint supplier. The
Canadian Newspaper Group, like other newspaper publishers in North America, has
not entered into any long-term fixed price newsprint supply contracts.
REGULATORY MATTERS. The publication, distribution and sale of newspapers and
magazines in Canada is regarded as a "cultural business" under the Investment
Canada Act and consequently, any acquisition of control of the Canadian
Newspaper Group by a non-Canadian investor would be subject to the prior review
and approval by the Minister of Industry of Canada. Because no such acquisition
of control of the Company or International has occurred, the current ownership
is acceptable.
OWNERSHIP. During 2001, HCPH Co. became the successor to the operations of
XSTM. International indirectly owns a combined 100% interest in HCPH Co. and
indirectly owns an 87.0% interest in the Partnership. Under the Income Tax Act
(Canada), there are limits on non-Canadian ownership of Canadian newspapers. At
present, we do not meet those limits and, if this continues beyond a specified
cure period, there could be adverse effects on advertising revenue. We intend to
take the necessary steps to ensure that we are in compliance before the cure
period expires.
COMMUNITY GROUP
SOURCES OF REVENUE. The following table sets forth the sources of revenue
and the percentage that such sources represented of total revenues for the
Community Group during the past three years.
Approximately 46.0% of the Jerusalem Post's revenues of $13.2 million in
2002 were derived from circulation, with 24.2% from job printing and other and
29.8% from advertising. The Jerusalem Post in the past derived a relatively high
percentage of its revenues from job printing as a result of a long-term contract
to print and bind copies of the Golden Pages, Israel's equivalent of a Yellow
Pages telephone directory. During 2002, Golden Pages effectively cancelled this
agreement and has ceased placing printing orders. An action was commenced by the
Jerusalem Post in 2003 seeking damages for the alleged breach. Newsprint costs
relating to publication of the
24
Jerusalem Post equalled approximately 11.3% of the Jerusalem Post's revenues in
2002. Newsprint used in producing the Golden Pages was provided by the owners of
that publication.
REGULATORY MATTERS. Newspapers in Israel are required by law to obtain a
license from the country's interior minister, who is authorized to restrain
publication of certain information if, among other things, it may endanger
public safety. To date, the Jerusalem Post has not experienced any difficulties
in maintaining its license to publish or been subject to any efforts to restrain
publication. In addition, all written media publications in Israel are reviewed
by Israel's military censor prior to publication in order to prevent the
publication of information that could threaten national security. Such
censorship is considered part of the ordinary course of business in the Israeli
media and has not adversely affected the Jerusalem Post's business in any
significant way.
F. ORGANIZATIONAL STRUCTURE
The following simplified chart shows the basic corporate structure of the
Company at June 19, 2003.
The Company believes that its and International's properties and equipment
are in generally good condition, well-maintained and adequate for current
operations.
The Chicago Sun-Times conducts its editorial, pre-press, marketing, sales
and administrative activities in a 535,000 square foot, seven-story building in
downtown Chicago. International has completed the full conversion of its Chicago
Sun-Times production operations to a new 320,000 square foot state-of-the-art
printing facility, at a total construction cost of approximately US$115 million.
It is intended that new facilities will be identified to house the
25
Chicago Sun-Times non-production activities and the downtown Chicago building
will be redeveloped. Agreement has been reached for a joint development of the
downtown Chicago building under which, if it proceeds, the Chicago Group will
receive the first US$75 million of consideration and will share in future
profits. There can be no assurance that this joint development will proceed.
Pioneer utilizes and owns a building in north suburban Chicago for editorial,
pre-press, sales and administrative activities. Pioneer leases several outlying
satellite offices for its editorial and sales staff in surrounding suburbs.
Production currently occurs at a 65,000 square foot leased building in a
neighboring suburb. Midwest Suburban Publishing utilizes one building for
editorial, pre-press, marketing, sales and administrative activities. Production
activities occur at a separate facility. Both facilities are located in
Chicago's south suburbs. The Post-Tribune editorial, prepress, marketing, sales
and administrative activities are housed in the newly completed facility in
Merrillville, Indiana while production activities continue at its facility in
Gary, Indiana. The headquarters for Fox Valley Publications Inc is a 172,000
square foot owned facility, built in 1992 and located in Plainfield, Illinois.
Fox Valley Publications produces its newspapers at this facility which also
houses marketing functions, pre-press as well as certain sales and
administrative activities. The editorial and sales activities are housed at
five owned facilities located in surrounding suburbs.
The Telegraph occupies five floors of a tower at Canary Wharf in London's
Docklands under a 25-year operating lease expiring in 2017. Printing of The
Telegraph's newspaper titles is done principally at fifty percent owned joint
venture printing plants in London's Docklands and in Trafford Park, Manchester.
The Jerusalem Post is produced and distributed in Israel from a three-story
building in Jerusalem owned by Jerusalem Post. Jerusalem Post also leases a
sales office in Tel Aviv and a sales and distribution office in New York.
The Canadian Newspaper Group's newspapers and magazines are published at
numerous facilities throughout Canada.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
OVERVIEW - HOLLINGER INC.
The Company is an international holding company and its assets consist primarily
of investments in subsidiaries and affiliated companies, principally the
investment in International. As at May 30, 2003, the Company directly and
indirectly owns 11,256,538 shares of Class A common stock and 14,990,000 shares
of Class B common stock of International, which represent 30.3% of the equity
and 72.7% of the voting interests. International's Class A common stock is
listed on the New York Stock Exchange. All of the Company's operating
subsidiaries are owned through International. Significant liabilities of the
holding company currently include Senior Secured Notes due 2011 and Series II
and Series III preference shares, which are retractable by the holder. NB Inc.,
a wholly owned subsidiary of the Company, has subordinated debt due to
International. On a non-consolidated basis, the Company's income consists mainly
of dividends from subsidiaries, principally International, and its operating
costs include public company costs (mainly legal and professional fees,
directors' fees and transfer agent fees), interest on its Senior Secured Notes
and dividends on Series II and Series III preference shares.
On a non-consolidated basis, the Company has experienced a shortfall between
the dividends and fees received from its subsidiaries and its obligations to pay
its operating costs, including interest and dividends on its preference shares
and such shortfalls are expected to continue in the future. Accordingly, the
Company is dependent upon the continuing financial support of RMI, a wholly
owned subsidiary of Ravelston, the Company's ultimate parent company, to fund
such shortfalls and, therefore, pay its liabilities as they fall due. On March
10, 2003, concurrent with the issue of Senior Secured Notes, RMI entered into a
support agreement with the Company, under which RMI has agreed to make annual
support payments in cash to the Company by way of capital contributions (without
the issuance of additional shares of the Company) or subordinated debt. The
annual support payments will generally be equal to the greater of (a) the
Company's negative net cash flow for the relevant period (which does not extend
to outlays for retractions or redemptions), determined on a non-consolidated
basis, and (b) U.S.$14.0 million per year.
26
Pursuant to this arrangement, RMI has made payments to the Company in respect of
the period from March 10 to March 31, 2003 in the amount of US$1.1 million.
RMI currently derives all of its income and operating cash flow from the
fees paid pursuant to Services Agreements with International and its
subsidiaries. RMI's ability to provide the required financial support under the
support agreement with the Company is dependent on RMI continuing to receive
sufficient fees pursuant to those Services Agreements. The Services Agreements
may be terminated by either party by giving 180 days notice. The fees in respect
of the Services Agreements are negotiated annually with and approved by the
audit committee of International. The fees to be paid to RMI for the year ending
December 31, 2003 amount to approximately US$22.0 million to US$24.0 million and
were approved in February 2003. The fees in respect of the periods after
December 31, 2003 have not yet been negotiated or approved. If in any quarterly
period after April 1, 2003 the Company fails to receive in cash a minimum
aggregate amount of at least US$4.7 million from a) payments made by RMI
pursuant to the support agreement and b) dividends paid by International on its
shares held by the Company, the Company would be in default under its Senior
Secured Notes. Based on the Company's current investment in International and
the current quarterly dividend paid by International of US$0.05 per share, the
minimum support payment required to be made by RMI to avoid such a default is
approximately US$3.5 million per quarter or US$14.0 million annually. This
default could cause the Senior Secured Notes to become due and payable
immediately.
In addition, the Company's issued capital stock consists of Series II
preference shares, Series III preference shares and retractable common shares,
each of which is retractable at the option of the holder. There is uncertainty
regarding the Company's ability to meet its future financial obligations arising
from the retraction of preference shares and retractable common shares. These
matters are more fully discussed under "Liquidity and Capital Resources -
Financial Condition and Cash Flows".
OVERVIEW - HOLLINGER INTERNATIONAL INC.
International's business is concentrated in the publication of newspapers in
the United States, the United Kingdom, Canada and Israel. Revenues are derived
principally from advertising, paid circulation and, to a lesser extent, job
printing. Of International's reported total operating revenue in 2002,
approximately 44% was attributable to the Chicago Group, 48% to the U.K.
Newspaper Group, 7% to the Canadian Newspaper Group and 1% to the Community
Group. The Chicago Group consists of the Chicago Sun-Times and other daily and
weekly newspapers in the greater Chicago metropolitan area. The U.K. Newspaper
Group consists of the operations of The Daily Telegraph, The Sunday Telegraph,
The Weekly Telegraph, telegraph.co.uk, and The Spectator and Apollo magazines,
its subsidiaries and joint ventures. The Canadian Newspaper Group consists of
the operations of HCPH Co., an 87% investment in the Partnership and until
August 31, 2001, a 50% interest in National Post publications. The Community
Group consists of the Jerusalem Post publications.
During 2000, International sold most of its remaining U.S. community
newspapers properties and completed the sale of most of International's Canadian
newspapers and related assets to CanWest.
During 2001, International sold most of the remaining Canadian newspaper
properties, the 50% interest in the National Post and the last remaining United
States community newspaper. In addition, International sold its approximate
15.6% equity interest in CanWest and participation interests in most of the
debentures issued by a subsidiary of CanWest both of which were received in 2000
as part of the proceeds on the sale of Canadian newspaper properties to CanWest.
BUSINESS OF THE COMPANY
The Company, through operating subsidiaries, has in the past acquired
underperforming newspaper properties with a view to improving the operation and
enhancing profitability and value. Generally, it was the Company's intention to
control the business and to realize profits from the continued ownership,
operation and improvement of the business along with profits from the periodic
disposal of all or part of the Company's holding in an operation. The Company's
emphasis has been on daily newspapers and usually those that are dominant in
their respective markets. The Company's purchases generally have been of
newspaper businesses that are underperforming either through weak operating
management or as a result of an inability to access necessary capital. The
Company also concentrated on acquisitions and disposals that increased the
average size of the Company's newspapers or that had significant potential
synergies with its other newspapers. In recent years, the Company has focused
more on selling
27
mature newspaper franchises with considerably less emphasis on acquisitions.
Management's current intention is to concentrate on a few core assets to
maximize their potential.
OUTLOOK FOR INTERNATIONAL
The industry wide advertising market remains sluggish particularly in the
United Kingdom. Although a turnaround is expected in advertising revenues for
the industry, the timing of such turnaround is uncertain and it is too soon to
have confidence in any recent encouraging news on that front. At the UK
Newspaper Group advertising revenue in local currency for the three months ended
March 31, 2003 was 6.5% lower than in 2002 and management does not anticipate
any significant improvement in the United Kingdom advertising market in the near
term. Mitigating the impact on operating income of that decline in advertising
revenue are the impact of a September 2002 cover price increase at the Telegraph
and the full year impact of aggressive cost reduction measures. In addition, the
retirement of Senior Notes, Senior Subordinated Notes and Total Return Equity
Swaps will result in lower interest costs at International in 2003.
The outlook for 2003 will be tempered by two significant issues. The impact
of the involvement in hostilities in Iraq will continue to be felt although the
degree to which the ongoing involvement may affect results is impossible to
fully assess. Further, newsprint prices were at historically low levels during
2002. The newsprint industry has recently implemented a price increase in the
U.S., but the extent and timing of any further increases, although expected to
be moderate, cannot be ascertained in light of a continuing perceived
overcapacity in the industry. In the U.K., management anticipates a reduction of
about 7% in the cost per tonne of newsprint as a consequence of contracts
negotiated for 2003.
THE COMPANY'S SIGNIFICANT TRANSACTIONS
In June 2000, the Company and International exercised their option to pay
cash on the mandatory exchange of the Hollinger Canadian Publishing Holdings
Inc. Special shares. Each Special share was exchanged for cash of US$8.88
resulting in a payment to Special shareholders of US$95.0 million. The Company
was responsible for US$36.8 million of this amount.
On June 1, 2001, International converted all of its Series C preferred
stock, which was held by the Company, at the conversion ratio of 8.503 shares of
International's Class A common stock per share of Series C preferred stock into
7,052,464 shares of International's Class A common stock. The 7,052,464 shares
of Class A common stock of International were subsequently purchased for
cancellation by International on September 5, 2001 for a total of $143.8 million
(U.S. $92.2 million). The purchase price per share was 98% of the closing price
of a share of Class A common stock and was approved by International's
independent directors. The proceeds were used to reduce the Company's bank
indebtedness by $142.0 million.
On September 27, 2001, International redeemed 40,920 shares of its Series E
redeemable convertible preferred stock held by the Company at their stated
redemption price of $146.63 per share for a total of $6.0 million.
In December 2001, the Company sold 2,000,000 shares of International's Class
A common stock to third parties for total cash proceeds of $31.4 million, the
proceeds of which were used to reduce the Company's bank indebtedness.
During January 2002, the Company sold a further 2,000,000 shares of
International's Class A common stock to third parties for total cash proceeds of
$38.6 million, the proceeds of which were used to reduce the Company's bank
indebtedness.
On March 10, 2003, the Company issued U.S. $120.0 million aggregate
principal amount of 11 7/8% Senior Secured Notes due 2011. The total net
proceeds were used to refinance existing indebtedness, to repay amounts due to
Ravelston and to make certain advances to Ravelston. The Senior Secured Notes
are fully and unconditionally guaranteed by RMI. The Company and RMI entered
into a support agreement, under which RMI has agreed to make annual support
payments in cash to the Company on a periodic basis by way of contributions to
the capital of the Company (without receiving any shares of the Company) or
subordinated debt. The amount of the annual support payments will be equal to
the greater of (a) the non-consolidated negative net cash flow of the Company
(which does not extend to outlays for retractions or redemptions) and (b) U.S.
$14.0 million per year (subject to certain adjustments as permitted under the
Indenture governing the Company's Senior Secured Notes), in either case, as
28
reduced by any permanent repayment of debt owing by Ravelston to the Company.
Initially, the support amount to be contributed by RMI will be satisfied through
the permanent repayment by Ravelston of its approximate $16.4 million of
advances from the Company, which resulted from the use of proceeds of the
Company's issue of Senior Secured Notes. Thereafter, all support amount
contributions by RMI will be made through contributions to the capital of the
Company, without receiving any additional shares of the Company, except that, to
the extent that the minimum payment exceeds the negative net cash flow of the
Company, the amounts will be contributed through an interest-bearing, unsecured,
subordinated loan to the Company. The support agreement terminates upon the
repayment of the Senior Secured Notes, which mature in 2011. All aspects of the
offering of the Senior Secured Notes and the amendment to certain indebtedness
due to International described below were approved by a Special Committee of the
Board of Directors of the Company, comprised entirely of independent directors.
On March 10, 2003, prior to the closing of the above offering, NB Inc. sold
its shares of Class A common stock and Series E redeemable convertible preferred
stock of International to RMI. Such shares were in turn sold back to NB Inc.
from RMI at the same price, with a resulting increase in the tax basis of the
shares of International and a taxable gain to RMI. As the exchange of the
International shares with RMI represents a transfer between companies under
common control, NB Inc. will record, in 2003, contributed surplus of
approximately $2.3 million, being the tax benefit associated with the increase
in the tax value of the shares of International.
Contemporaneously with the closing of the issue of Senior Secured Notes,
International:
(a) repurchased for cancellation, from NB Inc., 2,000,000 shares of
Class A common stock of International at U.S. $8.25 per share for
total proceeds of U.S. $16.5 million; and
(b) redeemed, from NB Inc., pursuant to a redemption request, all of the
93,206 outstanding shares of Series E redeemable convertible
preferred stock of International at the fixed redemption price of
$146.63 per share totalling U.S. $9.3 million.
Proceeds from the repurchase and redemption were offset against debt due
from NB Inc. to International, resulting in net outstanding debt due to
International of approximately U.S. $20.4 million. The remaining debt bears
interest at 14.25% (or 16.5% in the event that the interest is paid in kind), is
subordinated to the Company's Senior Secured Notes (so long as the Senior
Secured Notes are outstanding), and is guaranteed by Ravelston and secured by
certain assets of Ravelston.
All aspects of the transaction relating to the changes in the debt
arrangements with NB Inc. and the subordination of this remaining debt have been
reviewed by the audit committee of the Board of Directors of International,
comprised entirely of independent directors.
Effective April 30, 2003, U.S.$15.7 million principal amount of
subordinated debt owing to International by NB Inc. was transferred by
International to HCPH Co., a subsidiary of International, and subsequently
transferred to RMI by HCPH Co. in satisfaction of a non-interest bearing demand
loan due from HCPH Co. to RMI. After the transfer, NB Inc.'s debt to
International is approximately U.S$4.7 million and NB Inc.'s debt to RMI is
approximately U.S.$15.7 million. The debts owing by NB Inc. to RMI and owing by
NB Inc. to International each bear interest at the rate of 14.25% if interest is
paid in cash and 16.5% if it is paid in kind except that RMI has waived its
right to receive interest until further notice. The debts are subordinated to
the Senior Secured Notes for so long as the Senior Secured Notes are
outstanding, and that portion of the debt due by NB Inc. to International is
guaranteed by Ravelston and the Company. International entered into a
subordination agreement with the Company and NB Inc. pursuant to which
International has subordinated all payments of principal, interest and fees on
the debt owed to it by NB Inc. to the payment in full of principal, interest and
fees on the Senior Secured Notes, provided that payments with respect to
principal and interest can be made to International to the extent permitted in
the indenture governing the Senior Secured Notes. RMI has agreed to be bound by
these subordination arrangements with respect to the debt owed from NB Inc. to
RMI.
29
HOLLINGER INTERNATIONAL INC.'S SIGNIFICANT TRANSACTIONS
SIGNIFICANT TRANSACTIONS IN 2000
On November 16, 2000, International and its affiliates, XSTM and the
Partnership ("Hollinger Group") completed the sale of most of International's
Canadian newspapers and related assets to CanWest. Included in the sale were the
following assets of the Hollinger Group:
- a 50% interest in National Post (International continued as managing
partner);
- the metropolitan and a large number of community newspapers in Canada
(including the Ottawa Citizen, The Vancouver Sun, The
Province(Vancouver), the Calgary Herald, the Edmonton Journal, The
Gazette (Montreal), The Windsor Star, the Regina Leader Post, the Star
Phoenix and the Times- Colonist (Victoria); and
- the operating Canadian Internet properties, including canada.com.
The sale resulted in the Hollinger Group receiving approximately $1.7
billion (U.S.$1.1 billion) cash, approximately $425 million (U.S.$277 million)
in voting and non-voting shares of CanWest at fair value (representing an
approximate 15.6% equity interest and 5.7% voting interest) and subordinated
non- convertible debentures of a holding company in the CanWest group at fair
value of approximately $697 million (U.S.$456 million). The aggregate sale price
of these properties at fair value was approximately $2.8 billion (U.S.$1.8
billion), plus closing adjustments for working capital at August 31, 2000 and
cash flow and interest for the period September 1 to November 16, 2000 which, in
total, approximated an additional U.S.$40.7 million at December 31, 2000.
U.S.$972 million of the cash proceeds from this sale were used to pay down
International's bank credit facility.
During 2000, International sold most of its remaining U.S. community
newspaper properties including 11 paid dailies, three paid non-dailies and 31
free distribution publications for total proceeds of approximately U.S.$215.0
million. Pre-tax gains totaling U.S.$91.2 million were recognized by
International on these sales.
In December 2000, International acquired four paid daily newspapers, one
paid non-daily and 12 free distribution publications in the Chicago suburbs, for
total consideration of U.S.$111.0 million.
In November 2000, XSTM converted a promissory note from the Partnership in
the principal amount of $225.8 million (U.S.$147.9 million) into 22,575,324
limited partnership units of the Partnership, thereby increasing its interest in
the Partnership to 87.0%.
On February 17, 2000, Interactive Investor International, in which
International owned 51.7 million shares or a 47.0% equity interest, completed
its initial public offering ("IPO"), issuing 52 million shares and raising
$181.0 million. The IPO reduced International's equity ownership interest to 33%
and resulted in a dilution gain of $25.8 million. Subsequently International
sold five million shares of its holding, reducing its equity interest to 28.5%
resulting in a pretax gain of $2.4 million in 2000. The balance of the
investment was sold in 2001 resulting in an additional pre-tax gain in 2001 of
$14.7 million.
SIGNIFICANT TRANSACTIONS IN 2001
In January 2001, the Partnership completed the sale of UniMedia Company to
Gesca Limited, a subsidiary of Power Corporation of Canada. The publications
sold represented the French language newspapers of the Partnership, including
three paid circulation dailies and 15 weeklies published in Quebec and Ontario.
A pre-tax gain of approximately $75.1 million was recognized on this sale.
In two separate transactions in July and November 2001, International and
the Partnership completed the sale of most of International's remaining Canadian
newspapers to Osprey Media Group Inc. ("Osprey") for total sale proceeds of
approximately $255.0 million plus closing adjustments primarily for working
capital. Included in these sales were community newspapers in Ontario, such as
The Kingston Whig-Standard, The Sault Star, the Peterborough Examiner, the
Chatham Daily News and The Observer (Sarnia). Pre-tax gains of approximately
$1.5 million were recognized on these sales. The former Chief Executive Officer
of the Partnership is a minority shareholder of Osprey.
30
In August 2001, International entered into an agreement to sell to CanWest
its remaining 50% interest in the National Post. In accordance with the
agreement, its representatives resigned from their executive positions at the
National Post effective September 1, 2001. Accordingly, from September 1, 2001,
International had no influence over the operations of the National Post and
International 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. A pre-tax loss of
approximately $120.7 million was recognized on the sale.
In August and December 2001, International sold participation interests
("Participations") in $540.0 million (U.S. $350.0 million) and $216.8 million
(U.S.$140.5 million), respectively, principal amounts of debentures issued by a
subsidiary of CanWest to a special purpose trust ("Participation Trust"). Units
of the Participation Trust were sold by the Participation Trust to arm's-length
third parties. These transactions resulted in net proceeds of $621.8 million
(U.S.$401.2 million) and have been accounted for as sales of International's
CanWest debentures. The pre-tax loss on these transactions, including realized
holding losses on the underlying debentures, amounted to $97.4 million and has
been recognized in unusual items.
On November 28, 2001, International sold 27,405,000 non-voting shares in
CanWest (including 405,000 shares issued on conversion of 2,700,000 multiple
voting preferred shares) for total cash proceeds of approximately $271.3
million. The sale resulted in a realized pre-tax loss of $157.5 million, which
is included in unusual items.
SIGNIFICANT TRANSACTIONS IN 2002
On December 23, 2002, a wholly owned subsidiary of International,
Publishing and certain of Publishing's subsidiaries entered into an amended and
restated U.S. $310.0 million Senior Credit Facility with a group of financial
institutions arranged by Wachovia Bank N.A. (the "Senior Credit Facility").
The Senior Credit Facility consists of (a) a U.S. $45.0 million revolving
credit facility, which matures on September 30, 2008 (the "Revolving Credit
Facility"), (b) a U.S. $45.0 million Term Loan A, which matures on September 30,
2008 ("Term Loan A") and (c) a U.S. $220.0 million Term Loan B, which matures on
September 30, 2009 ("Term Loan B"). Publishing (a wholly owned direct
subsidiary) and Telegraph Group (a wholly owned indirect subsidiary) are the
borrowers under the Revolving Credit Facility and First DT Holdings Ltd.
("FDTH", a wholly owned indirect subsidiary in the United Kingdom) is the
borrower under Term Loan A and Term Loan B. The Revolving Credit Facility and
Term Loans bear interest at either the Base Rate (U.S.) or LIBOR, plus an
applicable margin. Cross-currency floating to fixed rate swaps from US$ LIBOR to
Sterling fixed rate have been purchased in respect of all amounts advanced under
the Senior Credit Facility. No amounts have currently been drawn under the
Revolving Credit Facility.
Publishing's borrowings under the Senior Credit Facility are guaranteed by
Publishing's material U.S. subsidiaries, while FDTH's and Telegraph Group's
borrowings under the Senior Credit Facility are guaranteed by Publishing and its
material U.S. and U.K. subsidiaries. International is also a guarantor of the
Senior Credit Facility. Publishing's borrowings under the Senior Credit Facility
are secured by substantially all of the assets of Publishing and its material
U.S. subsidiaries, a pledge of all of the capital stock of Publishing and its
material U.S. subsidiaries and a pledge of 65% of the capital stock of certain
foreign subsidiaries. FDTH's and Telegraph Group's borrowings under the Senior
Credit Facility are secured by substantially all of the assets of Publishing and
its material U.S. and U.K. subsidiaries and a pledge of all of the capital stock
of Publishing and its material U.S. and U.K. subsidiaries. International's
assets in Canada have not been pledged as security under the Senior Credit
Facility.
The Senior Credit Facility loan documentation requires Publishing to comply
with certain covenants which include, without limitation and subject to certain
exceptions, restrictions on additional indebtedness; liens; certain types of
payments (including without limitation, capital stock dividends and redemptions,
payments on existing indebtedness and intercompany indebtedness), and on
incurring or guaranteeing debt of an affiliate, making certain investments and
paying management fees; mergers, consolidations, sales and acquisitions;
transactions with affiliates; conduct of business, except as permitted; sale and
leaseback transactions; changing fiscal year; changes to holding company status;
creating or allowing restrictions on taking action under the Senior Credit
Facility loan documentation; and entering into operating leases, subject to
certain baskets and exceptions. The Senior Credit Facility loan documentation
also contains customary events of default.
31
On December 23, 2002, Publishing also issued U.S.$300.0 million aggregate
principal amount of 9% senior unsecured notes due 2010 (the "9% Senior Notes")
at par to certain qualified institutional buyers ("QIBs") pursuant to Rule 144A
under the Securities Act of 1933, as amended. The proceeds from the sale of the
9% Senior Notes, together with drawdowns under the Senior Credit Facility and
available cash balances, were used to redeem approximately U.S. $239.9 million
of Publishing's Senior Subordinated Notes due 2006 and approximately U.S. $265.0
million of Publishing's Senior Subordinated Notes due 2007, plus applicable
premium and accrued interest to the date of redemption, and to make a
distribution of U.S. $100.0 million to International. International used the
distribution (a) to repay all amounts borrowed by International on October 3,
2002 under its loan agreement with Trilon International Inc., (b) to retire the
equity forward purchase agreements between International and certain Canadian
chartered banks (the "Total Return Equity Swap") made as of October 1, 1998, as
amended, and (c) for other general corporate purposes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and the related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, investments, intangible assets, income taxes,
restructuring, pensions and other post-retirement benefits, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from those estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances could be required.
We hold minority interests in both publicly traded and privately held
companies. Some of the publicly traded companies have highly volatile share
prices. We record an investment impairment charge when we believe an investment,
whether or nor publicly traded, has experienced a decline in value that is other
than temporary. Future adverse changes in market conditions or poor operating
results of underlying investments may not be reflected in an investment's
current carrying value, thereby requiring an impairment charge in the future.
We have significant goodwill recorded in our accounts. Certain of our
newspapers operate in highly competitive markets. We are required to determine
annually whether or not there has been any impairment in the value of these
assets. Changes in long-term readership patterns and advertising expenditures
may affect the value and necessitate an impairment charge. Certain indicators of
potential impairment that could impact the Company's reporting units include,
but are not limited to, the following: (a) a significant long-term adverse
change in the business climate that is expected to cause a substantial decline
in advertising spending, (b) a permanent significant decline in a reporting
units' newspaper readership, (c) a significant adverse long-term negative change
in the demographics of a reporting units' newspaper readership and (d) a
significant technological change that results in a substantially more
cost-effective method of advertising than newspapers.
The Company sponsors several defined benefit pension and post-retirement
benefit plans for domestic and foreign employees. These defined benefit plans
include pension and post-retirement benefit obligations, which are calculated
based on actuarial valuations. In determining these obligations and related
expenses, key assumptions are made concerning expected rates of return on plan
assets and discount rates. In making these assumptions, the Company evaluated,
among other things, input from actuaries, expected long-term market returns and
current high-quality bond rates. The Company will continue to evaluate the
expected long-term rates of return on plan assets and discount rates at least
annually and make adjustments as necessary, which could change the pension and
post-retirement obligations and expenses in the future.
Unrecognized actuarial gains and losses in respect of pension and
post-retirement benefit plans are recognized by the Company over a period
ranging from 8 to 17 years, which represents the weighted average remaining
service life of the employee groups. Unrecognized actuarial gains and losses
arise from several factors, including
32
experience, assumption changes in the obligations and from the difference
between expected returns and actual returns on assets. At the end of 2002, the
Company had unrecognized net actuarial losses of $233.4 million. These
unrecognized amounts could result in an increase to pension expense in future
years depending on several factors, including whether such losses exceed the
corridor in accordance with CICA Section 3461, "Employee Future Benefits".
The estimated accumulated benefit obligations for the defined benefit plans
exceeded the fair value of the plan assets at December 31, 2002 and 2001, as a
result of the negative impact that declines in global capital markets and
interest rates had on the assets and obligations of the Company's pension plans.
During 2002, the Company made contributions of $20.2 million to the defined
benefit plans. Global capital market and interest rate fluctuations could impact
funding requirements for such plans. If the actual operations of the plans
differ from the assumptions, and the deficiency between the plans' assets and
obligations continues, additional Company contributions may be required. If the
Company is required to make significant contributions to fund the defined
benefit plans, reported results could be adversely affected, and the Company's
cash flow available for other uses may be reduced.
The Company recognizes a pension valuation allowance for any excess of the
prepaid benefit cost over the expected future benefit. Increases or decreases in
global capital markets and interest rate fluctuations could increase or decrease
any excess of the prepaid benefit cost over the expected future benefit
resulting in an increase or decrease to the pension valuation allowance. Changes
in the pension valuation allowance are recognized in earnings immediately.
Included in current liabilities are income taxes that have been provided on
gains on sales of assets computed on tax bases that result in higher gains for
tax purposes than for accounting purposes. Strategies have been and may be
implemented that may also defer and/or reduce these taxes, but the effects of
these strategies have not been reflected in the accounts.
CHANGES IN ACCOUNTING POLICIES
ACCOUNTING FOR INCOME TAXES
During 1999, the CICA mandated a change to the method of accounting for
income taxes that made Canadian GAAP more consistent with US GAAP. The change
was required to be adopted retroactively effective January 1, 2000 and the
Company chose to do so without restating prior years' financial statements. The
change required the Company to provide income taxes on the excess of book value
of intangible assets, other than goodwill, over the tax value of those assets
(book/tax differences). Over the years, the Company has recorded significant
amounts as circulation assets when businesses were purchased, which has not
resulted in amortizable tax cost. The adjustment made effective January 1, 2000
increased future income tax liabilities by $516.1 million and reduced minority
interest by $225.1 million with the net amount being recorded as an increase in
deficit in the amount of $291.0 million. The recording of these amounts is not
an indication that taxes will actually be paid, not does it reflect the timing
of any such payments.
EARNINGS PER SHARE
Effective January 1, 2001, the Company adopted, retroactively with
restatement, the recommendations of CICA Section 3500 with respect to earnings
per share. Under the revised standard, the treasury stock method is used instead
of the imputed earnings approach for determining the dilutive effect of options,
issued warrants or other similar instruments.
The change in the method of calculation of earnings per share did not
impact the previously reported basic earnings per share for 2000. Diluted
earnings per share for 2000 were increased from $4.48 per share to $5.05 per
share.
BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLES
In August 2001, the CICA issued Handbook Section 1581, "Business
Combinations" ("Section 1581") and Handbook Section 3062, "Goodwill and Other
Intangible Assets" ("Section 3062"). Section 1581 specifies criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. Section 3062 requires that goodwill and
intangible assets with indefinite useful lives no longer be
33
amortized, but instead be tested for impairment at least annually by comparing
the carrying value to the respective fair value in accordance with the
provisions of Section 3062. Section 3062 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment by
assessing the recoverability of the carrying value.
The Company adopted the provisions of Section 1581 as of July 1, 2001 and
Section 3062 as of January 1, 2002. Upon adoption of Section 3062, the Company
was required to evaluate its existing intangible assets and goodwill that were
acquired in purchase business combinations, and effective January 1, 2002, has
reclassified certain amounts previously ascribed to circulation to
non-competition agreements and subscriber and advertiser relationships, with the
balance to goodwill.
In connection with Section 3062's transitional goodwill impairment
evaluation, Section 3062 requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units and
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and identifiable intangible assets,
to those reporting units as of January 1, 2002. The Company had until June 30,
2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeded the fair value of the reporting unit, an indication
existed that the reporting unit goodwill may be impaired and the Company was
required to perform the second step of the transitional impairment test. The
second step was required to be completed no later than December 31, 2002. In the
second step, the Company compared the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill, both of which
would be measured as of January 1, 2002. The implied fair value of goodwill was
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation, in accordance with Section 1581.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill.
At January 1, 2002, the Company had unamortized goodwill in the amount of
$905.6 million, which is no longer being amortized. This amount is before any
reduction for the transitional impairment noted below. This change in accounting
policy cannot be applied retroactively and the amounts presented for prior
periods have not been restated for this change.
The Company completed its transitional impairment testing for goodwill
under Section 3062 and recorded an impairment charge of $32.0 million in respect
of the goodwill for the Jerusalem Post operation. That loss, net of related
minority interest, amounted to $12.1 million and has been recorded as a charge
to the opening deficit as at January 1, 2002.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
The Company and certain of its subsidiaries have employee stock-based
compensation plans. Until December 31, 2001, compensation expense was not
recognized on the grant or modification of options under these plans.
Effective January 1, 2002, the Company adopted Handbook Section 3870,
"Stock-based Compensation and Other Stock-based Payments" ("Section 3870").
Under Section 3870, the Company is required to account for, on a prospective
basis, all stock-based payments made by the Company to non-employees, including
employees of RCL and employee awards that are direct awards
of stock, call for settlement in cash or other assets, or are stock appreciation
rights that call for settlement by the issuance of equity instruments, granted
on or after January 1, 2002, using the fair value-based method. For all other
stock-based payments, the Company has elected to use the settlement method of
accounting whereby cash received on the exercise of stock options is recorded as
capital stock.
Under the fair value-based method, stock options granted to employees of
RCL by the Company and its subsidiaries are measured at the fair value of the
consideration received, or the fair value of the equity instruments issued, or
liabilities incurred, whichever is more reliably measurable. Such fair value
determined is recorded as a dividend-in-kind with no resulting impact on the
Company's net earnings. Section 3870 will be applied prospectively to all
stock-based payments to non-employees granted on or after January 1, 2002. The
Company has not granted any stock options since the adoption of Section 3870.
During 2002, the only options granted by International which are impacted by the
adoption of 3870 are options granted to employees of RCL. The fair value of such
options must be recorded as a dividend by International, with no impact to the
Company's results.
34
Consequently, there is no impact of adoption of this standard on the Company's
financial statements for the year ended December 31, 2002.
RECENT CANADIAN ACCOUNTING PRONOUNCEMENTS
FOREIGN CURRENCY AND HEDGING
In November 2001, the CICA issued Accounting Guideline 13, "Hedging
Relationships" ("AcG 13"). AcG 13 establishes new criteria for hedge accounting
and will apply to all hedging relationships in effect on or after July 1, 2003.
Effective January 1, 2004, the Company will reassess all hedging relationships
to determine whether the criteria are met or not and will apply the new guidance
on a prospective basis. To qualify for hedge accounting, the hedging
relationship must be appropriately documented at the inception of the hedge and
there must be reasonable assurance, both at the inception and throughout the
term of the hedge, that the hedging relationship will be effective. The Company
is in the process of formally documenting all hedging relationships and has not
yet determined whether any of its current hedging relationships will not meet
the new hedging criteria.
IMPAIRMENT OF LONG-LIVED ASSETS
In December 2002, the CICA issued Handbook Section 3063, "Impairment of
Long-Lived Assets" and revised Section 3475, "Disposal of Long-Lived Assets and
Discontinued Operations." These sections supersede the write-down and disposal
provisions of Section 3061, "Property, Plant and Equipment" and Section 3475,
"Discontinued Operations." The new standards are consistent with U.S. generally
accepted accounting principles. Section 3063 establishes standards for
recognizing, measuring and disclosing impairment of long-lived assets held for
use. An impairment is recognized when the carrying amount of an asset to be held
and used exceeds the projected future net cash flows expected from its use and
disposal, and is measured as the amount by which the carrying amount of the
asset exceeds its fair value. Section 3475 provides specific criteria for and
requires separate classification for assets held for sale and for these assets
to be measured at the lower of their carrying amounts and fair value, less costs
to sell. Section 3475 also broadens the definition of discontinued operations to
include all distinguishable components of an entity that will be eliminated from
operations. Section 3063 is effective for the Company's 2004 fiscal year;
however, early application is permitted. Revised Section 3475 is applicable to
disposal activities committed to by the Company after May 1, 2003; however,
early application is permitted. The Company expects that the adoption of these
standards will have no material impact on its financial position, results of
operations or cash flow at this time.
DISCLOSURE OF GUARANTEES
In February 2003, the CICA issued Accounting Guideline 14, "Disclosure of
Guarantees" ("AcG 14"). AcG 14 requires certain disclosures to be made by a
guarantor in its interim and annual financial statements for periods beginning
after January 1, 2003. The Company has determined the impact these new
disclosures and included such information in note 27h) to its audited
consolidated financial statements included elsewhere in this Annual Report.
RECENT US ACCOUNTING PRONOUNCEMENTS
DEBT EXTINGUISHMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The Statement
addresses, among other things, the income statement treatment of gains and
losses related to debt extinguishments, requiring that such expenses no longer
be treated as extraordinary items, unless the items meet the definition of
extraordinary per APB Opinion No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. Upon adoption, any
gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented, that does not meet the criteria in APB Opinion
No. 30 for classification as an extraordinary item, is required to be
reclassified. The Company has adopted this Statement effective January 1, 2002
for US GAAP purposes and retroactively classified net losses on repayment of
debt previously classified as extraordinary items.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
35
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS
146"). FAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities, and is effective for exit or disposal
activities initiated after December 31, 2002. FAS 146 nullifies Emerging Issues
Task Force Issue No. 94-3 ("EITF 94-3") Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in Restructuring). The principal difference between FAS
146 and EITF 94-3 relates to the recognition of a liability for a cost
associated with an exit or disposal activity. FAS 146 requires that the cost
associated with an exit or disposal activity be recognized when the liability is
incurred, whereas under EITF 94-3 the liability was recognized at the date of an
entity's commitment to an exit plan. The Company is currently assessing the
impact of FAS 146 on its financial position and results of operations.
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements for periods ending after December 15, 2002 about its obligations
under guarantees. FIN 45 also requires the recognition of a liability by a
guarantor at the inception of certain guarantees entered into or modified after
December 31, 2002. FIN 45 requires the guarantor to recognize a liability for
the non-contingent component of certain guarantees; that is, it requires the
recognition of a liability for the obligation to stand ready to perform in the
event that specified triggering events or conditions occur. The initial
measurement of this liability is the fair value of the guarantee at inception.
The Company included the disclosure of its guarantees in note 27h) of its
audited consolidated financial statements included elsewhere in this Annual
Report.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("VIE's") ("FIN 46") which requires that companies
that control another entity through interests other than voting interest should
consolidate the controlled entity. In the absence of clear control through a
voting equity interest, a company's exposure (variable interests) to the
economic risk and the potential rewards from a VIE's assets and activities are
the best evidence of a controlling financial interest. VIE's created after
January 31, 2003 must be consolidated immediately. VIE's existing prior to
February 1, 2003 must be consolidated by the Company commencing with its third
quarter 2003 financial statements. The Company has not yet determined whether it
has any VIE's which will require consolidation.
LIABILITIES AND EQUITY
On May 15, 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. The
Statement requires issuers to classify as liabilities (or assets in some
circumstance) three classes of freestanding financial instruments that embody
obligations for the issuer.
Generally, the Statement is effective for financial instruments entered into
or modified after May 31, 2003 and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. The Company will adopt
the provisions of the Statement on July 1, 2003.
To date, the Company has not entered into any financial instruments within
the scope of the Statement. The Company is currently assessing the impact of the
new standard.
DERIVATIVES AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133
on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
accounting for SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities". In particular, it clarifies under what circumstances a contract
with an initial net investment meets the characteristics of a derivative as
discussed in SFAS No. 133; clarifies when a derivative contains a financing
component; amends the definition of an underlying to conform it to the language
used in the FASB Interpretation No. 45; and amends certain other existing
pronouncements.
36
SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
Company will adopt the provisions of SFAS No. 149 for U.S. GAAP purposes in the
quarter ending June 30, 2003 and is currently assessing the impact, if any, that
the adoption of SFAS No. 149 will have on its results of operations and
financial position.
CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES
We prepare our consolidated financial statements in accordance with
Canadian GAAP. GAAP in the United States (US GAAP) differs in certain respects
from Canadian GAAP. The areas of material differences and their impact on our
consolidated financial statements are described in note 26 to the audited
consolidated financial statements, included elsewhere in this Annual Report.
Our statement of operations prepared under Canadian GAAP does not present
operating income as is required under US GAAP. The following are the significant
differences between Canadian and US GAAP which would impact any assessment of
our US GAAP operating income:
i) Prior to January 1, 2002, the Company capitalized certain operating
costs incurred to improve the long-term readership of our publications
("betterments") and amortized such costs on a straight-line basis over
their useful lives. Capitalization of such operating costs is not
permitted under US GAAP, which would result in higher operating costs,
partially offset by lower amortization expense under US GAAP.
ii) The Company presented as unusual items certain operating expenses, which
are of an infrequent nature, including start up costs associated with
new printing facilities as well as certain pension, benefit and
redundancy costs. Such costs are presented as operating expenses under
US GAAP.
iii) The Company proportionately consolidated the operating results of our
joint ventures under Canadian GAAP. Under US GAAP joint ventures are
required to be accounted for using the equity method. While this GAAP
difference does not affect our consolidated net earnings, it does
increase operating revenues and operating expenses from those that would
be reported under US GAAP.
iv) The Company reported investment and interest income as revenue under
Canadian GAAP, whereas such income is required to be reported as
non-operating income under US GAAP.
v) On January 1, 2000, upon adoption of a new income tax standard under
Canadian GAAP, the Company elected not to restate our prior year's
results. As a result, under Canadian GAAP the Company reported a charge
to deficit. Under US GAAP this has been reflected as additional goodwill
upon recognition of deferred income tax liabilities on business
acquisitions. Accordingly, the Company had higher goodwill amortization
(for periods prior to January 1, 2002) under US GAAP.
There are also a number of additional differences between Canadian and US
GAAP which would impact the Company's non-operating income, including the
following:
i) The Company is required under Canadian GAAP to treat the dividends paid
on our Series II and Series III redeemable preference shares as interest
expense. Under US GAAP, such dividends are charged to retained earnings
which would result in lower interest expense under US GAAP.
ii) The Company is not required to mark-to-market International's forward
purchase contracts under Canadian GAAP. The unrealized losses on these
contracts are required to be expensed under US GAAP. In December 2002,
these contracts were settled and the losses realized.
iii) Dilution gains reported under Canadian GAAP are lower than those which
would be reported under US GAAP principally as a result of the
capitalization of betterments under Canadian GAAP.
iv) Gains on sales of businesses reported under Canadian GAAP are higher
than those which would be reported under US GAAP principally as a result
of additional goodwill recorded under US GAAP in connection with income
taxes on business acquisitions noted under item (v) above.
37
v) Canadian GAAP requires recognition of a pension valuation allowance for
any excess of the benefit expense over the expected future benefit.
Changes in the pension valuation allowance are recognized in earnings
under Canadian GAAP immediately. US GAAP does not permit the recognition
of pension valuation allowances.
vi) Under U.S. GAAP, the transitional provisions of new accounting standards
for goodwill require the write-down resulting from the impairment test,
upon adoption on January 1, 2002, to be reflected in the consolidated
statement of earnings as a cumulative effect of a change in accounting
principle. However, Canadian GAAP requires the same loss to be recorded
as a charge to the opening deficit as at January 1, 2002.
vii) Under Canadian GAAP, the Company was required to treat the transfer in
1997 of the Canadian newspapers to International as a disposition at
fair value. This resulted in the recognition of a gain to the extent
there is a minority interest in International.
U.S. GAAP requires that the transfer of the Canadian newspapers to a
subsidiary company be accounted for at historical values using "as-if"
pooling of interests accounting. As a result, the revenues and expenses
for the periods prior to January 1, 1997 would be restated to give
effect to the transfer of the Canadian newspapers to International and
the gross gain of $114,000,000, prior to deducting expenses, on the
sale of the properties and the increase in intangible assets of an
equivalent amount would not have been recorded for U.S. GAAP purposes.
However, such gain would be recognized for U.S. GAAP purposes as the
underlying Canadian newspaper operations were sold to third parties, or
there was a further dilution in the Company's interest in
International.
CONSOLIDATED FINANCIAL INFORMATION
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001
NET LOSS. The net loss in the year ended December 31, 2002 amounted to
$88.6 million or a loss of $2.76 per retractable common share compared to a net
loss of $131.9 million or a loss of $3.91 per retractable common share in 2001.
The results of both periods are impacted by a large number of unusual items
which are discussed below.
SALES REVENUE. Sales revenue in 2002 was $1,628.2 million compared with
$1,822.1 million in 2001, a decrease of $193.9 million. The reduction in sales
revenue is primarily due to the sale of most of the remaining Canadian newspaper
properties in July and November 2001 and the sale of the remaining 50% interest
in the National Post in August 2001. Declines in U.K. advertising revenue in
local currency were partly offset by the strengthening of the pound sterling.
Sales revenue, in local currency, for the Chicago Group was flat year over year.
COST OF SALES AND EXPENSES. Cost of sales and expenses in 2002 were
$1,453.9 million compared with $1,730.1 million in 2001, a decrease of $276.2
million. The decrease in cost of sales and expenses resulted primarily from the
disposition of Canadian newspaper properties in 2001 as well as lower newsprint
costs, lower compensation costs and general cost reductions at the Chicago Group
and the U.K. Newspaper Group, primarily as a result of cost containment
strategies. Lower cost of sales and expenses at the U.K. Newspaper Group, in
local currency, were partially offset by the effect of the strengthening of the
pound sterling.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in 2002
amounted to $88.2 million compared with $144.7 million in 2001, a reduction of
$56.5 million. The reduction results from both the disposition of Canadian
properties in 2001 and the adoption on January 1, 2002 of CICA Handbook Section
3062, which resulted in goodwill not being amortized subsequent to January 1,
2002. In the year ended December 31, 2001, amortization of goodwill and
intangible assets, including amortization of goodwill and intangible assets in
respect of properties sold during 2001 which were not being amortized in 2002,
approximated $53.3 million.
INVESTMENT AND OTHER INCOME. Investment and other income in 2002 amounted
to $29.7 million compared with $97.3 million in 2001, a decrease of $67.6
million. Investment and other income in 2001 included interest on debentures
issued by a subsidiary of CanWest and a dividend on CanWest shares. In September
2001, CanWest temporarily suspended its semi-annual dividend. In the latter part
of 2001, all of the CanWest shares were sold and Participations were sold to the
Hollinger Participation Trust in respect of nearly all of the CanWest
debentures,
38
resulting in significantly lower interest and dividend income in 2002. Most of
the proceeds from the disposal of the CanWest investments were retained as
short-term investments at low rates of interest until the end of the first
quarter of 2002 when a portion of International's long-term debt was retired.
INTEREST EXPENSE. Interest expense for 2002 was $121.7 million compared
with $177.9 million in 2001, a reduction of $56.2 million. The reduction mainly
results from lower average debt levels in 2002 compared with 2001. The Company
reduced its revolving bank credit facility in 2001 by $173.4 million and by
$38.5 million in January 2002 and International reduced its long-term debt
beginning in March 2002 by U.S. $290.0 million. In addition, since both the
Company's Series II and Series III preference shares are financial liabilities,
dividends on such shares are included in interest expense. Dividends paid on the
Series II preference shares were lower in 2002 than in 2001, as a result of
Series II preference share retractions and International reducing its dividend
on shares of Class A common stock, on which the Series II preference share
dividends are based.
NET LOSS IN EQUITY-ACCOUNTED COMPANIES. Net loss in equity-accounted
companies amounted to $1.2 million in 2002 compared with $18.6 million in 2001.
Net loss in equity-accounted companies in 2001 primarily represented an
equity-accounted loss in Interactive Investor International, which was sold
during the third quarter of 2001.
NET FOREIGN CURRENCY LOSSES. Net foreign currency losses increased from a
loss of $7.5 million in 2001 to a loss of $19.7 million in 2002. Net foreign
currency losses in 2002 includes a $10.4 million net loss on amounts sold to the
Hollinger Participation Trust and a $5.7 million loss on a cross currency swap.
UNUSUAL ITEMS. Unusual items in 2002 amounted to a loss of $62.6 million
compared with a loss of $295.4 million in 2001. Unusual items in 2002 included
the loss on retirement of Publishing's Senior Notes in the amount of $56.3
million, a $63.6 million write-off of investments, and a $43.3 million loss on
the termination of the Total Return Equity Swap, partly reduced by a $20.1
million gain on the dilution of the Company's investment in International, a net
$44.5 million foreign exchange gain on the reduction of net investments in
foreign subsidiaries and a $34.4 million reduction of the pension valuation
allowance. Unusual items in 2001 included a $240.1 million loss on sales of
investments, a $23.0 million loss on sale of publishing interests, a $79.9
million loss on write-off of investments and a $29.6 million realized loss on
the Total Return Equity Swap, partly offset by a $59.4 million gain on the sale
of and dilution of the Company's investment in International and a $58.7 million
reduction of the pension valuation allowance.
INCOME TAXES. In 2002, income tax expense was $124.0 million computed on a
loss before income taxes and minority interest of $89.5 million primarily as a
result of non-deductible expenses including the settlement of the Total Return
Equity Swap and an increase in the tax valuation allowance of $74.0 million. In
2001, the income tax recovery was $89.5 million on a loss before income taxes
and minority interest of $454.9 million in part due to the impact of losses at
the National Post for which a tax benefit was not recorded.
MINORITY INTEREST. Minority interest in the year ended December 31, 2002
was a recovery of $124.9 million compared to a recovery of $233.5 million in
2001. Minority interest primarily represents the minority share of the net loss
of International and the net earnings of the Partnership. In 2001, minority
interest also included the minority's 50% share of the National Post net loss to
August 31, which totaled $28.7 million.
RESULTS OF OPERATIONS BY SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED
TO 2001
CHICAGO GROUP
Sales revenue in 2002 was $693.7 million compared with $686.3 million in
2001, an increase of $7.4 million or 1.1%. The increase results entirely from
the slightly stronger United States dollar compared to the Canadian dollar on
average in 2002 compared with 2001. In U.S. dollars, sales revenue was U.S.
$441.8 million in 2002, a slight decrease compared with U.S. $442.9 million in
2001. Advertising revenue in 2002 was U.S. $341.3 million compared with
U.S.$338.5 million in 2001, an increase of U.S. $2.8 million or 0.8%.
Circulation revenue in 2002 was U.S. $89.4 million compared with U.S. $92.7
million in 2001, a decrease of U.S. $3.3 million or 3.6%. The decrease was
primarily the result of price discounting.
Cost of sales and expenses in 2002 were $591.6 million compared with $623.0
million in 2001, a decrease of $31.4 million or 5.0%. In U.S. dollars, cost of
sales and expenses were U.S. $376.7 million in 2002 compared with U.S. $402.1
million in 2001, a decrease of U.S. $25.4 million or 6.3%. Cost savings were
achieved across the board
39
with reductions in compensation costs, in newsprint costs and in other operating
costs. Reductions in compensation and other costs are the result of cost
management initiatives undertaken during the course of 2002 and 2001; however,
the reduction in newsprint cost was primarily the result of newsprint price
decreases. The average newsprint cost per tonne was approximately 21% lower in
2002 than in 2001.
Depreciation and amortization in 2002 was $42.4 million compared with $53.5
million in 2001, a reduction of $11.1 million. The reduction is largely the
result of the adoption, effective January 1, 2002 of Section 3062, which
resulted in goodwill and intangible assets with indefinite useful lives no
longer being amortized. Amortization of approximately $15.3 million in 2001
related to such assets.
Operating income in 2002 totaled $59.7 million compared with $9.8 million
in 2001, an increase of $49.9 million. This increase is the result of lower
newsprint, compensation and other operating costs in 2002 compared with 2001 and
lower amortization expense resulting from the adoption of new accounting
standards for goodwill and intangible assets.
U.K. NEWSPAPER GROUP
In 2002, sales revenue for the U.K. Newspaper Group was $804.6 million
compared with $801.1 million in 2001, an increase of $3.5 million or 0.4%. In
pounds sterling, sales revenue was (pound)341.5 million in 2002 compared with
(pound)358.9 million in 2001, a decrease of (pound)17.4 million or 4.8%. In 2002
compared to 2001, the pound sterling on average strengthened compared with the
Canadian dollar. Advertising revenue at the Telegraph in 2002 was (pound)211.0
million compared with (pound)228.7 million in 2001, a decrease of (pound)17.7
million or 7.7%. Advertising revenues were lower in the recruitment and
financial areas. Circulation revenue in 2002 was (pound)93.6 million at the
Telegraph compared with (pound)94.5 million in 2001. Lower revenue from both a
change in the mix of sales between single copy and subscribers and lower overall
average circulation in 2002 compared with 2001 was partly offset by increased
revenue resulting from single copy cover price increases of 5 pence in each of
September 2001 and 2002 in respect of The Daily Telegraph.
Total cost of sales and expenses in the year ended December 31, 2002 were
$693.9 million compared with $703.3 million in 2001, a decrease of $9.4 million
or 1.3%. In local currency, cost of sales and expenses in 2002 approximated
(pound)294.3 million compared with (pound)314.9 million in 2001, a decrease of
(pound)20.6 million or 6.5%. The majority of the decrease is due to a reduction
in newsprint and compensation costs. The decrease in newsprint costs results
from a reduction in consumption due to lower pagination as a result of lower
advertising revenue, and a reduction in the average price per tonne of newsprint
of 9.9%. Lower compensation costs in 2002 result primarily from reduced staff
levels, mainly in editorial, which occurred at the end of 2001, as well as a
general salary level freeze in 2002.
Depreciation and amortization in 2002 was $35.9 million compared with $63.9
million in 2001, a reduction of $28.0 million. The reduction is primarily the
result of the adoption, effective January 1, 2002, of new accounting standards,
which resulted in goodwill and other intangible assets with indefinite useful
lives not being amortized in 2002. Amortization expense of approximately $25.9
million in 2001 related to such assets.
Operating income in 2002 totaled $74.8 million compared with $33.9 million
in 2001, an increase of $40.9 million. The increase in operating income, in
local currency, is the result of lower newsprint and compensation costs and
reduced amortization expense resulting from the adoption of new accounting
standards, reduced by lower advertising revenue. In addition, the strength of
the pound sterling on average in 2002 compared with the Canadian dollar, further
improved operating income in Canadian dollars.
CANADIAN NEWSPAPER GROUP
Sales revenue at the Canadian Newspaper Group in 2002 was $109.1 million
compared with $305.1 million in 2001, a decrease of $196.0 million. The
operating loss was $5.3 million in 2002 compared with an operating loss of $50.4
million in 2001, a decrease of $45.1 million. The results for 2001 included the
results of the National Post and other Canadian newspaper properties, all of
which were sold during 2001. The newspapers that were sold accounted for the
majority of the decrease in year-over-year sales revenue and the net reduction
in year-over-year operating loss. The 2001 operating loss included a $57.3
million operating loss for the National Post for the period January 1 to August
31, when the National Post was sold. Sales revenue for operations owned
throughout 2001 and 2002 was $108.8 million in 2002 and $114.1 million in 2001,
a decrease of $5.3 million or 4.6%. The decrease primarily resulted from lower
sales revenue at the Business Information Group.
40
COMMUNITY GROUP
In 2002, sales revenue was $20.8 million and the operating loss was $8.2
million compared with sales revenue of $29.6 million and an operating loss of
$5.3 million in 2001. The results for 2001 include the last remaining U.S.
Community Group newspaper which had operating revenue of U.S. $0.8 million and
an operating loss of U.S. $0.2 million in 2001. Sales revenue at the Jerusalem
Post in 2002 was U.S.$13.2 million compared with U.S. $19.1 million in 2001, a
decrease of U.S. $5.9 million. Advertising revenue declined U.S. $1.9 million,
circulation revenue declined U.S. $1.7 million and printing revenue declined
U.S.$2.3 million, each due to the poor economic climate in Israel. In addition
in the past, Jerusalem Post derived a relatively high percentage of its revenues
from printing as a result of a long-term contract to print and bind copies of
the Golden Pages, Israel's equivalent of a Yellow Pages telephone directory.
During 2002, Golden Pages effectively cancelled this agreement and has ceased
placing printing orders. An action was commenced by the Jerusalem Post in 2003
seeking damages for the alleged breach of contract. In addition, amortization
expense in the amount of $0.9 million at the Jerusalem Post in 2001 was not
incurred in 2002 as a result of new accounting standards for goodwill.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO 2000
NET EARNINGS (LOSS). The Company had a net loss of $131.9 million in 2001 or
a loss of $3.91 per retractable common share compared with net earnings of
$189.4 million in 2000 or $5.11 per retractable common share. The results of
both years included a large number of unusual items. In 2001, the net loss from
unusual items after income taxes and minority interest amounted to $74.0 million
compared with net income from unusual items after income taxes and minority
interest, in 2000 of $219.5 million. Excluding the net effect of unusual items,
the net loss in 2001 was $57.9 million compared with a net loss of $30.1 million
in 2000.
SALES REVENUE. Sales revenue in 2001 was $1,822.1 million compared with
$3,158.3 million in 2000, a decrease of $1,336.2 million. The overall decrease
in sales revenue was primarily due to the sale of Canadian Newspaper Group
properties in both 2000 and 2001 and the 2000 sale of Community Group newspaper
properties. In addition, lower sales revenue at the U.K. Newspaper Group and the
Chicago Group on a same store basis contributed to the decrease. However, the
acquisition of Fox Valley Publications Inc. (formerly Copley Group) in December
2000 increased total Chicago Group sales revenue.
COST OF SALES AND EXPENSE. Total cost of sales and expenses in 2001 were
$1,730.1 million compared with $2,586.2 million in 2000, a decrease of $856.1
million. The decrease in costs primarily results from the sales of Canadian
Newspaper Group properties in both 2000 and 2001 and the sale of Community Group
newspaper properties in 2000. In addition newsprint expense in respect of
properties owned throughout both 2000 and 2001 was lower mainly as a result of
lower consumption at the U.K. Newspaper Group and the Chicago Group. Cost of
sales and expenses are net of betterments capitalized. On completion of a
detailed impairment analysis of the cumulative betterments capitalized,
principally in respect of the U.K. Newspaper Group, a write-down of $37.8
million was taken in the fourth quarter of 2001 and included in cost of sales
and expenses. This partly offsets the decreases noted above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in 2001 totaled
$144.7 million compared with $219.9 million in 2000, a decrease of $75.2
million. Lower depreciation and amortization resulting from the sale of
properties in both the Community Group and Canadian Newspaper Group was in part
offset by increased depreciation at the Chicago Group related to the new
printing facility and increased depreciation and amortization resulting from the
Fox Valley Publications Inc. acquisition in December 2000.
INVESTMENT AND OTHER INCOME. Investment and other income in 2001 totaled
$97.3 million compared with $28.1 million in 2000, an increase of $69.2 million.
Investment and other income in 2001 included interest on the CanWest debentures
until the sale of participation interests in August and December, interest on
the remaining CanWest debentures, dividends on CanWest shares and bank interest
on the significant cash balance primarily accumulated from the proceeds of the
sale in 2001 of Canadian newspaper properties and the sale of CanWest shares and
participation interests in CanWest debentures. In 2000, interest and dividend
income on CanWest investments was received only for the period November 17 to
December 31.
INTEREST ON LONG-TERM DEBT. Interest on long-term debt amounted to $122.7
million in 2001 compared with $220.0 million in 2000, a decrease of $97.3
million. This decrease primarily results from the significantly lower debt
41
levels during 2001 compared with 2000. In November 2000, International repaid
U.S.$972.0 million of its senior credit facility with the proceeds from the sale
of properties to CanWest.
UNUSUAL ITEMS. Unusual items in 2001 amounted to a loss of $295.4 million
compared with a gain of $700.9 million in 2000. Unusual items in 2001 included a
loss on sale of investments of $240.1 million, being primarily the loss on sale
of participations in CanWest debentures and a loss on sale of CanWest shares, a
net loss of $23.0 million on sale of publishing interests including the loss on
sale of National Post, partly offset by gains on sales of Canadian properties, a
$79.9 million write-off of investments, a $29.6 million realized loss on
International's Total Return Equity Swap, a pension and post retirement plan
liability adjustment of $16.8 million primarily in respect of retired former
Southam employees, redundancy, rationalization and other costs of $16.9 million
and $7.2 million of duplicated costs resulting from operating two plants during
the start-up of a new plant in Chicago. These unusual losses were reduced by a
$59.4 million gain on the effective sale of International shares and a $58.7
million accounting gain resulting from a decrease in the required pension
valuation allowance in respect of Canadian Newspaper Group pension plans due to
a decline in the value of plan assets.
Unusual items in 2000 included $697.9 million of gains on sales of
publishing interests, being primarily the sale of Canadian properties to CanWest
and the sale of most of the remaining United States Community Group newspaper
properties, a $47.9 million gain on sale of investments, a $28.5 million gain on
the effective sales of International shares and a $25.8 million gain on the
dilution of the investment in Interactive Investor International. These gains
were reduced by a loss on the write-off of investments of $31.4 million,
redundancy, rationalization and other costs of $41.5 million, the write-off of
financing fees of $16.1 million and $10.1 million of duplicated costs resulting
from operating two plants during the start-up of the new plant in Chicago.
INCOME TAXES. In 2001, the effective tax rate was lower than the effective
tax rate in 2000 due to the impact of significantly higher losses of the
National Post, for which a tax benefit is not being recorded.
MINORITY INTEREST. Minority interest in 2001 was a recovery of $233.5
million compared with an expense of $331.1 million in 2000. Minority interest
primarily represents the minority share of the results of International, and the
net earnings of the Partnership and in 2001, the minority's share of the
National Post losses. In 2001, International reported a significant net loss
including unusual losses whereas in 2000 International reported net earnings
including unusual gains. Minority interest reflects the minority's share of
these results.
RESULTS OF OPERATIONS BY SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED
TO 2000
CHICAGO GROUP
Sales revenue in 2001 was $686.3 million compared with $596.8 million in
2000, an increase of $89.5 million. In United States dollars, sales revenue was
US$442.9 million in 2001 compared with US$401.4 million, an increase of US$41.5
million. Advertising revenue was US$338.5 million in 2001 compared with US$305.0
million in 2000, an increase of US$33.5 million. Circulation revenue was US$92.7
million in 2001 compared with US$80.3 million in 2000, an increase of US$12.4
million. Printing and other revenue was US$11.7 million in 2001 compared with
US$16.1 million in 2000, a decrease of US$4.4 million.
Chicago Group results are based on standard accounting periods, which for
2000 resulted in a 53-week year for the reported results of the Chicago Group
only. The effect of the 53rd week in 2000 was to add US$6.0 million to sales
revenue and US$6.2 million to operating costs and expenses. On December 15,
2000, the acquisition of Chicago Suburban Newspapers from Copley Group was
completed and operating results of this group have been included since that
time. Revenues for operations owned in both years, excluding Chicago Suburban
Newspapers ("same store") and based on a 52-week year in 2000, were US$363.6
million for 2001, compared with US$392.0 million in 2000. Advertising revenue in
2001, on a same store 52-week basis, was US$20.0 million or 6.7% lower than in
2000. Circulation revenue on a same store 52-week basis, in 2001, was US$2.7
million or 3.5% lower than in 2000. Chicago Sun-Times average daily circulation
in 2001 was higher than in 2000; however, circulation revenue for 2001 was lower
than in 2000 as a result of price discounting to build and maintain market share
in response to competitive activity. Printing and other revenue, on a same store
52-week basis was US$10.1 million in 2001 compared with US$15.8 million in 2000,
a decrease of US$5.7 million.
Cost of sales and expenses in 2001 were $623.0 million compared with $504.1
million in 2000, an increase of $118.9 million. In US dollars, costs of sales
and expenses were US$402.1 million in 2001 compared with US$339.0
42
million in 2000, an increase of US$63.1 million. Newsprint expense in 2001 was
US$76.4 million compared with US$69.2 million in 2000, an increase of US$7.2
million. Compensation costs were US$178.7 million in 2001 compared with US$150.9
million in 2000, an increase of US$27.8 million. Other operating costs were
US$147.0 million in 2001 compared with US$118.9 million in 2000, an increase of
US$28.1 million. On a same store 52-week basis, cost of sales and expenses were
US$328.5 million compared with US$329.9 million in 2000, a decrease of US$1.4
million or 0.4%. Same store newsprint expense in 2001 was US$67.5 million,
compared to US$67.6 million in 2000. Average newsprint prices in 2001 were
approximately 11% higher than in 2000. In 2001, newsprint consumption was
significantly less than in 2000 as a result of lower page counts due to reduced
advertising revenue, a reduction in commercial printing, and general cost
controls. On a same store 52-week basis, compensation and other costs decreased
US$1.3 million or 0.5% year over year. The lower compensation costs result from
staff reductions across the Chicago Group offset in part by increased medical
costs and workers compensation costs. Other operating costs are lower as a
result of reduced commercial printing production costs, and general cost
reductions across all areas. On a same store basis depreciation and amortization
increased US$6.3 million mainly as a result of higher depreciation charges
related to the new Chicago printing facility.
Operating income in 2001 totaled $9.8 million compared with $55.4 million
in 2000, a decrease of $45.6 million. On a same store 52-week basis in United
States dollars, operating income was US$16.9 million in 2001 compared with
US$37.0 million in 2000, a decrease of US$20.1 million. The decrease results
primarily from lower sales revenue, increased depreciation and amortization
offset in part by lower compensation and other operating costs. The acquisition
of Chicago Suburban Newspapers in 2000 added US$79.3 million to sales revenue
and operating income of US$2.4 million in 2001.
U.K. NEWSPAPER GROUP
In 2001, sales revenue for the U.K. Newspaper Group was $801.1 million
compared with $882.2 million in 2000, a decrease of $81.1 million or 9.2%. In
2001 compared to 2000, the pound sterling on average weakened compared with
the Canadian dollar. In pounds sterling, sales revenue was (pound)358.9 million
in 2001 compared with (pound)392.3 million in 2000, a decrease of (pound)33.4
million or 8.5%. The decrease in revenue was almost entirely the result of lower
advertising revenue. Advertising revenue in 2001 was (pound)228.7 million
compared with (pound)255.9 million in 2000, a decrease of (pound)27.2 million or
10.6%. Circulation revenue in 2001 was (pound)94.5 million compared with
(pound)95.7 million in 2000. On September 5, 2001, the price of The Daily
Telegraph on Monday to Friday increased from 45 pence to 50 pence and on
September 8, 2001, the price of The Daily Telegraph on Saturday increased from
75 pence to 85 pence. The price increases improved circulation revenue in the
last quarter of 2001.
Cost of sales and expenses in 2001 were $703.3 million compared with $684.9
million in 2000, an increase of $18.4 million or 2.7%. In local currency, cost
of sales and expenses in 2001 approximated (pound)314.9 million compared with
(pound)305.9 million in 2000, an increase of (pound)9.0 million or 2.9%.
Newsprint expense in local currency was (pound)64.7 million in 2001 compared
with (pound)60.6 million in 2000, an increase of (pound)4.1 million or 6.8%.
This increase results from the significant increase in newsprint prices in 2001
compared to 2000, offset in part by 4% lower consumption in 2001 compared to
2000. In addition, cost of sales and expenses are net of betterments
capitalized. On completion of a detailed impairment analysis during 2001 of the
cumulative betterments capitalized, a write down was taken in the fourth quarter
of 2001, resulting in a net reduction in betterments capitalized year over year
of (pound)9.8 million. The increased cost of sales and expenses in 2001 compared
with 2000 resulted from increased newsprint costs and the net reductions in
betterments capitalized reduced in part by lower other operating costs.
Depreciation and amortization in 2001 was $63.9 million compared with $58.1
million in 2000, an increase of $5.8 million.
Operating income in 2001 totaled $33.9 million compared with $139.1 million
in 2000, a decrease of $105.2 million. The decrease in operating income, is
primarily the result of lower advertising revenue, increased newsprint costs,
the net reduction in betterments capitalized and increased depreciation and
amortization offset in part by lower other operating costs.
CANADIAN NEWSPAPER GROUP
Sales revenue in the Canadian Newspaper Group was $305.1 million in 2001
compared with $1,579.2 million in 2000 and in 2001 there was an operating loss
of $50.4 million compared with operating income of $174.1 million in 2000. The
significant decrease in both sales revenue and operating income was largely a
result of the sale of
43
newspaper assets in November 2000 to CanWest, the sale of UniMedia Company
completed in January 2001, the July and November 2001 sales of operations to
Osprey and the August 31, 2001 sale of the National Post.
Included in the $50.4 million operating loss for the year ended December 31,
2001, are overhead costs of approximately $3.8 million that are not expected to
be incurred in 2002. Also included is a $2.6 million expense in respect of
employee benefit costs of retired former Southam employees.
COMMUNITY GROUP
Sales revenue and operating income were $29.6 million and a loss of $5.3
million in 2001, compared to $100.1 million and operating income of $6.7 million
in 2000. The significant decrease in both sales revenue and operating income
results almost entirely from the sale of Community Group properties that
occurred primarily during 2000. During the third quarter of 2001, the last
remaining U.S. Community Group property was sold. At December 31, 2001, the
Jerusalem Post was the only Community Group property still owned by the Company.
B. LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION AND CASH FLOWS
The Company is an international 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, on a
non-consolidated basis, is dependent upon the availability of cash flows
principally from International through dividends and other payments.
International and the Company's other subsidiaries and affiliated companies are
under no obligation to pay dividends. International's ability to pay dividends
on its common stock may be limited as a result of its dependence on the receipt
of dividends and other receipts primarily from Publishing. Publishing and its
principal United States and foreign subsidiaries are subject to statutory
restrictions and restrictions in debt agreements that limit their ability to pay
dividends. Substantially all of the assets of Publishing and its material U.S.
and U.K. subsidiaries have been pledged to the group's lenders. The Company's
right to participate in the distribution of assets of any subsidiary or
affiliated company upon its liquidation or reorganization will be subject to the
prior claims of the creditors of such subsidiary or affiliated company,
including trade creditors, except to the extent that the Company may itself be a
creditor with recognized claims against such subsidiary or affiliated company.
On a non-consolidated basis, the Company has experienced a shortfall
between the dividends and fees received from its subsidiaries and its
obligations to pay its operating costs, including interest and dividends on its
preference shares, and such shortfalls are expected to continue in the future.
Accordingly, the Company is dependent upon the continuing financial support of
RMI to fund such shortfalls and, therefore, pay its liabilities as they fall
due. RMI is a wholly owned subsidiary of Ravelston, the Company's ultimate
parent company. On March 10, 2003, concurrent with the issue of U.S. $120.0
million Senior Secured Notes due 2011, RMI entered into a support agreement with
the Company. Under the agreement, RMI has agreed to make annual support payments
in cash to the Company on a periodic basis by way of contributions to the
capital of the Company (without the issuance of additional shares of the
Company) or subordinated debt. The annual support payments will be equal to the
greater of (a) the Company's negative net cash flow (as defined) for the
relevant period (which does not extend to outlays for retractions or
redemptions), determined on a non-consolidated basis, and (b) U.S.$14.0 million
per year (less any payments of management services fees by International
directly to the Company or NB Inc. and any excess in the net dividend amount
that the Company and NB Inc. receive from International over U.S.$4.65 million
per year), in either case as reduced by any permanent repayment of debt owing by
Ravelston to the Company. Pursuant to this arrangement, RMI has made payments to
the Company in respect of the period from March 10 to March 31, 2003 in the
amount of U.S.$1.1 million.
RMI currently derives all of its income and operating cash flow from the
fees paid pursuant to Services Agreements with International and its
subsidiaries. RMI's ability to provide the required financial support under the
support agreement with the Company is dependent on RMI continuing to receive
sufficient fees pursuant to those Services Agreements. The Services Agreements
may be terminated by either party by giving 180 days notice. The fees in respect
of the Services Agreements are negotiated annually with and approved by the
audit committee of International. The fees to be paid to RMI for the year ending
December 31, 2003 amount to approximately U.S.$22.0 million to U.S.$24.0 million
and were approved in February 2003. The fees in respect of the periods after
December 31, 2003 have not yet been negotiated or approved. If in any quarterly
period after April 1, 2003 the Company fails to receive in cash a minimum
aggregate amount of at least U.S.$4.7 million from a) payments made
44
by RMI pursuant to the support agreement and b) dividends paid by International
on its shares held by the Company, the Company would be in default under its
Senior Secured Notes. Based on the Company's current investment in International
and the current quarterly dividend paid by International of U.S.$0.05 per share,
the minimum support payment required to be made by RMI to avoid such a default
is approximately U.S.$3.5 million per quarter or U.S.$14.0 million annually.
This default could cause the Senior Secured Notes to become due and payable
immediately.
Initially, the support amount to be contributed by RMI will be satisfied through
the permanent repayment by Ravelston of its approximate $16.4 million of
advances from the Company, which resulted from the use of proceeds of the
Company's issue of its Senior Secured Notes. Thereafter, all support amount
contributions by RMI will be made through contributions to the capital of the
Company, without receiving any additional shares of the Company, except that, to
the extent that the minimum payment exceeds the negative net cash flow of the
Company, the amounts will be contributed through an interest-bearing, unsecured,
subordinated loan to the Company. The support agreement terminates upon the
repayment of the Senior Secured Notes which mature in 2011. The Senior Secured
Notes are secured by a first priority lien on 10,108,302 shares of
International's Class A common stock and 14,990,000 shares of International's
Class B common stock owned by the Company and NB Inc. Therefore, at June 19,
2003, the Company and NB Inc., in total, hold only 1,148,236 shares of
International Class A common stock which are unencumbered, the current market
value of which approximates US$12.9 million.
On March 10, 2003, the Company repaid the amount due to Ravelston, made an
advance to Ravelston and repaid all borrowings under its revolving credit
facility and operating line of credit with the proceeds of its issuance of
Senior Secured Notes. Currently, the Company does not have a line of credit. The
Trust Indenture governing the Senior Secured Notes places certain limitations on
the Company's ability to incur additional indebtedness and the ability to
retract the Series II and III preference shares and the retractable common
shares.
In addition, on March 10, 2003, Ravelston and RMI entered into a
contribution agreement with the Company. The contribution agreement is not
pledged to the trustee for the Notes, and holders of the Notes are not entitled
to any rights thereunder. The contribution agreement sets out the manner in
which RMI will make support payments to the Company as described above.
Ravelston has guaranteed RMI's obligations under the contribution agreement and
its obligation to make support payments to the Company under the support
agreement. Ravelston's guarantee will not enure to the benefit of, or be
enforceable by, the trustee for the Notes or holders of the Notes. The Company
has pledged the benefit of this guarantee as security for its obligations under
the indebtedness of NB Inc. due to International. The contribution agreement
will terminate upon the repayment in full of the Notes, the termination of the
support agreement or if the Company ceases to be a public company.
RETRACTABLE SHARES.
The Company's issued capital stock consists of Series II preference shares,
Series III preference shares and retractable common shares, each of which is
retractable at the option of the holder. On retraction, the Series II preference
shares are exchangeable into a fixed number of shares of the Company's Class A
common stock of International or, at the Company's option, cash of equivalent
value. The Series III preference shares were retractable at the option of the
holder for a retraction price payable in cash, which fluctuated by reference to
two benchmark Government of Canada bonds having a comparable yield and term to
the shares and, after May 1, 2003, are retractable for a cash payment of $9.50
per share. The Series II preference shares provide for redemption on April 30,
2004 at $10.00 per share. The retractable common shares are retractable at any
time at the option of the holder at their retraction price (which is fixed from
time to time) in exchange for the Company's International Class A common stock
of equivalent value or, at the Company's option, cash. There is uncertainty
regarding the Company's ability to meet future retractions of preference shares
and retractable common shares. Under corporate law, the Company is not required
to make any payment to redeem any shares in certain circumstances, including if
the Company's liquidity would be unduly impaired as a consequence. If, when
shares are submitted by holders for retraction or when the Company is obliged to
redeem the Series III preference shares on April 30, 2004, there are reasonable
grounds for believing that, after making the payment in respect of those shares,
the Company's liquidity would be unduly impaired, the retractions and
redemptions will not be completed. In such event, shareholders would not become
creditors of the Company but would remain as shareholders until such time as the
retraction is able to be completed under applicable law. The Company's uncertain
ability to make payments on future retractions and redemptions of shares is due
to the fact that liquidity of its assets is limited at present, given that
substantially all of its shares of International common stock were provided as
security for the Senior Secured Notes.
45
During the period April 1, 2003 to May 16, 2003 holders of 3,651,784 Series
III preference shares, holders of 504,989 Series II preference shares, and
holders of 22,500 retractable common shares have submitted retraction notices to
the Company. As of May 20, 2003, the Company has completed or announced that it
is able to complete the retraction of 504,989 Series II preference shares for
232,293 shares of International Class A common stock, 876,050 Series III
preference shares for approximately $7.7 million in cash and 22,500 retractable
common shares for cash of $124,000. This completed all retraction notices
received up to and including April 30, 2003.
On May 20, 2003, after careful deliberation, the Company concluded that it
was not able to complete the retractions of shares submitted after April 30,
2003 without unduly impairing its liquidity. Since April 30, 2003 and up to and
including June 19, 2003, the Company has received retraction notices from
holders of 2,939,543 Series III preference shares of which 1,281,239 retraction
notices were subsequently withdrawn, leaving retraction notices from holders of
1,658,354 Series III preference shares for aggregate retraction proceeds of
approximately $15.8 million which are unable to be completed at the current
time. In addition, during the same time period, retraction notices were received
from the holders of 357,958 Series II preference shares for aggregate retraction
proceeds of 164,660 shares of International Class A common stock or cash of
approximately $2.5 million, which are unable to be completed at the current
time.
Giving effect to the retractions completed as of June 19, 2003, there
continues to be outstanding 3,775,990 Series II preference shares (exchangeable
for 1,736,955 shares of Class A common stock of International), 9,271,175 Series
III preference shares and 32,917,186 retractable common shares.
The Company's Series III preference shares have a fixed redemption date on
April 30, 2004 for a cash payment of $10.00 per share plus any accrued and
unpaid dividends to that date. The total cost to redeem all of the issued and
outstanding Series III preference shares would be $92.7 million. The Company
made an offer to exchange all of its Series III preference shares for newly
issuable Series IV preference shares having comparable terms, except for a
higher dividend rate (8% compared to 7% for the Series III preference shares)
and a longer term to mandatory redemption (April 30, 2008 compared to April 30,
2004). Holders will have the right at any time to retract Series IV preference
shares for a retraction price payable in cash which, during the first four years
will be calculated using 95% of prices for Government of Canada Bonds having a
comparable yield and term, and during the fifth year will be $9.50 per share
(plus unpaid dividends in each case). On June 9, 2003, the Company announced
that it was permitting the exchange offer to expire because holders of at least
5,000,000 of the Series III preference shares had not accepted the offer.
The Company will periodically review its liquidity position to determine if
and when further retractions can be completed. The Company will not complete
retractions or redemptions if to do so would unduly impair its liquidity.
Retractions of Series II preference shares and Series III preference shares will
be processed on a combined basis in order determined by their retraction date
(with equal ranking of the series) in advance of any retractable common shares
that are submitted for retraction. Following the satisfaction of all pending
retracted Series II preference shares and Series III preference shares,
retractions of the retractable common shares will be processed in order
determined by their retraction date. Accordingly, retractions of retractable
common shares cannot be completed as long as there are pending and unsatisfied
retractions of Series II preference shares and Series III preference shares.
RETRACTION PRICE OF RETRACTABLE COMMON SHARES OF HOLLINGER INC.
The retractable common shares of the Company have terms equivalent to
common shares, except that they are retractable at any time by the holder for
their retraction price in exchange for shares of the Company's holding of
International Class A common stock of equivalent value. The Company has the
right to settle the retraction price by cash payment. The retraction price
determined each quarter (or, in certain specific cases more frequently) by the
Company's Retraction Price Committee, is between 90% and 100% of the Company's
current value, being the aggregate fair market value of all of its assets less
the aggregate of (i) the maximum amount payable at such date by the Company on
its liquidation, dissolution or winding-up in respect of outstanding preference
shares other than the retractable common shares, and (ii) its liabilities,
including any tax liabilities that would arise on a sale of all or substantially
all of its assets, which, in the opinion of the Board, would not be refundable
at such date, divided by the number of retractable common shares outstanding on
such date.
Currently the Company and its wholly owned subsidiaries, which excludes
International, have assets which consist principally of the investment in
International together with other miscellaneous investments. The Company as at
June 19, 2003 directly and indirectly owned 11,256,538 shares of Class A common
stock and 14,990,000
46
shares of Class B common stock of International with a then market value of
approximately U.S.$294.2 million. The Company's significant liabilities include
U.S.$120.0 million 11 7/8% Senior Secured Notes due 2011, Series II preference
shares, which are exchangeable into 1,736,955 shares of International Class A
common stock with a current value of approximately U.S.$19.5 million and Series
III preference shares which are redeemable on April 30, 2004 for an aggregate of
$92.7 million.
The retraction price of the retractable common shares during 2002 and early
2003 was as follows:
Per Retractable
Common Share
January 10, 2002 $ 7.50
April 11, 2002 $ 9.50
July 9, 2002 $ 7.50
October 3, 2002 $ 5.50
January 7, 2003 $ 5.50
April 2, 2003 $ 1.75
The decline in the retraction price of the retractable common shares from
$5.50 per share on January 7, 2003 to $1.75 per share on April 2, 2003 primarily
results from the lower market price of shares of International Class A common
stock and a strengthening of the Canadian dollar relative to the U.S. dollar.
Since at the current time the Company is unable to complete retractions in
respect of retraction notices received for Series III preference shares, the
Company would be unable to complete any retraction notices received in the
future in respect of retractable common shares until all preference share
retraction notices, received by the Company and not withdrawn, are completed.
At June 19, 2003 there are 33,891,404 retractable common shares issued and
outstanding, of which 26,516,886 are held by Ravelston and its affiliates.
WORKING CAPITAL
Working capital consists of current assets less current liabilities. At
December 31, 2002, working capital, excluding the current portion of long-term
debt obligations and the related funds held in escrow, was a deficiency of
$604.4 million compared to working capital of $133.6 million at December 31,
2001. Current assets excluding funds held in escrow were $594.4 million at
December 31, 2002 compared with $1,196.9 million at December 31, 2001. Current
liabilities, excluding debt obligations, but including short-term bank
indebtedness, were $1,051.6 million at December 31, 2002, compared with $1,063.3
million at December 31, 2001. Current liabilities at December 31, 2002 include
$147.3 million in respect of retractable preference shares and the related
deferred unrealized gain. These retractable preference shares are included in
current liabilities since they are retractable at any time at the option of the
holder. Also included in current liabilities are approximately $436.7 million of
income taxes that have been provided on gains on sales of assets computed on tax
bases that result in higher gains for tax purposes than for accounting purposes.
Strategies have been and may be implemented that may also defer and/or reduce
these taxes but the effects of these strategies have not been reflected in the
accounts. While the timing of the payment of such income taxes, if any, is
uncertain, the Company does not expect any significant amounts to be paid in
2003.
The reduction in working capital in 2002, excluding the current portion of
long-term debt obligations and related funds held in escrow, is primarily the
result of the retractable preference shares being included in current
liabilities and the reduction in cash and cash equivalents as a result of the
pay-down of long-term debt since December 31, 2001, offset by the reduction in
bank indebtedness. During the year ended December 31, 2002, approximately
U.S.$370.8 million of cash and cash equivalents, which included both principal
repayments and related premiums, was used to retire a portion of Publishing's
long-term debt.
During January 2002, the Company's revolving bank credit facility was
reduced to $81.9 million from $120.4 million at December 31, 2001, using
proceeds from the sale of 2,000,000 shares of International's Class A common
stock. During 2001, the Company reduced its bank indebtedness by $173.4 million
with proceeds from the sale of
47
7.1 million shares of International's Class A common stock to International for
cancellation and from the December 2001 sale to third parties of 2,000,000
shares of International's Class A common stock.
At December 31, 2002, the Company had fully borrowed on its bank operating
line that provided for up to $10.0 million of borrowings and its revolving bank
credit facility that provided for up to $80.8 million in borrowings. The
Company's revolving bank credit facility was secured by International shares
owned by the Company and bore interest at the prime rate plus 2.5% or the
bankers' acceptance ("BA") rate plus 3.5%. Under the terms of the revolving bank
credit facility, the Company and its wholly owned subsidiaries were subject to
restrictions on the incurrence of additional debt. The revolving bank credit
facility was amended and restated on August 30, 2002 and was to mature on
December 2, 2002. A mandatory repayment of the revolving bank credit facility in
the amount of $50.0 million was required by December 2, 2002 and if such payment
was made, the lenders could have consented to an extension of the maturity date
to December 2, 2003 in respect of the principal outstanding. On December 2,
2002, the lenders extended the $50.0 million principal repayment date to
December 9, 2002. This repayment was not made, and on December 9, 2002, the bank
credit facility was amended to require a principal repayment of $44.0 million on
February 28, 2003 with the balance maturing on December 2, 2003. As a result of
the impending closing of the Company's Senior Secured Note issue, the lenders
further extended the due date for the repayment of $44.0 million to March 14,
2003. On March 10, 2003, the revolving bank credit facility in the amount of
$80.8 million and the bank operating line of $10.0 million were repaid with part
of the proceeds of the Company's issue of Senior Secured Notes.
On October 3, 2002, International entered into a term lending facility and
borrowed U.S.$50.0 million ($79.6 million). As a result of International's
borrowing under this term lending facility, the Company was in default of a
covenant under its revolving bank credit facility which, while in default,
resulted in borrowings being due on demand. The Company's banks waived the
default and on December 23, 2002 International repaid the full amount borrowed
under the term lending facility.
LONG-TERM DEBT
Long-term debt, including the current portion, was $1,789.3 million at
December 31, 2002 compared with $1,351.6 million at December 31, 2001.
On March 10, 2003, the Company issued U.S. $120.0 million aggregate
principal amount of 11 7/8% Senior Secured Notes due 2011. The total net
proceeds were used to repay the Company's revolving bank credit facility and
bank operating line, repay amounts due to Ravelston and to make an advance
to Ravelston. The Senior Secured Notes are fully and unconditionally guaranteed
by RMI and are secured by a first priority lien on 10,108,302 shares of
International's Class A Common stock and 14,990,000 shares of Class B common
stock owned by the Company NB Inc.
On December 23, 2002, certain of International's subsidiaries entered into
an amended and restated U.S. $310.0 million Senior Credit Facility with a group
of financial institutions arranged by Wachovia Bank, N.A. (the "Senior Credit
Facility").
The Senior Credit Facility consists of (a) a U.S. $45.0 million revolving
credit facility, which matures on September 30, 2008 (the "Revolving Credit
Facility"), (b) a U.S. $45.0 million Term Loan A, which matures on September 30,
2008 ("Term Loan A") and (c) a U.S. $220.0 million Term Loan B, which matures on
September 30, 2009 ("Term Loan B"). Publishing (a wholly owned direct
subsidiary) and Telegraph Group Limited ("Telegraph Group", a wholly owned
indirect United Kingdom subsidiary) are the borrowers under the Revolving Credit
Facility and First DT Holdings Ltd. ("FDTH", a wholly owned indirect U.K.
subsidiary) is the borrower under Term Loan A and Term Loan B. The Revolving
Credit Facility and Term Loans bear interest at either the Base Rate (U.S.) or
U.S. $ LIBOR, plus an applicable margin. Cross-currency floating to fixed rate
swaps from U.S.$ LIBOR to Sterling fixed rate have been purchased in respect of
all amounts advanced under the Senior Credit Facility. No amounts have currently
been drawn under the Revolving Credit Facility
Publishing's borrowings under the Senior Credit Facility are guaranteed by
Publishing's material U.S. subsidiaries, while FDTH's and Telegraph Group's
borrowings under the Senior Credit Facility are guaranteed by Publishing and its
material U.S. and U.K. subsidiaries. International is also a guarantor of the
Senior Credit Facility. Publishing's borrowings under the Senior Credit Facility
are secured by substantially all of the assets of Publishing and its material
U.S. subsidiaries, a pledge of all of the capital stock of Publishing and its
material U.S. subsidiaries and a pledge of 65% of the capital stock of certain
foreign subsidiaries. FDTH's and Telegraph Group's borrowings
48
under the Senior Credit Facility are secured by substantially all of the assets
of Publishing and its material U.S. and U.K. subsidiaries and a pledge of all of
the capital stock of Publishing and its material U.S. and U.K. subsidiaries.
International's assets in Canada have not been pledged as security under the
Senior Credit Facility.
The Senior Credit Facility loan documentation requires Publishing to comply
with certain covenants which include, without limitation and subject to certain
exceptions, restrictions on additional indebtedness; liens; certain types of
payments (including without limitation, capital stock dividends and redemptions,
payments on existing indebtedness and intercompany indebtedness), and on
incurring or guaranteeing debt of an affiliate, making certain investments and
paying management fees; mergers, consolidations, sales and acquisitions;
transactions with affiliates; conduct of business, except as permitted; sale and
leaseback transactions; changing fiscal year; changes to holding company status;
creating or allowing restrictions on taking action under the Senior Credit
Facility loan documentation; and entering into operating leases, subject to
certain baskets and exceptions. The Senior Credit Facility loan documentation
also contains customary events of default.
On December 23, 2002, Publishing issued U.S. $300.0 million aggregate
principal amount of 9% senior unsecured notes due 2010 (the "9% Senior Notes")
at par to certain qualified institutional buyers ("QIBs") pursuant to Rule 144A
under the Securities Act of 1933, as amended. The aggregate commissions were
U.S. $8.3 million. The proceeds from the sale of the 9% Senior Notes, together
with drawdowns under the Senior Credit Facility and available cash balances,
were used to redeem approximately U.S. $239.9 million of Publishing's Senior
Subordinated Notes due 2006 and approximately U.S. $265.0 million of
Publishing's Senior Subordinated Notes due 2007, plus applicable premium and
accrued interest to the date of redemption, and to make a distribution of U.S.
$100.0 million to International. International used the distribution (a) to
repay all amounts borrowed by International on October 3, 2002 under its loan
agreement with Trilon International Inc., (b) to retire the equity forward
purchase agreements between International and certain Canadian chartered banks
(the "Total Return Equity Swap") made as of October 1, 1998, as amended, and (c)
for other general corporate purposes. The trust indenture in respect of the 9%
Senior Notes contains customary covenants and events of default, which are
comparable to those under the Senior Credit Facility.
On February 14, 2002, Publishing commenced a cash tender offer for any and
all of its outstanding 8.625% Senior Notes due 2005. In March 2002, Senior Notes
in the aggregate principal amount of U.S. $248.9 million had been validly
tendered pursuant to the offer and these Senior Notes were paid out in full. In
addition, in 2002, Publishing purchased for retirement an additional U.S.$41.1
million in aggregate principal amount of the Senior Notes and Senior
Subordinated Notes. The total principal amount of Publishing's Senior Notes and
Senior Subordinated Notes retired during 2002 was U.S. $290.0 million. The
premiums paid to retire the debt totaled U.S. $27.1 million, which, together
with a write-off of U.S. $8.3 million of related deferred financing costs, have
been presented as an unusual item.
AMOUNT DUE TO INTERNATIONAL FROM NB INC.
The amount due to International from NB Inc. at December 31, 2002,
including accrued interest, totaled U.S.$45.8 million. On March 10, 2003
International repurchased for cancellation, from NB Inc., 2,000,000 shares of
Class A common stock of International at U.S.$8.25 per share for total proceeds
of U.S.$16.5 million and redeemed from NB Inc., pursuant to a redemption
request, all of the 93,206 outstanding shares of Series E Redeemable Convertible
Preferred Stock of International at the fixed redemption price of $146.63 per
share. Proceeds from the repurchase and redemption were offset against the debt
due to International from NB Inc., resulting in net outstanding debt due to
International of approximately U.S.$20.4 million as of March 10, 2003. The
remaining debt of U.S.$20.4 million was subordinated in right of payment to the
11 7/8% Senior Secured Notes due 2011 and the interest rate amended to 14.25% if
paid in cash and 16.5% if paid in kind.
Effective April 30, 2003, U.S.$15.7 million principal amount of NB Inc.'s
subordinated debt was transferred by International to HCPH Co., a subsidiary of
International, and subsequently transferred to RMI by HCPH Co., in satisfaction
of a non-interest bearing demand loan due from HCPH Co. to RMI. After the
transfer, NB Inc.'s debt to International was approximately U.S.$4.7 million and
NB Inc.'s debt to RMI was approximately U.S.$15.7 million. The debts owing by NB
Inc. to RMI and owing by NB Inc. to International each bears interest at the
rate of 14.25% if interest is paid in cash and 16.50% if it is paid in kind,
except that RMI has waived its right to receive interest until further notice.
The debts owing by NB Inc. are subordinated to the Senior Secured Notes for so
long as the Senior Secured Notes are outstanding, and that portion of the debt
due from NB Inc. to International is guaranteed by RCL and the Company.
International entered into a subordination agreement with the Company and NB
Inc. pursuant to which International has subordinated all payments of principal,
interest and fees on the debt owed to it
49
by NB Inc. to the payment in full of principal, interest and fees on the Senior
Secured Notes, provided that payments with respect to principal and interest can
be made to International to the extent permitted in the indenture governing the
Senior Secured Notes. RMI has agreed to be bound by these subordination
arrangements with respect to the debt owed by NB Inc. to RMI.
CASH FLOWS
Cash flows provided by operating activities were $149.4 million in 2002,
and cash flows used for operating activities were $334.9 million in 2001.
Improved operating results and lower cash interest costs and cash taxes resulted
in improved year-over-year cash flows provided by operating activities. The cash
flows used in operating activities in 2001 primarily resulted from the sales of
Canadian Newspaper Group properties and Community Group properties, lower
operating results at the Company's remaining operations and the non-cash
interest income received on the CanWest debentures.
Cash flows used in financing activities were $751.4 million in 2002 and
$239.5 million in 2001. In 2002, International repaid U.S. $290.0 million of
long-term debt primarily from available cash balances and repaid U.S. $100.0
million to terminate the Total Return Equity Swaps. The cash flows used in
financing activities in 2001 included the repurchase of shares of
International's Class A common stock and the redemption of retractable common
and preferred shares totalling $72.4 million.
Cash flows used in investing activities were $18.8 million in 2002 compared
to cash flows provided by investing activities of $1,132.5 million in 2001. The
cash flows used in investing activities in 2002 resulted primarily from
purchases of fixed assets and investments partially offset by proceeds from the
sale of 2,000,000 shares of International's Class A common stock in January 2002
and proceeds on the sale of fixed assets. The cash flows provided by investing
activities in 2001 resulted principally from the sales of Canadian newspaper
operations and sale of investments offset in part by additions to investments
and fixed assets.
CAPITAL RESOURCES AND NEEDS
Additions to capital assets amounted to $64.0 million, $91.0 million and
$113.0 million in 2002, 2001 and 2000, respectively. These additions are
principally in respect of International's operations. The following is a summary
of the major capital expenditures during these periods:
2002 2001 2000
Million $ Million $ Million $
--------- --------- ---------
Chicago Sun-Times plant................................... $ 3 $ 6 $ 38
Montreal presses.......................................... - - 26
National Post............................................. - - 4
Printing joint venture-- new presshall and mailroom....... - 20 -
Airplane.................................................. - 18 -
Jerusalem Post press...................................... 5 - -
Fox Valley - printing facility............................ 6 - -
Other capital additions and routine capital expenditures.. 50 47 45
--------- --------- ---------
$ 64 $ 91 $ 113
========= ========= =========
CAPITAL EXPENDITURES AND ACQUISITION FINANCING.
In the past three years, the Chicago Group, the Community Group, the U.K.
Newspaper Group and the Canadian Newspaper Group have funded their capital
expenditures and acquisition and investment activities out of cash provided by
their respective operating activities and in 2000 through borrowings. In 2003
International expects to invest approximately U.S.$20 million in capital
expenditures primarily through available cash flow.
Capital expenditures at the Chicago Group amounted to $24.3 million, $19.3
and $38.2 million in 2002, 2001 and 2000, respectively. International began
construction of a new printing facility in Chicago during 1998, which became
partially operational in 2000 and fully operational in 2001. The capital
expenditures in 2001 and 2000 are primarily related to the construction of this
facility.
50
Capital expenditures at the Community Group amounted to $7.9 million, $0.5
million and $4.9 million in 2002, 2001 and 2000, respectively. The capital
expenditures in 2002 were primarily for the acquisition of a new press by the
Jerusalem Post.
Capital expenditures at the U.K. Newspaper Group were $27.7 million, $48.8
million and $24.1 million in 2002, 2001 and 2000, respectively.
Capital expenditures at the Canadian Newspaper Group were $3.6 million,
$4.4 million and $42.8 million in 2002, 2001 and 2000, respectively.
Capital expenditures at the Corporate Group were $0.1 million, $18.4
million and $2.6 million in 2002, 2001 and 2000, respectively. Expenditures in
2001 were primarily in respect of a new airplane to replace an older airplane
that was sold in early 2002.
DERIVATIVE INSTRUMENTS
The Company or its subsidiaries may enter into various swap, option and
forward contracts from time to time when management believes conditions warrant.
Management does intend, however, that such contracts will be limited to those
that relate to the actual exposure to commodity prices, interest rates and
foreign currency risks. If, in management's view, the conditions that made such
arrangements worthwhile no longer exist, the contracts may be closed.
On December 27, 2002, FDTH, entered into two cross-currency floating to
fixed rate swap transactions to hedge principal and interest payments on U.S.
dollar borrowings by FDTH under the December 23, 2002 Senior Credit Facility.
The contracts have a total foreign currency obligation notional value of U.S.
$265.0 million, fixed at a rate of U.S. $1.5922 to (pound)1, convert the
interest rate on such borrowings from floating rate to a fixed blended interest
rate of 8.47%, and expire as to U.S. $45.0 million on December 29, 2008 and as
to U.S. $220.0 million on December 29, 2009. The swaps were purchased to take
advantage of low rates on this type of instrument and to provide certainty on
interest charges to the operations of the U.K. Newspaper Group in a time of soft
advertising sales.
On January 22, 2003 and February 6, 2003, Publishing entered into interest
rate swaps to convert U.S. $150.0 million and U.S. $100.0 million, respectively,
of the total U.S.$300.0 million Senior Notes issued in December 2002, from fixed
to floating rates for the period to December 15, 2010, subject to early
termination notice, with the objective of reducing the cost of borrowing.
Interest for the first six months has been set at 5.98% and floats, for
subsequent periods, at the six-month LIBOR rate plus a blended spread of 4.61%.
A further discussion of the Company's derivative instruments can be found
in note 24 to the Company's audited consolidated financial statements included
elsewhere in this Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
HOLLINGER PARTICIPATION TRUST. As part of its November 16, 2000 purchase
and sale agreement with CanWest, International was prohibited from selling the
CanWest debentures received in partial consideration prior to May 15, 2003. In
order to monetize this investment, International entered into a participation
agreement in August 2001 pursuant to which it sold participation interests in
$540.0 million (U.S. $350.0 million) principal amount of CanWest debentures to
the Participation Trust administered by an arm's-length trustee. That sale of
participation interests was supplemented by a further sale of participation
interests in $216.8 million (U.S. $140.5 million) principal amount of CanWest
debentures in December 2001. International remains the record and beneficial
owner of the participated CanWest debentures and is required to make payments to
the Participation Trust with respect to those debentures if and to the extent it
receives payment in cash or kind on the debentures from CanWest. Coincident with
the Participation Trust's purchase of the participation interests, the
Participation Trust sold senior notes to arm's-length third parties to finance
the purchase of the participation interests. These transactions resulted in net
cash proceeds to International of $621.8 million and for accounting purposes
have been accounted for as sales of CanWest debentures. The net loss on the
transactions amounted to $97.4 million and is included in unusual items in 2001.
At any time up to November 5, 2005, CanWest may elect to pay interest on
the debentures by way of additional CanWest debentures or through the issuance
of non-voting common shares of CanWest. Further, at any time after
51
May 15, 2003, the holders of the Participation Trust senior notes may, under the
terms of the Participation Trust request that the Participation Trust require
International to complete an outright transfer to the Participation Trust of the
CanWest debentures. The unrealized foreign exchange losses recognized at
December 31, 2002 and 2001 are classified as deferred credits in the
consolidated balance sheet.
On May 11, 2003, CanWest redeemed $265 million of the debentures of which
U.S.$159.8 million has been delivered to the Participation Trust and the balance
of US$27.6 million has been received by International and the Partnership, a
portion of which must be retained until November 4, 2010. This will reduce the
Company's obligation to the Participation Trust and hence its exposure to
changes in the U.S. dollar to Canadian dollar exchange rate.
COMMERCIAL COMMITMENTS AND CONTRACTUAL OBLIGATIONS.
The Telegraph Group has guaranteed the printing joint venture partners'
share of leasing obligations to third parties, which amounted to $1.0 million
(L0.4 million) at December 31, 2002. These obligations are also guaranteed
jointly and severally by each joint venture partner.
In connection with International's insurance program, letters of credit are
required to support certain projected workers' compensation obligations. At
December 31, 2002, letters of credit in the amount of $4.4 million were
outstanding.
In special circumstances, International's newspaper operations may engage
freelance reporters to cover stories in locales that carry a high risk of
personal injury or death. Subsequent to December 31, 2002, the Telegraph has
engaged a number of journalists and photographers to report from the Middle
East. As a term of their engagement, The Telegraph has agreed to provide a death
benefit which, in the aggregate for all freelancers engaged, amounts to $13.1
million (L5.1 million). This exposure is uninsured. Precautions have been
taken to avoid a concentration of the freelancers in any one location.
In connection with certain of its cost and equity method investments,
International is committed to fund approximately $1.9 million (U.S.$1.2 million)
to those investees in 2003.
Set out below is a summary of the amounts due and committed under
contractual cash obligations, other than in respect of the retractable common
shares at December 31, 2002:
Due Due
Due in between between
1 year 1 and 4 and Due over
Total or less 3 years 5 years 5 years
------------- ---------- ---------- ----------- ----------
(Dollars in thousands)
Existing Senior and Senior Subordinated Notes(1)..... $ 1,279,781 $ 797,751 $ 8,030 $ - $ 474,000
Other long-term debt................................. 443,954 4,886 40,014 45,212 353,842
Capital lease obligations............................ 65,586 12,157 17,165 11,909 24,355
Series II preference shares(2)....................... 33,827 33,827 - - -
Series III preference shares(3)...................... 101,472 101,472 - - -
Operating leases..................................... 257,251 27,095 45,590 35,125 149,441
----------- ---------- ---------- ----------- -----------
Total contractual cash obligations................... $ 2,181,871 $ 977,188 $ 110,799 $ 92,246 $ 1,001,638
=========== ========== ========== =========== ==========
(1) During 2002, Publishing purchased for retirement approximately
$406.8 million (U.S.$254.9 million) of the existing Senior Notes due
2005. The balance of those notes outstanding, approximately $8.0
million (U.S.$5.1 million) will mature in 2005. Included in the
total of notes outstanding is $797.8 million (U.S.$504.9 million) of
Senior Subordinated Notes with maturities in 2006 and 2007. At
December 31, 2002, the borrowings under the Senior Credit Facility
and the 9% Senior Notes due 2010 were held in escrow pending and for
the purpose of redemption of the Senior Subordinated Notes.
Consequently, outstanding balances for the Senior Subordinated
Notes, irrespective of their maturity date, have been reflected as
due in one year or less. Refer to "long-term debt" for a discussion
of the new $489.8 million (U.S.$310 million) Senior Credit Facility
maturing in 2008 and 2009.
(2) The Company has Series II preference shares that are exchangeable at
the holder's option for 0.46 of a share of International's Class A
common stock for each Series II preference share. The Company has
the option
52
to make a cash payment of equivalent value on redemption of any of
the Series II preference shares. As at December 31, 2002, the market
value of the shares of International's Class A common stock that
they are exchangeable into totals $33.8 million. While it is
uncertain as to when, if ever, the preference shares will be
retracted, because the retraction can occur at any time at the
option of the holder, the outstanding balance has been reflected as
due in one year or less.
(3) The Company has Series III preference shares which provide for a
mandatory redemption on the fifth anniversary of issue (April 30,
2004) for $10.00 cash per share (plus unpaid dividends) and an
annual cumulative dividend, payable quarterly, of $0.70 per share
per annum (or 7%) during their five-year term. The Company had the
right at its option to redeem all or any part of the Series III
preference shares at any time after three years (April 30, 2002) for
$10.00 cash per share (plus unpaid dividends). Holders have the
right at any time to retract Series III preference shares for a
retraction price payable in cash which, until April 30, 2003,
fluctuated by reference to two benchmark Government of Canada bonds
having a comparable yield and term to the shares, and during the
year ending April 30, 2004, will be $9.50 per share (plus unpaid
dividends in each case). While it is uncertain as to when, if ever,
the preference shares will be retracted, because the retraction can
occur at any time at the option of the holder, the outstanding
balance has been reflected as due in one year or less.
In addition to amounts committed under contractual cash obligations, the
Company and International have also assumed a number of contingent obligations
by way of guarantees and indemnities in relation to the conduct of their
business. The more significant guarantees and indemnities include those for
lease obligations of a 50% owned joint venture producing many of International's
U.K. publications; in support of representations and warranties on the
disposition of operations; against changes in laws affecting returns to certain
lenders; and against fluctuations in foreign currency exchange rates in respect
of the Participation Trust. For more information on our contingent obligations,
refer to note 27 h) - the Company's audited consolidated financial statements,
included elsewhere in this Annual Report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The names, ages, positions with the Company and principal occupations of
the directors and executive officers of the Company are as shown below. As of
April 30, 2003, the directors and executive officers of the Company as a group
beneficially own, directly or indirectly, or exercise control or direction over,
194,645 retractable common shares (representing 0.6% of the outstanding shares),
2,479,456 Series II Preference Shares (representing 65.7% of the outstanding
shares) and 243,580 Series III Preference Shares (representing 2.6% of the
outstanding shares) of the Company. In addition, Ravelston exercises control or
direction over a total of 25,754,303 retractable common shares (representing
78.2% of the outstanding common shares). Lord Black indirectly controls
Ravelston and therefore beneficially owns or exercises control or direction over
the retractable common shares owned by Ravelston. The term of each director will
expire at the next annual meeting of the Company's shareholders.
NAME AND AGE POSITION(S) WITH THE COMPANY
------------ ----------------------------
Peter Y. Atkinson, 56................................... Executive Vice President and Director
Barbara Amiel Black, 61................................. Vice President, Editorial and Director
The Lord Black of Crossharbour, PC(C), OC, KCSG, 58..... Chairman of the Board, Chief Executive Officer and Director
J. A. Boultbee, 59...................................... Executive Vice President and Director
Daniel W. Colson, 54.................................... Vice Chairman and Director, Deputy Chairman,
Chief Executive Officer and Director of The Telegraph
Frederick A. Creasey, 52................................ Vice President and Chief Financial Officer
Charles G. Cowan, CD, QC, 74............................ Vice President and Secretary, Director
Claire F. Duckworth, 35................................. Assistant Controller
Fredrik S. Eaton, OC, OOnt, 64.......................... Director
R. Donald Fullerton, 71................................. Director
Allan E. Gotlieb, CC, 74................................ Director
Henry H. Ketcham III, 52................................ Director
53
Peter K. Lane, 49....................................... Vice President
F. David Radler, 60..................................... Deputy Chairman, President, Chief Operating
Officer and Director
Sherrie L. Ross, 34..................................... Assistant Treasurer
Maureen J. Sabia, 61.................................... Director
Tatiana Samila, 39...................................... Treasurer
Peter G. White, 63...................................... Director, Executive Vice-President, The Ravelston Corporation
Limited
The principal occupation, business experience and tenure as a director of
the Company are set forth below. Unless otherwise indicated, all principal
occupations have been held for more than five years.
Peter Y. Atkinson, Executive Vice President and Director. Mr. Atkinson has
served as a Director and as Vice President since February 1996. In 2000 he was
appointed Vice President and General Counsel of the Company and in 2002 was
appointed Executive Vice President. He also serves as an officer and director of
Argus Corporation Ltd. and Hollinger Canadian Newspapers G.P. Inc. He is an
Executive Vice President and a Director of International. He is a director of
Toronto Hydro Corporation and of Canadian Tire Corporation, Limited and
Diamondex Resources Ltd., the latter two corporations being Canadian public
reporting companies.
Barbara Amiel Black (Lady Black), Vice President, Editorial and Director.
Barbara Amiel Black has served as Vice President, Editorial since September 1995
and as a director since February 1996 and is the wife of Lord Black. After an
extensive career in both on and off-camera television production, she was Editor
of The Toronto Sun from 1983 to 1985; columnist of The Times and senior
political columnist of The Sunday Times of London from 1986 to 1994; and
columnist of The Telegraph from 1994 to present. She has been a columnist of
Maclean's magazine since 1977. Barbara Amiel Black also serves as a director of
International and the Jerusalem Post. She is the author of two books: "By
Persons Unknown" (co-author), which won the Mystery Writers of America Edgar
Award for best non-fiction in 1978, and "Confessions", a book of political
essays published in 1980, which won the Canadian periodical publishers prize.
The Lord Black of Crossharbour, PC(C), OC, KCSG, Chairman of the Board of
Directors, Chief Executive Officer and Director, International, New York,
Chicago; Hollinger Inc., Toronto; Argus Corporation Ltd., Toronto. Lord Black
has held these or equivalent or similar positions since 1978. He currently
serves as the Chairman and as a director of Telegraph Group Limited, London,
U.K., and as a director of the Jerusalem Post and The Spectator (London). Lord
Black also serves as a director of Brascan Limited, the Canadian Imperial Bank
of Commerce and CanWest Global Communications Corp., all of which are public
reporting companies in Canada, and as a director of Sotheby's Holdings, Inc.
Lord Black is Chairman of the Advisory Board of The National Interest
(Washington) and a member of the International Advisory Board of The Council on
Foreign Relations (New York).
J.A. Boultbee, Executive Vice President and Director. Mr. Boultbee has
served as Executive Vice President since June 1996 and as Chief Financial
Officer from 1995 to 1999. Mr. Boultbee served as a Vice President of
International from 1990 to June 1996 and as a director of International from
1990 to October 25, 1995. Mr. Boultbee has served for the past five years as a
director and as the Vice-President, Finance and Treasury and Executive Vice
President and Chief Financial Officer of the Company. Mr. Boultbee also serves
as a director of Argus, IAMGOLD Corporation and Consolidated Enfield
Corporation, all of which are Canadian public reporting companies.
Daniel W. Colson, Vice Chairman and Director, Deputy Chairman, Chief
Executive Officer and Director of The Telegraph. Mr. Colson currently serves as
Vice Chairman and as a director of the Company. Mr. Colson has served as a
director of International since February 1995 and as Vice Chairman of
International since May 1998. He has served as Deputy Chairman of The Telegraph
since 1995 and as Chief Executive Officer of The Telegraph since 1994, and was
Vice Chairman of The Telegraph from 1992 to 1995. Mr. Colson also currently
serves as Chairman and as a director of Hollinger Telegraph New Media Ltd. and
as Vice Chairman and director of Hollinger Digital Inc. He also serves as a
director of Argus, Molson Inc. and Macyro Group Inc. (Canada), all of which are
Canadian public reporting companies. Mr. Colson also served as Deputy Chairman
and director of Interactive Investor International plc from 1998 to 2001.
54
Frederick A. Creasey, Vice President and Chief Financial Officer. Mr.
Creasey has served as Chief Financial Officer since September 2002 and for the
past five years as the Controller of the Company. Mr. Creasey has also served as
Vice President of International since September 2002 and Group Corporate
Controller since June 1996.
Charles G. Cowan, CD, QC, Vice-President and Secretary, Director. Mr. Cowan
has served as a Director since 1981 and as Vice-President and Secretary since
1985. He also serves as a director and officer of Argus Corporation Limited and
Ravelston. He was appointed the Secretary of the Company's predecessor
corporations in 1961, at which time he was practising law in the
corporate/commercial field with the Toronto law firm that was the general
counsel to those companies, and he continued with that firm, becoming Managing
Partner and Chairman of its Executive Committee, until he joined the Company on
a full-time basis in 1985.
Claire F. Duckworth, Assistant Controller. Ms. Duckworth has served as
Assistant Controller since May 2002. Ms. Duckworth has also served as Assistant
Treasurer from 1999 to May 2002. Prior to 1999, Ms. Duckworth was a principal
with Ernst & Young LLP.
Fredrik S. Eaton, OC, OOnt, Director. Mr. Eaton initially served as a
director from 1979 to 1991 and has subsequently served as a director since 1994.
Mr. Eaton is presently Chairman of White Raven Capital Corp., a privately owned
investment holding company, and director of Eaton's of Canada Inc. From 1967
until 1999, he held various positions with The T. Eaton Company Limited,
including director, Chairman, President and Chief Executive Officer. Mr. Eaton
is also a director of Masonite International Corporation.
R. Donald Fullerton, Director. Mr. Fullerton has served as a director since
1992. Mr. Fullerton joined Canadian Imperial Bank of Commerce in 1953 and was
Chairman and Chief Executive Officer from 1985 to 1992. He was Chairman of the
Executive Committee of Canadian Imperial Bank of Commerce from 1992 to 1999. Mr.
Fullerton is also a director of George Weston Limited and Asia Satellite
Telecommunications Co. Ltd.
Allan E. Gotlieb, CC, Director. Mr. Gotlieb has served as a director since
1989. Mr. Gotlieb has served as Canadian Ambassador to the United States,
Chairman of the Canada Council and Undersecretary of State for External Affairs.
Mr. Gotlieb is currently Chairman of Sotheby's Canada, the Donner Canadian
Foundation and The Ontario Heritage Foundation and a senior advisor to the law
firm, Stikeman Elliott LLP and various other corporate and financial
institutions. He is also currently a Director of D+H Holdings Corp. and a
Trustee of Davis + Henderson Income Fund.
Henry H. Ketcham III, Director. Mr. Ketcham has served as a director since
1996. Mr. Ketcham is Chairman, President and Chief Executive Officer of West
Fraser Timber Co. Ltd. and has held that position since 1996. Mr. Ketcham is
also a Director of the Toronto Dominion Bank.
Peter K. Lane, Vice President. Mr. Lane has served as Vice President since
October 2002. Mr. Lane acted as Chief Financial Officer of Southam Publications
from 2000 to 2002 and prior to that as Chief Financial Officer of Philip
Utilities Management Corporation commencing in 1994. Mr. Lane was a partner with
Coopers & Lybrand from 1990 to 1994. Before then he was a partner with Ernst &
Young, having joined that firm in 1976.
F. David Radler, Deputy Chairman, President, Chief Operating Officer and
Director. Mr. Radler currently serves as President and Chief Operating Officer
and Deputy Chairman of the Company and as a director of The Telegraph. Mr.
Radler has also served as President and Chief Operating Officer of International
since October 1995, as Deputy Chairman since May 1998 and as a director since
1990. Mr. Radler was Chairman of the Board of Directors of International from
1990 to October 1995. Mr. Radler also serves as a director of Argus, Dominion
Malting Limited, West Fraser Timber Co. Ltd. and CanWest Global Communications
Corp., all of which are Canadian public reporting companies. Mr. Radler also
serves as a director of the Jerusalem Post.
Sherrie L. Ross, Assistant Treasurer. Ms. Ross has served as Assistant
Treasurer since May 2002 having joined the Company in 2001. Prior to that Ms.
Ross was an accountant in public practice for three years.
Maureen J. Sabia, Director. Ms. Sabia has served as a director since 1996.
Ms. Sabia has served as the principal of her own consulting practice with
specialized business, organizational and strategic related projects in the
private sector since 1986. Ms. Sabia was appointed Chairman of Export
Development Corporation's Board of Directors in 1991 and is a director of a
number of organizations, including Canadian Tire Corporation Limited; O&Y
Properties Corporation and O&Y FPT Inc.
55
Tatiana Samila, Treasurer. Ms. Samila has served as a Treasurer since May
2002. Ms. Samila has also served as Assistant Controller from 1992 to May 2002.
Peter White, Director, Executive Vice-President, The Ravelston Corporation
Limited. Mr. White initially served as a director from 1979 to 1984 and from
1986 to 1988 and subsequently has served as a director since 1991. Mr. White
also serves as an officer and director of Argus Corporation Ltd. Mr. White is a
Director of Cinram International, Transat A.T. Inc., Normerica Building Systems
Inc., and Proprietary Industries Inc. From 1984 to 1986, and again from 1988 to
1989, Mr. White was respectively Director of Government Appointments and
Principal Secretary to the Prime Minister of Canada. On April 10, 1997, Mr.
White was named Chevalier de l'Ordre National de la Legion d'Honneur by the
President of France.
B COMPENSATION
Description of Officers' Remuneration
Services of the Company's executive officers are provided by Ravelston and,
prior to its termination, pursuant to the Hollinger Management Agreement. The
Company does not provide cash remuneration to its executive officers as such.
There is no basis upon which to allocate the aggregate amount previously payable
under the Hollinger Management Agreement to individual officers because the
individuals providing services to the Company pursuant to the Hollinger
Management Agreement are not in fact receiving compensation primarily in respect
of those services. Their individual cash compensation is determined by Ravelston
(which, as mentioned above, derives management fees from a number of other
companies) and not by the Compensation Committee of the Company. The aggregate
cash compensation paid to executive officers of the Company as directors of the
Company and its subsidiaries in 2002 was $321,625.
Description of Directors' Remuneration
Each director of the Company is entitled to receive an annual director's fee
of $25,000 and a fee of $1,500 for each board or committee meeting attended.
Directors are reimbursed for expenses incurred in attending the meetings.
Members of the Executive Committee receive annual fees of $6,000 and members of
the Audit, Corporate Governance, Compensation and Retraction Price Committees
receive annual fees of $3,000. The Chairman of any Committee of the Company's
Board of Directors receives an annual fee of $2,500.
The Company has taken steps to align more closely the interests of our
directors with those of our shareholders. Effective February 24, 1999, directors
are permitted to elect that up to 100% of the total fees to which they are
entitled be paid in the form of deferred share units under the Hollinger Inc.
Share Unit Plan for Directors (the "Directors' Share Unit Plan"). For a director
that elects to participate, a number of deferred share units equal to the number
of retractable common shares that could be purchased on the open market for a
dollar amount equal to the applicable percentage of that director's fee is
credited to an account maintained by the Company for that director under the
Directors' Share Unit Plan. Dividend equivalents will be credited to the
director's account as if dividends were paid on each deferred share unit held by
the director on the dividend record date and reinvested in additional deferred
share units at the market price of the retractable common shares on the dividend
payment date. Deferred share units will be paid to the director no later than
December 31 of the year following the calendar year in which the director ceased
to serve. Payment will be made, at the election of the director, in either cash
or retractable common shares purchased on the market, net of withholding tax,
based on the market value of the retractable common shares on the date of the
payment.
A Special Committee was constituted in February 2003 to review all aspects
of an issue by the Company of 11-7/8% Senior Secured Notes due in 2011. The
Chairman of the Special Committee, Ms. Sabia, received additional compensation
in the amount of $25,000 and the members of the Committee, Messrs. Eaton and
Gotlieb, received additional compensation in the amount of $10,000 each.
56
C. BOARD PRACTICES
The board of directors currently consists of thirteen members and is of a
size which is conducive to effective and efficient communication and
decision-making. The appropriate size of the board is under continuing
consideration by the directors and management.
The leaders of our principal subsidiaries are members of the board. This
provides non-executive directors with direct and frequent access to these key
executives. Such access assists the non-executive directors in achieving a
thorough understanding of the Company's businesses and operations and the issues
they face and also affords them opportunities to assess the calibre of
management.
Of its thirteen directors, eight are involved in the management of the
business and affairs of the Company or its affiliates. Five directors are not
part of management and are free from any interest (other than interests arising
from their shareholdings), business or familial relationship in or with the
Company or the significant shareholder, that could or could reasonably be
perceived to, materially interfere with the director's ability to act with a
view to the best interests of the Company. Consequently, 38% of directors are
"unrelated directors" as that term is defined in the current guidelines
published by the Toronto Stock Exchange (the "TSX Guidelines") and independently
represent the 22% interest held by shareholders other than the significant
shareholder. This exceeds the recommendation for the proportionate
representation of minority shareholders established in accordance with the
current TSX Guidelines. For these reasons and because the Company's directors
are legally obligated to be aware of the potential for conflicts of interest and
to declare them wherever a conflict exists, the Company believes it has an
adequate number of unrelated directors to discharge the board's
responsibilities.
In addition to those matters which must be legally approved by the board,
the board reviews and approves actions proposed by management which are outside
the ordinary course of business or are "material" to the Company's business.
These matters include dispositions, acquisitions, the recommendations of the
Corporate Governance Committee, the Audit Committee, and major capital
expenditures of the Company and its wholly owned subsidiaries.
The categorization of directors is as follows:
RELATED UNRELATED
P. Y. Atkinson F. S. Eaton
Lord Black R. D. Fullerton
B. Amiel Black A. E. Gotlieb
J. A. Boultbee H. H. Ketcham III
D. W. Colson M. J. Sabia
C. G. Cowan
F. D. Radler
P. G. White
CORPORATE AND GOVERNANCE COMMITTEE. The board has appointed a Corporate
Governance Committee, all of the members of which are unrelated directors, whose
mandate includes the nominating and assessment functions of the members of the
board. The nominating function of the Committee is conducted after consultation
with the Chairman and CEO. The Corporate Governance Committee has been assigned
the responsibility for administering the board's relationship to management. The
Committee monitors the ability of the board to act independently of management
and board members are encouraged to discuss privately with the Chairman and CEO
or the Chairman of the Corporate Governance Committee any matter or concern that
they would prefer not to raise before the full board. The Chairman and the
Corporate Governance Committee share responsibility for succession planning.
AUDIT COMMITTEE. All members of the Audit Committee are non-management
directors. The roles and responsibilities of the Audit Committee are set forth
in a formal charter and include, among other things, responsibility for
monitoring management in connection with, and reviewing:
- the financial reporting process;
- the preparation of consolidated financial statements in accordance with
generally accepted accounting principles;
57
- the system of internal controls and procedures designed to ensure
compliance with accounting standards and applicable laws and
regulations;
- the system of disclosure controls designed to ensure compliance with the
Company's disclosure obligations; and
- the independence and objectivity of the external auditors.
The Audit Committee charter sets out the criteria that should be considered
in the appointment of Committee members as well as the Committee's roles and
responsibilities. The board and the Committee are currently reviewing the
various ways of implementing appropriate processes to assist the Committee in
fulfilling its duties.
The majority of the Company's revenue in the last financial year represents
dividends from International. The outside auditor of International is KPMG who
is also the outside auditor of the Company. In addition, management services are
provided to International by RMI and RMI's parent, Ravelston, which also
provides management services to the Company. The Audit Committee of the Company
relies in good faith on the financial statements of International in considering
and reviewing the financial statements of the Company. In doing so, the Audit
Committee takes steps in order to be satisfied that such reliance is reasonable
and appropriate. Such steps include meeting with the representatives of KPMG who
have carried out the audit of International in order to satisfy the Audit
Committee of the Company that International's financial statements have been
prepared in accordance with generally accepted accounting principles in the
U.S., that an appropriate system of internal controls and procedures is in place
at International, that the Audit Committee understands the key accounting
principles applied in preparing the financial statements of International and
the effect of alternative presentations, and that KPMG is independent and
objective for purposes of that audit. The Audit Committee of the Company meets
with the members of management of Ravelston responsible for providing through
RMI financial and accounting services to International. The Audit Committee of
the Company also reviews the management letter prepared by KPMG and sent to
management of International in connection with the audit of the financial
statements of International as well as other material written communications
from KPMG to management of International or its audit committee in connection
with financial or internal control matters.
With respect to the financial results of the Company's operations unrelated
to International, the Audit Committee is responsible for monitoring and
reviewing the matters referred to above in accordance with its Audit Committee
charter. In that connection, the Audit Committee has direct communication
channels with the external auditors of the Company and has oversight
responsibility for management reporting on internal control. In carrying out
these responsibilities, the Audit Committee meets regularly with KPMG and the
individuals at Ravelston responsible for providing through RMI financial and
accounting services to the Company.
CORPORATE AND GOVERNANCE COMMITTEE, AUDIT COMMITTEE AND OTHER COMMITTEES.
Set out below is the composition of the current committees of the Company's
board. The right-hand column entitled "Status" represents the board's
characterization of each of the members:
COMMITTEE MEMBER STATUS
--------- ------ --------
1. Executive Committee................ Lord Black inside -- related
D. W. Colson inside -- related
A. E. Gotlieb outside -- unrelated
F. D. Radler inside -- related
2. Audit Committee.................... F. S. Eaton outside -- unrelated
R. D. Fullerton outside -- unrelated
A. E. Gotlieb outside -- unrelated
H. H. Ketcham outside -- unrelated
M. J. Sabia outside -- unrelated
3. Corporate Governance Committee..... F. S. Eaton outside -- unrelated
R. D. Fullerton outside -- unrelated
A. E. Gotlieb outside -- unrelated
4. Compensation Committee............. F. S. Eaton outside -- unrelated
R. D. Fullerton outside -- unrelated
A. E. Gotlieb outside -- unrelated
58
COMMITTEE MEMBER STATUS
--------- ------ --------
H. H. Ketcham outside -- unrelated
M. J. Sabia outside -- unrelated
5. Retraction Price Committee......... J. A. Boultbee inside -- related
P. Y. Atkinson inside -- related
The Executive Committee acts infrequently. When it does, it reports on its
actions to the board. Matters of any consequence are brought to the board for
consideration except on rare occasions when immediate action is required.
The Compensation Committee periodically settles and approves the management
fees, if any, paid by the Company and its subsidiaries to Ravelston and approves
the granting of options under its executive stock option plan.
The Retraction Price Committee meets quarterly and determines when the
right of retraction of holders of the Company's retractable common shares takes
effect and the retraction price of the Company's retractable shares.
D. EMPLOYEES
As of December 31, 2002, the Chicago Group employed approximately 3,372
employees including approximately 639 part-time employees. Of the 2,733
full-time employees, 702 are production staff, 659 are sales and marketing
personnel, 379 are circulation staff, 254 are general and administrative staff
and 739 are editorial staff. Approximately 920 employees are represented by 23
collective bargaining units. Employee costs (including salaries, wages, fringe
benefits, employment-related taxes and other direct employee costs) equaled
approximately 38.7% of the Chicago Group's revenues in the year ended December
31, 2002. There have been no strikes or general work stoppages at any of the
Chicago Group's newspapers in the past five years. The Chicago Group believes
that its relationships with its employees are generally good.
At December 31, 2002, The Telegraph and its subsidiaries employed
approximately 1,238 persons and the joint venture printing companies employed an
additional 914 persons. Of The Telegraph's approximately 1,238 employees, 52 are
production staff, 414 are sales and marketing personnel, 223 are general and
administrative staff and 549 are editorial staff. Collective agreements between
The Telegraph and the trade unions representing certain portions of The
Telegraph's workforce expired on June 30, 1990 and have not been renewed or
replaced. The absence of such collective agreements has had no adverse effect on
The Telegraph's operations and, in management's view, is unlikely to do so in
the foreseeable future.
The Telegraph's joint venture printing companies, West Ferry Printers and
Trafford Park Printers, each have "in-house" collective agreements with the
unions representing their employees and certain provisions of these collective
agreements are incorporated into the employees' individual employment contracts.
In contrast to the union agreements that prevailed on Fleet Street when the
Company acquired control of The Telegraph, these collective agreements provide
that there shall be flexibility in the duties carried out by union members and
that staffing levels and the deployment of staff are the sole responsibility of
management. Binding arbitration and joint labor-management standing committees
are key features of each of the collective agreements. These collective
agreements may be terminated by either party with six months' prior written
notice.
There have been no strikes or general work stoppages involving employees of
The Telegraph or the joint venture printing companies in the past five years.
Management of The Telegraph believes that its relationships with its employees
and the relationships of the joint venture printing companies with their
employees are generally good.
As of December 31, 2002, the Canadian Newspaper Group had approximately 725
full time equivalent employees of which approximately 31% are unionized. The
Canadian Newspaper Group has union contracts in place at approximately 11 of the
19 newspaper operating locations. The percentage of unionized employees varies
widely from paper to paper. With the large number of contracts being
renegotiated every year, labor disruptions are always possible, but no single
disruption would have a material effect on the Company.
59
E. SHARE OWNERSHIP
The following table and the notes thereto set forth the name of each of the
directors and executive officers of the Company and the approximate number of
shares of the Company, that they have advised the Company, are beneficially
owned by them or over which they exercise control or direction.
APPROXIMATE NUMBER OF SHARES
OF THE COMPANY BENEFICIALLY
OWNED OR OVER WHICH CONTROL
NAME OR DIRECTION IS EXERCISED(3)(4)
-------------------------------
PETER Y. ATKINSON................................ 5,158 retractable common shares
BARBARA AMIEL BLACK(5)(7)........................ 1,650 retractable common shares
FREDERICK A. CREASEY............................. 1,500 Series III Preference Shares
THE LORD BLACK OF CROSSHARBOUR, 1,611,039 Series II
P.C. (CAN), O.C., K.C.S.G.(6)(7)(9)........... Preference Shares
8,190 retractable
common shares(8)
J.A. BOULTBEE(7)................................. 1,031 retractable common shares
DANIEL W. COLSON(6)(7)........................... 290,697 Series II Preference Shares
16,625 retractable common shares(8)
CHARLES G. COWAN, Q.C.(7)........................ 5,158 retractable common shares
11,100 Series III Preference Shares
FREDRIK S. EATON, O.C.(6)........................ 174,284 retractable common shares
23,091 retractable common shares(8)
ALLAN E. GOTLIEB, C.C............................ 3,714 retractable common shares
1,000 Series III Preference Shares
17,437 retractable common shares(8)
60
APPROXIMATE NUMBER OF SHARES
OF THE COMPANY BENEFICIALLY
OWNED OR OVER WHICH CONTROL
NAME OR DIRECTION IS EXERCISED(3)(4)
-------------------------------
HENRY H. KETCHAM III(6).......................... 1,000 retractable common shares
23,794 retractable common shares(8)
1,000 Series III Preference Shares
F. DAVID RADLER(6)(7)............................ 577,720 Series II Preference Shares
229,980 Series III Preference Shares
16,720 retractable common shares(8)
MAUREEN J. SABIA................................. 619 retractable common shares
3,256 retractable common shares(8)
PETER G. WHITE(7)................................ --
Notes:
(1) Lord Black is the Chairman of the Executive Committee of the board of
directors. Messrs. Colson, Gotlieb and Radler are members.
Mr. Ketcham is the Chairman of the Audit Committee. Messrs. Eaton, Fullerton
and Gotlieb and Ms. Sabia are members.
Mr. Gotlieb is the Chairman of the Corporate Governance Committee. Mr. Eaton
and Mr. Fullerton are members.
Mr. Ketcham is Chairman of the Compensation Committee. Messrs. Eaton,
Fullerton and Gotlieb and Ms. Sabia are members.
Mr. Boultbee is Chairman of the Retraction Price Committee. Mr. Atkinson is
a member.
The following persons also held senior management positions with International:
(2) Lord Black is the Chairman of the Board and Chief Executive Officer; Mr.
Radler is the Deputy Chairman President and Chief Operating Officer; Mr.
Colson is the Vice-Chairman; Mrs. Black is Vice-President, Editorial; Mr.
Boultbee is an Executive Vice-President and a director; and Mr. Atkinson is
an Executive Vice-President. Lord Black is the Chairman and a director and
Mr. Colson is the Deputy Chairman and Chief Executive Officer and a director
of Telegraph Group Limited. Lord Black and Messrs. Colson, Atkinson and
Radler are directors of International.
(3) Lord Black and Messrs. Atkinson, Boultbee, Colson, Cowan, Radler and White
are shareholders, directly or indirectly, and officers and directors of
Ravelston.
(4) Lord Black controls Ravelston which exercises control or direction over 78.2
% of the outstanding retractable common shares of the Company.
(5) Mrs. Barbara Amiel Black is the wife of Lord Black.
(6) Lord Black and Messrs. Colson, Eaton, Ketcham and Radler own, directly or
indirectly, 7,500, 500, 17,000, 1,000 and 9,000 shares of Class A common
stock of International, respectively.
61
(7) Lord Black, Mrs. Black and Messrs. Colson, Boultbee, Radler and White own,
directly or indirectly, 72,300, 7,000, 100,000, 1,820, 103,300 and 3,500,
respectively, and Lord Black and Mr. Cowan exercises control or direction
over 150,000 and 5,000, limited partnership units of the Partnership,
respectively.
(8) The number of retractable common shares credited to the director's account
as of March 31, 2003 pursuant to the Directors Share Unit Plan (see page
58).
(9) Through Lord Black's indirect control of the Company, Lord Black exercises
control or direction over 14,990,000 Class B common shares of International.
Summary Compensation Table
The following table sets forth compensation information for the three fiscal
years ended December 31, 2002 in respect of each of the named executives.
TABLE A
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------------------------
Other Securities Under
Annual Options All Other
Name and Principal Position Year Salary Bonus Compensation Granted Compensation
---------------------------------------------------------------------------------------------------------------------------------
($)(1)(2) ($)(1) ($)(3) (#)(4) ($)(5)
Lord Black, 2002 900,361 0 237,440 (a) 250,000 (Company) 0
Chairman of the Board and 2001 898,884 387,250 0 (b) 205,000 (Partnership) 0
Chief Executive Officer 2000 888,552 2,763,902 47,295 (c) 375,000 (International) 0
-------------------------------------------------------------------------------------------------------------------------------
F. David Radler 2002 169,867 0 41,519 (a) 230,000 (Company) 0
Deputy Chairman, 2001 208,464 232,350 0 (b) 205,000 (Partnership) 0
President and Chief Operating 2000 233,294 788,267 0 (c) 375,000 (International) 0
Officer
-------------------------------------------------------------------------------------------------------------------------------
Daniel W. Colson 2002 569,929 0 29,477 (a) 160,000 (Company) 92,639
Vice-Chairman; 2001 608,078 1,740,641 22,860 (b) 130,000 (Partnership) 92,933
Deputy Chairman and Chief 2000 611,263 2,666,634 22,520 (c) 280,000 (International) 96,333
Executive Officer, Telegraph
Group Limited
-------------------------------------------------------------------------------------------------------------------------------
J.A. Boultbee 2002 62,000 0 0 (a) 95,000 (Company) 0
Executive Vice-President 2001 70,250 77,450 0 (b) 75,000 (Partnership) 0
and Chief Financial Officer 2000 81,250 0 0 (c) 117,000 (International) 0
-------------------------------------------------------------------------------------------------------------------------------
Peter Y. Atkinson 2002 79,955 0 0 (a) 80,000 (Company) 0
Executive Vice-President 2001 67,750 154,900 0 (b) 80,000 (Partnership) 0
2000 78,750 74,280 0 (c) 117,000 (International) 0
-------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) With the exception of salaries paid to Lord Black and Mr. Colson by The
Telegraph (which salaries were paid in pounds sterling and Canadian dollars,
respectively, and have been converted into Canadian dollars at the 2002
average rate of 2.3591 for the purposes of this disclosure) and certain
performance incentive bonuses, none of the executive officers of the Company
receives salary or bonus directly from the Company. See "Principal
Agreements with International" and "Compensation". Ravelston and RMI are
associates of Lord Black and Mr. Radler. The Company and its wholly-owned
subsidiaries paid management fees to Ravelston pursuant to the Hollinger
Management Agreement, prior to its termination as of January 1, 2001, of
$3,200,000 in 2000. The Company does not determine the allocation of the
management fee paid to Ravelston among its ultimate recipients. That
allocation is determined by Ravelston. The Company has requested, and
Ravelston provided, an allocation of the economic interest, direct or
indirect through compensation arrangements, shareholdings or otherwise, in
the management fee paid by the Company and its subsidiaries during the years
ended December 31, 2001 and December 31, 2002 which can reasonably be
attributed to the Chief Executive Officer of the Company and the other four
most senior officers of the Company whose salaries and bonuses for the years
ended December 31, 2001 and December 31, 2002 exceeded $100,000. The
allocation provided by Ravelston has not been independently verified by the
Company.
62
YEAR ENDED
----------------------------
December 31, December 31,
NAME 2002 2001
---- ---- ----
(U.S. DOLLARS)
Lord Black................................................................. $ 6,485,439 $ 6,619,256
F. David Radler............................................................ 3,147,922 3,102,221
Daniel W. Colson........................................................... 1,770,770 1,714,308
Peter Y. Atkinson.......................................................... 876,009 846,063
J. A. Boultbee............................................................. 929,395 897,250
(2) The amounts in this column also include directors' fees paid by the Company,
International, The Telegraph, the Partnership, The Sun-Times Company and
Jerusalem Post Publications Limited.
(3) With respect to Lord Black, "Other Annual Compensation" reflects a portion
of the cost of maintaining his New York condominium, an allocation for a
portion of the cost of a New York and a London automobile and driver, a
portion of the cost of his personal house staffs where offices are
maintained and in which meetings are frequently held, and an allocation of
variable costs covering any occasion when his use of a corporate airplane is
not entirely for corporate purposes. With respect to Mr. Radler, "Other
Annual Compensation" reflects a portion of the cost of maintaining the
Chicago condominium and automobile and an allocation of variable costs
covering any occasion when his use of a corporate airplane is not entirely
for corporate purposes. With respect to Mr. Colson, "Other Annual
Compensation" reflects a portion of the cost of an automobile allowance and
medical benefits.
(4) These amounts relate, as indicated, to options on retractable common shares
of the Company granted pursuant to the Company's Executive Share Option
Plan, to options on limited partnership units of the Partnership granted
pursuant to the Partnership's Unit Option Plan and to options on shares of
Class A common stock of International granted pursuant to International's
Stock Option Plans.
(5) With respect to Mr. Colson, "All Other Compensation" includes contributions
made by The Telegraph to its Executive Pension Scheme.
Options/Stock Appreciation Rights
In 1994 the Board of Directors approved an Executive Share Option Plan (the
"Option Plan"). Under the Option Plan the Company issues non-transferable
options ("Options") to purchase retractable common shares of the Company to
certain executives of the Company and its subsidiaries (including the named
executives). The Option Plan is designed: (i) to provide incentive to executives
of the Company and its subsidiaries who are in positions which enable them to
make significant contributions to the longer term objectives of the Company;
(ii) to give suitable recognition to the ability and industry of such
executives; and (iii) to attract and retain in the employment of the Company and
its subsidiaries persons of ability and industry.
The Options are to purchase up to a specified maximum number of retractable
common shares at a price equal to the exercise price which is the average
trading price on the Toronto Stock Exchange of the Company's retractable common
shares for the 10 trading days ending on the third trading day preceding the
date of grant. The Options are exercisable to the extent of 25% thereof at the
end of each of the first through fourth years following issuance, on a
cumulative basis, with the exercise period terminating six years after the date
of grant of the Options. Unexercised Options expire at the earlier of one month
following the date of termination of the employee's employment or six years
after grant.
HOLLINGER INTERNATIONAL INC. 1999 STOCK INCENTIVE PLAN. On May 5, 1999,
International adopted, and its stockholders approved, a new compensation plan
known as the Hollinger International Inc. 1999 Stock Incentive Plan (the "1999
Stock Incentive Plan"). The 1999 Stock Incentive Plan replaces International's
1997 Stock Incentive Plan. Awards previously made under the 1997 Stock Incentive
Plan are not affected. The purpose of the 1999 Stock Incentive Plan is to assist
in attracting and retaining highly competent employees and directors and to act
as an incentive in motivating selected officers and other key employees and
directors to achieve long-term corporate objectives. The 1999 Stock Incentive
Plan provides for awards of up to 8,500,000 shares of Class A common stock of
International. The number of shares available for issuance under the 1999 Stock
Incentive Plan are
63
subject to anti-dilution adjustments upon the occurrence of significant
corporate events. The shares offered under the 1999 Stock Incentive Plan are
either authorized and unissued shares or issued shares which have been
reacquired by International.
HOLLINGER L.P. UNIT OPTION PLAN. Simultaneously with the Partnership's
initial public offering in April 1999, Hollinger Canadian Newspapers G.P. Inc.,
the general partner of the Partnership, adopted and approved a unit option plan
for the Partnership. dated April 27, 1999 (the "Unit Option Plan"), under which
unit option awards have been made to eligible employees and officers. The
purpose of the Unit Option Plan was to promote the interest of the Partnership
and its unit holders by establishing a direct link between the financial
interest of eligible employees and officers and the performance of the
Partnership and by enabling the Partnership to attract and retain highly
competent employees and officers. The Unit Option Plan provides for awards of up
to 5,000,000 units. The number of units available for issuance under the Unit
Option Plan is subject to anti-dilution adjustments upon the occurrence of
significant partnership events.
The following table sets forth information concerning the issue in 2002 to
the named executives of options to purchase shares of Class A common stock of
International pursuant to International's Stock Option Plans. No options were
granted in 2002 pursuant to the Option Plan or the Partnership's Unit Option
Plan.
OPTION/SAR GRANTS DURING THE MOST RECENTLY
COMPLETED FINANCIAL YEAR
TABLE B
% OF TOTAL MARKET VALUE
SECURITIES OPTIONS EXERCISE OF SECURITIES
UNDER GRANTED TO OR UNDERLYING
OPTIONS EMPLOYEES IN BASE PRICE OPTIONS EXPIRATION
NAME GRANTED (#) FINANCIAL YEAR ($/SECURITY) ($/SECURITY) DATE
-----------------------------------------------------------------------------------------------------------------------
Lord Black, 375,000 16.8 U.S.$11.13 U.S.$11.13 Feb. 4, 2012
Chairman of the Board and (International)
Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------------
F. David Radler 375,000 16.8 U.S.$11.13 U.S.$11.13 Feb. 4, 2012
Deputy Chairman (International)
President and
Chief Operating Officer
-----------------------------------------------------------------------------------------------------------------------
Daniel W. Colson 280,000 12.6 U.S.$11.13 U.S.$11.13 Feb. 4, 2012
Vice-Chairman; (International)
Deputy Chairman and
Chief Executive Officer,
The Telegraph
-----------------------------------------------------------------------------------------------------------------------
J.A. Boultbee 117,000 5.2 U.S.$11.13 U.S.$11.13 Feb. 4, 2012
Executive Vice-President (International)
-----------------------------------------------------------------------------------------------------------------------
Peter Y. Atkinson 117,000 5.2 U.S.$11.13 U.S.$11.13 Feb. 4, 2012
Executive Vice-President (International)
-----------------------------------------------------------------------------------------------------------------------
The following table sets forth details concerning the financial year end value
of (a) outstanding options issued pursuant to the Option Plan, (b) outstanding
options to purchase shares of Class A common stock of International issued
pursuant to International's Stock Option Plans and (c) outstanding options to
purchase limited partnership units of the Partnership issued pursuant to the
Partnership's Unit Option Plan.
AGGREGATED OPTION/SAR EXERCISES DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES
64
TABLE C
VALUE OF
UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SECURITIES AGGREGATE FY-END FY-END
ACQUIRED VALUE (#)(1) ($)(2)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
-----------------------------------------------------------------------------------------------------------------------------
Lord Black, 250,000/0 0
Chairman of the Board 0 0 (Company)
and Chief Executive Officer 153,750/51,250 0/0
0 0 (Partnership)
803,750/941,250 U.S.$61,150/U.S.$0
0 0 (International)
-----------------------------------------------------------------------------------------------------------------------------
F. David Radler 230,000/0 0
Deputy Chairman, President 0 0 (Company)
and Chief Operating Officer 153,750/51,250 0/0
0 0 (Partnership)
803,750/941,250 U.S.$61,150/U.S.$0
0 0 (International)
-----------------------------------------------------------------------------------------------------------------------------
Daniel W. Colson 160,000/0 0
Vice-Chairman; 0 0 (Company)
Deputy Chairman and 97,500/32,500 0/0
Chief Executive Officer, 0 0 (Partnership)
The Telegraph 462,500/702,500 U.S.$10,800/ U.S.$0
0 0 (International)
-----------------------------------------------------------------------------------------------------------------------------
J.A. Boultbee 95,000/0 0
Executive Vice-President 0 0 (Company)
56,250/18,750 0/0
0 0 (Partnership)
241,000/302,000 U.S.$3,120/U.S.$0
0 0 (International)
-----------------------------------------------------------------------------------------------------------------------------
Peter Y. Atkinson 80,000/0 0
Executive Vice-President 0 0 (Company)
60,000/20,000 0/0
0 0 (Partnership)
250,000/302,000 U.S.$20,000/U.S.$0
0 0 (International)
-----------------------------------------------------------------------------------------------------------------------------
****Notes:
(1) These numbers relate to the options granted pursuant to the Option Plan, the
options granted pursuant to the International Stock Option Plans and the
options granted pursuant to the Partnership's Unit Option Plan.
(2) Calculated using the closing price for retractable common shares of the
Company on the Toronto Stock Exchange, the shares of Class A common stock of
International on the New York Stock Exchange and the limited partnership
units of the Partnership on the Toronto Stock Exchange on December 31, 2002,
less the exercise price of the options.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee consists of five directors who are neither
officers nor employees of the Company or Ravelston and who do not have any other
material interest in Ravelston. None of the Compensation Committee members is
eligible to participate in the Option Plan.
International is the most significant user of RMI's management services.
Since International is a public corporation with its own board of directors,
including directors independent of the Company and related companies, the
Committee has concluded that it would be appropriate for the International board
of directors to negotiate
65
directly with RMI the management fees payable for the services provided to it
and its subsidiaries pursuant to the two Services Agreements.
In the past under the Hollinger Management Agreement, the aggregate
management fee for each calendar year was negotiated with the Company on an
annual basis. The Compensation Committee had been delegated authority by the
board of directors of the Company to settle and approve the management fees, if
any, to be paid by the Company , and its wholly-owned subsidiaries, to Ravelston
pursuant to such agreement. Until the annual fee was determined for any year,
Ravelston continued to be compensated on the basis of the previous year's fee.
The Hollinger Management Agreement was terminated as of January 1, 2001 although
Ravelston continues to provide management services to the Company . No
management fee will be payable by the Company to Ravelston in respect of the
management services to be provided for the year 2003.
The compensation levels for the executives and other employees of Ravelston
are the responsibility of Ravelston and are not determined by the Compensation
Committee of the Company or by the board of directors or any committee of
International, except to the extent that the Company or International
compensates the executives and employees in the form of stock options. Pursuant
to the management fee arrangements, the management fees are not allocated to
specific Ravelston or RMI employees, consequently, the Compensation Committee
has no basis for attributing specific amounts to the Company's executive
officers as salaries and bonuses.
The Compensation Committee also approves the granting of Options under the
Company's Option Plan.
In respect of its role in approving the grant of options to the Company's
executives, the Compensation Committee utilizes the following strategy:
(i) motivate executives to achieve their strategic goals by tying grants
to the performance of the Company as well as their individual
performance;
(ii) be competitive with other leading companies so as to attract and
retain talented executives; and
(iii) align the interests of the Company's executives with long-term
interests of the Company's shareholders through stock-related
programs.
No Options were granted under the Option Plan in 2002.
The foregoing report has been furnished by the current members of the
Compensation Committee: Henry H. Ketcham III (Chairman), Fredrik S. Eaton, R.
Donald Fullerton, Allan E. Gotlieb and Maureen J. Sabia.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The chart below compares the yearly percentage change in the Company's
cumulative total shareholder return on the Company's retractable common shares
(assuming all dividends were reinvested at the market price on the date of
payment) against the cumulative total shareholder return of the S&P/TSX
Composite Index for the five years commencing December 31, 1997 and ending
December 31, 2002.
66
COMPARISON OF 5-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN
ON RETRACTABLE COMMON SHARES OF THE COMPANY'S
AND THE S&P/TSX COMPOSITE INDEX
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
In the past, the Company made loans to certain directors and officers of the
Company in connection with the subscription for convertible preference shares
pursuant to its now-expired executive share purchase plan (the "Purchase Plan").
These loans were assumed by one of the Company's wholly-owned subsidiaries,
Domgroup Ltd. In 1999, the Company also made loans to companies controlled by
certain directors and officers of the Company in connection with the initial
public offering by the Partnership. Hollinger's board of directors has resolved
to retire these loans on a timely and orderly basis. The following table sets
out certain information relating to such loans.
TABLE D
FINANCIALLY
LARGEST AMOUNT ASSISTED
INVOLVEMENT AMOUNT OUTSTANDING SECURITIES SECURITY
OF ISSUER OR OUTSTANDING AS AT PURCHASES FOR
SUBSIDIARY(1)(2) DURING 2002 MAY 16, 2003 DURING INDEBTEDNESS(3)
NAME 2002
----------------------------------------------------------------------------------------------------------------------------
($) ($) (#)
Lord Black, Domgroup as lender 3,345,646 3,369,570 0 735,280 Series II
Preference Shares
Chairman of the Board and the Company as lender 183,101 186,671 0 50,000 units
Chief Executive Officer
----------------------------------------------------------------------------------------------------------------------------
F. David Radler Domgroup as lender 2,450,463 2,447,587 0 577,720 Series II
Preference Shares
Deputy Chairman, President the Company as lender 189,684 193,382 0 50,000 units
and Chief Operating Officer
----------------------------------------------------------------------------------------------------------------------------
Notes :
(1) The loans made by the Company and assigned to Domgroup were on a
non-interest basis prior to the conversion of the preference shares
subscribed for with the proceeds of the loans. All preference shares
subscribed for under the Purchase Plan have been converted and, as a
consequence of tenderings to issuer bids by the Company in 1997 and 1998,
Series II Preference Shares resulting from the preference shares issued
under the Purchase Plan are now held in trust by Ravelston for the benefit
of the subscribers. From October 1, 1998, the loans made by the Company and
assigned to Domgroup have been bearing interest at the prime rate
established by the Canadian Imperial Bank of Commerce plus 1/2%; and are
secured by a pledge of the Series II Preference Shares resulting from the
preference shares issued under the Purchase Plan.
(2) From April 13, 1999, the loans are partially secured by a pledge of the
Partnership units and have been bearing interest at the prime rate
established by the Canadian Imperial Bank of Commerce plus 1/2%.
(3) The number of Series II Preference Shares of the Company and limited
partnership units of the Partnership pledged as security for the
indebtedness.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
To the knowledge of the directors and officers of the Company, there is
no beneficial owner or person who exercises control or direction over
more than 10% of the outstanding retractable common shares of the
Company except as follows. Ravelston exercises control or direction
over a total of 26,516,886 retractable common shares or 78.2% of the
outstanding retractable common shares of the Company. Lord Black
indirectly controls Ravelston and therefore beneficially owns or
exercises control or direction over 78.2% of the outstanding
retractable common shares of the Company. The address of Ravelston is
10 Toronto Street, Toronto, Ontario, M5C 2B7.
67
B. RELATED PARTY TRANSACTIONS
International and its subsidiaries have entered into Services Agreements with
Ravelston, whereby Ravelston acts as manager of International and its
subsidiaries and carries out head office and executive responsibilities. These
Services Agreements were assigned on July 5, 2002 to RMI, a wholly-owned
subsidiary of Ravelston. Ravelston and RMI billed International and its
subsidiaries $37.3 million in 2002 pursuant to these agreements ($44.9 million
in 2001 and $49.9 million in 2000). In addition, certain executives of Ravelston
and Moffat Management and Black-Amiel Management, affiliates of Ravelston and
RMI, have separate Services Agreements with certain subsidiaries of
International. During 2002, amounts paid directly by subsidiaries of
International pursuant to such agreements were $3.0 million ($2.6 million in
2001 and $5.4 million in 2000). The fees under Ravelston's and RMI's services
agreement and the fees paid directly to executives and affiliates of Ravelston,
have been negotiated and approved by International's independent directors.
In addition to the amounts referred to in the preceding paragraph, during 2001
and 2000 there were further remuneration paid directly by subsidiaries of
International to certain Ravelston executives of $2.6 million and $6.3 million,
respectively (2002-nil).
Similarly, Ravelston carries out head office and executive responsibilities for
the Company and its subsidiaries, other than International and its subsidiaries.
In 2002 and 2001, no amounts were charged by Ravelston for such services. In
2000, the Company received $10.7 million, net, from Ravelston pursuant to a
services agreement which was terminated on December 31, 2000.
In 2002, expenses are net of $2.4 million received from Ravelston and RMI as a
reimbursement of certain head office expenses incurred on behalf of Ravelston
and RMI ($2.0 million in 2001). Such expenses were not incurred on behalf of
Ravelston in 2000.
During 2001 and 2000, in connection with the sales of properties, the Company,
Ravelston, International, Lord Black and three senior executives entered into
non-competition agreements with the purchasers in return for cash consideration
paid.
68
During the three months ended March 31, 2003, International made a venture
capital investment of US$2.5 million in a company in which a director of
International has a minority interest.
On March 10, 2003, prior to the issue of Senior Secured Notes, NB Inc. sold
its shares of Class A common stock and Series E redeemable preferred stock of
International to RMI. Such shares were in turn sold back to NB Inc. from RMI at
the same price with a resulting increase in the tax basis of the shares of
International and a taxable gain to RMI.
All of the Services Agreements were negotiated in the context of a
parent-subsidiary relationship and, therefore, were not the result of arm's
length negotiations between independent parties. The terms of the Services
Agreements may therefore not be as favorable to International and its
subsidiaries as the terms that might be reached through negotiations with
non-affiliated third parties.
ASSET SALES
On July 3, 2002, NP Holdings Company ("NP Holdings"), a subsidiary of
International, was sold to RMI for cash consideration of $5,750,000. The net
assets of NP Holdings primarily included Canadian tax losses. The tax losses,
only a portion of which were previously recognized for accounting purposes, were
effectively sold at their carrying value. Due to the inability of NP Holdings to
utilize its own tax losses prior to their expiry, as a result of its disposing
of its interest in the National Post, it sold these losses to a company which
would be able to utilize the losses. The only other potential purchaser for
these losses, CanWest, declined the opportunity to acquire the losses. The terms
of the sale of the tax losses to RMI were negotiated with and approved by the
independent directors of International.
In two separate transactions in July and November, 2001, International and
the Partnership completed the sale of most of their remaining Canadian
newspapers to Osprey for total sale proceeds of approximately $255 million plus
closing adjustments primarily for working capital. The former Chief Executive
Officer of the Partnership is a minority shareholder and Chief Executive Officer
of Osprey. International's independent directors approved the terms of these
transactions.
In connection with the above two sales of Canadian newspaper properties to
Osprey and to satisfy a closing condition, International, the Company, and Lord
Black and three senior executives entered into non-competition agreements with
Osprey pursuant to which each agreed not to compete directly or indirectly in
Canada with the Canadian businesses sold to Osprey for a five-year period,
subject to certain limited exceptions, for aggregate consideration of $7.9
million. Such consideration was paid to Lord Black and the three senior
executives and was approved by International's independent directors.
On November 16, 2000, International, together with its affiliates, Southam
and the Partnership, completed the sale of most of their Canadian newspapers and
related assets to CanWest. The aggregate sale price of these properties at fair
value was approximately $2.8 billion, plus closing adjustments for working
capital at August 31, 2000 and cash flow and interest for the period September 1
to November 16, 2000 which in total at December 31, 2000 approximated an
additional $40.7 million.
In connection with the sale to CanWest, Ravelston entered into a management
services agreement with CanWest and National Post pursuant to which it agreed to
continue to provide management services to the Canadian businesses sold to
CanWest in consideration for an annual fee of $6 million payable by CanWest.
CanWest will be obligated to pay Ravelston a termination fee of $45 million in
the event that CanWest chooses to terminate the management services agreement or
$22.5 million in the event that Ravelston chooses to terminate the agreement.
Further, CanWest required as a condition to the transaction that International,
Ravelston, the Company, Lord Black and three senior executives enter into
non-competition agreements with CanWest pursuant to which each agreed not to
compete directly or indirectly in Canada with the Canadian business sold to
CanWest for a five-year period, subject to certain limited exceptions, for
aggregate consideration of $80 million paid by CanWest in addition to the
purchase price referred to above of which $38 million was paid to Ravelston and
$42 million was paid to Lord Black and the three senior executives.
International's independent directors approved the terms of these payments.
During 2001, International transferred two publications to Horizon
Publications Inc. in exchange for net working capital. Horizon Publications Inc.
is managed by former Community Group executives and controlled by
69
certain members of the Board of Directors of International. The terms of theses
transactions were approved by the independent directors of International.
During 2000, International sold most of its remaining U.S. community
newspaper properties, for total proceeds of approximately US$215 million. In
connection with those sales, to satisfy a closing condition, International, Lord
Black and three senior executives entered into non-competition agreements with
the purchasers to which each agreed not to compete directly or indirectly in the
United States with the United States businesses sold to purchasers for a fixed
period, subject to certain limited exceptions, for aggregate consideration paid
in 2001 of US$0.6 million. These amounts were in addition to the aggregate
consideration paid in respect of these non-competition agreements in 2000 of
US$15 million. International's independent directors approved the terms of these
payments. Included in these dispositions during 2000 International sold four
U.S. community newspapers for an aggregate consideration of US $38.0 million
($56.5 million) to Bradford Publishing Company, a company formed by a former
U.S. Community Group executive and in which some of International's directors
are shareholders. The terms of this transaction were approved by the independent
directors of International.
International issued to a subsidiary of the Company in connection with the
1995 Reorganization in which International acquired the Company's interest in
The Telegraph and Southam, 739,500 shares of Series A preferred stock. The
Series A preferred stock was subsequently exchanged for Series D preferred
stock. During 1998, 408,551 shares of Series D preferred stock were converted
into 2,795,165 shares of Class A common stock. In February 1999, 196,823 shares
of Series D preferred stock were redeemed for cash of US$19.4 million. In May
1999, the remaining 134,126 shares of Series D preferred stock were converted
into 134,126 shares of Series E preferred stock. In September 2001, 40,920
shares of Series E preferred stock were redeemed for cash of US$3.8 million. The
shares of Series E preferred stock were redeemable in whole or in part, at any
time and from time to time, subject to restrictions in International's credit
facilities, by International or by a holder of such shares. As described above,
the remaining Series E preferred stock was redeemed on March 10, 2003.
Pursuant to a January 1997 transaction wherein International acquired
Canadian publishing assets from the Company, International issued 829,409 shares
of Series C preferred stock. The stated value of each share was $108.51. On June
1, 2001, International converted all the Series C preferred stock at the
conversion ratio of 8.503 shares of Class A common stock per share of Series C
preferred stock into 7,052,464 shares of Class A common stock. On September 5,
2001, International purchased for cancellation, from the Company, the 7,052,464
shares of Class A common stock for a total cost of US$92.2 million or US$13.07
per share which represented 98% of the September 5, 2001 closing price.
International has reviewed its procedures for ensuring that transactions
with affiliates of Publishing (other than its subsidiaries) comply with the
covenants under its debt instruments existing prior to the December 2002
refinancing, including the indentures governing outstanding debt securities.
Based on this review, International has determined that in one related-party
transaction, although International satisfied the requirement to obtain the
approval of the independent directors of International's Board of Directors that
the transaction was being undertaken on an arm's length basis, International did
not obtain a fairness opinion although the transaction exceeded the relevant
threshold for delivering such an opinion by US$23 million. In light of the
various intercompany transactions and arrangements within the Hollinger group
and the related party transactions that have occurred from time to time in the
past and may occur in the future, International intends to strengthen its
controls for monitoring compliance with those covenants under the 9% Senior
Notes and other debt instruments by which International, Publishing and our
other subsidiaries are bound that are applicable to such transactions and
arrangements.
Lord Black controls Ravelston and, through Ravelston and its subsidiaries,
together with his associates, he exercises control or direction over 78.2% of
our outstanding retractable common shares.
RIGHTS OF FIRST REFUSAL
Ravelston has rights of first refusal in respect of any retractable common
shares of the Company that may be issued on exercise of options held to acquire
retractable common shares should the holders decide to exercise their options
and dispose of the retractable common shares.
PRINCIPAL AGREEMENTS WITH INTERNATIONAL
70
Services Agreements. Two Services Agreements govern the provision of
certain advisory, consultative, procurement and administrative services to
International and its subsidiaries by RMI. Services provided include, among
other things, strategic advice and planning and financial services (including
advice and assistance with respect to acquisitions) and assistance in
operational matters. The Services Agreements will be in effect until terminated
by either party under certain specified circumstances. The Services Agreements
may be terminated by either party giving 180 days notice. Payments by
International and its subsidiaries made pursuant to the Services Agreements are
subject to the review and approval of the Audit Committee of the Board of
Directors of International.
Business Opportunities Agreement. The Business Opportunities Agreement
provides that International will be the Company's principal vehicle for engaging
in and effecting acquisitions in newspaper businesses and in related media
businesses in the United States, Israel and, through The Telegraph, the European
Community, Australia and New Zealand (the "Telegraph Territory"). The Company
has reserved to itself the ability to pursue newspaper and all media acquisition
opportunities outside the United States, Israel and the Telegraph Territory, and
media acquisition opportunities unrelated to the newspaper business in the
United States, Israel and the Telegraph Territory. The Business Opportunities
Agreement does not restrict newspaper companies in which the Company has a
minority investment from acquiring newspaper or media businesses in the United
States, Israel or the Telegraph Territory, nor does it restrict subsidiaries of
the Company from acquiring up to 20% interests in publicly held newspaper
businesses in the United States. The Business Opportunities Agreement will be in
effect for so long as the Company holds at least 50% of the voting power of
International, subject to termination by either party under specified
circumstances. The Company assigned its rights and obligations under the
Business Opportunities Agreement to a wholly-owned subsidiary on September 22,
1997 with the consent of International.
Co-operation Agreement. In connection with the listing of The Telegraph's
shares on the London Stock Exchange in July 1992, the Company and The Telegraph
entered into the Co-operation Agreement which sets forth the basis upon which
the Company and The Telegraph will divide their respective newspaper and other
media interests world-wide. Under this agreement, The Telegraph and the Company
have agreed not to engage in, or hold a significant interest in an enterprise
engaging in, the newspaper, magazine, radio or television business where the
other has existing operations, except in specified circumstances. For purposes
of this agreement, The Telegraph's areas of operation are the United Kingdom,
the rest of the European Union, Australia and New Zealand; the Company's areas
of operation are the United States, Canada, the Caribbean and Israel.
International, which assumed the Company's position under the Co-operation
Agreement in 1995, has agreed not to violate the Co-operation Agreement.
RELATED PARTY INDEBTEDNESS
The Company and its subsidiaries have amounts due to related parties of $79.7
million and $45.9 million as at December 31, 2002 and 2001 respectively.
Included in these amounts are unsecured demand loans and advances, including
accrued interest owing to Ravelston of $52.2 million and $32.2 million as at
December 31, 2002 and 2001, respectively, which were borrowed to partially fund
the Company's operating costs, including interest and preference share dividend
obligations. The loans bear interest at the bankers' acceptance rate plus 3.75%
per annum or 6.68% at December 31, 2002. In addition, International owes $5.0
million and $13.7 million at December 31, 2002 and 2001, respectively, to
Ravelston or RMI in connection with fees payable pursuant to the Services
Agreements as noted below. The amounts due to related parties at December 31,
2002 also include $22.5 million owing to RMI in connection with the assumption
by RMI, as a result of its purchase of NP Holdings (as noted below), of a
liability of $22.5 million owing to CanWest. As at December 31, 2002, this
amount is due on demand and is non-interest bearing.
On July 11, 2000, International loaned US$36.8 million to a subsidiary of the
Company in connection with the cash purchase by the Company of HCPH Co. Special
shares. The loan is payable on demand and to December 31, 2001, interest was
payable at the rate of 13% per annum at which time, with the approval of the
independent directors, it was changed to LIBOR plus 3% per annum. This loan,
together with accrued interest, totaled US$45.8 million at December 31, 2002. On
March 10, 2003, prior to the closing of the offering of 117/8% Senior Secured
Notes, International repurchased for cancellation, from NB Inc., 2,000,000
shares of Class A common stock at US$8.25 per share for total proceeds of $24.2
million (US $16.5 million) and redeemed, from NB Inc., pursuant to a redemption
request, all of the 93,206 outstanding shares of Series E redeemable convertible
preferred stock of International at the fixed redemption price of $146.63 per
share for total proceeds of $13.6 million (US$9.3 million). The proceeds from
the repurchase and redemption were used to repay US$25.4 million of the loan
resulting in the net outstanding debt due to International of approximately
$29.9 million (US$20.4 million) as of March 10, 2003. The remaining
71
debt bears interest at 14.25% or, if paid in additional notes, 16.5% and is
subordinated to the Company's Senior Secured Notes (so long as the Senior
Secured Notes are outstanding), guaranteed by Ravelston and secured by certain
assets of Ravelston. Following a review by a special committee of the Board of
Directors of International, comprised entirely of independent directors, of all
aspects of the transaction relating to the changes in the debt arrangements with
NB Inc. and the subordination of this remaining debt, the special committee
approved the new debt arrangements, including the subordination.
Effective April 30, 2003, US$15.7 million principal amount of subordinated debt
owing to International by NB Inc. was transferred by International to HCPH Co.,
and subsequently transferred to RMI by HCPH Co. in satisfaction of a
non-interest bearing demand loan due from HCPH Co. to RMI. After the transfer,
NB Inc.'s debt to International is approximately US$4.7 million and NB Inc.'s
debt to RMI is approximately US$15.7 million. The debts owing by NB Inc. to RMI
and by NB Inc. to International each bears interest at the rate of 14.25% if
interest is paid in cash and 16.50% if it is paid in kind except that RMI has
waived its right to receive interest until further notice. The debts are
subordinated to the Senior Secured Notes for so long as the Senior Secured Notes
are outstanding, and that portion of the debt due by NB Inc. to International is
guaranteed by Ravelston and the Company. International entered into a
subordination agreement with the Company and NB Inc. pursuant to which
International has subordinated all payments of principal, interest and fees on
the debt owed to it by NB Inc. to the payment in full of principal, interest and
fees on the Senior Secured Notes, provided that payments with respect to
principal and interest can be made to International to the extent permitted in
the indenture governing the Senior Secured Notes. RMI has agreed to be bound by
these subordination arrangements with respect to the debt owed from NB Inc. to
RMI.
In response to the 1998 issuer bid, all options held by executives were
exercised. As at December 31, 2002, included in accounts receivable is $5.8
million (2001-$5.8 million) due from executives, which bears interest at the
prime rate plus 1/2%. The receivables are fully secured by a pledge of the
shares held by the executives.
1n 1999, executive-controlled companies invested in the Partnership. As at
December 31, 2002, included in accounts receivable is $0.4 million (2001-$0.4
million) due from these companies, which bears interest at the prime rate plus
1/2%. The receivables are partially secured by a pledge of the units held in the
Partnership.
Included in Other Assets at December 31, 2002 is $6.5 million (US$4.1 million)
owing to International from Bradford Publishing Company ("Bradford"), a company
in which certain of the Company's and International's directors are significant
shareholders. Such amount represents the present value of the remaining amounts
owing under a non-interest bearing note receivable granted to International in
connection with a non-competition agreement entered into on the sale of certain
operations to Bradford during 2000. The amount receivable is unsecured, due over
the period to 2010 and is subordinated to Bradford's lenders.
Included in Other Assets at December 31, 2002 is $7.7 million (US$4.9 million)
owed by Horizon Publications Inc. ("Horizon"), a company controlled by certain
members of the Board of Directors of International and the Company. Such amount
represents the unpaid purchase price payable to International in connection with
the sale of certain operations to Horizon during 1999. The loan receivable is
unsecured, bears interest at the lower of LIBOR plus 2% and 8% per annum and is
due in 2007.
During 2002, the Company paid to Horizon a management fee in the amount of
$0.3 million in connection with certain administrative services provided by
Horizon. The fee was approved by International's independent directors.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18. Pages F1-F79
B. DIVIDEND DISTRIBUTION POLICY
The Company is an international 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, on a
non-consolidated basis, including the payment of dividends, is dependent upon
the availability of cash flows
72
principally from International through dividends, from RMI under the Support
Agreement, and other payments. International and the Company's other
subsidiaries and affiliated companies are under no obligation to pay dividends.
International's ability to pay dividends on its common stock may be limited as a
result of its dependence on the receipt of dividends and other receipts
primarily from Publishing. Publishing and its principal United States and
foreign subsidiaries are subject to statutory restrictions and restrictions in
debt agreements that limit their ability to pay dividends. Under the Support
Agreement, RMI is required to contribute amounts to the Company with respect to
its dividend obligations under the Series II Preference Shares and Series III
Preference Shares, but RMI is not required to contribute any amounts in respect
of dividends on the retractable common shares.
Under corporate law, the Company is not required to pay any dividends or
redeem any of its shares in certain circumstances, including if the Company's
liquidity would be unduly impaired as a consequence. In addition, there are
restrictions under the indenture governing the Company's Senior Secured Notes on
the Company's ability to pay dividends on its outstanding shares.
The following is a summary of the Company's dividend record for the last
three fiscal years. On December 10, 2002, the Company paid (i) a cash dividend
of $0.05 per retractable common share and (ii) a stock dividend of 0.013334 of a
retractable common share for each retractable common share held as at November
26, 2002. On March 10, 2003, the Company paid (i) a cash dividend of $0.05 per
retractable common share and (ii) a stock dividend of 0.018182 of a retractable
common share, for each retractable common share held as at February 24, 2003. On
April 9, 2003, the Company declared a stock dividend of 0.02961 of a retractable
common share, which was paid on June 10, 2003 to shareholders of record on May
27, 2003. Prior to these dividends, the Company had paid regular quarterly cash
dividends of $0.15 per retractable common share for the period March 10, 2000 to
September 10, 2002.
Each Series II Preference Share entitles the holder to a dividend equal to
the amount of any dividend on 0.46 of a share of Class A common stock of
International (less any U.S. withholding tax thereon payable by the Company or
its subsidiaries). In the first quarter of 2003, the Company paid dividends of
$0.033545958 per Series II Preference Share. In the first quarter of 2002, the
Company paid dividends of $0.09554099 per Series II Preference Share; in the
second quarter of 2002, the Company paid dividends of $0.07644098 per Series II
Preference Share; in the third quarter of 2002, the Company paid dividends of
$0.07391001 per Series II Preference Share; and in the fourth quarter of 2002,
the Company paid dividends of $0.03464300 per Series II Preference Share.
Since their issue in 1999, the Company has paid regular quarterly dividends
of $0.175 per Series III Preference Share. Shareholders of record at the close
of business on April 22, 2003 will be entitled to receive the dividend of $0.175
per Series III Preference Share which has been declared payable on May 6, 2003
to shareholders of record at the close of business on such date.
ITEM 9. THE OFFER AND LISTING
A. LISTING
The retractable common shares, Series II Preference Shares and Series III
Preference Shares of the Company are listed on the Toronto Stock Exchange under
the symbols "HLG.C", "HLG.PR.B" and "HLG.PR.C", respectively. The following
table sets forth the range of high and low sale prices for each class of stock
as reported on the Toronto Stock Exchange during the five most recent years,
including quarterly information for the two most recent years and monthly
information for the past six months.
On June 12, 2003, the closing price of the Series III Preference Shares on
the Toronto Stock Exchange was $ 7.50.
ITEM 10. ADDITIONAL INFORMATION
Interested directors must disclose as to the nature and extent of said
directors' material interest at the time and in the manner provided by the
Canadian Business Corporations Act. The directors shall be paid such
remuneration as the directors determine from time to time by resolution. The
majority of directors may decide upon the amount of such remuneration.
A. SHARE CAPITAL
Not applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
DESCRIPTION OF SHARES
The Company's issued capital stock consists of Series II preference
shares, Series III preference shares and retractable common shares, each of
which is retractable at the option of the holder. On retraction, the Series II
preference shares are exchangeable into a fixed number of shares of the
Company's Class A common stock of International or, at the Company's option,
cash of equivalent value. The Series III preference shares are currently
retractable at the option of the holder for a retraction price payable in cash,
for a cash payment of $9.50 per share and provide for redemption on April 30,
2004 at $10.00 per share. The retractable common shares are retractable at any
time at the option of the holder at their retraction price (which is fixed from
time to time) in exchange for the Company's shares of International Class A
common stock of equivalent value or, at the Company's option, cash.
The holders of common shares shall be entitled to receive notice of and to
attend all meetings of shareholders of the Company, other than separate meetings
of holders of another class or series of the Company, and to vote at any such
meeting on the basis of one vote for each common share held. Except as required
by law, the holders of the Series II Preference Shares as a series shall not be
entitled as such to receive notice of, to attend, or to vote at any meeting of
the shareholders of the Company. The holders of Series III Preference Shares
shall not be entitled to vote, except as required by law or unless and until the
Company shall have failed to pay the whole amount of eight quarterly dividends
on the Series III Preference Shares, in which case, and only for so long
thereafter as any dividends on the Series III Preference Shares remain in
arrears, the holders of those shares shall be entitled to one vote per share of
the Series III Preference Shares for the election of two (2) directors to be
elected in conjunction with the holders of any other series of preference shares
which may have a similar right.
The rights, privileges, restrictions and conditions attaching to the
Preference Shares as a class may be added to, changed or removed but only with
the affirmative vote of at least 66 2/3% of the votes cast at a meeting of the
holders of Preference Shares duly called for that purpose.
The annual meeting of shareholders shall be held at the registered office
of the Company or at such other place within Canada as the directors may
determine, or at any place outside Canada specified in the articles of the
Company or agreed to by all the shareholders entitled to vote at that meeting,
at such time in each year as the directors may determine. Notice of the time and
place of a meeting of shareholders shall be given not less than 21 days nor more
than 60 days before the meeting to each holder of shares carrying voting rights
at the close of business on the record date for notice. The only persons
entitled to be present at a meeting of shareholders are those
76
entitled to vote, the directors, the auditor and other persons who are entitled
or required under any provision of the Canadian Business Corporations Act or the
articles of bylaws of the Company to attend. Any other person may be admitted
only on the invitation of the chair of the meeting or with the consent of the
meeting.
C. MATERIAL CONTRACTS
SENIOR SECURED NOTES
In March 2003, we issued US$120,000,000 of 11-7/8% Senior Secured Notes
due 2011. The Senior Secured Notes rate equally with our senior credit
facilities and are secured by a pledge of the Company's right under the support
agreement between RMI and the Company and are guaranteed by RMI and NB Inc. The
guarantees are secured (i) by NB Inc., by a first priority lien in 10,108,302
shares of Class A common stock and 14,990,000 shares of Class B common stock of
International that are held by the Company and NB Inc. and (ii) by RMI, by a
pledge by RMI of its rights under (a) the services agreement between
International and Ravelston and (b) the services agreement between HCPH Co. and
Ravelston, in each case as such agreements were assigned by Ravelston to RMI in
July 2002. The Senior Secured Notes contain customary covenants including, but
not limited to, covenants with respect to:
- granting liens;
- making restricted investments and restricted payments;
- sale leasebacks;
- mergers and amalgamations;
- sales of assets;
- transactions with affiliates;
- issuances of guaranties of indebtedness;
- limitations on issuance and sale of capital stock; and
- limitations on RMI incurrence of additional debt.
These covenants are subject to important qualifications and limitations
set forth in the Indenture, which is filed as an exhibit to this Annual Report.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Company agreed that
holders of the original Notes would be entitled to exchange the original Senior
Secured Notes for registered notes (the "Exchange Notes") with substantially
identical terms. The Exchange Notes, when issued, will be governed by the
Indenture. The Registration Rights Agreement provided that the Company would:
(i) file a registration statement by June 30, 2003 regarding the exchange of the
Original Notes for Exchange Notes; (ii) use its best efforts to have the
registration statement declared effective by November 7, 2003; and (iii)
complete the exchange offer within 30 days after the registration statement is
declared effective.
SUPPORT AGREEMENT
In March 2003, RMI and the Company entered into a support agreement.
Under the agreement, RMI is required to make an annual support payment in cash
to the Company on a periodic basis by way of contributions to capital (without
the issuance of additional shares) or subordinated debt. The annual support
payment will be equal to the greater of (1) the negative net cash flow of the
Company (as defined in the support agreement) for the relevant period, and (2)
US$14.0 million per year (less any payments of management services fees by
International directly to the Company or NB Inc. and any excess in the net
dividend amount that the Company and NB Inc. receive from
77
International over US$4.65 million per year), in either case as reduced by any
permanent repayment of debt owing by Ravelston to the Company.
CONTRIBUTION AGREEMENT
In March 2003, Ravelston, RMI and the Company entered into a
contribution agreement. The contribution agreement sets out the manner in which
RMI will make the support payments described above to the Company, and provides
that such payments will be made by way of contributions to capital (without the
issuance of additional shares) or by way of loan represented by subordinated
debt, depending on specified circumstances. Ravelston guaranteed RMI's
obligations under the contribution agreement and its obligations to make support
payments to the Company under the support agreement. The Company pledged the
benefit of this guarantee as security for the Company's obligations under
certain permitted indebtedness (as such term is defined in the indenture
governing the Senior Secured Notes). The contribution agreement will terminate
upon the repayment in full of the Senior Secured Notes, the termination of the
support agreement or if the Company ceases to be a public company. The
contribution agreement, including the guarantee thereunder, may be amended or
terminated without the consent of the trustee for the Senior Secured Notes or
holders of the Senior Secured Notes.
SERVICES AGREEMENTS
RMI provides services to International and HCPH Co. pursuant to two
separate Services Agreements, each of which was assigned to RMI on July 5, 2002.
These Services Agreements govern the provision by RMI of certain advisory,
consultative, procurement and administrative services to International and HCPH
Co. The services to be provided pursuant to the Services Agreements include,
among other things, strategic advice and planning and financial services
(including advice and assistance with respect to acquisitions), and assistance
in operational matters. Each services agreement will be in effect until
terminated by either party under certain specified circumstances. The Services
Agreements may be terminated upon 180 days notice by either party.
The services fees are generally determined on an annual basis and are
subject to negotiation with and the approval of an independent committee of the
board of directors of International. The aggregate amount of the annual services
fees payable to Ravelston (and, after its assignment of the Services Agreements
to RMI in July 2002, to RMI) for 2002 was approximately $23.9 million. On
February 26, 2003, the independent committee of the board of International
approved an aggregate annual services fee for 2003 that was at a comparable
level to 2002.
D. EXCHANGE CONTROLS
There are no limitations on the right of non-residents of Canada or foreign
owners to hold or vote the Company's shares of common stock or any of its other
securities imposed by Canadian or provincial laws or any of the Company's
constating documents.
Except for the Investment Canada Act (Canada) and Canadian withholding
taxes described in "Taxation--Canadian Federal Income Tax Considerations for
United States Investors", there are no Canadian federal or provincial laws,
decrees or regulations that restrict the export or import of capital or affect
the remittance of dividends, interest or other payments to holders of any of the
Company's securities who are not residents of Canada.
E. TAXATION
BECAUSE CANADIAN AND UNITED STATES TAX CONSEQUENCES MAY DIFFER FROM ONE
HOLDER TO THE NEXT, THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE
ALL OF THE TAX CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR
SITUATION. ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO
THE UNITED STATES AND CANADIAN FEDERAL, PROVINCIAL, STATE AND OTHER TAX
CONSEQUENCES OF INVESTING IN THE COMPANY'S COMMON SHARES. THE STATEMENTS OF
UNITED STATES AND CANADIAN TAX LAW SET OUT BELOW ARE BASED ON THE LAWS AND
INTERPRETATIONS IN FORCE AS OF THE DATE OF THIS ANNUAL REPORT, AND ARE SUBJECT
TO ANY CHANGES OCCURRING AFTER THAT DATE.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR UNITED STATES INVESTORS
The statements of law and legal conclusions regarding the material Canadian
federal income tax considerations applicable to a person who is a U.S. holder
contained in "Canadian Federal Income Tax Considerations for United
78
States Investors" are the opinion of Torys LLP, counsel for the Company. In this
summary, a "U.S. holder" means a person who, for the purposes of the
Canada-United States Income Tax Convention (1980) (the "Convention"), is a
resident of the United States and not of Canada and who, for the purposes of the
Income Tax Act (Canada) (the "Canadian Act"):
- deals at arm's length with the Company;
- is the beneficial owner of the Company's common shares;
- holds the Company's common shares as capital property;
- does not use or hold and is not deemed to use or hold the Company's common
shares in the course of carrying on a business in Canada; and
- is not an insurer for whom the Company's common shares constitute
designated insurance property.
The Company's common shares will generally be capital property to a U.S.
holder unless it is held in the course of carrying on a business, in an
adventure in the nature of trade or as "mark-to-market" property for purposes of
the Canadian Act. This summary does not apply to a U.S. holder that is a
"financial institution" for purposes of the mark-to-market rules contained in
the Canadian Act.
This summary is based on the current provisions of the Canadian Act and the
regulations in force on the date of this Annual Report, the Convention,
counsel's understanding of the current published administrative and assessing
practices of the Canada Customs and Revenue Agency, and all specific proposals
to amend the Canadian Act and the regulations announced by the Canadian Minister
of Finance prior to the date of this Annual Report.
This summary is not exhaustive and, except for the proposed amendments to
the Canadian Act, does not take into account or anticipate changes in the law,
whether by judicial, governmental or legislative action or interpretation, nor
does it take into account tax legislation or considerations of any province or
territory of Canada. Because Canadian tax consequences may differ from one
holder to the next, this summary does not purport to describe all of the tax
considerations that may be relevant to you and your particular situation. You
are advised to consult your own tax advisor.
DIVIDENDS
Dividends paid or deemed to be paid on the Company's common shares are
subject to non-resident withholding tax under the Canadian Act at the rate of
25%, although this rate may be reduced by the provisions of an applicable income
tax treaty. Under the Convention, U.S. holders will generally be subject to a
15% withholding tax on the gross amount of dividends the Company pays on its
common shares. Also pursuant to the Convention, in the case of a U.S. holder
that is a U.S. corporation which beneficially owns at least 10% of our voting
stock, the applicable rate of withholding tax on dividends will generally be
reduced to 5%.
DISPOSITIONS
A U.S. holder will not be subject to tax under the Canadian Act in respect
of a capital gain arising on a disposition or deemed disposition of the
Company's common shares, including common shares that the Company purchases,
unless (1) the common shares constitute "taxable Canadian property" within the
meaning of the Canadian Act to the U.S. holder, and (2) the capital gain is not
exempt from taxation in Canada under the Convention. Generally, the Company's
common shares will not constitute taxable Canadian property of a U.S. holder
provided the common shares are listed on a prescribed stock exchange for
purposes of the Canadian Act, which includes the TSX, and the U.S. holder, alone
or together with persons with whom the U.S. holder does not deal at arm's
length, has not owned 25% or more of the issued shares of any class or series of
the Company's capital stock at any time within five years preceding the date of
disposition. Under the Convention, capital gains derived by a U.S. holder from
the disposition of the Company's common shares in circumstances where it
constitutes taxable Canadian property to the U.S. holder generally will not be
taxable in Canada unless the value of the common shares is derived principally
from real property situated in Canada.
79
A disposition or deemed disposition of the Company's common shares by a
U.S. holder in respect of which the Company's common shares is taxable Canadian
property and which is not exempt from capital gains taxation in Canada under the
Convention will give rise to a capital gain (or a capital loss) equal to the
amount, if any, by which the proceeds of disposition, less the reasonable costs
of disposition, exceed (or are less than) the adjusted cost base of the common
shares to the U.S. holder at the time of the actual or deemed disposition.
Generally, one-half of any capital gain realized will be required to be included
in income as a taxable capital gain and one-half of any capital loss will be
deductible, subject to certain limitations, against taxable capital gains in the
year of disposition or the three preceding years or any subsequent year in
accordance with the detailed provisions in the Canadian Act.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
considerations arising from the acquisition, ownership and disposition of the
Company's common shares by a United States holder. A United States holder is:
- an individual citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the "substantial presence" test under Section 7701(b) of the
Code (as defined below);
- a corporation or other entity that is taxable as a corporation, created or
organized in or under the laws of the United States or any of its
political subdivisions;
- an estate the income of which is subject to United States federal
income taxation regardless of its source;
- a trust subject to the primary supervision of a United States court, and
one or more United States persons have the authority to control all
substantial decisions of the trust; or
- any other person that is subject to United States federal income tax on
his, her or its worldwide income.
This summary deals only with common shares that are held as a capital asset
by a United States holder, and does not address tax considerations applicable to
United States holders that may be subject to special tax rules, such as:
- a broker-dealer, a dealer in securities or foreign currency, or a
financial institution;
- a pass-through entity (e.g., a partnership) or an investor who holds the
Company's common shares through a pass-through entity (e.g., a partner in
a partnership);
- an insurance company;
- a tax-exempt organization;
- a United States holder subject to the alternative minimum tax provisions
of the Code;
- a United States holder holding the Company's common shares as part of a
hedge, straddle or other risk reduction or constructive sale transaction;
- a United States expatriate; or
- a nonresident alien or foreign corporation subject to net-basis United
States federal income tax on income or gain derived from the common shares
because such income or gain is effectively connected with the conduct of a
United States trade or business;
- United States holders that own, or are deemed for United States tax
purposes to own, 10% or more of the total combined voting power of all
classes of the Company's voting stock;
- United States holders that have a principal place of business or "tax
home" outside the United States; or
- United States holders whose "functional currency" is not the United States
dollar.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986 (the "Code"), as amended, and regulations, rulings
and judicial decisions as of the date of this Annual Report; any authority may
be repealed, revoked or modified, perhaps with retroactive effect, so as to
result in federal income tax consequences different from those discussed below.
The discussion below also is based upon representations that we have made, which
in turn rely upon significant assumptions as to facts and circumstances in the
future.
80
DISTRIBUTIONS
Distributions that the Company makes with respect to its common shares,
other than distributions in liquidation and distributions in redemption of stock
that are treated as exchanges, will be treated as a dividend to the extent that
the distributions do not exceed the current and accumulated earnings and profits
of the Company. The amount treated as a dividend will include any Canadian
withholding tax deducted from the distribution. Under current law, certain
dividends received by individuals are taxed at lower rates than items of
ordinary income. Distributions, if any, in excess of the current and accumulated
earnings and profits of the Company will constitute a nontaxable return of
capital to a United States holder and will be applied against and reduce the
United States holder's tax basis in the holder's common shares. To the extent
that these distributions exceed the tax basis of the United States holder in its
common shares, the excess generally will be treated as capital gain.
In the case of distributions in Canadian dollars, the amount of the
distributions generally will equal the United States dollar value of the
Canadian dollars distributed, determined by reference to the spot currency
exchange rate on the date of receipt of the distribution by the United States
holder, and the United States holder will realize separate foreign currency gain
or loss only to the extent that gain or loss arises on the actual disposition of
foreign currency received. Any foreign currency gain or loss generally will be
treated as ordinary income or loss.
Dividends that the Company pays will not be eligible for the
dividends-received deduction generally allowed to United States corporations
under the Code.
Subject to the limitations set forth in the Code, the Canadian tax withheld
or paid with respect to distributions on the Company's common shares generally
may be credited against the U.S. federal income tax liability of a United States
holder if such United States holder makes an appropriate election for the
taxable year in which such taxes are paid or accrued. Alternatively, a United
States holder who does not elect to credit any foreign taxes paid during the
taxable year may deduct such taxes in such taxable year subject to certain
requirements. Because the foreign tax credit provisions of the Code are very
complex, United States holders should consult their own tax advisors with
respect to the claiming of foreign tax credits.
SALE OR EXCHANGE
Subject to the discussion of the passive foreign investment company rules
below, upon a sale or exchange of common shares of the Company, a United States
holder will recognize gain or loss in an amount equal to the difference between
the amount realized on the sale or exchange and the United States holder's
adjusted tax basis in the common shares. Any gain or loss recognized will be
capital gain or loss and will be long-term capital gain or loss if the United
States holder has held the Company's common shares for more than one year. Under
current law, long-term capital gains of individuals are generally taxed at lower
rates than items of ordinary income.
PASSIVE FOREIGN INVESTMENT COMPANY
The Code contains special rules for the taxation of United States holders
who own shares in a "passive foreign investment company" (a "PFIC"). A PFIC is a
non-U.S. corporation that meets an income test and/or an asset test in any
taxable year. The income test is met if 75% or more of the corporation's gross
income is "passive income" (generally, dividends, interest, rents, royalties,
and gains from the disposition of assets producing passive income, such as
shares of stock, subject to certain exceptions). The asset test is met if at
least 50% of the average value of the corporation's assets produce, or are held
for the production of, passive income. For purposes of the PFIC rules, a
non-U.S. corporation that owns at least 25% of the stock of another corporation
is treated as if it held its proportionate share of the assets of the other
corporation and received directly its proportionate share of the income of the
other corporation.
If the Company is classified as a PFIC, a United States holder may be
subject to increased tax liability and an interest charge in respect of gain
recognized on the sale of such United States holder's common shares and upon the
receipt of certain distributions. Alternatively, if the Company complies with
certain information reporting requirements, a United States holder may elect to
treat the Company as a "qualified electing fund" (a "QEF"), in which case such
United States holder would be required to include in income, in each year that
the Company is a PFIC, its pro rata share of the Company's ordinary earnings and
net capital gains, whether or not distributed. However, the Company does not
currently intend to provide the information necessary to permit a United States
holder to make the QEF election. As another alternative to the foregoing rules,
if the Company's shares constitute "marketable stock" under applicable Treasury
regulations, a United States holder may make a mark-to-market election to
include in income each year as ordinary income an amount equal to the increase
in value of the United States holder's common shares for that year or to claim a
deduction for any decrease in value (but only to the extent of previous
mark-to-market gains).
As no assurance can be provided as to whether the Company is a PFIC or will
be a PFIC in the future, United States holders should consult their own tax
advisors with respect to the United States federal income tax consequences under
the PFIC rules and its potential application to their particular situation.
BACKUP WITHHOLDING TAX
Backup withholding tax at a rate of 28% may apply to payments of dividends
and to payments of proceeds of the sale or other disposition of the Company's
common shares within the United States by a non-corporate United
81
States holder, if the holder fails to furnish a correct taxpayer identification
number or otherwise fails to comply with applicable requirements of the backup
withholding tax rules. Backup withholding tax is not an additional tax and
amounts so withheld may be refunded or credited against a United States holder's
United States federal income tax liability, provided that correct information is
provided to the Internal Revenue Service.
F. DOCUMENTS ON DISPLAY
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith file
reports and other information with the SEC. These reports and other information
may be inspected and copied at prescribed rates from the public reference
facilities maintained by the SEC at its principal offices at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the public reference room by calling the
SEC at 1-800-SEC-0330. Such material may also be accessed electronically by
means of the SEC's website on the Internet at http://www.sec.gov.
All documents that we file pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Annual Report shall be deemed to
be incorporated in this Annual Report by reference and to be a part hereof from
the respective dates of the filing of such documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Annual
Report to the extent that a statement contained herein or in any subsequently
filed document which also is, or is deemed to be, incorporated by reference
herein, modifies or supersedes such earlier statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Annual Report.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Annual Report has been delivered, upon written or oral
request of any such person, a copy of any and all of the documents referred to
above which have been or may be incorporated in this Annual Report by reference,
other than exhibits to such documents which are not specifically incorporated by
reference into such documents. Requests for such copies should be directed to
the Chief Financial Officer, Hollinger Inc., at 10 Toronto Street, Toronto,
Canada M5C 2B7, telephone (416) 363-8721.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NEWSPRINT. On a consolidated basis, newsprint expense in 2002 amounted to
$236.4 million and $316.2 million in 2001. Management believes that newsprint
prices may vary widely from time to time and could continue to show significant
price variations in the future. During the first half of 2001, newsprint prices
in North America were at their highest price per tonne since 1994 and 1995.
However, the recessional climate in 2001 caused a significant decline in
industry consumption and this, coupled with an abundant supply of competitively
priced newsprint, resulted in a downward trend in prices during the second half
of 2001. This downward trend has continued into 2002; however, there are
indications that prices on the spot market where the Chicago Group purchases its
newsprint may moderately increase from their current levels. In the United
Kingdom, average newsprint prices were less than the average prices paid in
2001. In the United Kingdom, the Company negotiates newsprint prices for
one-year periods. Rates negotiated for 2003 are about 7% lower than those for
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 year ended December 31, 2002, a change in the price of newsprint of $50 per
tonne would increase or decrease the year-to-date net loss by approximately $4.6
million.
INTEREST RATES. At December 31, 2002, other than the $90.8 million
revolving credit and overdraft facility, the Company, on a non-consolidated
basis had no debt on which interest is calculated at floating rates. On March
10, 2003, the Company issued U.S. $120.0 million of Senior Secured Notes which
bear interest at a fixed rate of 11 7/8% and with part of the proceeds repaid
the $90.8 million amount outstanding under the revolving credit and overdraft
facility. Interest paid by International to the banks under the Total Return
Equity Swap was at floating rates. However, such amounts have been fully repaid
as of December 31, 2002. As a result of an interest rate swap entered into in
late December 2002, U.S.$265.0 million borrowings under Publishing's Senior
Credit Facility bear interest at fixed rates. Consequently, the borrowings under
Publishing's Senior Credit Facility are not exposed to fluctuations in interest
rates.
82
In January 2003, Publishing also purchased fixed to floating rate swaps for
U.S.$250.0 million principal amount of its U.S.$300.0 million 9% Senior Notes.
Each 1% change in interest rates will result in an increase or decrease of $3.9
million in interest expense to Publishing for which the impact on the Company's
net earnings will be $0.7 million.
FOREIGN EXCHANGE RATES. The majority of the Company's operating divisions
are outside Canada. As a result, the Company is vulnerable to changes in the
value of the Canadian dollar. Increases in the value of the Canadian dollar can
reduce the value of our foreign properties and declines can increase these
values. In the year ended December 31, 2002, the Company's operating income
(sales revenue less cost of sales and expenses and depreciation and
amortization) was $86.1 million in total. The U.K. Newspaper Group contributed
$74.8 million of operating income, the United States operations contributed
$51.5 million while the operating loss in Canada, including the Corporate Group,
totaled $40.2 million. Based on 2002 results and ownership levels and current
debt levels at December 31, 2002, a $0.05 change in the important foreign
currencies would have the following effect on the Company's reported net income
for the year ended December 31, 2002:
Currency Actual 2002 Average Net Income
-------- ------------------- ----------
Rate Effect
---- ------
United Kingdom...................................... 2.36/L $ 236,000
United States....................................... 1.57/U.S.$ $ 130,000
----------- -----------
The effects of changes in foreign exchange rates will also be affected by
many other factors, including earnings levels and amounts of borrowings in
various currencies.
In 2001, International sold participation interests in $756.8 million
principal amount of CanWest debentures to the Participation Trust at an exchange
rate of U.S. $0.6482 to each Canadian dollar, which translates into U.S.$490.5
million. At some time between May 15, 2003 and the maturity date of the CanWest
debentures, being November 15, 2010, International will be required to deliver
to the Participation Trust U.S.$490.5 million of the CanWest debentures at then
current exchange rates plus interest received. The actual date of delivery will
be established by noteholders of the Participation Trust. As noted below, up
until November 5, 2005, CanWest may elect to pay interest on the debentures in
kind or by the issuance of shares. At December 31, 2002, the liability to the
Participation Trust is US$575.7 million and the corresponding CanWest debentures
had a principal amount receivable of $888.2 million. Given that the CanWest
debentures are denominated in Canadian dollars, International entered into
forward foreign exchange contracts in 2001 to mitigate the currency exposure.
The foreign currency contracts required International to sell $666.6 million on
May 15, 2003 at a forward rate of U.S.$0.6423. In 2002, International sold
certain of its foreign currency contracts and subsequently entered into
additional foreign currency contracts. However, on September 30, 2002, all of
the outstanding contracts were unwound. During 2002 and 2001, the net loss
realized on the mark to market of both the obligation to the Participation Trust
and the hedge contract was $10.4 million and $0.7 million, respectively, and has
been included in net foreign currency losses in the consolidated statement of
earnings. This is net of cash received on the termination of the hedge of $9.9
million in 2002. The foreign exchange exposure associated with the Participation
Trust is no longer hedged, due to constraints under International's current debt
facilities.
At any time up to November 5, 2005, CanWest may elect to pay interest on
the debentures by way of additional CanWest debentures. International
anticipates that additional debentures will be received in the future as payment
in kind for the interest on the debentures. A $0.05 change in the U.S. dollar to
Canadian dollar exchange rate applied to the $888.2 million principal amount of
the CanWest debentures at December 31, 2002 would result in a U.S. $44.4 million
($70.2 million) change in the amount available to International for delivery to
the Participation Trust and a net loss or gain to the Company, after related tax
and minority interest, of $13.4 million.
On May 11, 2003, CanWest redeemed $265 million of the debentures of which
U.S.$159.8 million has been delivered to the Participation Trust and the balance
of US$27.6 million has been received by International and the Partnership, a
portion of which must be retained until November 4, 2010. This will reduce
International's obligation to the Participation Trust and hence its exposure to
changes in the U.S. dollar to Canadian dollar exchange rate.
INFLATION. During the past two years, inflation has not had a material
effect on International's newspaper business in the United States, United
Kingdom or Canada.
INTERNATIONAL SHARE PRICE. The Series II preference shares are exchangeable
at the holder's option for 0.46 of a share of International's Class A common
stock for each Series II preference share. The Company has the option to make a
cash payment of equivalent value on the redemption of any of the Series II
preference shares. The Series II preference shares represent a financial
liability of the Company and are recorded at their fair value, which will
fluctuate with the market price of International's Class A common stock. In
2002, such fluctuations had no impact
83
on the Company's net earnings as deferred unrealized losses/gains have been
designated as a hedge of the Company's investment in International common
shares. However, due to the March 2003 sale of International shares, in
settlement of amounts owing to International and the pledging of International
shares under the Trust Indenture for the Company's Senior Secured Notes, the
Series II preference shares will no longer be a hedge. As a result, beginning in
2003 the Series II preference shares will be marked to market for fluctuations
in International's share price and foreign exchange rates and unrealized
deferred gains in the amount of $11,983,000 as at December 31, 2002 will be
recognized in income. On December 31, 2002, the Series II preference shares were
retractable into 2,107,250 shares of Class A common stock of International.
Based on exchange rates as at December 31, 2002, each U.S.$1.00 increase from
the December 31, 2002 quoted market price of International's Class A common
stock, would result in an unrealized pre-tax loss of $3.3 million which must be
reflected as a charge against the Company's earnings.
COMPETITION. Revenues in the newspaper industry are dependent primarily
upon advertising revenues and paid circulation. Competition for advertising and
circulation revenue comes from the local and regional newspapers, radio,
broadcast and cable television, direct mail and other communications and
advertising media that operate in International's markets. The extent and nature
of such competition is, in large part, determined by the location and
demographics of the markets and the number of media alternatives in those
markets. Some of International's competitors are larger and have greater
financial resources than International does. In the past, newspapers which
compete in some of International's markets have chosen to reduce their cover
prices and/or decrease the price of bulk sales in efforts to increase their
circulation at the expense of International's newspapers. Price competition has
been particularly intense in the United Kingdom and in Chicago, Illinois in
recent years. These actions have in the past forced International to similarly
reduce International's cover prices and/or decrease the price of bulk sales,
which has a negative effect on its sales revenues and overall financial
performance. The Company may experience price competition from competing
newspapers and other media sources in the future that force us to make similar
reductions, which would again decrease its operating results and circulation
revenues. In addition, the use of alternative means of delivery, such as free
Internet sites, for news and other content has increased significantly in the
past few years. In the event that significant numbers of International's
customers choose to receive content using these alternative delivery sources
rather than newspapers, International may be forced to decrease the prices
International charges for newspapers or make other changes in the way
International operates, or International may face a long-term decline in
circulation, any or all of which may harm financial and operating performance.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
As of December 31, 2002, International's aggregate annual rental
payments under operating leases exceeded the amounts permitted under the
covenants to the Senior Credit Facility. International was advised by the
Administrative Agent of the Senior Credit Facility that the lenders agreed to
amend the Senior Credit Facility effective March 28, 2003, to increase the
amount permitted under the operating lease covenant and have agreed to a waiver
of any default or event of default in connection therewith. Based on the amended
covenant, International would have been in compliance as of December 31, 2002.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
84
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures within 90 days prior to the filing of
this report. Based upon this review, these officers believe that our
disclosure controls and procedures are effective in ensuring that material
information related to the Company is made known to them by others within
the Company.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls since the date of
our most recent evaluation.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable
85
ITEM 18. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
HOLLINGER INC.
Audited Consolidated Financial Statements
Report of KPMG LLP, Independent Auditors.................. F-2
Consolidated Balance Sheets as of December 31, 2001 and
2002................................................... F-4
Consolidated Statements of Earnings for the Year Ended
December 31, 2000, 2001 and 2002....................... F-5
Consolidated Statements of Deficit for the Years Ended
December 31, 2000, 2001 and 2002....................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002....................... F-7
Notes to Consolidated Financial Statements................ F-8
F-1
AUDITORS' REPORT
To the Board of Directors of Hollinger Inc.
We have audited the consolidated balance sheets of Hollinger Inc. as at
December 31, 2001 and 2002 and the consolidated statements of earnings, deficit
and cash flows for each of the years in the three-year period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and United States generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2001 and 2002 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Toronto, Canada
April 1, 2003, except
as to note 29, which is /s/ KPMG LLP
as of June 19, 2003 Chartered Accountants
F-2
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA -- U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's financial statements, such as the changes described in note 2,
or when there is a retroactive adjustment such as those described in note 26v),
to the consolidated financial statements as at December 31, 2001 and 2002 and
for each of the years in the three-year period ended December 31, 2002. Our
report to the shareholders dated April 1, 2003 is expressed in accordance with
Canadian reporting standards, which do not require a reference to such changes
in accounting principles in the auditors' report when the change is properly
accounted for and adequately disclosed in the financial statements.
Toronto, Canada /s/ KPMG LLP
April 1, 2003 Chartered Accountants
F-3
HOLLINGER INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
2001 2002
---------- ----------
(IN THOUSANDS OF
CANADIAN DOLLARS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (note 3).......................... $ 806,347 $ 188,852
Escrow deposits (note 10a))................................. -- 859,128
Accounts receivable......................................... 336,438 355,031
Prepaid expenses............................................ 17,604 28,499
Inventory................................................... 36,506 22,058
---------- ----------
1,196,895 1,453,568
INVESTMENTS (note 5)........................................ 259,435 210,145
CAPITAL ASSETS (note 6)..................................... 666,501 660,501
GOODWILL (note 7)........................................... 174,324 913,327
OTHER INTANGIBLE ASSETS (note 7)............................ 1,177,544 185,143
DEFERRED FINANCING COSTS AND OTHER ASSETS (note 8).......... 154,543 193,537
---------- ----------
$3,629,242 $3,616,221
========== ==========
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 9).................................. $ 129,475 $ 90,810
Accounts payable and accrued expenses....................... 358,444 337,086
Amounts due to related parties (note 23d)).................. 45,919 79,655
Income taxes payable........................................ 463,853 476,387
Deferred revenue............................................ 65,627 67,612
Retractable preference shares (note 11)..................... -- 135,299
Deferred unrealized gain on retractable preference shares
(note 11a))............................................... -- 11,983
Senior Subordinated Notes due 2006 and 2007 (note 10a))..... -- 797,751
Current portion of long-term debt (note 10)................. 10,020 16,800
---------- ----------
1,073,338 2,013,383
LONG-TERM DEBT (note 10).................................... 1,341,606 974,770
RETRACTABLE PREFERENCE SHARES (note 11)..................... 147,472 --
DEFERRED UNREALIZED GAIN ON RETRACTABLE PREFERENCE SHARES
(note 11a))............................................... 7,670 --
FUTURE INCOME TAXES (note 18)............................... 486,937 375,479
OTHER LIABILITIES AND DEFERRED CREDITS (note 12)............ 109,761 130,648
---------- ----------
3,166,784 3,494,280
---------- ----------
MINORITY INTEREST........................................... 725,928 473,272
---------- ----------
SHAREHOLDERS' DEFICIENCY
Capital stock (note 13)..................................... 271,774 273,759
Deficit..................................................... (485,313) (605,145)
---------- ----------
(213,539) (331,386)
Equity adjustment from foreign currency translation (note
14)....................................................... (49,931) (19,945)
---------- ----------
(263,470) (351,331)
---------- ----------
$3,629,242 $3,616,221
========== ==========
Commitments (note 15)
Contingencies (note 16)
Subsequent events (notes 1, 9, 10a), 16d) and 29)
F-4
HOLLINGER INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31
----------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS OF CANADIAN DOLLARS
EXCEPT PER SHARE AMOUNTS)
REVENUE
Sales.............................................. $3,158,280 $1,822,060 $1,628,198
Investment and other income........................ 28,146 97,282 29,729
---------- ---------- ----------
3,186,426 1,919,342 1,657,927
---------- ---------- ----------
EXPENSES
Cost of sales and expenses......................... 2,586,183 1,730,108 1,453,894
Depreciation and amortization...................... 219,932 144,716 88,193
Interest on long-term debt......................... 219,970 122,701 92,625
Other interest..................................... 54,361 55,225 29,122
---------- ---------- ----------
3,080,446 2,052,750 1,663,834
---------- ---------- ----------
NET LOSS IN EQUITY-ACCOUNTED COMPANIES............... (14,115) (18,571) (1,233)
---------- ---------- ----------
NET FOREIGN CURRENCY LOSSES.......................... (12,288) (7,470) (19,741)
---------- ---------- ----------
EARNINGS (LOSS) BEFORE THE UNDERNOTED................ 79,577 (159,449) (26,881)
Unusual items (note 17)............................ 700,945 (295,434) (62,630)
Income tax (expense) recovery (note 18)............ (260,091) 89,477 (124,025)
Minority interest.................................. (331,058) 233,508 124,896
---------- ---------- ----------
NET EARNINGS (LOSS).................................. $ 189,373 $ (131,898) $ (88,640)
========== ========== ==========
EARNINGS (LOSS) PER RETRACTABLE COMMON SHARE (note
19)
Basic.............................................. $ 5.11 $ (3.91) $ (2.76)
========== ========== ==========
Diluted............................................ $ 5.05 $ (4.17) $ (2.79)
========== ========== ==========
F-5
HOLLINGER INC.
CONSOLIDATED STATEMENTS OF DEFICIT
YEAR ENDED DECEMBER 31
------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS OF CANADIAN DOLLARS)
DEFICIT AT BEGINNING OF YEAR
As previously reported.................................. $(180,732) $(310,988) $(485,313)
Adjustment of prior years' deficit (note 2)............. (291,004) -- --
--------- --------- ---------
As restated............................................. (471,736) (310,988) (485,313)
Net earnings (loss)....................................... 189,373 (131,898) (88,640)
--------- --------- ---------
(282,363) (442,886) (573,953)
Adjustment to deficit related to transitional impairment
charge, net of minority interest (note 1)............... -- -- (12,071)
Dividends -- retractable common shares.................... (22,177) (20,216) (19,220)
Gain (premium) on retraction of retractable common shares
(notes 13b), 13d) and 13e))............................. (6,448) (22,211) 141
Share issue costs......................................... -- -- (42)
--------- --------- ---------
DEFICIT AT END OF YEAR.................................... $(310,988) $(485,313) $(605,145)
========= ========= =========
F-6
HOLLINGER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------
2000 2001 2002
----------- --------- ---------
(IN THOUSANDS OF CANADIAN DOLLARS)
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
CASH FLOWS PROVIDED BY (USED FOR) OPERATIONS BEFORE THE
UNDERNOTED (note 20a)).................................... $ 153,579 $(120,211) $ 59,628
Change in non-cash operating working capital (note 20b)).... (82,456) (144,429) 41,328
Other costs................................................. (42,188) (70,234) 48,474
----------- --------- ---------
28,935 (334,874) 149,430
----------- --------- ---------
FINANCING ACTIVITIES
Redemption and cancellation of capital stock................ (700) (273) (1,064)
Redemption and cancellation of retractable preference
shares.................................................... (5,133) (317) (277)
Premium on retirement of senior notes....................... -- -- (56,287)
Capital stock of subsidiaries purchased for cancellation by
subsidiaries.............................................. -- (71,767) (157,056)
Issue of partnership units and common shares of
subsidiaries.............................................. 8,166 10,637 6,667
Decrease in long-term debt and deferred liabilities......... (1,280,475) -- --
Redemption of HCPH Special shares........................... (140,429) -- --
Repayment of long-term debt................................. -- (176,383) (582,920)
Proceeds from long-term debt................................ -- 152,778 514,343
Proceeds from issuance of notes............................. -- -- 474,000
Payment of debt issue costs................................. -- (7,230) (24,666)
Escrow deposits and restricted cash......................... -- -- (859,128)
Dividends................................................... (22,177) (20,216) (16,031)
Dividends and distributions paid by subsidiaries to minority
interest.................................................. (127,390) (126,478) (48,721)
Other....................................................... -- (204) (249)
----------- --------- ---------
(1,568,138) (239,453) (751,389)
----------- --------- ---------
INVESTING ACTIVITIES
Proceeds on disposal of fixed assets........................ 18,813 157 17,024
Purchase of fixed assets.................................... (112,661) (91,406) (63,603)
Proceeds on sale of investment in subsidiary................ -- 31,417 38,637
Proceeds on disposal of investments......................... 87,465 919,567 7,188
Additions to investments.................................... (92,735) (99,040) (17,636)
Additions to circulation.................................... (37,667) (3,920) --
Decrease (increase) in other assets......................... 779 (1,132) (450)
Investment in newspaper operations.......................... (175,376) -- --
Proceeds on disposal of newspaper and magazine operations... 2,016,885 376,865 --
----------- --------- ---------
1,705,503 1,132,508 (18,840)
----------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (6,825) 14,250 3,304
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 159,475 572,431 (617,495)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 74,441 233,916 806,347
----------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 233,916 $ 806,347 $ 188,852
=========== ========= =========
CASH FLOW PROVIDED BY (USED FOR) OPERATIONS PER RETRACTABLE
COMMON SHARE (note 19)
SUPPLEMENTAL DISCLOSURE OF FINANCING AND INVESTING
ACTIVITIES
Interest paid............................................. $ 244,592 $ 153,972 $ 108,159
Income taxes paid......................................... $ 69,710 $ 122,087 $ 14,095
F-7
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada, which vary in
certain significant respects from United States GAAP. A description of
significant differences, as applicable to the Company is included in note 26.
BASIS OF PREPARATION
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles using a basis of
presentation which assumes that the Company will continue in operation for the
foreseeable future and be able to realize its assets and discharge its
liabilities and commitments in the normal course of business. The Company is an
international 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, on a non-consolidated basis, is dependent
upon the availability of cash flows from its Canadian and foreign subsidiaries
through dividends, management fees and other payments. On a non-consolidated
basis during 2002, the Company experienced a shortfall between the dividends and
fees received from its subsidiaries and its obligations to pay its operating
costs, including interest and dividends on its preference shares and such
shortfalls were expected to continue in the future. Accordingly, the Company is
dependent upon the continuing financial support of Ravelston Management Inc.
("RMI") to fund such shortfalls and, therefore, pay its liabilities as they fall
due. RMI is a wholly owned subsidiary of The Ravelston Corporation Limited
("Ravelston"), the Company's ultimate parent company.
On March 10, 2003, the date of issue of US $120,000,000 aggregate principal
amount of Senior Secured Notes due 2011, RMI entered into a Support Agreement
with the Company. Under the agreement, RMI has agreed to make annual support
payments in cash to the Company on a periodic basis by way of contributions to
the capital of the Company (without receiving any shares of the Company) or
subordinated debt. The amount of the annual support payments will be equal to
the greater of (a) the non-consolidated negative net cash flow of the Company
(which does not extend to outlays for retractions or redemptions) and (b)
US$14.0 million per year (less any future payments of services agreements fees
directly to the Company or to any of the Company's wholly owned restricted
subsidiaries, as they are defined in the indenture governing the Company's
Senior Secured Notes due 2011, and any excess in the net dividend amount
received by the Company and 504468 N.B. Inc. ("NB Inc.") on the shares of
Hollinger International Inc. ("Hollinger International") that the Company and NB
Inc. own that is over US$4.65 million per year), in either case, reduced by any
permanent repayment of debt owing by Ravelston to the Company. Initially, the
support amount to be contributed by RMI is expected to be satisfied through the
permanent repayment by Ravelston of its approximate $16.4 million of advances
from the Company resulting from the use of proceeds of the Company's offering of
Senior Secured Notes. Thereafter, all support amount contributions by RMI will
be made through contributions to the capital of the Company without receiving
any additional shares of the Company, except that, to the extent that the
support payment exceeds the negative net cash flow of the Company, the amounts
will be contributed through an interest-bearing, unsecured, subordinated loan to
the Company. The support agreement terminates upon the repayment of the Senior
Secured Notes, which mature in 2011.
RMI currently derives all of its income and operating cash flow from the
fees paid pursuant to services agreements with Hollinger International and its
subsidiaries. RMI's ability to provide the required financial support under the
Support Agreement with the Company is dependent on RMI continuing to receive
sufficient fees pursuant to those services agreements. The services agreements
may be terminated by either party by giving 180 days notice. The fees in respect
of the services agreements are negotiated annually with and approved by the
audit committee of Hollinger International. The fees to be paid to RMI for the
year ending
F-8
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
December 31, 2003 amount to approximately US$22.0 million to US$24.0 million and
were approved in February 2003. The fees in respect of the periods after
December 31, 2003 have not yet been negotiated or approved. If, in any quarterly
period after April 1, 2003, the Company fails to receive in cash a minimum
aggregate amount of at least US$4.7 million from a) payments made by RMI
pursuant to the Support Agreement and b) dividends paid by Hollinger
International on its shares held by the Company, net of dividends paid by the
Company on its Series 11 preference shares, the Company would be in default
under its Senior Secured Notes. Based on the Company's current investment in
Hollinger International and the current quarterly dividend paid by Hollinger
International of US$0.05 per share, the minimum support payment required to be
made by RMI to avoid such a default is approximately US$3.5 million per quarter
or US$14.0 million annually. This default could cause the Senior Secured Notes
to become due and payable immediately.
The Company's issued capital stock consists of Series II preference shares,
Series III preference shares and retractable common shares each of which is
retractable at the option of the holder. On retraction, the Series II preference
shares are exchangeable into a fixed number of shares of the Company's Class A
common stock of Hollinger International or at the Company's option, cash of
equivalent value. The Series III preference shares are currently retractable at
the option of the holder for a retraction price payable in cash, which
fluctuates by reference to two benchmark Government of Canada bonds having a
comparable yield and term to the shares and, after May 1, 2003, for a cash
payment of $9.50 per share. The retractable common shares are retractable at any
time at the option of the holder at their retraction price (which is fixed from
time to time) in exchange for the Company's shares of Hollinger International
Class A common stock of equivalent value or, at the Company's option, cash.
There is uncertainty regarding the Company's ability to meet future retractions
of preference shares and retractable common shares. Under corporate law, the
Company is not required to make any payment to redeem any shares in certain
circumstances, including if the Company is, or after the payment, the Company
would be, unable to pay its liabilities as they come due. If at the time of
future retractions, the Company does not have sufficient cash or sufficient
available Hollinger International shares of Class A common stock to both fund
such retractions and continue to pay its liabilities as they come due,
shareholders would not become creditors of the Company but would remain as
shareholders until such time as the retraction is able to be completed under
applicable law. On May 20, 2003, the Company concluded it was not able to
complete retractions of shares submitted after April 30, 2003, without unduly
impairing its liquidity (note 29f)).
The Company's uncertain ability to make payments on future retractions and
redemptions of shares is due to the fact that liquidity of its assets is limited
at present given that substantially all of its shares of Hollinger International
common stock were provided as security for the Senior Secured Notes.
GENERAL BUSINESS
Hollinger Inc. publishes, prints and distributes newspapers and magazines
in Canada, the United Kingdom, the United States of America, and Israel through
subsidiaries and associates. In addition, Hollinger Inc. has developed related
websites on the Internet. The consolidated financial statements include the
accounts of Hollinger Inc., its subsidiaries, other controlled entities and its
pro rata share of assets, liabilities,
F-9
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
revenue and expenses of joint ventures (collectively, the "Company"). The
Company's significant subsidiaries and controlled entities are set out below:
PERCENTAGE OWNED AS AT DECEMBER 31,
-----------------------------------
2000 2001 2002
------- ------- -------
Hollinger International Inc. ("Hollinger International").... 47.5%(3) 36.0%(3) 31.8%(3)
Hollinger International Publishing Inc. ("Publishing")...... 100.0%(1) 100.0%(1) 100.0%(1)
The Sun-Times Company....................................... 100.0%(1) 100.0%(1) 100.0%(1)
Jerusalem Post Publications Limited ("Jerusalem Post")...... 100.0%(1) 100.0%(1) 100.0%(1)
Hollinger Canadian Publishing Holdings Co. ("HCPH
Co.")(2).................................................. 100.0%(1) 100.0%(1) 100.0%(1)
The National Post Company ("National Post") (note 5c))...... 50.0%(1) -- --
Telegraph Group Limited ("Telegraph")....................... 100.0%(1) 100.0%(1) 100.0%(1)
Hollinger Canadian Newspapers, Limited Partnership
("Hollinger L.P.")........................................ 87.0%(1) 87.0%(1) 87.0%(1)
(1) Percent owned by Hollinger International.
(2) During 2001 HCPH Co. (formerly Hollinger Canadian Publishing Holdings Inc.
("HCPH")) became the successor to the operations of XSTM Holdings (2000)
Inc. (formerly Southam Inc. ("Southam")).
(3) Represents the Company's equity interest in Hollinger International. The
Company's voting percentage at December 31, 2002 is 72.8% (2001 -- 71.8% and
2000 -- 73.3%).
FOREIGN CURRENCY TRANSLATION
Monetary items denominated in foreign currency are translated to Canadian
dollars at exchange rates in effect at the balance sheet date and non-monetary
items are translated at exchange rates in effect when the assets were acquired
or obligations incurred. Revenues and expenses are translated at exchange rates
in effect at the time of the transactions. Foreign exchange gains and losses are
included in income.
The financial statements of foreign subsidiaries, all of which are
self-sustaining, are translated using the current rate method, whereby all
assets and liabilities are translated at year-end exchange rates, with items in
the consolidated statements of earnings translated at the weighted average
exchange rates for the year. Exchange gains or losses arising from the
translation of balance sheet items are deferred and disclosed separately within
shareholders' equity. These exchange gains or losses are not included in
earnings unless they are actually realized through a reduction of the Company's
net investment in the foreign subsidiary. Exchange gains or losses on the
translation of exchangeable preference shares are deferred as they have been
designated as a hedge of the Company's investment in shares of Hollinger
International Class A common stock for which they are exchangeable.
Effective January 1, 2002, the Company adopted, on a retroactive basis, The
Canadian Institute of Chartered Accountants ("CICA") amended Handbook Section
1650, "Foreign Currency Translations" ("Section 1650"), which eliminates the
deferral and amortization of foreign currency translation gains and losses on
long-term monetary items denominated in foreign currencies, with a fixed or
ascertainable life. There was no impact to the Company upon adoption of this
standard as at January 1, 2002 or any period presented.
CASH EQUIVALENTS
Cash equivalents consist of certain highly liquid investments with original
maturities of three months or less.
F-10
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
INVENTORY
Inventory, principally printing material, is valued at the lower of cost
and net realizable value. Cost is determined using the first-in, first-out
(FIFO) method.
CAPITAL ASSETS
Capital assets are stated at cost. Cost represents the cost of acquisition
or construction, including the direct costs of financing until the asset is
ready for use.
Leases which transfer substantially all of the benefits and risks of
ownership to the Company or its subsidiaries are recorded as assets, together
with the obligations, based on the present value of future rental payments,
excluding executory costs.
Capital assets, including assets under capital leases, are depreciated over
their estimated useful lives as follows:
Buildings straight line over 25 to 40 years
Machinery and equipment straight line over 4 to 20 years or 7% to
12% on the diminishing-balance basis
Leasehold interests straight line over the term of the lease
ranging from 5 to 40 years
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over estimated fair
value of net assets, including definite lived intangibles, acquired in business
combinations. Until December 31, 2001, goodwill amortization was calculated
using the straight-line method over the respective estimated useful lives to a
maximum of 40 years.
Prior to January 1, 2002, circulation represented the long-term readership
of paid newspapers and the Company allocated a portion of the purchase price
discrepancy in each business acquired to the cost of circulation. In addition,
the Company capitalized costs incurred to increase the long-term readership.
Circulation was amortized on a straight-line basis over periods ranging from 10
to 40 years.
Effective January 1, 2002, the Company adopted the CICA Handbook Section
3062, "Goodwill and Other Intangible Assets" ("Section 3062") and certain
transitional provisions of CICA Handbook Section 1581, "Business Combinations"
("Section 1581"). The new standards require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. The standards also specify criteria that
intangible assets must meet to be recognized and reported apart from goodwill.
In addition, Section 3062 requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment by assessing the
recoverability of the carrying value.
As of the date of adoption of Section 3062 and certain transitional
provisions of Section 1581, the Company has discontinued amortization of all
existing goodwill, evaluated existing intangible assets and has reclassified
from circulation amounts in respect of non-competition agreements and subscriber
and advertiser relationships, which meet the new criteria for recognition of
intangible assets apart from goodwill. The balance of circulation has been
reclassified to goodwill effective January 1, 2002.
In connection with the Section 3062 transitional impairment evaluation, the
Company was required to assess whether goodwill was impaired as of January 1,
2002. The fair values of the Company's reporting units were determined primarily
using a multiple of maintainable normalized cash earnings. As a result of this
F-11
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
transitional impairment test, and based on the methodology adopted, the Company
has determined that the carrying amount of the Jerusalem Post was in excess of
the estimated fair value at January 1, 2002. Accordingly, the value of goodwill
attributable to the Jerusalem Post of $32.0 million has been written down in its
entirety. Such loss, net of related minority interest amounted to $12.1 million
and has been recorded as a charge to the opening deficit as at January 1, 2002.
The Company has determined that the fair value of all other reporting units is
in excess of the respective carrying amounts, both on adoption and at year end
for purposes of the annual impairment test.
In addition to the transitional goodwill impairment test as of January 1,
2002, the Company is required to test goodwill for impairment on an annual basis
for each of its reporting units. The Company is also required to evaluate
goodwill for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. Certain indicators of potential impairment that could
impact the Company's reporting units include, but are not limited to, the
following: (a) a significant long-term adverse change in the business climate
that is expected to cause a substantial decline in advertising spending, (b) a
permanent significant decline in a reporting unit's newspaper readership, (c) a
significant adverse long-term negative change in the demographics of a reporting
unit's newspaper readership and (d) a significant technological change that
results in a substantially more cost-effective method of advertising than
newspapers.
Effective January 1, 2002, the Company had unamortized goodwill in the
amount of $873.7 million, which is no longer being amortized. This amount
reflects the transitional impairment loss of $32.0 million relating to the
Jerusalem Post.
This change in accounting policy cannot be applied retroactively and the
amounts presented for prior periods have not been restated for this change. If
this change in accounting policy were applied to the reported consolidated
statement of earnings for the years ended December 31, 2000 and 2001, the impact
of the change, in respect of goodwill and intangible assets not being amortized,
would be as follows:
2000 2001
-------- ---------
Net earnings (loss) -- as reported.......................... $189,373 $(131,898)
Add goodwill and intangible asset amortization, net of
income taxes and minority interest........................ 31,384 16,978
-------- ---------
Adjusted net earnings (loss)................................ $220,757 $(114,920)
======== =========
Basic earnings (loss) per share -- as reported.............. $ 5.11 $ (3.91)
======== =========
Basic adjusted earnings (loss) per share.................... $ 5.97 $ (3.41)
======== =========
Diluted earnings (loss) per share -- as reported............ $ 5.05 $ (4.17)
======== =========
Diluted adjusted earnings (loss) per share.................. $ 5.90 $ (3.64)
======== =========
Adjusted net earnings (loss), noted above, reflects only the reduction in
amortization expense of intangibles now classified as goodwill and does not give
effect to the impact that this change in accounting policy would have had on the
gains and losses resulting from the disposal of operations during 2000 and 2001,
nor the expensing of the costs previously capitalized to increase long-term
readership in 2000 and 2001.
INVESTMENTS
Investments are accounted for at cost, except for investments in which the
Company exercises significant influence which are accounted for by the equity
method. Investments are written down when declines in value are considered to be
other than temporary. Dividend and interest income are recognized when earned.
F-12
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Prior to the adoption of new accounting standards for goodwill on January
1, 2002, as described above, the excess of acquisition costs over the Company's
share of the fair value of net assets at the acquisition date of an equity
method investment was amortized on a straight-line basis over its estimated
useful life. Effective January 1, 2002, such equity method goodwill is no longer
amortized. The Company recognizes a loss when there is other than a temporary
decline in the fair value of the investment below its carrying value.
DEFERRED FINANCING COSTS
Deferred financing costs consist of certain costs incurred in connection
with debt financings. Such costs are amortized on a straight-line basis over the
term of the related debt.
DERIVATIVES
The Company uses derivative financial instruments to manage risks generally
associated with interest rate and foreign currency exchange rate market
volatility. The Company does not hold or issue derivative financial instruments
for trading purposes. None of the derivatives has been designated as a hedge.
All derivatives are recorded at their fair value with changes in fair value
reflected in the consolidated statements of earnings, other than Hollinger
International's forward share purchase contracts (described in note 24b)).
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
The Company and certain of its subsidiaries have employee stock-based
compensation plans. Until December 31, 2001, compensation expense was not
recognized on the grant or modification of options under these plans.
Effective January 1, 2002, the Company adopted the new CICA Handbook
Section 3870, "Stock-based Compensation and Other Stock-based Payments"
("Section 3870"). Under Section 3870, the Company is required to adopt, on a
prospective basis, the fair value-based method to account for all stock-based
payments made by the Company to non-employees, including employees of Ravelston,
the parent company, and employee awards that are direct awards of stock, call
for settlement in cash or other assets, or are stock appreciation rights that
call for settlement by the issuance of equity instruments, granted on or after
January 1, 2002. For all other stock-based payments, the Company has elected to
use the settlement method of accounting, whereby cash received on the exercise
of stock options is recorded as capital stock.
Under the fair value-based method, stock options granted to employees of
Ravelston by the Company and its subsidiaries are measured at the fair value of
the consideration received, or the fair value of the equity instruments issued,
or liabilities incurred, whichever is more reliably measurable. Such fair value
determined is recorded as a dividend-in-kind in the Company's financial
statements with no impact on the Company's net earnings. Section 3870 has been
applied prospectively to all stock-based payments to non-employees granted on or
after January 1, 2002.
EMPLOYEE BENEFIT PLANS
The Company accrues its obligations under employee benefit plans and the
related costs, net of plan assets. The following policies are applied in
accounting for employee benefit plans:
- The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected benefit method pro-rated
on service and management's best estimate of expected plan investment
performance, salary escalation, retirement ages of employees and
expected health care costs.
- For the purpose of calculating the expected return on plan assets, those
assets are valued at fair value.
F-13
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
- Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at
the date of amendment.
- The excess of the net actuarial gain (loss) over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized
over the average remaining service period of active employees. The
average remaining service period of the active employees covered by the
plans ranges from 8 to 17 years.
INCOME TAXES
Future income tax assets and liabilities are recognized for the future
income tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Future income tax assets and liabilities are measured
using enacted or substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded against any future
income tax asset if it is more likely than not that the asset will not be
realized. Income tax expense is the sum of the Company's provision for current
income taxes and the difference between opening and ending balances of future
income tax assets and liabilities. The effect on future tax assets and
liabilities for change in tax rates is recognized in income in the period that
includes the enactment date.
REVENUE RECOGNITION
The Company's principal sources of revenue comprise advertising,
circulation and job printing. As a general principle, revenue is recognized when
the following criteria are met: (a) persuasive evidence of an arrangement
exists, (b) delivery has occurred and services have been rendered, (c) the price
to the buyer is fixed or determinable, and (d) collectibility is reasonably
assured or is probable. Advertising revenue, being amounts charged for space
purchased in the Company's newspapers, is recognized upon publication of the
advertisements. Circulation revenue from subscribers, billed to customers at the
beginning of a subscription period, is recognized on a straight-line basis over
the term of the related subscription. Deferred revenue represents subscription
receipts that have not been earned. Circulation revenue from single copy sales
is recognized at the time of distribution. In both cases, circulation revenue is
recorded net of fees or commissions paid to distributors and retailers and less
an allowance for returned copies. Job printing revenue, being charges for
printing services provided to third parties, is recognized upon delivery.
LOSS PER SHARE
Basic loss per share is computed by dividing the net loss by the weighted
average shares outstanding during the year. Diluted loss per share is computed
similar to the basic loss per share except that the weighted average shares
outstanding is increased to include additional shares from the assumed exercise
of stock options of Hollinger Inc., if dilutive and the net loss is increased to
reflect the impact of additional shares of Hollinger International being issued
from the exercise of its stock options and Series E preferred shares, if
dilutive. The number of additional shares is calculated by assuming that
outstanding stock options were exercised and that the proceeds from such
exercises were used by Hollinger International to acquire shares of common stock
of Hollinger International at the average market price during the year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires the Company
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 bad debts, investments, intangible assets, income
taxes, restructuring, pensions and other post-
F-14
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
retirement benefits, contingencies and litigation. The Company relies on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances in making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances could be
required.
The Company holds minority interests in both publicly traded and not
publicly traded Internet-related companies. Some of the publicly traded
companies have highly volatile share prices. The Company records an investment
impairment charge when it believes an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results of underlying investments may not be reflected in an
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
The Company has significant goodwill recorded in its accounts. Certain of
its newspapers operate in highly competitive markets. The Company is required to
determine annually whether or not there has been any impairment in the value of
these assets. Changes in long-term readership patterns and advertising
expenditures may affect the value and necessitate an impairment charge. Certain
indicators of potential impairment that could impact the Company's reporting
units include, but are not limited to, the following: a) a significant long-term
adverse change in the business climate that is expected to cause a substantial
decline in advertising spending, b) a permanent significant decline in a
reporting unit's newspaper readership, c) a significant adverse long-term
negative change in the demographics of a reporting unit's newspaper readership,
and d) a significant technological change that results in a substantially more
cost-effective method of advertising than newspapers.
The Company sponsors several defined benefit pension and post-retirement
benefit plans for domestic and foreign employees. These defined benefit plans
include pension and post-retirement benefit obligations, which are calculated
based on actuarial valuations. In determining these obligations and related
expenses, key assumptions are made concerning expected rates of return on plan
assets and discount rates. In making these assumptions, the Company evaluated,
among other things, input from actuaries, expected long-term market returns and
current high-quality bond rates. The Company will continue to evaluate the
expected long-term rates of return on plan assets and discount rates at least
annually and make adjustments as necessary, which could change the pension and
post-retirement obligations and expenses in the future.
Unrecognized actuarial gains and losses in respect of pension and
post-retirement benefit plans are recognized by the Company over a period
ranging from 8 to 17 years, which represents the weighted average remaining
service life of the employee groups. Unrecognized actuarial gains and losses
arise from several factors, including experience, assumption changes in the
obligations and from the difference between expected returns and actual returns
on assets. At the end of 2002, the Company had unrecognized net actuarial losses
of $233.4 million. These unrecognized amounts could result in an increase to
pension expense in future years depending on several factors, including whether
such losses exceed the corridor in accordance with CICA Section 3461, "Employee
Future Benefits".
The Company recognized a pension valuation allowance for any excess of the
prepaid benefit cost over the expected future benefit. Increases or decreases in
global capital markets and interest rate fluctuations could increase or decrease
any excess of the prepaid benefit cost over the expected future benefit
resulting in
F-15
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
an increase or decrease to the pension valuation allowance. Changes in the
pension valuation allowance are recognized in earnings immediately.
2. CHANGE IN ACCOUNTING POLICIES
a) Earnings per share
Effective January 1, 2001, the Company adopted, retroactively with
restatement, the recommendations of the CICA Section 3500 with respect
to earnings per share. Under the revised standard, the treasury stock
method is used instead of the imputed earnings approach for determining
the dilutive effect of options, issued warrants or other similar
instruments.
The change in the method of calculation of earnings per share did not
impact the previously reported basic earnings per share for 2000.
Diluted earnings per share for 2000 were increased from $4.49 per share
to $5.05 per share.
b) Income taxes
Effective January 1, 2000, the CICA changed the accounting standard
relating to the accounting for income taxes. The new standard adopted
the liability method of accounting for future income taxes. Prior to
January 1, 2000, income tax expense was determined using the deferral
method.
The Company adopted the new income tax accounting standard retroactively
on January 1, 2000, and did not restate the financial statements of any
prior periods. As a result, the Company has recorded an increase to
deficit of $291,004,000, an increase to the future tax liability of
$516,113,000 and a decrease to minority interest of $225,109,000 as at
January 1, 2000.
c) Goodwill and other intangible assets
Effective January 1, 2002, the Company adopted CICA Handbook Section
3062, "Goodwill and Other Intangible Assets" ("Section 3062") and
certain transitional provisions of CICA Handbook Section 1581, "Business
Combinations" ("Section 1581"). The new standards must be adopted
prospectively and require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually. The standards also specify criteria
that intangible assets must meet to be recognized and reported apart
from goodwill. The impact of this change in accounting policy is
discussed under "Goodwill and Other Intangible Assets" in note 1.
3. RESTRICTED CASH
Cash and cash equivalents at December 31, 2001 included US$7,500,000
($11,944,000) of restricted cash deposited with an escrow agent under the terms
of one of Hollinger International's forward share purchase contracts (note
24b)), which were terminated in 2002.
In addition, US$5,000,000 ($7,963,000) of cash was pledged as security at
December 31, 2001 for Hollinger International's US$5,000,000 Restated Credit
Facility (note 10f)) under which no amounts were permitted to be borrowed at
December 31, 2001. At December 31, 2002, restricted cash includes US$2,000,000
($3,160,000) deposited in connection with outstanding letters of credit.
4. ACQUISITIONS AND DISPOSITIONS
a) In January 2002, the Company sold 2,000,000 shares of Hollinger
International Class A common stock to third parties for total cash
proceeds of $38.6 million. This transaction, together with the
retraction of Series II preference shares of the Company for shares of
Hollinger International
F-16
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Class A common stock (note 11a)), resulted in a pre-tax gain on the
effective sales of the Hollinger International shares of $20.1 million
(note 17).
b) In January 2001, Hollinger L.P. completed the sale of UniMedia Company
to Gesca Limited, a subsidiary of Power Corporation of Canada, for cash
consideration. The publications sold represented the French language
newspapers of Hollinger L.P., including three paid circulation dailies
and 15 weeklies published in Quebec and Ontario. A pre-tax gain of
approximately $75.1 million was recognized on this sale (note 17).
c) In two separate transactions in July and November 2001, the Company and
Hollinger L.P. completed the sale of most of its remaining Canadian
newspapers to Osprey Media Group Inc. ("Osprey") for total cash
proceeds of approximately $255.0 million plus closing adjustments
primarily for working capital. Included in these sales were community
newspapers in Ontario such as The Kingston Whig-Standard, The Sault
Star, the Peterborough Examiner, the Chatham Daily News and The
Observer (Sarnia). Pre-tax gains of approximately $1.5 million were
recognized on these sales (note 17). The former Chief Executive Officer
of Hollinger L.P. is a minority shareholder of Osprey. Hollinger
International's independent directors have approved the terms of these
transactions.
In connection with the two sales of Canadian newspaper properties to
Osprey in 2001, to satisfy a closing condition, the Company, Hollinger
International, Lord Black of Crossharbour, PC(C), OC, KCSG and three
senior executives entered into non-competition agreements with Osprey
pursuant to which each agreed not to compete directly or indirectly in
Canada with the Canadian businesses sold to Osprey for a five-year
period, subject to certain limited exceptions, for aggregate
consideration of $7.9 million. Such consideration was paid to Lord Black
and the three senior executives and has been approved by Hollinger
International's independent directors.
d) In August 2001, the Company entered into an agreement to sell to
CanWest Global Communications Corp. ("CanWest") its 50% interest in the
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, from September 1, 2001,
the Company had no influence over the operations of the National Post
and the Company no longer consolidated or recorded 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. A pre-tax loss of approximately $120.7 million was recognized on
the sale and is included in unusual items (note 17).
e) During 2001, Hollinger International converted all of its Series C
Preferred Stock which was held by the Company, at the conversion ratio
of 8.503 shares of Hollinger International Class A common stock per
share of Series C Preferred Stock into 7,052,464 shares of Hollinger
International Class A common stock. The 7,052,464 shares of Class A
common stock of Hollinger International were subsequently purchased for
cancellation by Hollinger International for a total of US$92.2 million
($143.8 million). The purchase price per share was 98% of the closing
price of the shares of Hollinger International Class A common stock and
was approved by Hollinger International's independent directors. The
Company used the proceeds to reduce its bank indebtedness by $142.0
million (note 9).
On September 27, 2001, Hollinger International redeemed 40,920 shares of
its Series E preferred stock held by the Company at their stated
redemption price of $146.63 per share for a total cash payment of $6.0
million.
F-17
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
In December 2001, the Company sold 2,000,000 shares of Hollinger
International Class A common stock to third parties for total cash
proceeds of $31.4 million and reduced its bank indebtedness by the same
amount (note 9).
The above transactions, together with the retraction of retractable
common shares of the Company in exchange for shares of Hollinger
International Class A common stock (note 13d)) and the retraction of
Series II preference shares of the Company for shares of Class A common
stock of Hollinger International (note 11a)), resulted in a total
pre-tax gain on the effective sales of the Hollinger International
shares of $59.4 million (note 17).
f) During 2001, Hollinger International transferred two publications to
Horizon Publications Inc. in exchange for net working capital. Horizon
Publications Inc. is managed by former Community Group executives and
controlled by certain members of the Board of Directors of Hollinger
International. The terms of these transactions were approved by the
independent directors of Hollinger International.
g) On November 16, 2000, Hollinger International and its affiliates,
Southam and Hollinger L.P. ("Hollinger Group") completed the sale of
most of its Canadian newspapers and related assets to CanWest. Included
in the sale were the following assets of the Hollinger Group:
- a 50% interest in National Post, with Hollinger International
continuing as managing partner;
- the metropolitan and a large number of community newspapers in Canada
(including the Ottawa Citizen, The Vancouver Sun, The Province
(Vancouver), the Calgary Herald, the Edmonton Journal, The Gazette
(Montreal), The Windsor Star, the Regina Leader Post, the Star
Phoenix and the Times-Colonist (Victoria); and
- the operating Canadian Internet properties, including canada.com.
The sale resulted in the Hollinger Group receiving approximately $1.7
billion cash, approximately $425 million in voting and non-voting shares
of CanWest at fair value, and subordinated non-convertible debentures of
a holding company in the CanWest group with a fair value of
approximately $697 million. The aggregate sale price of these properties
at fair value was approximately $2.8 billion, plus closing adjustments
for working capital at August 31, 2000 and cash flow and interest for
the period September 1 to November 16, 2000 which in total was estimated
as an additional $63 million at December 31, 2000. The cash proceeds
were used to pay down outstanding debt on Hollinger International's Bank
Credit Facility (note 10). The sale resulted in a pre-tax gain of
approximately $566.0 million in 2000 which was included in unusual items
(note 17).
In 2001, certain of the closing adjustments were finalized, resulting in
an additional pre-tax gain in 2001 of approximately $29.1 million which
is included in unusual items (note 17). At December 31, 2002,
approximately $60.7 million (2001 -- $57.3 million) in respect of
closing adjustments remained due to the Company and is included in
accounts receivable. Certain closing adjustments have not yet been
finalized. Amounts due bear interest at a rate of approximately 9%. The
amount outstanding is subject to negotiation between CanWest and the
Company. Adjustments to the balance due, if any, resulting from further
negotiations will be recorded as an unusual item.
In connection with the sale to CanWest, The Ravelston Corporation
Limited ("Ravelston"), a holding company controlled by Lord Black,
entered into a management services agreement with CanWest and National
Post pursuant to which it agreed to continue to provide management
services to the Canadian businesses sold to CanWest in consideration for
an annual fee of $6 million payable by CanWest. In addition, CanWest
will be obligated to pay Ravelston a termination fee of $45 million, in
the event that CanWest chooses to terminate the management services
agreement or
F-18
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
$22.5 million, in the event that Ravelston chooses to terminate the
agreement (which cannot occur before December 31, 2002). Also, as
required by CanWest as a condition to the transaction, the Company,
Ravelston, Hollinger International, Lord Black and three senior
executives entered into non-competition agreements with CanWest pursuant
to which each agreed not to compete directly or indirectly in Canada
with the Canadian businesses sold to CanWest for a five-year period,
subject to certain limited exceptions, for aggregate consideration of
$80 million paid by CanWest in addition to the purchase price referred
to above, of which $38 million was paid to Ravelston and $42 million was
paid to Lord Black and the three senior executives. The independent
directors of Hollinger International have approved the terms of these
payments.
h) On November 1, 2000, Southam converted the convertible promissory note
in Hollinger L.P. in the principal amount of $225,753,000 into
22,575,324 limited partnership units of Hollinger L.P., thereby
increasing Hollinger International's interest in Hollinger L.P. to
87.0%.
i) During 2000, Hollinger International sold most of its remaining U.S.
community newspaper properties, including 11 paid dailies, three paid
non-dailies and 31 free distribution publications for total proceeds
of approximately US$215,000,000 ($325,166,000). Pre-tax gains
totalling $75,114,000 were recognized on these sales and were included
in unusual items in 2000 (note 17).
In connection with the sales of United States newspaper properties in
2000, to satisfy a closing condition, Hollinger International, Lord Black
and three senior executives entered into non-competition agreements with
the purchasers pursuant to which each agreed not to compete directly or
indirectly in the United States with the United States businesses sold to
the purchasers for a fixed period, subject to certain limited exceptions,
for aggregate consideration paid in 2001 of US$600,000 ($917,000). These
amounts were in addition to the aggregate consideration paid in respect
of these non-competition agreements in 2000 of US$15.0 million ($22.5
million). All such amounts were paid to Lord Black and the three senior
executives. The independent directors of Hollinger International have
approved the terms of these payments.
j) Included in the dispositions during 2000 described in note 4i),
Hollinger International sold four U.S. community newspapers for an
aggregate consideration of US$38.0 million ($56.5 million) to Bradford
Publishing Company, a Company formed by a former U.S. Community Group
executive and in which some of Hollinger International's directors are
shareholders. The terms of this transaction were approved by the
independent directors of Hollinger International.
k) On February 17, 2000, Interactive Investor International, in which
Hollinger International owned 51.7 million shares or a 47% equity
interest, completed its initial public offering ("IPO") issuing 52
million shares and raising L78,000,000 ($181,000,000). The IPO reduced
Hollinger International's equity ownership to 33% and resulted in a
dilution gain of $25,775,000 for accounting purposes. Subsequently,
Hollinger International sold five million shares of its holding,
reducing its equity interest to 28.5% and resulting in a pre-tax gain
in 2000 of $2,400,000. Both the dilution gain and gain on sale were
included in unusual items in 2000 (note 17). The balance of the
investment was sold in 2001 resulting in an additional pre-tax gain in
2001 of $14.7 million (note 17).
l) In December 2000, Hollinger International acquired four paid daily
newspapers, one paid non-daily and 12 free distribution publications
in the Chicago suburbs for total cash consideration of US$111,000,000
($166,744,000). Of the aggregate purchase price, $78,781,000 was
ascribed to circulation and $48,244,000 to goodwill.
All of the Company's acquisitions have been accounted for using the
purchase method with the results of operations included in these
consolidated financial statements from the dates of acquisition.
F-19
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The details of the acquisitions including those detailed above are as
follows:
2000 2001 2002
-------- ---- ----
Assets acquired, at fair value
Current assets............................................ $ 19,444 $-- $--
Fixed assets.............................................. 51,724 -- --
Circulation............................................... 78,781 -- --
Goodwill and other assets................................. 57,418 -- --
-------- -- --
207,367 -- --
-------- -- --
Less liabilities assumed
Current liabilities....................................... 16,269 -- --
Long-term liabilities..................................... 15,722 -- --
-------- -- --
31,991 -- --
-------- -- --
Net cost of investments..................................... $175,376 $-- $--
======== == ==
5. INVESTMENTS
2001 2002
-------- --------
ASSOCIATED COMPANIES, AT EQUITY
The Company
Cayman Free Press Ltd. -- 40% interest................. $ 11,245 $ 11,314
Telegraph
Trafford Park Printers Limited ("Trafford Park"), West
Ferry Printers Limited ("West Ferry"), Paper Purchase
Management Limited ("PPM") and handbag.com Limited
(handbag) joint ventures -- 50% interests............ 29,110 27,763
Internet-related investments.............................. 8,205 8,012
Other..................................................... 1,490 1,886
-------- --------
50,050 48,975
-------- --------
MARKETABLE INVESTMENTS, AT COST
CanWest debentures a)..................................... 72,259 85,664
Internet-related investments.............................. 6,680 5,812
-------- --------
78,939 91,476
-------- --------
OTHER NON-MARKETABLE INVESTMENTS, AT COST
Internet and telephony-related investments................ 78,272 36,282
Other..................................................... 52,174 33,412
-------- --------
130,446 69,694
-------- --------
$259,435 $210,145
======== ========
a) The CanWest debentures were issued by a wholly owned subsidiary of
CanWest and are guaranteed by CanWest. The debentures were received on
November 16, 2000 as partial consideration for the operations sold to
CanWest. Interest on the CanWest debentures is calculated, compounded
and payable semi-annually in arrears at a rate of 12.125% per annum. At
any time prior to November 5, 2005, CanWest may elect to pay interest
on the debentures by way of non-voting shares of CanWest, debentures in
substantially the same form as the CanWest debentures, or cash.
Subsequent to November 5, 2005, interest is to be paid in cash. The
debentures are due November 15, 2010, but
F-20
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
are redeemable at any time prior to May 15, 2003 for cash at CanWest's
option at 100% of the principal amount.
CanWest debentures at December 31, 2002 had a principal face amount of
$93.0 million (2001 -- $77.2 million), including $15.8 million of
additional debentures received in 2002 (2001 -- $67.1 million) in
payment of the interest due on existing debentures held by the Company,
a portion of which related to 2001. These debentures have been recorded
at their fair value at the time they are received.
As part of Hollinger International's November 16, 2000 purchase and sale
agreement with CanWest, Hollinger International was prohibited from
selling CanWest debentures prior to May 15, 2003. In order to monetize
the debentures, Hollinger International entered into a participation
agreement in August 2001 pursuant to which it sold participation
interests in $540.0 million (US$350.0 million) principal amount of
CanWest debentures to a special purpose trust (the "Participation
Trust") administered by an arm's-length trustee. That sale of
participation interests was supplemented by a further sale of $216.8
million (US$140.5 million) in December 2001 for a total of $756.8
million (US$490.5 million). Both sales were conducted at a fixed rate of
exchange of US$0.6482 for each $1. Hollinger International remains the
record owner of the participated CanWest debentures and is required to
make payments to the Participation Trust with respect to those
debentures if and to the extent it receives payment in cash or in kind
on the debentures from CanWest. These payments are not reflected in the
Company's accounts.
Coincident with the Participation Trust's purchase of the participation
interests, the Participation Trust sold senior notes to arm's-length
third parties to finance the purchase of the participation interests.
These transactions resulted in net proceeds to Hollinger International
of $621.8 million and for accounting purposes have been accounted for as
sales of CanWest debentures. The net loss on the 2001 transactions,
including realized holding losses on the debentures, amounted to $97.4
million and has been included in unusual items (note 17). Hollinger
International believes that the participation arrangement does not
constitute a prohibited sale of debentures as legal title was not
transferred. CanWest has advised Hollinger International that it accepts
that position.
Hollinger International has not retained an interest in the
Participation Trust nor does it have any beneficial interest in the
assets of the Participation Trust. The Participation Trust and its
investors have no recourse to Hollinger International's other assets in
the event that CanWest defaults on its debentures. Under the terms of
the Participation Trust, the interest payments received by Hollinger
International in respect of the underlying CanWest debentures will be
paid to the Participation Trust. However, after May 15, 2003, Hollinger
International may be required to deliver to the Participation Trust
CanWest debentures with a face value equivalent to US$490.5 million
based on then current rates of exchange. The CanWest debentures are
denominated in Canadian dollars and, consequently, there is a currency
exposure on the debentures subject to the delivery provision. A
substantial portion of that exposure was previously hedged; however, the
hedge instrument (a forward foreign exchange contract) was terminated in
contemplation of and in conjunction with Publishing's placement of
Senior Notes (note 10a)) and amendment of Publishing's Senior Credit
Facilities (note 10b)). During 2001 and 2002, the net loss before tax,
realized on the mark to market of both the obligation to the
Participation Trust and the related hedge contract was $0.7 million and
$10.4 million, respectively, and has been included in net foreign
currency losses in the consolidated statement of earnings. In 2002, the
loss before tax is net of cash received on the termination of the hedge
of $9.9 million.
F-21
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Pursuant to the terms of the Participation Trust, the Company is unable
to sell to an unaffiliated third party until at least November 4, 2010
the equivalent of US$50.0 million ($79.0 million at December 31, 2002)
principal amount of CanWest debentures.
b) CanWest shares at December 31, 2000 consisted of 2,700,000 multiple
voting preferred shares and 27,000,000 non-voting shares. The
non-voting shares were publicly traded and the multiple voting shares
were not publicly traded but were convertible into non-voting shares at
the rate of 0.15 non-voting share for each voting preferred share or a
total additional 405,000 non-voting shares. The non-voting shares and
voting preferred shares represented an approximate 15.6% equity
interest and 5.7% voting interest in CanWest. On November 28, 2001,
Hollinger International sold the 2,700,000 multiple voting preferred
shares and 27,000,000 non-voting shares in CanWest for total cash
proceeds of approximately $271.3 million. The sale resulted in a
realized pre-tax loss of $157.5 million which is included in unusual
items (note 17).
6. CAPITAL ASSETS
2001 2002
---------- ----------
COST
Land...................................................... $ 54,878 $ 52,050
Buildings and leasehold interests......................... 326,449 340,886
Machinery and equipment................................... 803,345 848,576
---------- ----------
1,184,672 1,241,512
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Buildings and leasehold interests......................... 58,680 66,373
Machinery and equipment................................... 459,491 514,638
---------- ----------
518,171 581,011
---------- ----------
NET BOOK VALUE.............................................. $ 666,501 $ 660,501
========== ==========
OWNED ASSETS
Cost...................................................... $ 898,007 $ 887,484
Accumulated depreciation and amortization................. 330,240 352,956
---------- ----------
Net book value............................................ $ 567,767 $ 534,528
========== ==========
LEASED ASSETS
Cost...................................................... $ 286,665 $ 354,028
Accumulated depreciation and amortization................. 187,931 228,055
---------- ----------
Net book value............................................ $ 98,734 $ 125,973
========== ==========
Depreciation and amortization of capital assets totalled $116,760,000,
$78,450,000 and $74,352,000 in 2000, 2001 and 2002, respectively. Hollinger
International capitalized interest in 2000, 2001 and 2002 amounting to
$4,653,000, $129,000 and nil, respectively, related to the construction and
equipping of production facilities for its newspapers in Chicago.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
As described in note 1 to the consolidated financial statements, the
Company adopted Section 3062 and certain transitional provisions of Section 1581
effective January 1, 2002.
F-22
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The changes in the carrying amount of goodwill by reportable segment for
the year ended December 31, 2002 are as follows:
U.K. CANADIAN
CHICAGO COMMUNITY NEWSPAPER NEWSPAPER CONSOLIDATED
GROUP GROUP GROUP GROUP TOTAL
-------- --------- --------- ---------- ------------
Balance as at January 1,
2002........................ $234,320 $31,975 $569,013 $70,333 $905,641
Transitional impairment loss
-- Jerusalem Post (note
1).......................... -- (31,975) -- -- (31,975)
-------- ------- -------- ------- --------
Revised balance as at January
1, 2002..................... 234,320 -- 569,013 70,333 873,666
Adjustment of excess
acquisition reserves........ (19,477) -- -- -- (19,477)
Repurchase of shares of
Hollinger International
Class A common stock by
Hollinger International
(note 24b))................. 3,344 -- 8,240 -- 11,584
Foreign exchange and other.... (1,534) -- 48,809 279 47,554
-------- ------- -------- ------- --------
Balance as at December 31,
2002........................ $216,653 $ -- $626,062 $70,612 $913,327
======== ======= ======== ======= ========
Upon adoption of Section 3062, intangible assets totalling $978,569,000,
which were previously ascribed to circulation, net of $247,252,000 of deferred
taxes, were reclassified to goodwill. Intangible assets with a total net book
value at January 1, 2002 of $198,975,000 previously ascribed to circulation,
consisting of non-competition agreements of $12,195,000 net of accumulated
amortization of $8,360,000 and subscriber and advertiser relationships of
$186,780,000 net of accumulated amortization of $35,261,000 were recognized as
identifiable intangible assets apart from goodwill upon adoption of Section
3062.
The Company's amortizable other intangible assets consist of
non-competition agreements with former owners of acquired newspapers which are
amortized using the straight-line method over the term of the respective
non-competition agreements which range from three to five years, and subscribers
and advertiser relationships which are amortized using the straight-line method
over 30 years. The components of other amortizable intangible assets at December
31, 2002 are as follows:
GROSS
CARRYING ACCUMULATED NET BOOK
AMOUNT AMORTIZATION VALUE
-------- ------------ --------
Amortizable other intangible assets:
Non-competition agreements........................ $ 22,120 $15,049 $ 7,071
Subscriber and advertiser relationships........... 220,485 42,413 178,072
-------- ------- --------
$242,605 $57,462 $185,143
======== ======= ========
Amortization of non-competition agreements for the year ended December 31,
2002 was $6,689,000. Amortization of advertiser and subscriber relationships for
the year ended December 31, 2002 was $7,152,000. Future amortization of
amortizable intangible assets is as follows: 2003 -- $13,895,000, 2004 --
$7,483,000, 2005 -- $7,235,000, 2006 -- $7,195,300, and 2007 -- $7,195,000.
Amortization of goodwill and other intangible assets in total for the year
ended December 31, 2001 was $66,266,000 (2000 -- $103,172,000).
F-23
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
8. DEFERRED FINANCING COSTS AND OTHER ASSETS
2001 2002
-------- --------
Deferred pension asset (note 22)............................ $ 83,459 $123,230
Deferred finance costs, net of amortization of $38,494,000
(2001 -- $36,512,000)..................................... 52,484 52,759
Deferred foreign exchange loss on exchangeable shares....... 1,446 1,234
Other assets................................................ 17,154 16,314
-------- --------
$154,543 $193,537
======== ========
Amortization of deferred finance costs, included in other interest expense,
totalled $18,504,000, $18,648,000 and $11,347,000 in 2000, 2001 and 2002,
respectively.
9. BANK INDEBTEDNESS
2001 2002
-------- -------
The Company................................................. $129,475 $90,810
======== =======
At December 31, 2002, the Company has a bank operating line which provides
for up to $10.0 million of borrowings and a revolving bank credit facility which
provides for up to $80.8 million of borrowings. The Company's revolving bank
credit facility is secured by shares of Hollinger International Class A and
Class B common stock owned by the Company and bears interest at the prime rate
plus 2.5% or the banker's acceptance ('BA') rate plus 3.5%. Under the terms of
the revolving bank credit facility, the Company and its subsidiaries are subject
to restrictions on the incurrence of additional debt.
The revolving bank credit facility was amended and restated on August 30,
2002 and was to mature on December 2, 2002. A mandatory repayment of the
revolving bank credit facility in the amount of $50.0 million was required by
December 2, 2002 and if such payment was made, the lenders could have consented
to an extension of the maturity date to December 2, 2003 in respect of the
principal outstanding. On December 2, 2002, the lenders extended the $50.0
million principal repayment date to December 9, 2002. This repayment was not
made and on December 9, 2002, the bank credit facility was amended to require a
principal payment of $44.0 million on February 28, 2003 with the balance
maturing on December 2, 2003. As a result of the impending closing of the
Company's Senior Secured Note issue, the lenders further extended the due date
for the repayment of the $44.0 million to March 14, 2003. On March 10, 2003, the
revolving bank credit facility in the amount of $80.8 million and the bank
operating line of $10.0 million were repaid with part of the proceeds of the
Company's issue of Senior Secured Notes (note 29a)).
On October 3, 2002, Hollinger International entered into a term lending
facility and borrowed US$50.0 million ($79.6 million). As a result of Hollinger
International's borrowing under this term facility, the Company was in default
of a covenant under its revolving bank credit facility which, while in default,
resulted in the Company's borrowings being due on demand. The banks waived the
default and on December 23, 2002, Hollinger International repaid the full amount
borrowed under its term lending facility (note 10d)).
During 2001, the Company reduced its bank indebtedness by $142,000,000 with
proceeds from the sale, to Hollinger International for cancellation, of
7,052,464 million of its shares of Class A common stock (note 4e)). In December
2001, the Company sold 2,000,000 shares of Hollinger International Class A
common stock to third parties for total cash proceeds of $31,400,000 (note 4e))
and reduced bank indebtedness by the same amount. During January 2002, the
Company sold a further 2,000,000 shares of
F-24
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Class A common stock of Hollinger International and reduced bank indebtedness by
an additional $38,600,000 (note 4a)).
10. LONG-TERM DEBT
2001 2002
---------- ----------
Hollinger International
Senior Notes due 2010 (US$300,000,000).................... $ -- $ 474,000
Senior Credit Facility (US$265,000,000)................... -- 418,698
Senior Notes due 2005 (US$5,082,000) (2001 --
US$260,000,000)........................................ 414,050 8,030
Senior Subordinated Notes due 2006 (US$239,900,000) (2001
-- US$250,000,000)..................................... 398,125 379,051
Senior Subordinated Notes due 2007 (US$265,000,000) (2001
-- US$290,000,000)..................................... 461,825 418,700
Other..................................................... 16,933 5,103
Other....................................................... 15,346 20,152
Obligations under capital leases
Printing joint ventures................................... 37,914 60,096
Other..................................................... 7,433 5,491
---------- ----------
1,351,626 1,789,321
Less:
Current portion included in current liabilities........... 10,020 16,800
Senior Subordinated Notes (note 10a))..................... -- 797,751
---------- ----------
$1,341,606 $ 974,770
========== ==========
a) On December 23, 2002, Publishing issued US$300,000,000 of 9% Senior
Notes due 2010 guaranteed by Hollinger International. Net proceeds of
the issue of US$291,700,000 plus cash on hand and borrowings under
Publishing's Senior Credit Facility (note 10b)) were used in December
2002 to retire Hollinger International's equity forward share purchase
contracts (Total Return Equity Swaps (note 24b)) and to repay amounts
borrowed under its term facility maturing December 31, 2003 (note 10d))
and in January 2003 to retire, in their entirety, Publishing's
outstanding Senior Subordinated Notes due 2006 and 2007 with the
balance available for general corporate purposes.
The Senior Notes bear interest at 9% payable semi-annually and mature on
December 15, 2010. The Senior Notes are redeemable at the option of
Publishing anytime after December 15, 2006 at 104.5% of the principal
amount, after December 15, 2007 at 102.25% of the principal amount and
after December 15, 2008 at 100% of the principal amount.
On December 23, 2002, Publishing gave notice of redemption to both the
holders of the Senior Subordinated Notes due 2006 with a principal
remaining outstanding of US$239.9 million and to the holders of the
Senior Subordinated Notes due 2007 with a principal remaining
outstanding of US$265.0 million. Such notes were retired in January 2003
with a payment of $859.1 million (US$543.8 million), including early
redemption premiums and accrued interest. At December 31, 2002, the
notes remained outstanding and have been disclosed as a current
liability. The proceeds from the December 2002 issue of Publishing's
Senior Notes and borrowings under the Senior Credit Facility used to
fund the redemption were held in escrow at December 31, 2002 and have
been disclosed as escrow deposits in current assets.
F-25
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Unamortized deferred financing costs in the amount of $28.0 million and
the $31.1 million premium related to the retirement of the Senior
Subordinated Notes will be charged to earnings in 2003 on extinguishment
of the notes.
The Indentures relating to the 9% Senior Notes contain financial
covenants and negative covenants that limit Publishing's ability to,
among other things, incur indebtedness, pay dividends or make other
distributions on its capital stock, enter into transactions with related
companies, and sell assets, including stock of a restricted subsidiary.
The Indentures provide that upon a change of control (as defined in the
Indentures), each noteholder has the right to require Publishing to
purchase all or any portion of such noteholder's notes at a cash
purchase price equal to 101% of the principal amount of such notes, plus
accrued and unpaid interest. The Senior Credit Facility (note 10b))
restricts Publishing's ability to repurchase these notes even when
Publishing may be required to do so under the terms of the Indenture
relating to the 9% Senior Notes in connection with a change of control.
On January 22, 2003 and February 6, 2003, Publishing entered into
interest rate swaps to convert US$150.0 million and US$100.0 million,
respectively, of the 9% Senior Notes issued in December 2002 to floating
rates for the period to December 15, 2010, subject to early termination
notice.
The Trust Indenture in respect of the 9% Senior Notes contains customary
covenants and events of default, which are comparable to those under the
Senior Credit Facility.
b) On December 23, 2002, Publishing and certain of its subsidiaries
entered into a senior credit facility with an aggregate commitment of
US$310,000,000 (the "Senior Credit Facility").
The Senior Credit Facility consists of i) US$45,000,000 revolving credit
facility which matures on September 30, 2008 (the "Revolving Credit
Facility"), ii) a US$45,000,000 Term Loan A which matures on September
30, 2008 ("Term Loan A") and iii) a US$220,000,000 Term Loan B which
matures on September 30, 2009 ('Term Loan B'). Publishing and Telegraph
are the borrowers under the Revolving Credit Facility and First DT
Holdings Ltd. ("FDTH"), a wholly owned indirect U.K. subsidiary) is the
borrower under Term Loan A and Term Loan B. The Revolving Credit
Facility and Term Loans bear interest at either the Base Rate (U.S.) or
U.S. LIBOR, plus an applicable margin. Interest is payable quarterly.
At December 31, 2002, FDTH had a total US$265,000,000 of borrowings
outstanding under Term Loan A and Term Loan B.
On December 27, 2002, a United Kingdom subsidiary of the Company entered
into two cross-currency rate swap transactions to hedge principal and
interest payments on U.S. dollar borrowings under the December 23, 2002
Senior Credit Facility. The contracts have a total foreign currency
obligation notional value of US$265.0 million, fixed at a rate of
US$1.5922 to L1, convert the interest rate on such borrowing from
floating to fixed, and expire as to US$45.0 million on December 29, 2008
and as to US$220.0 million on December 29, 2009.
Publishing's borrowings under the Senior Credit Facility are guaranteed
by Publishing's material U.S. subsidiaries, while FDTH's and Telegraph's
borrowings under the Senior Credit Facility are guaranteed by Publishing
and its material U.S. and U.K. subsidiaries. Hollinger International is
also a guarantor of the Senior Credit Facility. Publishing's borrowings
under the Senior Credit Facility are secured by substantially all of the
assets of Publishing and its material U.S. subsidiaries, a pledge of all
of the capital stock of Publishing and its material U.S. subsidiaries
and a pledge of 65% of the capital stock of certain foreign
subsidiaries. FDTH's and Telegraph's borrowings under the Senior Credit
Facility are secured by substantially all of the assets of Publishing
and its material U.S. and U.K. subsidiaries and a pledge of all of the
capital stock of Publishing and its material U.S. and
F-26
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
U.K. subsidiaries. Hollinger International's assets in Canada have not
been pledged as security under the Senior Credit Facility.
The Senior Credit Facility agreement requires Publishing to comply with
certain covenants which include, without limitation and subject to
certain exceptions, restrictions on additional indebtedness; liens,
certain types of payments (including without limitation, capital stock
dividends and redemptions, payments on existing indebtedness and
intercompany indebtedness), and on incurring or guaranteeing debt of an
affiliate, making certain investments and paying management fees;
mergers, consolidations, sales and acquisitions; transactions with
affiliates; conduct of business except as permitted; sale and leaseback
transactions; changing fiscal year; changes to holding company status;
creating or allowing restrictions on taking action under the Senior
Credit Facility loan documentation; and entering into operating leases,
subject to certain basket calculations and exceptions. The Senior Credit
Facility loan agreement also contains customary events of default.
As of December 31, 2002, Hollinger International's aggregate annual
rental payments under operating leases exceeded the amounts permitted
under the covenants to the Senior Credit Facility. Hollinger
International has been advised by the Administrative Agent of the Senior
Credit Facility that the lenders have agreed to amend the Senior Credit
Facility effective March 28, 2003, to increase the amount permitted
under the operating lease covenant and have agreed to a waiver of any
default or event of default in connection therewith. Based on the
amended covenant, Hollinger International would have been in compliance
as of December 31, 2002.
c) On February 14, 2002, Publishing commenced a cash tender offer for any
and all of its outstanding 8.625% Senior Notes due 2005. The tender
offer was made upon the terms and conditions set forth in the Offer to
Purchase and Consent Solicitation Statement dated February 14, 2002.
Under the terms of the offer, Hollinger International offered to
purchase the outstanding notes at a price to be determined three
business days prior to the expiration date of the tender offer by
reference to a fixed spread of 87.5 basis points over the yield to
maturity of the 7.50% U.S. Treasury Notes due February 15, 2005, plus
accrued and unpaid interest up to, but not including the day of payment
for the notes. The purchase price totalled US$1,101.34 for each
US$1,000 principal amount of notes. Included in the purchase price was
a consent payment equal to US$40 per US$1,000 principal amount of the
notes, payable to those holders who validly consented to the proposed
amendments to the indenture governing the notes. In connection with the
tender offer, Publishing solicited consents from the holders of the
notes to amend the Indenture governing the notes by eliminating most of
the restrictive provisions. On March 15, 2002, $397.2 million (US$248.9
million) in the aggregate principal amount had been validly tendered
pursuant to the offer and on March 18, 2002, these noteholders were
paid out in full. In addition, during the year, Publishing purchased
for retirement an additional $9.6 million (US$6.0 million) in aggregate
principal amount of the 8.625% Senior Notes due 2005.
During 2002, Publishing purchased for retirement $16.1 million (US$10.1
million) in aggregate principal amount of the 9.25% Senior Subordinated
Notes due 2006 and $39.9 million (US$25.0 million) in the aggregate
principal amount of its 9.25% Senior Subordinated Notes due 2007.
The total principal amount of the above Publishing Senior and Senior
Subordinated Notes retired during 2002 was $462.8 million (US$290.0
million). The premiums paid to retire the debt totalled $43.0 million
which, together with a write-off of $13.3 million of related deferred
financing costs, have been presented as an unusual item (note 17).
F-27
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
As at December 31, 2001, Hollinger International did not meet a
financial test set out in the Trust Indentures for Publishing's Senior
Notes due 2005 and Senior Subordinated Notes. As a result, Publishing
and its subsidiaries were unable to incur additional indebtedness, make
restricted investments, make advances, pay dividends or make other
distributions on their capital stock.
d) In October 2002, Hollinger International borrowed on an unsecured basis
$79,600,000 (US$50,000,000) at 10.5% under a term facility maturing
December 31, 2003. Proceeds from Publishing's aforementioned Senior
Credit Facility and the issue of 9% Senior Notes were used, in part, to
repay these borrowings in December 2002.
e) Amounts borrowed under a former short-term credit facility of
$191,100,000 (US$120,000,000) entered into by Hollinger International
in 2001 were repaid during that year.
f) In June 2000, Publishing, HCPH, Telegraph, Southam, HIF Corp., a wholly
owned subsidiary of Publishing, and a group of financial institutions
increased the term loan component of the Fourth Amended and Restated
Credit Facility ("Restated Credit Facility") by US$100,000,000 to
US$975,000,000. On November 16, 2000, using the proceeds from the
CanWest transaction (note 4(g)) US$972,000,000 of borrowings were
repaid and the Restated Credit Facility was reduced to US$5,000,000.
The Restated Credit Facility was secured by the collateralization of
US$5,000,000 of Hollinger International's positive cash balance (note
3). At December 31, 2001, no amounts were owing under the Restated
Credit Facility. During 2002, the Restated Credit Facility was
terminated.
g) Principal amounts payable on long-term debt, excluding obligations
under capital leases, for each of the five years subsequent to December
31, 2002 are as follows:
h) Minimum lease commitments, together with the present value of
obligations under capital leases, are as follows:
2003........................................................ $ 15,044
2004........................................................ 12,245
2005........................................................ 9,454
2006........................................................ 9,084
2007........................................................ 6,379
Subsequent.................................................. 28,913
--------
Total future minimum lease payments......................... 81,119
Less imputed interest and executory costs................... (15,532)
--------
Present value of minimum lease payments discounted at an
average rate of 6.9%...................................... 65,587
Less current portion included in current liabilities........ (11,914)
--------
$ 53,673
========
F-28
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
11. RETRACTABLE PREFERENCE SHARES
2001 2002
-------- --------
4,580,979 Series II preference shares (2001 -- 5,366,979)... $ 46,000 $ 33,827
10,147,225 Series III preference shares 2001 --
10,147,225)............................................... 101,472 101,472
-------- --------
$147,472 $135,299
======== ========
a) The Series II preference shares are exchangeable non-voting preference
shares issued at $10.00 per share. On May 12, 1999, the Series II
preference shares became redeemable at the holder's option for 0.46 of
a share of Class A common stock of Hollinger International for each
Series II preference share. The Company has the option to make a cash
payment of equivalent value on the redemption of any of the Series II
preference shares. Each Series II preference share entitles the holder
to a dividend equal to the amount of any dividend on 0.46 of a share of
Class A common stock of Hollinger International (less any U.S.
withholding tax thereon payable by the Company or any subsidiary). In
2002, these retractable preference shares are included in current
liabilities since they are retractable at any time at the option of the
holder.
During 2002, 750,000 Series II preference shares were retracted in
exchange for 345,000 shares of Hollinger International Class A common
stock which, together with the Hollinger International share sale
described in note 4a), resulted in a gain on effective sale of Hollinger
International shares of $20,103,000 (note 17). In addition, 36,000
Series II preference shares were retracted for the cash equivalent value
of 0.46 of a Class A common share of Hollinger International at the time
of retraction, which totalled $277,000.
During 2001, 2,685,465 Series II preference shares were retracted in
exchange for 1,235,312 of shares of Hollinger International Class A
common stock which, together with the retraction of retractable common
shares in exchange for shares of Hollinger International Class A common
stock (note 13d)) and Hollinger International share redemptions and
sales described in note 4e), resulted in a gain on effective sale of
Hollinger International shares of $59,449,000 (note 17). In addition,
28,038 Series II preference shares were retracted for the cash
equivalent value of 0.46 of a share of Class A common stock of Hollinger
International at the time of retraction, which totalled $317,000.
During 2000, a total of 6,710,817 Series II preference shares were
retracted in exchange for 3,086,971 shares of Hollinger International
Class A common stock which, together with the
F-29
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
retraction of retractable common shares in exchange for shares of
Hollinger International common stock (note 13e)), resulted in a gain on
effective sale of Hollinger International shares of $28,450,000 (note
17). In addition, 239,435 Series II preference shares were retracted for
the cash equivalent value of 0.46 of a share of Class A common stock of
Hollinger International at the time of retraction, which totalled
$2,385,000.
The Series II preference shares represent a financial liability and are
recorded in the accounts at their fair value, being the market value of
the shares of Class A common stock of Hollinger International for which
they are exchangeable. At December 31, 2002, the market value of the
shares of Class A common stock of Hollinger International into which the
4,580,979 Series II preference shares were exchangeable was $33,827,000
or $11,983,000 less than the issue price. At December 31, 2001, the
market value of the shares of Class A common stock of Hollinger
International into which the 5,366,979 Series II preference shares are
exchangeable was $46,000,000 or $7,670,000 less than issue price.
As at December 31, 2002, the cumulative deferred unrealized gains of
$11,983,000 have been deferred as the Series II preference shares are
hedged by the Company's investment in shares of Hollinger International
Class A common stock, which it intends to deliver in future Series II
preference share retractions, if any. Delivery of shares of Hollinger
International Class A common stock on such retractions would result in a
dilution gain to the Company which would be included in unusual items.
b) The Series III preference shares provide for a mandatory redemption on
the fifth anniversary of issue being April 30, 2004 for $10.00 cash per
share (plus unpaid dividends) and an annual cumulative dividend,
payable quarterly, of $0.70 per share per annum (or 7%) during the
five-year term. The Company has the right at its option to redeem all
or any part of the Series III preference shares at any time after April
30, 2002, for $10.00 cash per share (plus unpaid dividends). Holders
have the right at any time to retract Series III preference shares for
a retraction price payable in cash which, until April 30, 2003,
fluctuates by reference to two benchmark Government of Canada bonds
having a comparable yield and term to the Series III preference shares,
and during the year ending April 30, 2004, the retraction price will be
$9.50 per share (plus unpaid dividends in each case).
During 2000, 315,000 Series III preference shares were retracted for
cash of $2,748,000. The resulting gain of $402,000 was included in
unusual items (note 17).
c) Certain of the HCPH Special shares, issued in 1997, represented a
financial liability of the Company which was hedged by the Company's
investment in shares of Class A common stock of Hollinger
International. In June 2000, the Company exercised its option to pay
cash on the mandatory exchange of these Special shares in the amount of
US$36.8 million. The previously deferred foreign exchange loss arising
from translating the U.S. dollar obligation was written off to unusual
items (note 17).
In addition, in connection with the acquisition of Southam shares in
1997, HCPH issued 6,552,425 Special shares valued at $10.00 per share at
the time of issue. In accordance with the terms of these shares,
Hollinger International was required to deliver cash or common shares of
Hollinger International upon the exchange of the Special shares and
accordingly, they did not represent a financial liability of the Company
and were presented as minority interest. These shares were exchangeable
at the option of the holder at any time prior to June 26, 2000, into
newly issued Class A subordinate voting shares of Hollinger
International. On June 12, 2000, Hollinger International exercised its
option to pay cash on the mandatory exchange of the HCPH Special shares.
Pursuant to the terms of the indenture governing the Special shares,
each Special share was
F-30
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
exchanged for cash of US$8.88 resulting in a payment to Special
shareholders by Hollinger International of US$58.2 million.
12. OTHER LIABILITIES AND DEFERRED CREDITS
2001 2002
-------- --------
Deferred gains.............................................. $ 3,189 $ 2,536
Pension obligations (note 22)............................... 8,182 12,863
Accrued post-retirement cost (note 22)...................... 62,092 60,506
Other benefit obligations................................... 35,607 18,824
Liability for amounts due to Participation Trust (notes 5a)
and 24d))................................................. 691 21,444
Liability for cross currency swap (note 24d))............... -- 14,475
-------- --------
$109,761 $130,648
======== ========
Deferred gains represent a lease inducement, which is being recognized in
income over the term of the lease, and a portion of the gain arising on the
Telegraph's transfer of certain equipment to the Trafford Park joint venture,
which is being recognized in income as the assets are depreciated and/or sold by
the joint venture.
13. CAPITAL STOCK
2001 2002
-------- --------
AUTHORIZED
Unlimited number of retractable common shares and an
unlimited number of preference shares
ISSUED AND FULLY PAID
PREFERENCE SHARES
4,580,979 Series II (2001 -- 5,366,979) (note 11)......... $ -- $ --
10,147,225 Series III (2001 -- 10,147,225) (note 11)...... -- --
RETRACTABLE COMMON SHARES
32,352,047 (2001 -- 32,068,937)........................... 271,774 273,759
-------- --------
$271,774 $273,759
======== ========
a) The retractable common shares have terms equivalent to common shares,
except that they are retractable at any time by the holder for their
retraction price, which is fixed from time to time, in exchange for the
Company's shares of Hollinger International Class A common stock of
equivalent value or, at the Company's option, cash. The retraction
price each quarter (or, in certain specific cases more frequently) is
between 90% and 100% of the Company's current value, as determined by
the Retraction Price Committee in accordance with the share conditions.
b) During 2002, 141,000 and 1,148 retractable common shares were retracted
for cash of $7.50 per share and $5.50 per share, respectively. The
total retractions in 2002 of 142,148 retractable common shares resulted
in a gain on retraction of $141,000, which has been included in the
consolidated statements of deficit.
c) In December 2002, the Company paid a stock dividend of 10 cents per
retractable common share, resulting in 425,258 retractable common
shares being issued for $3,189,000 with a corresponding amount booked
to dividends paid.
F-31
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
d) During 2001, 20,015 retractable common shares were retracted for cash
amounts ranging between $8.00 and $14.50 per share for total cash
consideration of $273,000. In addition, a further 1,809,500 and
2,476,035 retractable common shares were retracted for $14.50 and
$13.00 per share, respectively, and were settled with the delivery of
an aggregate of 2,570,002 shares of Hollinger International Class A
common stock. This, together with the retraction of Series II
preference shares for Hollinger International Class A common stock
(note 11a)) and the Hollinger International share redemptions and sales
described in note 4e), resulted in a gain on effective sale of the
Hollinger International shares of $59,449,000 (note 17). The total
retractions in 2001 of 4,305,550 retractable common shares resulted in
a premium on retraction of $22,211,000, which has been charged to
deficit.
e) During 2000, 13,210 and 33,918 retractable common shares were retracted
for cash of $10.00 per share and $16.75 per share, respectively. In
addition, a further 51,100 and 723,700 retractable common shares were
retracted for $11.50 and $16.75, respectively, and were settled with
the delivery of 554,927 shares of Hollinger International Class A
common stock. This, together with the retraction of Series II
preference shares for Hollinger International shares (note 11a)),
resulted in a gain on effective sale of the Hollinger International
shares of $28,450,000 (note 17). The total retractions in 2000 of
821,928 retractable common shares resulted in premium on retraction of
$6,448,000 which has been charged to deficit.
f) The Company and certain of its subsidiaries have stock option plans for
their employees.
i) Details of the Hollinger Inc. stock option plan are as follows:
The Company has one Executive Share Option Plan ("Plan"), under which
the Company may grant options to certain key executives of the
Company, its subsidiary or affiliated companies or its parent
company, for up to 5,560,000 retractable common shares.
These options give the holder the right to purchase, subject to the
executives' entitlement to exercise, one retractable common share of
the Company for each option held. The options are exercisable to the
extent of 25% thereof at the end of each of the first through fourth
years following granting, on a cumulative basis. Options expire six
years after the date of grant. Unexercised options expire one month
following the date of termination of the executives' employment,
except in the case of retirement at normal retirement age, death or
certain offers made to all or substantially all of the holders of
retractable common shares of the Company, in which events, all
unexercised options become exercisable in full.
Stock option activity with respect to the Company's stock options is
as follows
NUMBER
OF EXERCISE
SHARES PRICE
------- --------
Options outstanding as at December 31, 1999, 2000 and
2001.................................................... 928,000 $13.72
Options expired in 2002................................... (15,000) 13.72
------- ------
Options outstanding as at December 31, 2002............... 913,000 $13.72
======= ======
Options exercisable at December 31, 2000.................. 464,000 $13.72
======= ======
Options exercisable at December 31, 2001.................. 696,000 $13.72
======= ======
Options exercisable at December 31, 2002.................. 913,000 $13.72
======= ======
Options outstanding at December 31, 2000, 2001 and 2002 had a
remaining contractual life of four, three and two years,
respectively.
F-32
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
ii) Details of Hollinger International's stock option plan are as
follows:
Hollinger International's Incentive Plan is administered by its
independent committee ("Committee") of its Board of Directors. The
Committee has the authority to determine the employees to whom awards
will be made, the amount and type of awards, and the other terms and
conditions of the awards. In 1999, the Company adopted the 1999 Stock
Incentive Plan ("1999 Stock Plan") which superseded its previous two
plans.
The 1999 Stock Plan authorizes the grant of incentive stock options
and nonqualified stock options. The exercise price for stock options
must be at least equal to 100% of the fair market value of the shares
of Hollinger International Class A common stock on the date of grant
of such option.
Under Section 3870, stock options granted to employees of Ravelston,
the parent company of the Company, must be measured at fair value and
recorded as a dividend-in-kind by Hollinger International. On
February 5, 2002, Hollinger International granted 1,309,000 stock
options to employees of Ravelston with an exercise price of US$11.13
per share. The aggregate fair value of these options was $9,594,000
(US$6,111,000) and this has been recorded by Hollinger International
as an in-kind dividend (with no impact on the accounts of the
Company) during the year. On April 2, 2001, Hollinger International
granted 1,402,500 stock options to employees of Ravelston with an
exercise price of US$14.37 per share. The aggregate fair value of
these options was $12,090,000 (US$7,800,000) and was recorded by
Hollinger International as an in-kind dividend in 2001.
For all other series of stock options, no compensation cost has been
recognized by Hollinger International.
Stock option activity with respect to Hollinger International's stock
options is as follows:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
(IN US$)
Options outstanding at December 31, 1999............ 5,149,500 $11.88
Options granted..................................... 2,559,250 10.57
Options exercised................................... (471,063) 11.67
Options cancelled................................... (536,374) 12.11
---------- ------
Options outstanding at December 31, 2000............ 6,701,313 11.38
Options granted..................................... 2,418,000 14.40
Options exercised................................... (624,162) 11.01
Options cancelled................................... (82,750) 12.33
---------- ------
Options outstanding at December 31, 2001............ 8,412,401 12.26
Options granted..................................... 2,227,000 11.14
Options exercised................................... (75,375) 10.81
Options cancelled................................... (168,688) 12.64
---------- ------
Options outstanding at December 31, 2002............ 10,395,338 $12.03
========== ======
Options exercisable at December 31, 2000............ 1,989,548 $11.51
========== ======
Options exercisable at December 31, 2001............ 3,032,682 $11.48
========== ======
Options exercisable at December 31, 2002............ 4,739,994 $11.85
========== ======
F-33
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
iii) Had the Company determined compensation expense based on the fair
value method at the grant date for stock options granted to
employees, consistent with the method prescribed under Section
3870, the Company's net earnings (loss) for the year and the
earnings (loss) per share would have been reported as the pro forma
amounts indicated below. This compensation expense takes into
account all options granted by the Company and Hollinger
International, including those granted prior to January 1, 2002.
The fair value of the options is amortized over the vesting period.
2000 2001 2002
-------- --------- --------
Net earnings (loss), as reported............ $189,373 $(131,898) $(88,640)
Stock-based compensation expense --
Hollinger Inc............................. (478) (239) (72)
Stock-based compensation expense --
Hollinger International Inc............... (4,712) (4,711) (3,985)
-------- --------- --------
Pro forma net earnings (loss)............... $184,183 $(136,848) $(92,697)
======== ========= ========
Net earnings (loss) per share:
As reported............................... $ 5.11 $ (3.91) $ (2.76)
Effect of stock-based compensation
expense................................ (0.14) (0.15) (0.13)
-------- --------- --------
Pro forma basic net earnings (loss) per
share..................................... $ 4.97 $ (4.06) $ (2.89)
======== ========= ========
Diluted net earnings (loss) per share, as
reported.................................. $ 5.05 $ (4.17) $ (2.79)
Pro forma diluted net earnings (loss) per
share..................................... $ 4.91 $ (4.32) $ (2.92)
======== ========= ========
The fair value of each Hollinger International stock option granted
during 2000, 2001 and 2002 was estimated on the date of grant for pro
forma disclosure purposes using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants
in fiscal 2000, 2001 and 2002, respectively: dividend yield of 3.4%,
4.6% and 3.6%, expected volatility of 43.3%, 55.2% and 68.3%,
risk-free interest rates of 5.1%, 5.0% and 4.5% and expected lives of
10 years. Weighted average fair value of options granted by Hollinger
International during 2000, 2001 and 2002 was $6.12 (US$4.12), $8.79
(US$5.67) and $8.87 (US$5.65), respectively.
14. EQUITY ADJUSTMENT FROM FOREIGN CURRENCY TRANSLATION
As described in note 1 under "Foreign currency translation", this amount
results principally from the accounting treatment for self-sustaining foreign
subsidiaries. The change in the amount from December 31, 2001 to December 31,
2002 primarily reflects the weakening of the Canadian dollar against the British
pound partly offset by the strengthening of the Canadian dollar against the U.S.
dollar and the recognition in unusual items (note 17) of a realized foreign
exchange gain arising on the reduction of net investments in foreign
subsidiaries. The amount at December 31, 2002 is unrealized and bears no
relationship to the underlying value of the Company's investment in foreign
subsidiaries.
F-34
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
15. COMMITMENTS
a) Future minimum lease payments subsequent to December 31, 2002 under
operating leases are as follows:
b) In connection with certain of its cost and equity investments (note 5),
Hollinger International and its subsidiaries are committed to fund
approximately $1.9 million to those investees in 2003.
16. CONTINGENCIES
a) The Telegraph has guaranteed to third parties, the joint venture
partners' share of operating lease obligations of both the West Ferry
and Trafford Park joint ventures, which amounted to $948,000 (L372,000)
at December 31, 2002. These obligations are also guaranteed jointly and
severally by each joint venture partner.
b) In connection with the Company's insurance program, letters of credit
are required to support certain projected workers' compensation
obligations. At December 31, 2002, letters of credit in the amount of
$4,384,500 were outstanding.
c) A number of libel and legal actions against the Company and its
subsidiaries are outstanding. The Company believes there are valid
defences to these proceedings or sufficient insurance to protect it
from material loss.
d) In special circumstances, the Company's newspaper operations may engage
freelance reporters to cover stories in locales that carry a high risk
of personal injury or death. Subsequent to December 31, 2002, the
Telegraph has engaged a number of journalists and photographers to
report from the Middle East. As a term of their engagement, the
Telegraph has agreed to provide a death benefit which, in the aggregate
for all freelancers engaged, amounts to $13,100,000 (L5,153,000). This
exposure is uninsured. Precautions have been taken to avoid a
concentration of the journalists and photographers in any one location.
The uninsured exposure was reduced to $3,820,000 (L2,600,000) as of
March 31, 2003.
F-35
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
17. UNUSUAL ITEMS
2000 2001 2002
-------- --------- --------
Net gain on dilution of investments......................... $ 25,775 $ -- $ --
Gain (loss) on sale of investments.......................... 47,921 (240,060) --
Gain on sales of interest in Hollinger International (notes
4a), 4e), 11a) and 13d)).................................. 28,450 59,449 20,103
Net gain (loss) on sales of Publishing interests............ 697,871 (22,963) --
Loss on retirement of Senior Notes (note 10c)).............. -- -- (56,287)
New Chicago plant pre-operating costs....................... (10,097) (7,237) (661)
Write-off of financing fees................................. (16,088) -- --
Write-off of investments.................................... (31,381) (79,943) (63,609)
Decrease in pension valuation allowance (note 22)........... -- 58,704 34,402
Realized loss on Total Return Equity Swap (note 24b))....... -- (29,646) (43,313)
Pension and post-retirement plan liability adjustment....... -- (16,823) --
Net foreign exchange gain on reduction of net investment in
foreign subsidiaries...................................... -- -- 44,548
Other income (expense), net................................. (41,506) (16,915) 2,187
-------- --------- --------
$700,945 $(295,434) $(62,630)
======== ========= ========
The income tax expense related to unusual items amounted to $229,812,000 in
2000, and an income tax recovery of $76,849,000 and $8,043,000 in 2001 and 2002,
respectively. The minority interest expense in unusual items after income taxes
amounted to $251,628,000 in 2000, and a minority interest recovery of
$144,634,000 and $48,570,000 in 2001 and 2002, respectively, resulting in net
earnings (loss) from unusual items after income taxes and minority interest of
$219,505,000, ($73,951,000) and ($6,017,000) in 2000, 2001 and 2002,
respectively.
18. INCOME TAXES
Income tax expense (recovery) attributable to income from continuing
operations consists of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The income tax expense (recovery) in the consolidated statements of
earnings varies from the amount that would be computed by applying the basic
federal and provincial income tax rates to loss before income taxes and minority
interest as shown in the following table:
2000 2001 2002
-------- --------- --------
Earnings (loss) before income taxes and minority
interest.......................................... $780,522 $(454,883) $(89,511)
======== ========= ========
Basic income tax rate............................... 43.95% 41.75% 41.00%
======== ========= ========
Computed income tax expense (recovery).............. $343,039 $(189,914) $(36,700)
Decrease (increase) in income tax expenses
(recovery) resulting from:
Different tax rate on earnings of
subsidiaries................................. (83,949) 22,075 17,834
Tax gain in excess of book gain................ (244,030) 24,293 949
Potential tax benefit of current year's losses
not recorded................................. 29,255 -- --
Large Corporations Tax......................... 15,531 940 1,079
Loss on Total Return Equity Swap............... -- 12,377 17,758
Change in valuation allowance.................. -- 42,841 74,043
Minority interest in earnings of Hollinger
L.P.......................................... (26,669) (2,001) (1,214)
Permanent differences.......................... 226,914 (88) 50,276
-------- --------- --------
Income tax expense (recovery)....................... $260,091 $ (89,477) $124,025
======== ========= ========
Effective tax rate.................................. 33.32% 19.67% 138.56%
======== ========= ========
The Company's Canadian subsidiaries have operating losses carried forward
for tax purposes of approximately $76,892,000, the tax benefit of which has not
been reflected in the accounts. These losses expire as follows:
The Company has recorded a valuation allowance of $74,043,000 in the
current year related to net operating loss carryforwards and other deferred tax
assets in the Canadian group. The valuation allowance in the prior year related
entirely to net operating losses of N.P. Holdings Company, a subsidiary of the
Company. As described in note 23c), this subsidiary was sold to an affiliate
during the year. The tax losses were sold at their carrying value.
F-37
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities are presented
below:
2001 2002
--------- ---------
Future tax assets:
Net operating loss carryforwards.......................... $ 127,753 $ 37,283
Compensation and accrued pension.......................... 7,459 6,952
Investments............................................... 20,717 51,676
Post-retirement benefit obligations....................... 28,044 28,050
Other..................................................... 86,046 30,933
--------- ---------
Gross future tax assets..................................... 270,019 154,894
Less valuation allowance.................................... (28,539) (74,043)
--------- ---------
Net future tax assets....................................... 241,480 80,851
--------- ---------
Future tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation............................ 94,037 107,671
Intangible assets, principally due to differences in basis
and amortization....................................... 469,564 189,365
Pension assets............................................ 7,746 47,266
Long-term advances under joint venture printing
contract............................................... 20,801 20,290
Deferred gain on exchange of assets....................... 56,009 40,342
Other..................................................... 80,260 51,396
--------- ---------
Gross future tax liabilities................................ 728,417 456,330
--------- ---------
Future income tax liabilities............................... $(486,937) $(375,479)
========= =========
19. LOSS AND CASH FLOWS PER RETRACTABLE COMMON SHARE
The following tables reconcile the numerator and denominator for the
calculation of basic and diluted loss per share for the years ended December 31,
2000, 2001 and 2002:
YEAR ENDED DECEMBER 31, 2000
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS
Net earnings available to common shareholders.... $189,373 37,041 $5.11
Effect of dilutive securities
Stock options of subsidiary.................... (2,161) -- (0.06)
-------- ------ -----
Diluted EPS
Net earnings available to common shareholders.... $187,212 37,041 $5.05
======== ====== =====
F-38
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
YEAR ENDED DECEMBER 31, 2001
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS
Net loss available to common shareholders........ $(131,898) 33,740 $(3.91)
Effect of dilutive securities
Stock options of subsidiary.................... (8,651) -- (0.26)
--------- ------ ------
Diluted EPS
Net loss available to common shareholders........ $(140,549) 33,740 $(4.17)
========= ====== ======
YEAR ENDED DECEMBER 31, 2002
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS
Net loss available to common shareholders........ $(88,640) 32,064 $(2.76)
Effect of dilutive securities
Stock options of subsidiary.................... (885) -- (0.03)
-------- ------ ------
Diluted EPS
Net loss available to common shareholders........ $(89,525) 32,064 $(2.79)
======== ====== ======
For 2000, 2001 and 2002, the effect of potentially dilutive options of the
Company were excluded from the computation of diluted loss per share as their
effect is anti-dilutive.
YEAR ENDED DECEMBER 31
----------------------
2000 2001 2002
----- ------ -----
Cash flows provided by (used for) operations per retractable
common share
Basic..................................................... $4.15 $(3.56) $1.86
Diluted................................................... $4.09 $(3.82) $1.83
Cash flows provided by (used for) operations per retractable common share
is based on the cash flows provided by (used for) operations as computed in note
20. Diluted cash flows provided by (used for) operations utilize the effect of
dilutive securities on income, as disclosed in note 19. Cash flows provided by
(used for) operations per retractable common share calculations utilize the
weighted average number of retractable common shares outstanding during the year
of 37,040,670, 33,740,182 and 32,064,151, in 2000, 2001 and 2002, respectively.
F-39
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
20. CASH FLOWS
a) Cash flows provided by (used for) operations is before any increase or
decrease in non-cash operating working capital and other costs. These
items are included in the consolidated statements of cash flows. Cash
flows provided by (used for) operations is determined as follows:
2000 2001 2002
-------- --------- --------
Net earnings (loss)................................. $189,373 $(131,898) $(88,640)
Unusual items (note 17)............................. (700,945) 295,434 62,630
Current income taxes related to unusual items....... 459,831 (15,155) 149
Items not involving cash:
Depreciation and amortization..................... 219,932 144,716 88,193
Amortization of deferred financing costs.......... 18,504 18,648 11,347
Future income taxes............................... (357,603) (145,781) 126,640
Minority interest................................. 307,079 (249,439) (131,187)
Net earnings in equity-accounted companies, net of
dividends received............................. 14,115 36,789 1,233
Non-cash interest income on CanWest debentures.... 11,463 (67,517) (9,239)
Miscellaneous..................................... (8,170) (6,008) (1,498)
-------- --------- --------
$153,579 $(120,211) $ 59,628
======== ========= ========
b) The change in non-cash operating working capital is determined as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
--------- -------- --------
Changes in current assets and current liabilities,
net of acquisitions and dispositions:
Accounts receivable............................... $ (77,880) $ 23,666 $ 1,061
Inventory......................................... (11,152) (3,886) 14,704
Prepaid expenses.................................. 903 (2,594) (4,337)
Amounts due to related parties.................... (5,897) -- 14,775
Accounts payable and accrued expenses............. (38,678) 55,373 (26,223)
Income taxes payable.............................. 53,466 (77,980) 31,821
Deferred revenue.................................. (933) (11,726) (1,307)
Bank indebtedness................................. 10,340 (150,813) 1,094
Other............................................. (12,625) 23,531 9,740
--------- -------- --------
$ (82,456) $(144,429) $ 41,328
========= ======== ========
21. SEGMENTED INFORMATION
The Company operates principally in the business of publishing, printing
and distribution of newspapers and magazines and holds investments principally
in companies which operate in the same business as the Company. Other
investments held by the Company either do not represent a business segment or
are not sufficiently significant to warrant classification as a separate segment
and are included within Corporate and Other. HCPH Co., Hollinger L.P. and, until
August 31, 2001, National Post make up the Canadian Newspaper Group. The U.S.
Community Group includes the results of the Jerusalem Post and the last
remaining U.S. Community paper until it was sold in August 2001. The following
is a summary of the reportable segments of the Company.
F-40
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
UNITED STATES
-------------------- U.K. CANADIAN
YEAR ENDED CHICAGO COMMUNITY NEWSPAPER NEWSPAPER CORPORATE CONSOLIDATED
DECEMBER 31, 2000 GROUP GROUP GROUP GROUP AND OTHER TOTAL
----------------- -------- --------- --------- ---------- --------- ------------
Sales revenue............. $596,759 $100,104 $882,196 $1,579,200 $ 21 $3,158,280
Cost of sales and
expenses................ 504,079 85,702 684,900 1,294,975 16,527 2,586,183
-------- -------- -------- ---------- -------- ----------
Sales revenue less cost of
sales and expenses...... 92,680 14,402 197,296 284,225 (16,506) 572,097
Depreciation and
amortization............ 37,328 7,653 58,148 110,112 6,691 219,932
-------- -------- -------- ---------- -------- ----------
Operating income (loss)... $ 55,352 $ 6,749 $139,148 $ 174,113 $(23,197) $ 352,165
======== ======== ======== ========== ======== ==========
Expenditures on capital
assets.................. $ 38,177 $ 5,038 $ 24,039 $ 42,812 $ 2,595 $ 112,661
======== ======== ======== ========== ======== ==========
UNITED STATES
-------------------- U.K. CANADIAN
YEAR ENDED CHICAGO COMMUNITY NEWSPAPER NEWSPAPER CORPORATE CONSOLIDATED
DECEMBER 31, 2001 GROUP GROUP GROUP GROUP AND OTHER TOTAL
----------------- -------- --------- ---------- --------- --------- ------------
Sales revenue............. $686,266 $29,619 $ 801,053 $305,073 $ 49 $1,822,060
Cost of sales and
expenses................ 622,974 31,950 703,296 337,383 34,505 1,730,108
-------- ------- ---------- -------- -------- ----------
Sales revenue less cost of
sales and expenses...... 63,292 (2,331) 97,757 (32,310) (34,456) 91,952
Depreciation and
amortization............ 53,537 2,962 63,855 18,134 6,228 144,716
-------- ------- ---------- -------- -------- ----------
Operating income (loss)... $ 9,755 $(5,293) $ 33,902 $(50,444) $(40,684) $ (52,764)
======== ======= ========== ======== ======== ==========
Total assets.............. $973,279 $85,291 $1,257,805 $691,568 $621,299 $3,629,242
======== ======= ========== ======== ======== ==========
Expenditures on capital
assets.................. $ 19,343 $ 463 $ 48,788 $ 4,405 $ 18,407 $ 91,406
======== ======= ========== ======== ======== ==========
UNITED STATES
-------------------- U.K. CANADIAN
YEAR ENDED CHICAGO COMMUNITY NEWSPAPER NEWSPAPER CORPORATE CONSOLIDATED
DECEMBER 31, 2002 GROUP GROUP GROUP GROUP AND OTHER TOTAL
----------------- -------- --------- ---------- --------- ---------- ------------
Sales revenue............ $693,690 $20,781 $ 804,584 $109,121 $ 22 $1,628,198
Cost of sales and
expenses............... 591,628 25,259 693,895 112,723 30,389 1,453,894
-------- ------- ---------- -------- ---------- ----------
Sales revenue less cost
of sales and
expenses............... 102,062 (4,478) 110,689 (3,602) (30,367) 174,304
Depreciation and
amortization........... 42,378 3,682 35,939 1,713 4,481 88,193
-------- ------- ---------- -------- ---------- ----------
Operating income
(loss)................. $ 59,684 $(8,160) $ 74,750 $ (5,315) $ (34,848) $ 86,111
======== ======= ========== ======== ========== ==========
Total assets............. $895,917 $59,173 $1,120,023 $411,891 $1,129,217 $3,616,221
======== ======= ========== ======== ========== ==========
Expenditures on capital
assets................. $ 24,344 $ 7,888 $ 27,680 $ 3,575 $ 116 $ 63,603
======== ======= ========== ======== ========== ==========
Corporate and Other includes results of miscellaneous operations.
22. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PENSION PLANS
Hollinger International sponsors six defined contribution plans, three of
which have provisions for Hollinger International matching contributions. For
the years ended December 31, 2000, 2001 and 2002,
F-41
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Hollinger International contributed $2,372,000, $2,402,000 and $3,330,000,
respectively. Hollinger International sponsors 11 defined contribution plans in
Canada and contributed $3,069,000, $261,500 and $241,000 to the plans in 2000,
2001 and 2002, respectively.
The Telegraph sponsors a defined contribution plan for the majority of its
employees, as well as a defined contribution plan to provide pension benefits
for senior executives. For 2000, 2001 and 2002, contributions to the defined
contribution plan are included as part of the service cost of the defined
benefit plan. For the years ended December 31, 2000, 2001 and 2002, the
Telegraph contributed $874,000, $803,000 and $835,000, respectively, to the
Telegraph Executive Pension Scheme. The Telegraph plan's assets consist
principally of U.K. and overseas equities, unit trusts and bonds.
DEFINED BENEFIT PENSION PLANS
The Company's subsidiaries have ten foreign and seven domestic
single-employer defined benefit plans and contribute to various union-sponsored,
collectively bargained multi-employer pension plans. The Company's subsidiaries'
contributions to these plans for the years ended December 31, 2000, 2001 and
2002 were:
The Telegraph has a defined benefit plan that was closed to new
participants on July 1, 1991 and provides only benefits accrued up to that date.
The liabilities of the plan have been actuarially valued as at December 31,
2002. At that date, the market value of the plan assets was $191,742,000,
representing 91% of the estimated cost of purchasing the plan's benefits from an
insurance company. The actuary assumed a discount rate of 5.6%. Increases to
pension payments are discretionary and are awarded by the trustees, with the
Telegraph's consent, from surpluses arising in the fund from time to time.
Contributions to the plan were $9,900,000 $10,034,000 and $10,616,000 in 2000,
2001 and 2002, respectively.
West Ferry and Trafford Park have defined benefit plans, the West Ferry
Printers Pension Scheme and the Trafford Park Printers Pension Scheme,
respectively, of which 50%, being the Telegraph's share in the joint venture, of
the pension costs and obligations are included in the Company's financial
statements. Pursuant to the West Ferry joint venture agreement, the Telegraph
has a commitment to fund 50% of the obligation under West Ferry's defined
benefit plan.
SINGLE-EMPLOYER PENSION PLANS
The benefits under the subsidiary companies' single-employer pension plans
are based primarily on years of service and compensation levels. These companies
fund the annual provisions which are deductible for income tax purposes. The
plans' assets consist principally of marketable equity securities and corporate
and government debt securities.
F-42
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The components of the net period cost (benefit) for the years ended
December 31, 2000, 2001 and 2002 are as follows:
2000 2001 2002
-------- -------- --------
Service cost......................................... $ 22,076 $ 15,308 $ 15,930
Interest cost........................................ 64,590 49,433 49,541
Expected return on plan assets....................... (90,011) (56,133) (52,422)
Amortization of prior service costs.................. 900 583 782
Settlement and curtailment........................... 6,487 2,272 --
Amortization of net (gain) loss...................... (304) 1,516 6,200
Change in valuation allowance against prepaid benefit
cost............................................... 97,258 (59,106) (34,729)
-------- -------- --------
Net period cost (benefit)............................ $100,996 $(46,127) $(14,698)
======== ======== ========
The table below sets forth the reconciliation of the benefit obligation as
of December 31, 2001 and 2002:
2001 2002
--------- --------
Benefit obligation at the beginning of the year............. $ 864,839 $780,138
Adjustments to opening balance.............................. 7,243 --
Service cost................................................ 15,308 15,930
Interest cost............................................... 49,433 49,541
Participant contributions................................... 9,027 7,539
Divestitures................................................ (122,131) --
Plan amendments............................................. 28 9,629
Settlement gain............................................. (12,973) --
Exchange rate differences................................... 17,860 33,314
Changes in assumptions...................................... -- (1,000)
Actuarial loss (gain)....................................... 17,402 (21,064)
Benefits paid............................................... (65,898) (69,670)
--------- --------
Benefit obligation at the end of the year................... $ 780,138 $804,357
========= ========
The 2001 settlement gain was related to the sale of Canadian newspapers.
The 2000 curtailment and settlement gains were related to the sale of Canadian
and Community Group newspapers.
The table below sets forth the change in plan assets for the years ended
December 31, 2001 and 2002:
2001 2002
--------- --------
Fair value of plan assets at the beginning of the year...... $ 971,208 $757,751
Adjustment to opening balance............................... -- 4,897
Actual return on plan assets................................ (37,943) (67,865)
Exchange rate differences................................... 16,969 27,529
Employer contributions...................................... 15,737 20,166
Participant contributions................................... 9,027 7,539
Settlement gain............................................. (15,245) --
Divestitures................................................ (136,104) --
Benefits paid............................................... (65,898) (69,670)
--------- --------
Fair value of plan assets at the end of the year............ $ 757,751 $680,347
========= ========
F-43
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The following table provides the amounts recognized in the consolidated
balance sheet as of December 31, 2001 and 2002:
2001 2002
-------- ---------
Plan deficit................................................ $(22,387) $(124,010)
Unrecognized net actuarial loss............................. 133,110 233,369
Unrecognized prior service cost............................. 3,699 3,039
Unrecognized net transition obligation...................... (331) 2,054
-------- ---------
Prepaid benefit cost........................................ 114,091 114,452
Valuation allowance......................................... (38,814) (4,085)
-------- ---------
Prepaid benefit cost, net of valuation allowance............ $ 75,277 $ 110,367
======== =========
The above prepaid benefit cost is classified in the consolidated balance
sheet as follows:
As a result of the 2000 sale of Canadian newspapers to CanWest, the
expected future benefits to be derived from the plan surplus at that time were
significantly reduced and a valuation allowance of $97.9 million was provided
for. Due to the reduction in the plan surplus in 2001 and 2002 as a result of a
decline in the market value of the assets in the plan, the valuation allowance
required against the pension asset has been reduced by $58.7 million and $34.4
million, respectively. This change in the valuation allowance, in respect of the
HCPH Co. pension plans, has been recognized in income in 2001 and 2002 as an
unusual item (note 17).
Approval by the various provincial pension regulatory bodies has not yet
been granted for the transfer of pension assets related to the operations
previously sold. To the extent pension surpluses are required to be transferred
for the CanWest properties, the Company is entitled to a cash payment from
CanWest for a portion of that amount. The Company anticipates that these
transfers will be made in 2003.
F-44
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
MULTI-EMPLOYER PENSION PLANS
Certain U.S. employees were covered by union-sponsored multi-employer
pension plans, all of which are defined benefit plans. Contributions were
determined in accordance with the provisions of negotiated labour contracts and
are generally based on the number of man-hours worked. Pension expense for these
plans was $1,828,000, nil and nil for the years ended December 31, 2000, 2001
and 2002, respectively. The newspaper properties participating in these
multi-employer plans were sold in 2000. The passage of the Multi-employer
Pension Plan Amendments Act of 1980 (the "Act") may, under certain
circumstances, cause Hollinger International to become subject to liabilities in
excess of the amounts provided for in the collective bargaining agreements.
Generally, liabilities are contingent upon withdrawal or partial withdrawal from
the plans. Hollinger International has not undertaken to withdraw or partially
withdraw from any of the plans as of December 31, 2002. Under the Act,
withdrawal liabilities would be based upon Hollinger International's
proportional share of each plan's unfunded vested benefits. As of the date of
the latest actuarial valuations, Hollinger International's share of the unfunded
vested liabilities of each plan was zero.
POST-RETIREMENT BENEFITS
The Company's subsidiaries sponsor two post-retirement plans that provide
post-retirement benefits to certain employees in Canada.
The components of net period post-retirement cost (benefit) for the years
ended December 31, 2000, 2001 and 2002 are as follows:
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.75%, 6.5% and 6.25% for 2000, 2001 and
2002, respectively. All benefits under the plans are paid for by contributions
to the plans. For measuring the expected post-retirement benefit obligation of
former Southam employees, an 8% annual rate of increase in the per capita claims
was assumed for 2002, 9% for 2001, and 10% for 2000.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. If the health care cost trend rate was
increased 1%, the accumulated post-retirement benefit obligation as of December
31, 2001 and 2002 would have increased $3,390,000 and $2,846,000, respectively,
and the effect of this change on the aggregate of service and interest cost for
2001 and 2002 would have been an increase of $220,000 and $260,000,
respectively. If the health care cost trend rate was decreased 1%, the
accumulated post-retirement benefit obligation as of December 31, 2001 and 2002
would have decreased by $2,098,000 and $2,556,000, respectively, and the effect
of this change on the aggregate of service and interest cost for 2001 and 2002
would have been a decrease of $160,000 and $233,000, respectively.
23. RELATED PARTY TRANSACTIONS
a) Lord Black controls Ravelston and, through Ravelston and its
subsidiaries, together with his associates, he exercises control or
direction over 78.2% (2000 -- 68.6%; 2001 -- 77.8%) of the outstanding
retractable common shares of the Company.
Ravelston has rights of first refusal in respect of any retractable
common shares of the Company that may be issued on exercise of options
held to acquire retractable common shares should the holders decide to
exercise their options and dispose of the retractable common shares.
Hollinger International and its subsidiaries have entered into a
services agreement with Ravelston, whereby Ravelston acts as manager of
the Company and carries out head office and executive responsibilities.
The services agreement was assigned on July 5, 2002 to RMI, a wholly
owned subsidiary of Ravelston. Ravelston and RMI billed to Hollinger
International and its subsidiaries fees totalling $49,943,000,
$44,853,000 and $37,272,000 for 2000, 2001 and 2002, respectively,
pursuant to this agreement.
Similarly, Ravelston carries out head office and executive
responsibilities for the Company and its subsidiaries, other than
Hollinger International and its subsidiaries. In 2001 and 2002, no
amounts were charged by Ravelston for such services. In 2000, the
Company received $10.7 million, net, from Ravelston pursuant to a
services agreement which was terminated on December 31, 2000.
Expenses of the Company are net of $2.0 million and $2.4 million in 2001
and 2002, respectively, received from Ravelston and RMI as a
reimbursement of certain head office expenses incurred on behalf of
Ravelston and RMI. Such expenses were not incurred on behalf of
Ravelston in 2000.
Certain executives of Ravelston and Moffat Management and Black-Amiel
Management, affiliates of Ravelston and RMI, have separate services
agreements with certain subsidiaries of Hollinger International. Amounts
paid directly by subsidiaries of Hollinger International pursuant to
such
F-46
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
agreements were $5,436,000, $2,629,000 and $2,976,000 for 2000, 2001 and
2002, respectively. The fees under Ravelston's and RMI's services
agreement and the fees paid directly to executives and affiliates of
Ravelston, in aggregate, are negotiated with and approved by Hollinger
International's independent committee.
In addition to all of the amounts referred to above, during 2000 and
2001, there was further remuneration paid directly by subsidiaries of
Hollinger International to certain Ravelston executives of $6,293,000
and $2,592,000, respectively (2002 -- nil).
b) On July 11, 2000, Hollinger International loaned US $36,817,000 to a
subsidiary of the Company in connection with the cash purchase by the
Company of HCPH Co. Special shares. The loan is payable on demand and
to December 31, 2001 interest was payable at the rate of 13% per annum.
Effective January 1, 2002, the interest rate was adjusted to LIBOR plus
3% per annum. This loan, together with accrued interest, totalled US
$45,848,000 at December 31, 2002. On March 10, 2003, a portion of this
loan has been settled and the terms of the loan have been amended as
described in note 29c).
c) On July 3, 2002, N.P. Holdings Company ("NP Holdings"), a subsidiary of
Hollinger International, was sold for cash consideration of $5.75
million to RMI. The net assets of NP Holdings primarily included
Canadian tax losses. The tax losses, only a portion of which was
previously recognized for accounting purposes, were effectively sold at
their carrying value. Due to the inability of NP Holdings to utilize
its own tax losses prior to their expiry, as a result of its disposing
of its interest in the National Post, it sold these losses to a company
which would be able to utilize the losses. The only other potential
purchaser for these losses, CanWest, declined the opportunity to
acquire the losses. The terms of the sale of the tax losses to RMI were
approved by the independent directors of Hollinger International.
d) The Company and its subsidiaries have unsecured demand loans and
advances, including accrued interest owing to Ravelston totalling $32.2
million and $52.2 million at December 31, 2001 and 2002, respectively.
At December 31, 2000, the Company and its subsidiaries have unsecured
demand loans and advances receivable of $1.0 million. The Company has
borrowed the majority of these funds from Ravelston to partially fund
its operating costs, including interest and preference share dividend
obligations. The loans bear interest at the bankers' acceptance rate
plus 3.75% per annum or 6.68% as at December 31, 2002.
Hollinger International owes $11.6 million, $13.7 million and $5.0
million at December 31, 2000, 2001 and 2002, respectively, to Ravelston
or RMI in connection with fees payable pursuant to the services
agreement. As at December 31, 2002, HCPH Co. also owes RMI $22.5 million
in connection with the assumption by RMI, as a result of its purchase of
NP Holdings (note 23c)), of a liability of $22.5 million owing to
CanWest. This amount is due on demand and is non-interest bearing. As
described in note 29e), this debt was transferred to a related company
on April 30, 2003.
e) In response to the 1998 issuer bid, all options held by executives were
exercised. As at December 31, 2000, 2001 and 2002, included in accounts
receivable is $5,866,000, $5,843,000 and $5,892,000, respectively, due
from executives, which bears interest at the prime rate plus 1/2%. The
receivables are fully secured by a pledge of the shares held by the
executives.
f) In 1999, executive-controlled companies invested in Hollinger L.P. As
at December 31, 2000, 2001 and 2002, included in accounts receivable is
$681,000, $436,000 and $373,000 due from these companies, which bears
interest at the prime rate plus 1/2%. The receivables are partially
secured by a pledge of the units held in Hollinger L.P.
F-47
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
g) During 2000 and 2001, in connection with the sales of properties
described in note 4c), 4g) and 4i), the Company, Ravelston, Hollinger
International, Lord Black and three senior executives entered into
non-competition agreements with the purchasers in return for cash
consideration paid.
h) As described in note 4c), 4f) and 4j), during 2001, the Company sold
newspaper properties to certain related parties.
i) As described in note 4e), during 2001, Hollinger International
redeemed certain of its shares held by the Company and converted
preference shares held by the Company into shares of Hollinger
International Class A common stock. The shares of Class A common stock
were subsequently purchased by Hollinger International from the
Company for cancellation.
j) Included in Other Assets at December 31, 2002 is $6,525,000
(US$4,130,000), owing to Hollinger International from Bradford
Publishing Company ('Bradford'), a company in which certain of the
Company's and Hollinger International's directors are significant
shareholders. Such amount represents the present value of the
remaining amounts owing under a non-interest bearing note receivable
granted to Hollinger International in connection with a
non-competition agreement entered into on the sale of certain
operations to Bradford during 2000. The note receivable is unsecured,
due over the period to 2010 and is subordinated to Bradford's lenders.
k) Included in Other Assets at December 31, 2002 is $7,677,000
(US$4,859,000) owed by Horizon Publications Inc. ("Horizon"), a company
controlled by certain members of the Board of Directors of Hollinger
International and the Company. Such amount represents the unpaid
purchase price payable to Hollinger International in connection with
the sale of certain operations to Horizon during 1999. The loan
receivable is unsecured, bears interest at the lower of LIBOR plus 2%
and 8% per annum and is due in 2007.
l) During 2002, the Company paid to Horizon a management fee in the
amount of $256,000 in connection with certain administrative services
provided by Horizon. Such fee was approved by Hollinger
International's independent directors.
m) Additional related party transactions occurring subsequent to year end
are described in note 29.
24. FINANCIAL INSTRUMENTS
a) Risk management activities
i) Credit risk
The Company does not have a significant exposure to any individual
customer or counterparty. The Company is exposed to credit risk in
the event of non-performance by counterparties in connection with its
foreign currency contracts and interest rate swap agreements. The
Company does not obtain collateral or other security to support
financial instruments subject to credit risk but mitigates this risk
by dealing only with financially sound counterparties and,
accordingly, does not anticipate loss due to non-performance.
ii) Interest rate and currency risk
The Company and its subsidiaries have entered into interest rate
swaps, forward foreign exchange contracts and cross-currency rate
swaps, as described in detail in notes 24c) and 24d) below.
F-48
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
iii) Market risk
During 1999, the Company's Series II exchangeable preference shares
became exchangeable for a fixed number of shares of Hollinger
International Class A common stock. As a result, such shares are
valued at an amount equivalent to the market price of the underlying
shares of Hollinger International Class A common stock for which they
are exchangeable. While the carrying value of these exchangeable
shares will fluctuate with the market price of the shares of
Hollinger International Class A common stock, this market risk is
mitigated by the Company's holding of such Hollinger International
shares.
b) Forward share purchase contracts
At December 31, 2000, Hollinger International had arrangements with four
banks pursuant to which the banks had purchased 14,109,905 shares of
Hollinger International's Class A common stock at an average price of
US$14.17. Hollinger International had the option, quarterly, up to and
including September 30, 2000, to buy the shares from the banks at the
same cost or to have the banks resell those shares in the open market.
These arrangements were extended from time to time for periods
ultimately ending between February 28, 2003 and June 30, 2003. In the
event the banks resold the shares, any gain or loss realized by the
banks would be for Hollinger International's account. Under the
arrangements, until Hollinger International purchased the shares or the
banks resold the shares, dividends paid on shares belonged to Hollinger
International and Hollinger International paid interest to the banks,
based on their purchase price at the rate of LIBOR plus a spread.
In August 2001, Hollinger International purchased for cancellation from
one of the banks 3,602,305 shares of Class A common stock for
US$50,000,000 or US$13.88 per share. The market value of these shares on
the date of purchase was US$47,000,000 or US$13.05 per share.
In November 2001, one of the banks sold in the open market 3,556,513
shares of Hollinger International Class A common stock for US$34,200,000
or an average price of US$9.62 per share. This resulted in a loss to the
bank of US$15,800,000, which, in accordance with the arrangement, was
paid in cash by Hollinger International.
At December 31, 2001, Hollinger International had two forward equity
swap arrangements remaining with banks for a total of US$100,000,000. Of
that total, US$10,000,000 was prepaid during the course of 2002 from
available cash on hand. In October 2002, a further US$50,000,000 was
prepaid using the proceeds from borrowings in that month referred to in
note 10d). In December 2002, the forward equity swap arrangements were
terminated when Hollinger International purchased for cancellation from
the banks approximately 7.0 million shares of Class A common stock of
Hollinger International for a total cost of US$100,000,000 (including
the US$60,000,000 prepaid during 2002). The additional US$40,000,000
payment was paid from a portion of the proceeds received in December
2002 from Publishing's Senior Credit Facility and 9% Senior Notes (note
10). This resulted in a realized loss of $43,313,000, on the 2002
termination of the contracts, which has been included in unusual items
(note 17). During 2001, a realized loss of $29,646,000 on contracts
terminated in 2001 was included in unusual items (note 17).
The Total Return Equity Swaps were originally entered into as a
structure for the repurchase of Hollinger International's shares over an
extended time frame based on a price fixed at the outset of the
arrangement. Hollinger International does not presently intend to enter
into further similar arrangements.
F-49
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
c) Fair values of financial instruments
The Company has entered into various types of financial instruments in
the normal course of business. Fair value estimates are made at a
specific point in time, based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates
reflecting the country of origin and varying degrees of perceived risk.
The estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, may not accurately
represent future realizable values.
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2001 and 2002 are as follows:
The carrying values of cash and cash equivalents, escrow deposits,
accounts receivable, bank indebtedness, accounts payable and accrued
expenses and amounts due to related parties approximate their fair
values, due to the relatively short periods to maturity of the
instruments.
The fair value of marketable securities is based on the closing market
value of such securities at the year end.
Fair values for long-term debt have been determined based on the future
contractual cash payments at the respective operation's current
borrowing rate. The fair value of the long-term debt related to the
Senior Subordinated Notes at December 31, 2002 is the value at which
they were retired in January 2003. Fair value of the retractable
preference shares is based on the market value of the shares of
Hollinger International Class A common stock or the cash proceeds for
which they are retractable or redeemable.
The fair value of the cross-currency swaps, interest rate swaps, forward
share purchase contracts, and forward foreign exchange contracts is the
estimated amount that the Company would pay or receive to terminate the
agreements. Interest rate swaps were considered a hedge until the hedged
debt was repaid in 2000. Subsequent to the debt repayment, the estimated
cost to terminate the swap has been included in income. Such swaps were
terminated in 2002. The foreign currency obligation and forward foreign
exchange contract are in connection with the sale of participations in
the CanWest debentures, which is described in note 5. The cross-currency
swap is in connection with the Service Credit Facility, as described in
note 10b). The carrying values of all other financial instruments at
December 31, 2002 and 2001 approximate their estimated fair values.
F-50
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
d) Derivative instruments
The Company may enter into various swaps, options and forward contracts
from time to time when management believes conditions warrant. Such
contracts are limited to those that relate to the Company's actual
exposure to commodity prices, interest rates and foreign currency risks.
If, in management's view, the conditions that made such arrangements
worthwhile no longer exist, the contracts may be closed. At the end of
2001, there were no material contracts or arrangements of these types,
other than the forward exchange contract related to the Participation
Trust as described in note 5. The contract was terminated as at
September 30, 2002. The contract was marked to market and the related
gains and losses included in foreign exchange losses during the year.
The cumulative loss on the Company's obligation under the Participation
Trust as at December 31, 2002 is $21,444,000 (2001 -- $691,000) and is
included in the consolidated balance sheet in other liabilities and
deferred credits (note 12).
As described in note 10b), the Company entered into two cross-currency
rate swaps to offset principal and interest payments on U.S. dollar
borrowings by a U.K. subsidiary under Publishing's December 2002 Senior
Credit Facility. The fair value of the contracts as of December 31, 2002
of $14,475,000 million is included in the consolidated balance sheet in
other liabilities and deferred credits (note 12).
25. RECENT ACCOUNTING PRONOUNCEMENTS
a) Foreign currency and hedging
In November 2001, the CICA issued Accounting Guideline 13, "Hedging
Relationships" ("AcG 13"). AcG 13 establishes new criteria for hedge
accounting and will apply to all hedging relationships in effect on or
after July 1, 2003. On January 1, 2004, the Company will reassess all
hedging relationships to determine whether the criteria are met or not
and will apply the new guidance on a prospective basis. To qualify for
hedge accounting, the hedging relationship must be appropriately
documented at the inception of the hedge and there must be reasonable
assurance, both at the inception and throughout the term of the hedge,
that the hedging relationship will be effective. The Company is in the
process of formally documenting all hedging relationships and has not
yet determined whether any of their current hedging relationships will
not meet the new hedging criteria.
b) Impairment of long-lived assets
In December 2002, the CICA issued Handbook Section 3063, "Impairment of
Long-Lived Assets" and revised Section 3475, "Disposal of Long-Lived
Assets and Discontinued Operations". These sections supersede the
write-down and disposal provision of Section 3061, "Property, Plant and
Equipment", and Section 3475, "Discontinued Operations". The new
standards are consistent with U.S. GAAP. Section 3063 establishes
standards for recognizing, measuring and disclosing impairment of
long-lived assets held for use. An impairment is recognized when the
carrying amount of an asset to be held and used exceeds the projected
future net cash flows expected from its use and disposal and is measured
as the amount by which the carrying amount of the asset exceeds its fair
value. Section 3475 provides specific criteria for and requires separate
classification for assets held for sale and for these assets to be
measured at the lower of their carrying amounts and fair value, less
costs to sell. Section 3475 also broadens the definition of discontinued
operations to include all distinguishable components of an entity that
will be eliminated from operations. Section 3063 is effective for the
Company's 2004 fiscal year; however, early application is permitted.
Revised Section 3475 is applicable to disposal activities committed to
by the Company after May 1, 2003;
F-51
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
however, early application is permitted. The Company expects that the
adoption of these standards will have no material impact on its
financial position, results of operations or cash flow at this time.
c) Disclosure of guarantees
In February 2003, the CICA issued Accounting Guideline 14, "Disclosure
of Guarantees" ("AcG 14"). AcG 14 requires certain disclosures to be
made by a guarantor in its interim and annual financial statements for
periods beginning after January 1, 2003. AcG 14 is generally consistent
with the disclosure requirements for guarantees in the U.S. (Financial
Accounting Standards Board ("FASB") Interpretation No. 45) but, unlike
the FASB's guidance, does not encompass recognition and measurement
requirements. The Company has evaluated the impact of adoption of AcG 14
and the disclosures are included in note 27h).
26. SCHEDULE OF RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
The following represents additional information to the consolidated
financial statements of the Company that were prepared in accordance with
Canadian GAAP. Set out below are the material adjustments (net of deferred
income taxes, minority interest and foreign exchange rate adjustments where
applicable) to net earnings (loss) for the years ended December 31, 2000, 2001
and 2002 and to shareholders' deficiency at December 31, 2001 and 2002 in order
to conform to accounting principles generally accepted in the United States
("U.S. GAAP").
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001
(RESTATED-(V)) (RESTATED-(V)) 2002
-------------- -------------- --------
NET EARNINGS (LOSS)
Net earnings (loss) for the year based on Canadian
GAAP................................................. $ 189,373 $(131,898) $(88,640)
Capitalization of betterments, net of related
amortization(a)...................................... (4,633) 5,230 --
Gain on sale of shares, gain on subsidiary's issue of
shares or sale of assets(c)(v)....................... 13,868 30,920 4,505
Foreign exchange(d).................................... 6,406 10,086 (7,293)
Cost of acquisitions, net of amortization(e)........... 42 42 42
Compensation to employees(f)........................... (1,127) 918 --
Net earnings (loss) in equity accounted companies(g)... (7,882) 7,882 --
Adjustment to tax provision(h)(v)...................... (162,764) (41,893) --
Business combinations(i)(v)............................ 29,932 56,932 --
Financial instruments(j)............................... 2,421 9,294 8,185
Total return equity swap(k)(v)......................... (9,112) (15,316) 17,789
Valuation allowance against prepaid pension
asset(l)(v).......................................... 29,757 (14,244) (6,277)
--------- --------- --------
Net earnings (loss) for the year based on U.S. GAAP,
before accounting change, as restated(v)............. 86,281 (82,047) (71,689)
Cumulative effect of accounting change for
goodwill(q).......................................... -- -- (12,071)
--------- --------- --------
Net earnings (loss) for the year based on U.S. GAAP, as
restated(v).......................................... $ 86,281 $ (82,047) $(83,760)
========= ========= ========
F-52
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
DECEMBER 31,
---------------------------
2001 2002
--------------- ---------
(RESTATED-26V))
SHAREHOLDERS' DEFICIENCY
Shareholders' deficiency based on Canadian GAAP............. $(263,470) $(351,331)
Capitalization of betterments, net of related
amortization(a)........................................... (182,807) (195,166)
Amortization of intangible assets(b)........................ (24,175) (24,175)
Gain on sale of shares, gain on subsidiary's issue of shares
or sale of assets(c)(v)................................... 117,854 122,359
Foreign exchange(d)......................................... (1,569) (1,404)
Cost of acquisitions, net of amortization(e)................ (1,890) (1,848)
Compensation to employees(f)................................ (2,764) (2,764)
Net loss in equity accounted companies(g)................... (1,389) (1,389)
Income taxes(h)(v).......................................... 63,699 63,699
Business combinations(i)(v)................................. 4,603 4,603
Financial instruments(j).................................... 18,707 23,019
Total return equity swap(k)(v).............................. (17,789) --
Valuation allowance against prepaid pension asset(l)(v)..... 8,513 2,236
Capital stock(m)............................................ (5,843) (5,782)
Investments(n).............................................. (3,755) (839)
Minimum pension liability adjustment(o)..................... (11,552) (25,612)
--------- ---------
Shareholders' deficiency based on U.S. GAAP, as
restated(v)............................................... $(303,627) $(394,394)
========= =========
BALANCE SHEET DIFFERENCES:
The following material balance sheet differences exist between Canadian and
U.S. GAAP.
1) Other intangible assets:
DECEMBER 31,
---------------------
2001 2002
---------- --------
Canadian GAAP............................................... $1,177,544 $185,143
Adjustment for capitalization of betterments, net of related
amortization(a)........................................... (394,246) --
Adjustment for amortization(b).............................. (24,175) --
Adjustment for cost of acquisitions(e)...................... (1,876) --
Adjustment for business combinations(i)(v).................. 4,603 --
---------- --------
U.S. GAAP................................................... $ 761,850 $185,143
========== ========
F-53
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
2) Goodwill:
DECEMBER 31,
-------------------
2001 2002
-------- --------
Canadian GAAP............................................... $174,324 $913,327
Adjustment for capitalization of betterments, net of related
amortization(a)........................................... -- (424,589)
Adjustment for amortization(b).............................. -- (24,175)
Adjustment for cost of acquisitions(e)...................... -- (1,809)
Adjustment for income taxes(h)(v)........................... 63,699 63,699
Adjustment for business combinations(i)(v).................. -- 4,603
-------- --------
U.S. GAAP................................................... $238,023 $531,056
======== ========
3) Minority interest:
DECEMBER 31,
---------------------
2001 2002
--------- ---------
Canadian GAAP............................................... $ 725,928 $ 473,272
Adjustment for minority interest(v)......................... (252,886) (235,969)
--------- ---------
U.S. GAAP................................................... $ 473,042 $ 237,303
========= =========
4) Future income tax liabilities:
DECEMBER 31,
---------------------
2001 2002
--------- ---------
Canadian GAAP............................................... $ 486,937 $ 375,479
Adjustment for income taxes................................. (107,399) (122,637)
--------- ---------
U.S. GAAP................................................... $ 379,538 $ 252,842
========= =========
5) Deferred pension asset:
DECEMBER 31,
-------------------
2001 2002
-------- --------
Canadian GAAP............................................... $ 83,459 $123,230
Adjustment for change in valuation allowance against prepaid
asset(l)(v)............................................... 38,487 3,758
-------- --------
U.S. GAAP................................................... $121,946 $126,988
======== ========
6) Total return equity swap liability:
DECEMBER 31,
-------------------
2001 2002
-------- --------
Canadian GAAP............................................... $ -- $ --
Adjustment for unrealized losses(k)(v) 55,912 --
-------- --------
U.S. GAAP................................................... $ 55,912 $ --
======== ========
F-54
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
SUMMARY OF ACCOUNTING POLICY DIFFERENCES:
The areas of material difference between Canadian and U.S. GAAP and their
impact on the consolidated financial statements of the Company are set out
below:
a) Capitalization of betterments
Effective January 1, 1990, the Company capitalized as circulation the
costs incurred to increase the long-term readership of its publications
("betterments"). U.S. GAAP does not permit capitalization of these
costs. As a result of new Canadian accounting standards, effective
January 1, 2002, the Company no longer capitalizes these costs under
Canadian GAAP.
b) Amortization of intangible assets
Prior to the adoption on January 1, 2002 of new U.S. and Canadian
accounting standards for goodwill described below, U.S. GAAP required
the amortization of all intangible assets acquired on a straight-line
basis over a period not exceeding 40 years. Under Canadian GAAP, prior
to December 31, 1990, there was no requirement to amortize intangible
assets, such as circulation, that were considered to have an indefinite
life. Effective January 1, 1991, Canadian GAAP required that all
intangible assets be amortized. As a result, commencing January 1, 1990
under Canadian GAAP, the Company amortized the cost of circulation on a
straight-line basis over periods ranging from 10 to 40 years.
Effective January 1, 2002, the Company adopted new Canadian accounting
standards for Goodwill and Other Intangible Assets and certain
transitional provisions for Business Combinations. These new Canadian
standards are substantially consistent with the new U.S. accounting
standards SFAS 141 and SFAS 142, except that under U.S. GAAP, any
transitional impairment charge is recognized in earnings as a cumulative
effect of a change in accounting principle. The new standards require
that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least
annually. The standards also specify criteria that intangible assets
must meet to be recognized and reported apart from goodwill. In
addition, the standard requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and that such assets are reviewed
for impairment by assessing the recoverability of the carrying value.
Effective January 1, 2002, the Company has discontinued amortization of
all existing goodwill, evaluated existing intangible assets and has made
the necessary reclassifications in order to conform with the new
criteria for recognition of intangible assets apart from goodwill.
Amounts previously ascribed to circulation, including costs capitalized
to increase long-term readership and certain other intangible assets
have now been reclassified to goodwill, net of the related deferred
income taxes, effective January 1, 2002.
This change in accounting policy cannot be applied retroactively and the
amounts presented for prior periods have not been restated for this
change. If this change in accounting policy were applied to the reported
net earnings (loss) under U.S. GAAP for the years ended December 31,
2000 and
F-55
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
2001, the impact of the change, in respect of the U.S. GAAP goodwill and
intangible assets with indefinite useful lives not being amortized,
would be as follows:
DECEMBER 31,
-------------------------
2000 2001
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE)
U.S. GAAP net earnings (loss), as reported.................. $ 86,281 $(82,047)
Add U.S. GAAP amortization, net of income tax and minority
interest.................................................. 38,668 17,548
-------- --------
Adjusted U.S. GAAP net earnings (loss)...................... $124,949 $(64,499)
======== ========
U.S. GAAP basic net earnings (loss) per share, as
reported.................................................. $ 1.52 $ (2.33)
Adjusted U.S. GAAP basic net earnings (loss) per share...... $ 2.56 $ (1.81)
U.S. GAAP diluted net earnings (loss) per share, as
reported.................................................. $ 1.42 $ (2.62)
Adjusted U.S. GAAP diluted net earnings (loss) per share.... $ 2.46 $ (2.10)
Adjusted net earnings (loss), noted above, reflects only the reduction
in amortization expense in respect of intangibles now classified as
goodwill and does not give effect to the impact that this change in
accounting policy would have had on the gains and losses resulting from
the disposal of operations during 2001 and 2000.
c) Gain on sale of shares, gain on subsidiary's issue of shares or sale of
assets
As a result of the adjustments in a) and b) above, and for periods
subsequent to January 1, 2002, as a result of adjustments (h) and (i),
the carrying value of the investments in Hollinger L.P., Southam and
Hollinger International are lower under U.S. GAAP, resulting in the gain
on sale of properties by Hollinger International, Southam and Hollinger
L.P., gains on the sale by the Company of shares of Hollinger
International, and gains on dilution of investments in Hollinger
International and Hollinger L.P., being higher under U.S. GAAP.
d) Foreign exchange
Under Canadian GAAP, a portion of the equity adjustment from foreign
currency translation, included in shareholders' deficiency, is required
to be transferred to income whenever there is a reduction in the net
investment in a foreign entity or repayment of foreign currency
denominated long-term intercompany loans. U.S. GAAP requires the
transfer of a portion of this account to income only when the reduction
in net investment is due to a sale or complete or substantially complete
liquidation. While there may be differences in the timing of the
recognition of such foreign exchange gains and losses under Canadian and
U.S. GAAP, this difference in accounting has no effect on total
shareholders' deficiency.
e) Cost of acquisitions
Under Canadian GAAP, the Company previously had a policy of including
certain internal acquisition costs as part of the purchase price of
businesses acquired. U.S. GAAP does not permit capitalization of these
costs.
f) Compensation to employees
The Company and Hollinger International have various stock option and
stock purchase plans for executives. Under Canadian GAAP, compensation
is not recognized on the grant or modification of any employee option.
In accordance with U.S. GAAP, options granted to employees of the parent
company are measured using the fair value based method and treated as a
dividend in kind with no resulting impact on either net earnings (loss)
or shareholders' deficiency. For all other employee
F-56
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
options, the compensation element is measured under U.S. GAAP using the
intrinsic value based method of accounting and is apportioned over the
period of service to which the compensation is related. As a result of a
previous reduction in the exercise price of Hollinger International's
options, compensation expense was recorded under U.S. GAAP in 2000 and a
reversal of compensation was recorded under U.S. GAAP in 2001.
g) Equity accounted companies
Under U.S. GAAP the compensation element of executive stock options
related to equity accounted companies is measured and apportioned over
the period of service to which the compensation is related. Under
Canadian GAAP, compensation is not recognized for stock options. In
addition, betterments, net of related amortization, related to equity
accounted companies were capitalized under Canadian GAAP until January
1, 2002. This is not permitted under U.S. GAAP.
As a result of the above adjustments, the carrying value of equity
accounted investments is lower under U.S. GAAP, resulting in the gain on
the disposition of these investments in 2001 being higher under U.S.
GAAP. The adjustments for 2000 and 2001 are in respect of the Company's
investment in Interactive Investor International.
h) Income taxes
Effective January 1, 2000, the Company adopted, on a retroactive basis,
new Canadian accounting standards for income taxes, which now require
income taxes to be accounted for using the asset and liability method,
consistent with U.S. GAAP. Previously, under Canadian GAAP, the deferral
method of providing for income taxes was used.
Under Canadian accounting standards for income taxes, the Company is not
required to restate its comparative figures for prior years and the
cumulative effect of this change in accounting policy of $291,004,000
(net of related minority interest) has been charged directly to retained
earnings as at January 1, 2000. Of this adjustment, $276,215,000 was
attributable to future income tax liabilities established in respect of
amounts ascribed to circulation on business acquisitions which are
largely not deductible for income tax purposes. Under U.S. GAAP, the
establishment of such future tax liabilities on business acquisitions
would have resulted in additional goodwill being recorded for an
equivalent amount. Under U.S. GAAP, the deferred tax recovery recorded
in respect of circulation amortization is fully offset by the related
goodwill amortization, with no net impact on U.S. GAAP net earnings.
Effective January 1, 2002, on the adoption of the new Canadian and U.S.
accounting standards for Goodwill and Business combinations (note b)),
amounts ascribed to circulation have been reclassified to goodwill,
which is no longer being amortized.
The new Canadian accounting standard for income taxes adopted January 1,
2000 does not require the restatement of prior years' business
acquisitions and permits the adjustment, otherwise made to goodwill
under U.S. GAAP, to be made directly to retained earnings (net of
related minority interest). As a result of not restating comparative
figures, the $276,215,000 net deferred tax impact of circulation
recorded on January 1, 2000 as a charge against retained earnings under
Canadian GAAP would have been recorded as goodwill under U.S. GAAP. This
difference, in turn, resulted in higher goodwill amortization or
write-off charges under U.S. GAAP in the amount of $162,764,000 and
$41,893,000 for the years ended December 31, 2000 and 2001,
respectively.
Accordingly, while there may not be any new material differences between
Canadian and U.S. GAAP with respect to income taxes for periods
subsequent to January 1, 2000, there will continue to be a difference
between Canadian and U.S. GAAP in respect of the remaining
F-57
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
$63.7 million of deferred taxes which will eliminate subsequent to
January 1, 2002 only when the underlying operation is sold or the
Company's interest in the underlying operations is diluted.
U.S. GAAP income tax expense would have differed from the amounts
computed by applying the basic federal and provincial income tax rates
to U.S. GAAP earnings (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle as shown in the
following table:
2000 2001 2002
-------- --------- ---------
Earnings (loss) before income taxes, minority
interest and cumulative effect of change in
accounting principle............................. $896,205 $(417,688) $(140,394)
======== ========= =========
Basic income tax rate.............................. 43.95% 41.75% 41.00%
======== ========= =========
Computed income tax expense (recovery)............. $393,882 $(174,385) $ (57,562)
Change in income tax expense (recovery) resulting
from:
Different tax rate on earnings of subsidiaries..... (89,178) 19,565 15,144
Tax gain in excess of book gain.................... (82,350) 52,158 949
Potential tax benefit of current year's losses not
recorded......................................... 29,255 -- --
Large Corporations Tax............................. 15,531 940 1,079
Loss on total return equity swap................... 8,013 27,134 (4,844)
Change in valuation allowance...................... -- 42,841 74,043
Minority interest earnings in Hollinger L.P........ (26,669) (2,001) (1,214)
Permanent differences.............................. 208,778 (35,810) 56,983
-------- --------- ---------
Income tax expense (recovery)...................... $457,262 $ (69,558) $ 84,578
======== ========= =========
Effective tax rate................................. 51.02% 16.65% 60.24%
======== ========= =========
Canadian and foreign components of earnings (loss) before income taxes,
minority interest and cumulative effect of change in accounting
principle are presented below:
Under Canadian GAAP, the Company was required to treat the transfer in
1997 of the Canadian newspapers to Hollinger International as a
disposition at fair value. This resulted in the recognition of a gain to
the extent there is a minority interest in Hollinger International.
U.S. GAAP requires that the transfer of the Canadian Newspapers to a
subsidiary company be accounted for at historical values using "as-if"
pooling of interest accounting. As a result, the revenues and expenses
for the periods prior to January 1, 1997 would be restated to give
effect to the transfer of the Canadian Newspapers to Hollinger
International and the gross gain, prior to deducting expenses, of
$114,000,000 on the sale of the properties and the increase in
intangible assets of an equivalent amount would not have been recorded
for U.S. GAAP purposes. However, such gain would be recognized for U.S.
GAAP purposes as the underlying Canadian newspaper operations were sold
to third parties, or there was a further dilution in the Company's
interest in Hollinger International.
In addition, because the consideration received by the Company in 1997
included shares of Hollinger International, the Company was required to
treat this as an acquisition of an additional interest in Hollinger
International, which resulted in $20,500,000 being ascribed to
circulation and additional annual amortization expense of $932,000.
Effective January 1, 2002, upon adoption of the new Canadian and U.S.
accounting standards for Goodwill and Business Combinations (note 26b)),
amounts ascribed to circulation have been reclassified to goodwill,
which is no longer being amortized. Accordingly, there would be no
difference between Canadian and U.S. GAAP with respect to this item for
periods subsequent to January 1, 2002 unless the underlying operation is
sold, or the Company's interest in the underlying operations is diluted.
j) Financial instruments
Canadian GAAP requires the value ascribed to certain subsidiary Special
shares outstanding during 2000 to be increased over the life of the
shares to the Company's optional cash settlement amount through a
periodic charge to earnings. Under U.S. GAAP, the shares are recorded at
their fair value on the date of issue and such a charge to increase
their carrying amount is not required, until the shares were settled in
2000.
F-59
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Under Canadian GAAP, the $11,054,000, $9,294,000, $8,185,000 of
dividends on mandatory redeemable preferred stock in 2000, 2001 and
2002, respectively, must be recorded as interest expense. Under U.S.
GAAP, such dividends are charged against shareholders' deficiency.
Under U.S. GAAP, the mark to market and foreign exchange adjustments
totalling a gain of $7,670,000 at December 31, 2001 and a gain of
$11,983,000 at December 31, 2002 to the carrying value of the Series II
preference shares, which reflect the value of the underlying Hollinger
International shares for which they are exchangeable, must be recorded
within shareholders' deficiency. Under Canadian GAAP, such adjustments
are deferred and recorded on the balance sheet outside of shareholders'
deficiency.
k) Total return equity swap
During 2000, U.S. GAAP clarified the accounting for certain derivative
financial instruments indexed to, and potentially settled, in a
company's own stock, that require a cash payment by the issuer upon the
occurrence of future events outside the control of the issuer. This new
U.S. GAAP guidance applies to new contracts entered into after September
30, 2000. Consequently, the extension of Hollinger International's
forward share purchase contracts on October 1, 2000 resulted in such
contracts being accounted for using the asset and liability method after
that date. Under this method, the derivative forward contract was marked
to market subsequent to October 1, 2000. The unrealized loss during the
period, October 1 to December 31, 2000, net of minority interest,
totalled $9,112,000 and was charged to earnings for U.S. purposes.
During 2001, the mark to market losses for the contracts totalled
$95,267,000 of which $59,920,000 of losses were realized when certain
forward share purchase contracts were settled, resulting in a U.S. GAAP
difference, net of related minority interest, of $15,316,000.
In December 2002, the total return equity swaps were settled and the
losses realized.
For Canadian GAAP, no adjustment was required to reflect the mark to
market adjustment for such forward purchase contracts and losses were
recognized only when realized upon the settlement of the contract.
l) Valuation allowance against prepaid pension asset
Canadian GAAP requires recognition of a pension valuation allowance for
any excess of the prepaid benefit expense over the expected future
benefit. Changes in the pension valuation allowance are recognized in
earnings under Canadian GAAP immediately. U.S. GAAP does not permit the
recognition of pension valuation allowances.
m) Capital stock
U.S. GAAP requires that loans receivable from employees relating to
share purchases be presented in the consolidated balance sheet as a
deduction from capital stock. Canadian GAAP permits these amounts to be
shown as assets in certain circumstances.
n) Unrealized holding gains (losses) on investments available for sale
Under Canadian GAAP, the Company accounts for all of its investments,
which consist of corporate debt and equity securities, at historical
cost. U.S. GAAP requires those investments in marketable securities
which are available for sale, other than those investments accounted for
on an equity basis, to be recorded at fair value. Unrealized holding
gains and losses, net of the related tax and minority interest effect,
on available for sale securities are excluded from earnings and are
reported as a separate component of other comprehensive income and
shareholders' equity until realized. Realized
F-60
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis.
o) Minimum pension liability adjustment
Under U.S. GAAP, the Company is required to record an additional minimum
pension liability for certain of its defined benefit pension plans to
reflect the excess of the accumulated benefit obligations over the fair
value of the plan assets with a corresponding charge against other
comprehensive income included in shareholders' deficiency (note 26u)).
No such adjustment is required under Canadian GAAP.
p) Interest in joint ventures
Canadian GAAP requires the proportionate consolidation of interests in
joint ventures. Proportionate consolidation is not permitted under U.S.
GAAP and interests in joint ventures are accounted for on the equity
basis.
Although the adoption of proportionate consolidation has no impact on
net earnings (loss) or shareholders' deficiency, it does increase
assets, liabilities, revenues, expenses and cash flows from operations
from those amounts otherwise reported under U.S. GAAP.
q) Change in accounting principle
Under U.S. GAAP, the transitional provisions of SFAS 142 require the
write-down resulting from the impairment test upon adoption on January
1, 2002 to be reflected in the consolidated statement of earnings as a
cumulative effect of a change in accounting principle. However, Canadian
GAAP requires the same loss to be recorded as a charge to the opening
deficit as at January 1, 2002. As described in note 1, goodwill
attributable to Jerusalem Post was written down in its entirety upon
adoption of SFAS 142.
r) Unusual items
Included in Unusual items on the consolidated statements of earnings
under Canadian GAAP are certain items which under U.S. GAAP must be
classified as either operating costs, non-operating income or
non-operating expenses. In particular, the unusual items (note 17) would
have been classified as follows: net gain on dilution of investments as
non-operating expenses, gains and losses on sale of investments and
publishing interests as non-operating income or expenses, net, gain on
effective sale of interest in Hollinger International as non-operating
income and partially non-operating expense, loss on retirement of Senior
Notes as non-operating expenses, new Chicago plant pre-operating costs
as operating costs, write-off of financing fees as non-operating
expenses, write-off of investments as non-operating expenses, realized
loss on total return equity swap as non-operating costs, pension and
post-retirement plan liability adjustment as operating costs and
redundancy, rationalization and other costs as operating costs.
F-61
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
s) Net earnings (loss) per retractable common share
YEARS ENDED DECEMBER 31
-----------------------
2000 2001 2002
----- ------ ------
(DOLLARS PER SHARE)
Basic net earnings (loss) per retractable common share:
Earnings (loss) before cumulative effect of change in
accounting principles.................................. $1.52 $(2.33) $(2.32)
Net earnings (loss) for the year.......................... $1.52 $(2.33) $(2.70)
Diluted earnings (loss) per retractable common share:
Earnings (loss) before cumulative effect of change in
accounting principles.................................. $1.42 $(2.62) $(2.35)
Net earnings (loss) for the year.......................... $1.42 $(2.62) $(2.73)
Earnings (loss) per retractable common share amounts in accordance with
U.S. GAAP are based on U.S. GAAP net earnings. The weighted average
number of outstanding shares for purposes of calculating basic and
diluted net earnings (loss) per share is the same under both Canadian
and U.S. GAAP (note 19).
Under U.S. GAAP, the change in the unrealized mark to market gain (loss)
on the Series II preference shares of ($19,048,000), $12,759,000 and
$5,431,000 as at December 31, 2000, 2001 and 2002 must be treated as an
adjustment to dividends paid for purposes of calculating basic and
diluted net earnings (loss) per share. Such adjustment is not required
under Canadian GAAP.
t) Statement of cash flows
Canadian GAAP permits the disclosure of the amount of funds provided by
operations before changes in non-cash operating working capital and
certain other items to be included in the consolidated statements of
cash flows as a subtotal.
In addition, Canadian GAAP permits the disclosure of cash flows provided
by operations per retractable common share. U.S. GAAP does not permit
disclosure of these items.
Canadian GAAP requires proportionate consolidation of interests in joint
ventures, which is not permitted under U.S. GAAP. As a result, under
U.S. GAAP, the total funds provided by operations (including the changes
in non-cash working capital and other items) for the years ended
December 31, 2000, 2001 and 2002 would have decreased by $25,280,000,
$25,102,000 and $6,282,000, respectively.
F-62
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
u) Comprehensive income (loss)
Total comprehensive income (loss) in accordance with U.S. GAAP is as
follows:
YEARS ENDED DECEMBER 31
------------------------------
2000 2001 2002
-------- -------- --------
Net earnings (loss) based on U.S. GAAP, as restated (v)..... $ 86,281 $(82,047) $(83,760)
Other comprehensive net earnings (loss), net of tax, being:
Unrealized gain (loss) on investments held for sale, net
of related tax recovery of $20,390, $29,002 and $2,372
and minority interest of $38,990, $77,542 and $5,701 in
2000, 2001 and 2002, respectively...................... (35,244) (54,066) 2,256
Reclassification adjustment for realized loss reclassified
out of accumulated comprehensive income, net of related
tax recovery of nil, $47,102 and $832 and minority
interest of nil, $118,041 and $1,384 in 2000, 2001 and
2002, respectively..................................... -- 83,005 659
-------- -------- --------
(35,244) 28,939 2,915
Change in the equity adjustment from foreign currency
translation............................................... (64,559) 10,527 24,914
Minimum pension liability adjustment, net of a related tax
recovery of nil, $11,726 and $24,897 and minority interest
of $1,570, $13,055 and $29,504 in 2000, 2001 and 2002,
respectively.............................................. (1,570) (9,982) (14,060)
-------- -------- --------
Comprehensive loss based on U.S. GAAP....................... $(15,092) $(52,563) $(69,991)
======== ======== ========
v) Restatements
Shareholder's deficiency and net earnings (loss) based on U.S. GAAP as
at December 31, 2000 and 2001 and for the years ended December 31, 2000
and 2001 differ from the amounts previously reported as follows:
i) In 2001, adjustments described in note 26k), were previously
computed without giving effect to the full amount of the realized
losses, which would have already been recognized in the net loss
for Canadian GAAP purposes. The dilution gain adjustment recorded
in 2001 (note 26c)) has also been effected as a consequence of this
adjustment. This restatement reduced the previously reported U.S.
GAAP net loss in fiscal 2001 by $20,098,000.
ii) In 2000, the Company recorded a valuation allowance against the
excess of the prepaid benefit expense for certain of its Canadian
operations, over the expected future benefit. U.S. GAAP does not
specifically address pension valuation allowances and the Company
had believed that such valuation allowance was appropriate under
U.S. GAAP. Recently U.S. regulators have interpreted there to be a
difference between Canadian and U.S. GAAP in this area. In light of
these recent developments, the Company retroactively adjusted for
the changes in the valuation allowance and the related impact on
the dilution gain, which resulted in an increase to reported U.S.
GAAP net earnings for fiscal 2000 of $29,757,000 and an increase to
reported U.S. GAAP net loss for fiscal 2001 of $5,670,000, each net
of related income tax and minority interest.
iii) In addition to giving effect to the matters noted above, certain
basic and diluted earnings per share figures for 2000, and 2001
have been restated from amounts previously reported due to an error
in the computation of the unrealized mark to market adjustment on
the Series II preference shares (note 26s)) as well as a
restatement of the dilutive effect of certain dilutive securities
of International.
F-63
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
iv) As described in note 26i), in 1997 the Company recorded for Canadian
GAAP purposes, a gain on the sale of certain Canadian newspapers to
Hollinger International. Under U.S. GAAP, no gain could be
recognized in 1997. However, such gain should have been recognized
as the underlying Canadian newspaper operations were sold to third
parties, or there was a further dilution in the Company's interest
in Hollinger International.
In the years 1998 through 2001, the Company did not appropriately
recognize such gains for U.S. GAAP purposes and has restated its U.S.
GAAP results for these years to reflect such gains. In addition, as a
result of this matter, the Company has also retroactively restated the
adjustment to the income tax provision for U.S. GAAP purposes. As a
result of these two items, the Company has retroactively decreased the
previously reported U.S. GAAP shareholder's deficiency as at December
31, 1999 by a net $21.1 million and increased reported U.S. GAAP net
earnings for fiscal 2000 by $21.1 million and increased reported U.S.
GAAP net earnings for fiscal 2001 by $40.8 million.
The net effect of all these restatements to basic and diluted net
earnings (loss) for the years ended December 31, 2000 and 2001 is
summarized below:
YEARS ENDED
DECEMBER 31
-------------------
2000 2001
-------- --------
(DOLLARS PER SHARE)
U.S. GAAP basic earnings (loss) per retractable common
share:
As previously reported.................................... $(0.12) $(3.89)
Restated.................................................. $ 1.52 $(2.33)
U.S. GAAP diluted loss per retractable common share:
As previously reported.................................... $(0.49) $(4.11)
Restated.................................................. $ 1.42 $(2.62)
w) Recent pronouncements
In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. FAS 143
requires the Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal
use of the assets. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying
amount is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of time
and changes in the estimated future cash flows underlying the obligation.
If the obligation is settled to other than the carrying amount of the
liability, the Company will recognize a gain or loss on settlement. The
Company is required to adopt the provisions of FAS 143 for the quarter
ending March 31, 2003. To accomplish this, the Company must identify all
legal obligations for asset retirement obligations, if any, and determine
the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to
gather market information and develop cash flow models. Additionally, the
Company will be required to develop processes to track and monitor these
obligations. The Company has determined that the adoption of FAS 143 does
not have a material impact on its financial statements.
F-64
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
In April 2002, the FASB issued FAS 145 which rescinded FAS 4, "Reporting
Gains and Losses from Extinguishment of Debt" ("FAS 145"). FAS 145
addresses, among other things, the income statement treatment of gains
and losses related to debt extinguishments, requiring that such expenses
no longer be treated as extraordinary items, unless the items meet the
definition of extraordinary per APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". Upon adoption, any gain or loss on
extinguishment of debt that was classified as an extraordinary item, in
prior periods presented, that does not meet the criteria in Opinion 30
for classification as an extraordinary item, is required to be
reclassified to non-operating expense. The Company retroactively adopted
the new presentation requirements of FAS 145 effective January 1, 2002.
The adoption of such accounting standard did not impact the Company's
U.S. GAAP net earnings as information regarding extraordinary losses
under U.S. GAAP on debt extinguishment was presented for disclosure
purposes only.
In July 2002, the FASB issued FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"), which is effective for
exit or disposal activities that are initiated after December 31, 2002.
FAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF
94-3"), "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring)". The principal difference between FAS 146 and EITF 94-3
related to the recognition of a liability for a cost associated with an
exit or disposal activity. FAS 146 requires that a liability be
recognized for exit or disposal costs only when the liability is
incurred, whereas under EITF 94-3, the liability was recognized when a
company commits to an exit plan, and that the liability be initially
measured at fair value. The Company is currently assessing the impact of
the new standards.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("VIE'S") ("FIN 46"), which requires the
companies that control another entity through interests other than
voting interest should consolidate the controlled entity. In the absence
of clear control through a voting equity interest, a company's exposure
(variable interests) to the economic risk and the potential rewards from
a VIE's assets and activities are the best evidence of a controlling
financial interest. VIE's created after January 31, 2003 must be
consolidated immediately. VIE's existing prior to February 1, 2003 must
be consolidated by the Company commencing with its third quarter 2003
financial statements. The Company has not yet determined whether it has
any VIE's which will require consolidation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure", an amendment of
FASB Statement No. 123. This Statement amends SFAS No. 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value method of accounting
for stock-based employee compensation. The Company plans to continue to
use the intrinsic value method for U.S. GAAP purposes. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements.
Certain of the disclosure modifications are required for fiscal years
ending after December 15, 2002 and are included in note 27e).
F-65
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
27. ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP
a) Accounting policy
Issuance of a Subsidiary's Stock
The Company accounts for the issuance of a subsidiary's stock as a
dilution gain or loss which is included in the statement of earnings.
b) Marketable equity and debt securities
All marketable equity and debt securities are classified as available
for sale, recorded at fair value, and presented as non-current assets.
Available for sale securities consist of the following:
During 2001, the Company disposed of certain available-for-sale
securities resulting in gross realized losses of $139,586,000. In
computing the realized losses, cost was determined based on average
cost.
Under U.S. GAAP, FIN 44, "Accounting for Certain Transactions involving
Stock Compensation" was effective July 1, 2000 and required repriced
options to be treated as variable stock option awards. As a result, the
Company has recorded, net of minority interest, $1,127,000 of
compensation expense for 2000 and a reversal of compensation expense of
$918,000 for 2001, in respect of certain repriced options of Hollinger
International. For all other stock options granted by the Company and
its subsidiaries, no compensation cost has been recognized. Had the
Company determined compensation costs based on the fair value at the
grant date of its stock options under Statement of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation",
the Company's U.S. GAAP net earnings (loss) and earnings (loss) per
share would have been reduced to the pro forma amounts indicated in the
following table:
2000 2001 2002
-------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE)
Net earnings (loss) as restated (note 26v))........... $86,281 $(82,047) $(83,760)
Add compensation expense, as reported................. 1,071 (763) --
Deduct pro forma compensation expense................. (5,190) (4,950) (4,057)
------- -------- --------
Pro forma U.S. GAAP net earnings (loss)............... $82,162 $(87,760) $(87,817)
======= ======== ========
U.S. GAAP basic net earnings (loss) per share as
reported............................................ $ 1.52 $ (2.33) $ (2.70)
U.S. GAAP diluted net earnings (loss) per share as
reported............................................ $ 1.42 $ (2.62) $ (2.70)
U.S. GAAP pro forma basic net earnings (loss) per
share............................................... $ 1.41 $ (2.50) $ (2.82)
U.S. GAAP pro forma diluted net earnings (loss) per
share............................................... $ 1.30 $ (2.79) $ (2.82)
The Company has not granted any options since 1998. The weighted average
fair value of stock options granted during 2000, 2001 and 2002 by
Hollinger International was estimated to be US$4.12, US $5.67 and
US$5.65, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
dividend yield 3.4%, 4.6% and 3.6%, expected volatility 43.3%, 55.2% and
68.3%, risk free interest rates of 5.1%, 5.0% and 4.5%, and expected
lives of 10 years in each of those same years.
f) Rent expense
Rent expense was $28,440,000, $22,589,000, and $26,790,000 for 2000,
2001 and 2002, respectively.
g) Derivatives
For U.S. GAAP reporting purposes, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138
F-67
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
("SFAS No. 133") on January 1, 2001. There was no impact on results of
operations or financial position upon adoption.
The Company may enter into various swap, option and forward contracts
from time to time when management believes conditions warrant, as
described in note 24d). Such derivative contracts have not been
designated as effective hedges, and therefore the changes in their fair
value are recorded in earnings under both Canadian and U.S. GAAP.
On December 27, 2002, a United Kingdom subsidiary of the Company entered
into two cross-currency rate swap transactions to hedge principal and
interest payments on U.S. dollar borrowings under Publishing's December
2002 Senior Credit Facility. The contracts have a total foreign currency
obligation notional value of U.S.$265 million, fixed at a rate
U.S.$1.5922 to L1, convert the interest rate on such borrowing from
floating to fixed, and expire as to of U.S.$45 million on December 29,
2008 and as to U.S.$220 million on December 29, 2009.
On January 22, 2003 and February 6, 2003, Publishing entered into
interest rate swaps to convert U.S.$150 million and U.S.$100 million,
respectively, of the Publishing Notes issued in December 2002 to
floating rates for the period to December 15, 2010, subject to early
termination notice.
Changes in the value of derivatives comprising the forward exchange
contract described in note 5a) and cross-currency swaps described above
amounted to a gain of $24.3 million and a loss of $28.5 million in 2001
and 2002, respectively. The fair values of all derivative contracts are
disclosed in note 24c).
h) Guarantees
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which
establishes and clarifies requirements for disclosure of most guarantees
and the recognition of an initial liability for the fair value of
obligations a guarantor assumes under guarantees. The initial liability
recognition and measurement provisions are effective in respect of
guarantees entered into or modified after December 31, 2002. FIN 45
provides guidance regarding the identification of guarantees and
requires a guarantor to disclose the significant details of guarantees
that have been given regardless of whether it will have to make payments
under the guarantees.
Senior Secured Notes
In connection with the issuance in 2003 of 11 7/8% Senior Secured Notes
due 2011, the Company and certain of its subsidiaries have agreed to
indemnify its lenders against any losses or damages resulting from
inaccuracy of financial statements, environmental matters, taxes and
compliance with Securities Act. The Company and its subsidiaries also
indemnified the Noteholders against any related tax liabilities arising
from payments made with respect to the Notes, except taxes on
Noteholder's income. These indemnifications generally extend for the
term of the Senior Secured Notes and do not provide for any limit on the
maximum potential liability.
The Company is unable to estimate the maximum potential liability for
these types of indemnifications as the Notes indenture does not specify
a maximum amount and the amounts are dependent upon future contingent
events, the nature and likelihood of which cannot be determined at this
time. No amount has been accrued in the interim consolidated financial
statements with respect to these indemnifications and the Company is
unable to estimate amounts due for withholding taxes, if any, at this
time. Any such amounts will increase the future effective cost of
borrowing.
F-68
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
The Company has indemnified the lenders and their affiliates from and
against all losses as a result of any obligations of any of the
borrowers and guarantors under the Company's Senior Secured Notes.
Property Leases
A subsidiary of the Company has agreed to indemnify lessors of its
operating leases against liabilities, damages, costs, claims and actions
resulting from damaged property, violations of any lease covenants or
any accident or injury occurring on the leased premises.
The Company is unable to estimate the maximum exposure for these types
of indemnifications as the operating leases do not specify a maximum
amount and the amounts are dependent upon future contingent events, the
nature and likelihood of which cannot be determined at this time. No
amount has been accrued in the interim consolidated financial statements
with respect to these indemnifications.
Joint Ventures
The Telegraph Group Limited ("Telegraph") has guaranteed the printing
joint venture partners' share of equipment leasing obligations to third
parties, which amounted to approximately $948,000 (L372,000) at December
31, 2002. These obligations are guaranteed jointly and severally by each
joint venture partner.
Land leased by the Telegraph under a Head Lease under which the property
is held until July 2183 has been sublet to West Ferry Printers, one of
the Telegraph's printing joint ventures. The sublease is for a term of
34 years from 1987. Although the sublease has been consented to by the
landlord, it has not released Telegraph from its obligation under the
lease and, accordingly, Telegraph is contingently liable for performance
by West Ferry Printers. Annual rents under the lease are based on a
percentage of immoveable assets, currently L600,000 per year.
Pursuant to a joint venture agreement in the United Kingdom, the
Telegraph has agreed to guarantee up to L0.5 million, if required, in
connection with borrowing by the joint venture. To date, the joint
venture has made no request for the supporting guarantee.
Pursuant to the West Ferry joint venture agreement, the Telegraph has a
commitment to fund 50% of the obligation under West Ferry's defined
benefit plan.
Dispositions
In connection with certain dispositions of assets and/or businesses, the
Company has provided customary representations and warranties whose
terms range in duration and may not be explicitly defined. The Company
has also retained certain liabilities for events occurring prior to
sale, relating to tax, environmental, litigation and other matters.
Generally, the Company has indemnified the purchasers in the event that
a third party asserts a claim against the purchaser that relates to a
liability retained by the Company. These types of indemnification
guarantees typically extend for a number of years.
The Company is unable to estimate the maximum potential liability for
these indemnifications as the underlying agreements do not always
specify a maximum amount and the amounts are dependent upon the outcome
of future contingent events, the nature and likelihood of which cannot
be determined at this time.
Historically, the Company has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying interim consolidated financial
F-69
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
statements with respect to these indemnification guarantees. The Company
continues to monitor the conditions that are subject to guarantees and
indemnifications to identify whether it is probable that a loss has
occurred, and would recognize any such losses under any guarantees or
indemnifications when those losses are probable and estimable.
Amended and Restated Credit Agreement
The Company and its subsidiaries also indemnified the Borrower against
any related tax liabilities arising from payments made with respect to
the revolving bank credit facility, except taxes on Borrower's income.
These indemnifications generally extended for the term of the revolving
bank credit facility and did not provide for any limit on the maximum
potential liability. The revolving bank credit facility was repaid in
March 2003.
Credit Facilities
Under Hollinger International's Senior Credit Facility, Hollinger
International has agreed to indemnify its lenders under that facility
against certain costs or losses resulting from changes in laws and
regulations which would increase the lenders' costs or reduce the rate
of return otherwise available to them in respect of the loans to
Hollinger International. Hollinger International has further agreed to
indemnify certain lenders against existing loans to the extent that such
loans impose an obligation for withholding tax or similar charge on
interest, should such tax or charge not be recoverable by the lenders.
These indemnifications generally extend for the term of the credit
facilities and do not provide for any limit on the maximum potential
liability.
Hollinger International is unable to estimate the maximum potential
liability for these types of indemnifications as the credit agreements
do not specify a maximum amount and the amounts are dependent upon
future contingent events, the nature and likelihood of which cannot be
determined at this time.
No amount has been accrued in the accompanying interim consolidated
financial statements with respect to these indemnifications.
International is unable to estimate amounts due for withholding taxes at
this time. Any such amounts will increase the future effective cost of
borrowing.
Hollinger International has indemnified the lenders and their affiliates
from and against all losses as a result of any obligations of any of the
borrowers and guarantors under its Senior Credit Facility.
Participation Trust
In connection with the participation agreement, International has agreed
to indemnify the Participation Trust and its trustee, in the event the
participation agreement entitles the issuer to fail to make payments
with respect to the debentures. Although the indemnity has not been
capped, the Company estimates the liability is limited to the amount of
participation interests sold, totalling US$490.5 million, plus accrued
interest and any further debentures received as paid-in-kind interest.
Other
The Company licenses some of the content it publishes for use by third
parties. In doing so, the Company warrants that it is entitled to
license that content and indemnifies the licensee against claims against
improper use. The number of quantum of such claims cannot be reasonably
estimated. Historically, claims of this nature have not been
significant.
In special circumstances, the Company's newspaper operations may engage
freelance reporters to cover stories in locales that carry a high risk
of personal injury or death. Telegraph has engaged a number of
journalists and photographers to report from the Middle East. As a term
of engagement,
F-70
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
Telegraph has agreed to provide a death benefit which, in the aggregate
for all freelancers engaged, amounts to L2,600,000. This exposure is
uninsured. Precautions have been taken to avoid a concentration of the
freelancers in any one location.
28. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted in the current period.
29. SUBSEQUENT EVENTS
a) On March 10, 2003, the Company issued US$120,000,000 aggregate
principal amount of 11 7/8% Senior Secured Notes due 2011. These notes
are secured by 10,108,302 shares of Hollinger International Class A
common stock and all 14,990,000 shares of Hollinger International Class
B common stock. The total net proceeds were used to repay existing bank
indebtedness, to repay amounts due to Ravelston and make an advance to
Ravelston. The Senior Secured Notes are fully and unconditionally
guaranteed by RMI, a wholly owned subsidiary of Ravelston. The Company
and RMI entered into a support agreement, under which RMI is required
to make an annual support payment in cash to the Company on a periodic
basis by way of contributions to the capital of the Company (without
receiving any shares of the Company) or subordinated debt. The amount
of the annual support payment will be equal to the greater of a) the
non-consolidated negative net cash flow of the Company (which does not
include outlays for retractions or redemptions) and b) US$14.0 million
per year (less any future payments of services agreements fees NB Inc.
and any excess in the net dividend amount received by the Company or
any of the Company's wholly owned restricted subsidiaries, as they are
defined in the indenture governing the Company's Senior Secured Notes
due 2011, on the shares of Hollinger International that the Company and
NB Inc. own that is over US$4.65 million per year), in either case,
reduced by any permanent repayment of debt owing by Ravelston to the
Company. Initially, the support amount to be contributed by RMI is
expected to be satisfied through the permanent repayment by Ravelston
of its approximate $16.4 million of advances from the Company, which
resulted from the use of proceeds of the Company's offering of its
Senior Secured Notes. Thereafter, all support amount contributions by
RMI will be made through contributions to the capital of the Company,
without receiving any additional shares of the Company, except that, to
the extent that the minimum payment exceeds the negative net cash flow
of the Company, the amounts will be contributed through an
interest-bearing, unsecured, subordinated loan to the Company. The
support agreement terminates upon the repayment of the Senior Secured
Notes, which mature in 2011.
All aspects of this transaction have been reviewed and approved by a
special committee of the Board of Directors of the Company, comprised
entirely of independent directors.
b) On March 10, 2003, prior to the closing of the above offering, NB Inc.
sold its shares of Class A common stock and Series E redeemable
preferred stock of Hollinger International to RMI. Such shares were in
turn sold back to NB Inc. from RMI at the same price with a resulting
increase in the tax basis of the shares of Hollinger International and
a taxable gain to RMI. As the exchange of the Hollinger International
shares with RMI represents a transfer between companies under common
control, NB Inc. will record in 2003, contributed surplus of
approximately $1.4 million, being the tax benefit associated with the
increase in the tax value of the shares of Hollinger International.
c) On March 10, 2003, Hollinger International repurchased shares of its
Class A common stock and redeemed shares of Series E preferred stock
from the Company and has revised certain debt
F-71
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
arrangements it had in place with the Company. These transactions were
completed in conjunction with the Company closing a private placement
of Senior Secured Notes (note 29a)).
Contemporaneously with the closing of the issue of Senior Secured Notes,
Hollinger International:
i) repurchased for cancellation, from NB Inc., 2,000,000 shares of
Class A common stock of Hollinger International at US$8.25 per
share for total proceeds of $24.2 million (US$16.5 million); and
ii) redeemed, from NB Inc., pursuant to a redemption request, all of
the 93,206 outstanding shares of Series E redeemable convertible
preferred stock of Hollinger International at the fixed redemption
price of $146.63 per share being a total of $13.6 million (US$9.3
million).
As a result, the Company's equity and voting interest in Hollinger
International is 30.3% and 72.6%, respectively. The dilution gain
arising on this effective sale will be recorded in 2003.
Proceeds from the repurchase and redemption were offset against debt due
to Hollinger International from NB Inc. (note 23b)), resulting in net
outstanding debt due to Hollinger International of approximately $29.9
million (US$20.4 million) as of March 10, 2003. The remaining debt bears
interest at 14.25% or, if paid in additional notes, 16.5% and is
subordinated to the Company's Senior Secured Notes (so long as the Notes
are outstanding), guaranteed by Ravelston and secured by certain assets
of Ravelston.
Following a review by a special committee of the Board of Directors of
Hollinger International, comprised entirely of independent directors, of
all aspects of the transaction relating to the changes in the debt
arrangements with NB Inc. and the subordination of this remaining debt,
the special committee approved the new debt arrangements, including the
subordination.
d) On April 21, 2003, the Company made an offer to exchange its Series III
preference shares into Series IV preference shares on a share-for-share
basis. The terms of the new Series IV preference shares will provide
for a mandatory redemption on April 30, 2008 for $10.00 cash per share
(plus unpaid dividends) and an annual cumulative dividend, payable
quarterly, of $0.80 per share per annum (or 8%) during the five-year
term. As with the Series III preference shares, i) the Company will
have the right at its option to redeem all or part of the Series IV
preference shares at any time after three years for $10.00 cash per
share (plus unpaid dividends) and ii) holders will have the right at
any time to retract the Series IV preference shares for a retraction
price payable in cash which, during the first four years, will be
calculated by reference to Government of Canada bonds having a
comparable yield and term to the shares, and during the fifth year, the
retraction price will be $9.50 per share (plus unpaid dividends in each
case). The offer was conditional upon acceptance by holders of at least
50% of the outstanding Series III preference shares. The bid originally
expired on May 27, 2003 and was extended until June 9, 2003. This
condition was not met and, accordingly, the offer was terminated.
e) Effective April 30, 2003, US$15.7 million principal amount of
subordinated debt owing to Hollinger International by NB Inc. was
transferred by Hollinger International to HCPH Co., a subsidiary of
Hollinger International, and subsequently transferred to RMI by HCPH
Co. in satisfaction of a non-interest bearing demand loan due from HCPH
Co. to RMI. After the transfer, NB Inc.'s debt to Hollinger
International was approximately US$4.7 million and NB Inc.'s debt to
RMI was approximately US $15.7 million. The debts owing by NB Inc. to
RMI and owing by NB Inc. to Hollinger International each bears interest
at the rate of 14.25% if interest is paid in cash and 16.50% if it is
paid in kind, except that RMI has waived its right to receive interest
until further notice. The debts are subordinated to the Senior Secured
Notes for so long as the Senior Secured Notes are
F-72
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
outstanding, and that portion of the debt due by NB Inc. to Hollinger
International is guaranteed by RCL and the Company. Hollinger
International entered into a subordination agreement with the Company
and NB Inc. pursuant to which Hollinger International has subordinated
all payments of principal, interest and fees on the debt owed to it by
NB Inc. to the payment in full of principal, interest and fees on the
Senior Secured Notes, provided that payments with respect to principal
and interest can be made to International to the extent permitted in
the indenture governing the Senior Secured Notes. RMI has agreed to be
bound by these subordination arrangements with respect to the debt owed
from NB Inc. to RMI.
f) During the period April 1, 2003 to May 16, 2003, holders of 3,651,784
Series III preference shares, holders of 504,989 Series II preference
shares and holders of 22,500 retractable common shares submitted
retraction notices to the Company. As of May 20, 2003, the Company
completed or announced that it was able to complete the retraction of
504,989 Series II preference shares for 232,293 shares of Hollinger
International Class A common stock, 876,050 Series III preference
shares for approximately $7.7 million in cash and 22,500 retractable
common shares for cash of $124,000. This completed all retraction
notices received up to and including April 30, 2003.
On May 20, 2003, after careful deliberation, the Company concluded that
it was not able to complete the retractions of shares submitted after
April 30, 2003 without unduly impairing its liquidity. Since April 30,
2003 and up to and including June 19, 2003, the Company has received
retraction notices from holders of 2,939,593 Series III preference
shares, of which 1,281,239 retraction notices were subsequently
withdrawn, leaving retraction notices from the holders of 1,658,354
Series III preference shares, for aggregate retraction proceeds of $15.8
million, which were unable to be completed at the current time. In
addition, during the same time period, retraction notices were received
from the holders of 357,958 Series II preference shares for aggregate
retraction proceeds of 164,660 shares of Hollinger International Class A
common stock or cash of $2.5 million, which were unable to be completed
at the current time.
The Company will periodically review its liquidity position to determine
if and when further retractions can be completed. The Company will not
complete the retractions or redemptions if to do so would unduly impair
its liquidity. Retractions of Series II preferences shares and Series
III preference shares will be processed on a combined basis in order
determined by their retraction date (with equal ranking of the series)
in advance of any retractable common shares that are submitted for
retraction. Following the satisfaction of all pending retracted Series
II preference shares and Series III preference shares, retractions of
the retractable common shares will be processed in order determined by
their retraction date. Accordingly, retractions of retractable common
shares cannot be completed as long as there are pending and unsatisfied
retractions of Series II preference shares and Series III preference
shares.
g) On May 11, 2003, 3815668 Canada Inc., a subsidiary of CanWest (the
Issuer of the 12 1/8% Subordinated Debentures due 2010 received by the
Company in partial consideration on sale of the Company's Canadian
newspaper operations to CanWest in November 2000) redeemed $265.0
million principal amount of the 12 1/8% debentures, exclusive of
interest accrued to the redemption date of $8.8 million. Of the total
amount received, US$159.8 million has been delivered to the
Participation Trust and the balance of US$27.6 million has been
received by Hollinger International and Hollinger LP., a portion of
which must be retained until November 4, 2010.
h) On May 19, 2003, a shareholder of Hollinger International filed a
Schedule 13D with the U.S. Securities and Exchange Commission (the
"SEC") and amongst other things, served a demand letter on the Board of
Directors of Hollinger International (the "Board") requesting that the
Board investigate and, if determined to be advisable, take corrective
action in respect of
F-73
HOLLINGER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS EXCEPT WHERE NOTED)
payments made to senior executives of Hollinger International in
respect of non-competition agreements, that had been disclosed in the
financial statements. On June 11, 2003, the same shareholder filed an
Amendment to the Schedule 13D with the SEC reiterating the earlier
demands as well as requesting that the Board investigate and, if
determined to be advisable, take corrective action in respect of i) an
asset sale by Hollinger International to an entity affiliated with
certain officers and directors of Hollinger International, and (ii) the
payment of fees by Hollinger International pursuant to various
affiliated management services agreements. On June 17, 2003, in
response to these requests, the Board established a special committee
to conduct an independent review and investigation of those
allegations. The potential impact of filing and the demand letters, on
the financial statements of Hollinger International and the Company, is
not known at the current time.
i) On May 22, 2003, Hollinger International and the Company announced
that they had reached an agreement in principle, regarding a proposed
transaction with Southeastern Asset Management Inc. ("Southeastern").
Under the proposed transaction, Southeastern would purchase from the
Company between five to ten million shares (as determined by the
Company) of Hollinger International Class A common stock at a purchase
price of US$11.60 per share. The terms of the shares of Class B common
stock of Hollinger International, which currently have ten votes per
share and represent approximately 67% of the voting power of Hollinger
International, would be amended to allocate 35% of the voting power of
Hollinger International to the shares of Class B common stock for a
period of 3 1/2 years. The voting power of the shares of Class B
common stock would then be reduced to two votes per share for 18
months thereafter, after which time, the shares of Class B common
stock would be converted on a share-for-share basis into shares of
Class A common stock. Going forward, Ravelston management would be
employed and paid directly by Hollinger International. An aggregate
annual compensation level of US$20 million has received the support of
Southeastern which would have the right to nominate three directors to
the Board of Hollinger International.
Completion of the transaction is subject to various conditions,
including approval of the Board of Directors of Hollinger International
and the Company, approval by the shareholders of Hollinger International
and the execution of definitive agreements. If the requisite approvals
are obtained, it is contemplated that the transaction would close on or
before September 30, 2003.
Since the proposed transaction is in its preliminary stages and has not
yet been finalized, the Company has not yet determined the potential
impact on its financial statements.
j) In 2003, Hollinger International made a venture capital investment of
US$2.5 million in a corporation in which a director of Hollinger
International has a minority interest.
k) Commencing April 3, 2003, Hollinger International began purchasing its
own shares through the public market and holding the shares acquired as
treasury stock. During the period April 3, 2003 to May 5, 2003,
Hollinger International acquired 1,000,000 shares of its Class A common
stock at an average price of U.S.$8.79 per share for total cash
consideration of U.S.$8.8 million.
F-74
HOLLINGER INC.
SCHEDULE 1 -- CONDENSED UNCONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY
CONDENSED NON-CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------
2001 2002
--------- ---------
(IN THOUSANDS OF
CANADIAN DOLLARS)
ASSETS
CURRENT ASSETS
Prepaid expenses and other assets........................... $ 978 $ 1,751
Due from subsidiaries....................................... 22,620 26,616
--------- ---------
23,598 28,367
Equity investments in subsidiaries and affiliates........... 130,460 115,612
Other assets................................................ 1,446 1,234
--------- ---------
$ 155,504 $ 145,213
========= =========
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness........................................... $ 129,475 90,810
Accounts payable and accrued expenses....................... 3,003 2,278
Retractable preference shares............................... -- 135,299
Deferred unrealized gain on retractable preference shares... -- 11,983
Due to subsidiaries (note 5)................................ 107,174 210,085
Due to The Ravelston Corporation Limited.................... 23,500 46,089
--------- ---------
263,152 496,544
Retractable preference shares............................... 147,472 --
Deferred unrealized gain on retractable preference shares... 7,670 --
Future income taxes......................................... 680 --
--------- ---------
418,974 496,544
--------- ---------
SHAREHOLDERS' DEFICIENCY
Capital stock............................................... 271,774 273,759
Contributed surplus (note 2)................................ 51,797 51,797
Deficit (note 3)............................................ (537,110) (656,942)
--------- ---------
(213,539) (331,386)
Equity adjustment from foreign currency translation......... (49,931) (19,945)
--------- ---------
(263,470) (351,331)
--------- ---------
$ 155,504 $ 145,213
========= =========
See accompanying notes to condensed non-consolidated financial statements.
F-75
HOLLINGER INC.
SCHEDULE 1 -- CONDENSED UNCONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY -- (CONTINUED)
CONDENSED NON-CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31
----------------------------------
2000 2001 2002
--------- ---------- ---------
(IN THOUSANDS OF CANADIAN DOLLARS)
REVENUE
Interest income............................................. $ 183 $ 388 $ 26
-------- --------- --------
EXPENSES
General and administrative expenses......................... 1,900 2,591 3,259
Amortization of deferred finance costs...................... 1,177 1,963 2,560
Interest on exchangeable shares............................. 11,054 9,294 8,185
Interest on amounts due to The Ravelston Corporation
Limited................................................... -- -- 2,045
Other interest.............................................. 14,386 11,626 5,614
-------- --------- --------
28,517 25,474 21,663
-------- --------- --------
Net earnings (loss) in equity accounted companies........... 185,740 (165,899) (66,773)
-------- --------- --------
Net foreign currency gains (losses)......................... 74 (16) 15
-------- --------- --------
Earnings (loss) before the undernoted....................... 157,480 (191,001) (88,395)
Unusual gains (losses), net (note 4)........................ 32,969 54,670 (293)
Income tax recovery (expense)............................... (1,076) 4,433 48
-------- --------- --------
Net earnings (loss)......................................... $189,373 $(131,898) $(88,640)
======== ========= ========
See accompanying notes to condensed non-consolidated financial statements.
F-76
HOLLINGER INC.
SCHEDULE 1 -- CONDENSED UNCONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY -- (CONTINUED)
CONDENSED NON-CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------------
2000 2001 2002
--------- ---------- ---------
(IN THOUSANDS OF CANADIAN DOLLARS)
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net earnings (loss)......................................... $189,373 $(131,898) $(88,640)
Unusual gains (losses), net................................. (32,969) (54,670) 293
Other income (costs)........................................ 1,444 (1,964) 212
-------- --------- --------
157,848 (188,532) (88,135)
Items not involving cash:
Amortization of deferred finance costs...................... 1,177 1,963 2,560
Net (earnings) loss in equity accounted companies, net of
amounts received.......................................... (96,193) 245,738 74,472
Change in non-cash operating working capital................ (343) 23,144 (1,499)
Other....................................................... 1,677 -- --
Future income taxes......................................... -- (5,239) (680)
-------- --------- --------
64,166 77,074 (13,282)
FINANCING ACTIVITIES
Redemption and cancellation of capital stock................ (700) (273) (1,064)
Redemption and cancellation of exchangeable shares.......... (5,133) (317) (277)
Increase (decrease) in short-term borrowings................ 4,039 (32,525) (38,665)
Increase in amount due to Ravelston......................... 2,267 21,233 22,589
Change in amounts due to subsidiaries....................... 12,728 (63,713) 49,203
Dividends paid on retractable common shares................. (22,177) (20,216) (16,031)
Redemption of HCPH special shares........................... (54,482) -- --
Other....................................................... -- -- (2,473)
-------- --------- --------
(63,458) (95,811) 13,282
INVESTING ACTIVITIES
Proceeds on disposal of investments......................... -- 19,892 --
Additions to investments.................................... -- (1,155) --
Increase in other assets.................................... (708) -- --
-------- --------- --------
(708) 18,737 --
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ -- $ -- $ --
======== ========= ========
SUPPLEMENTAL DISCLOSURE
Dividends received from subsidiaries...................... $ 89,547 $ 79,839 $ 7,699
======== ========= ========
See accompanying notes to condensed non-consolidated financial statements.
F-77
NOTES TO CONDENSED NON-CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE 1 -- CONDENSED UNCONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
1. BASIS OF PRESENTATION:
The accompanying condensed non-consolidated financial statements include
the accounts of Hollinger Inc. and, on an equity basis, its subsidiaries and
affiliates. These financial statements should be read in conjunction with the
consolidated financial statements of the Company.
The Company is a holding company and its assets consist primarily of
investments in its wholly owned subsidiaries, including Hollinger International
and Publishing. As a result, the Company's ability to meet its future financial
obligations, including the retraction and redemption of shares, is dependent
upon the availability of cash flows from its United States and foreign
subsidiaries through dividends, intercompany advances, management fees and other
payments, as well as on the ongoing support of RMI. This is fully described in
note 1 to the Company's consolidated financial statements. As further described
in note 9 to the Company's consolidated financial statements, Publishing and its
principal United States and foreign subsidiaries are subject to statutory
restrictions and restrictions in debt agreements that limit their ability, among
other things, to incur indebtedness, pay dividends or make other distributions
on its capital stock, enter into transactions with related companies, and sell
assets, including stock of a restricted subsidiary. As a result, substantially
all of the net assets of the Company's subsidiaries are restricted.
As further described in note 9 to the Company's consolidated financial
statements, on December 23, 2002, Publishing issued senior unsecured notes and
certain of Publishing's subsidiaries entered into a Senior Credit Facility.
These debt agreements also restrict Publishing's ability and the ability of
Publishing's restricted subsidiaries, to, among other things, incur additional
debt, make advances, pay dividends or distributions on, redeem or repurchase
capital stock, make investments, enter into transactions with affiliates, issue
stock of restricted subsidiaries, engage in unrelated lines of business, create
liens to secure debt; and transfer or sell assets or merge with or into other
companies.
2. CONTRIBUTED SURPLUS:
During 2000 and 2001, the Company sold certain of its investments in its
wholly-owned subsidiaries to other wholly-owned subsidiaries, for cash,
promissory notes and share consideration. The excess of or shortfall in the cash
and promissory notes received over the historical carrying value of the
Company's investment in the wholly-owned subsidiaries sold has been reflected as
contributed surplus.
3. DEFICIT:
As described in note 1 "Significant Accounting Policies -- Goodwill and
Other Intangible Assets" to the Company's consolidated financial statements, on
adoption of new accounting standards, Hollinger International has determined
that the carrying amount of the Jerusalem Post was in excess of the estimated
fair value at January 1, 2002. The impairment write down of goodwill, net of
related minority interest has been charged to opening deficit as at January 1,
2002.
4. UNUSUAL GAINS (LOSSES), NET:
In 2000 and 2001, unusual gains (losses), net are principally comprised of
the dilution gain arising on the sale of shares of Hollinger International and
gains resulting from the delivery of shares of Hollinger International on the
exchange of Series II preference shares.
5. DUE TO SUBSIDIARIES:
The amount due to subsidiaries includes $198,311,000 at December 31, 2002
($96,195,000 at December 31, 2001) to 504468 N.B. Inc., which results from
advances made to the Company from the
F-78
SCHEDULE I
HOLLINGER INC.
NOTES TO CONDENSED NON-CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SCHEDULE 1 -- CONDENSED UNCONSOLIDATED FINANCIAL
INFORMATION OF THE COMPANY -- (CONTINUED)
proceeds from sales of shares of Hollinger International Class A common stock
and from dividends received by 504468 N.B. Inc. on its shares of Hollinger
International common stock. 504468 N.B. Inc. will declare a dividend to settle
the amount receivable from the Company and declare regular dividends in the
future to settle future funds advanced to the Company.
F-79
ITEM 19. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
1.1a Certificate of Amalgamation and Articles of Amalgamation amalgamating Argcen Holdings
Inc., Hollinger Argus Limited and Labmin Resources Limited, dated September 17, 1985
1.1b Amalgamation Agreement between Argcen Holdings Inc., Hollinger Argus Limited and Labmin
Resources Limited, dated August 23, 1985
1.1c Certificate of Amendment and Articles of Amendment, dated June 14, 1989
1.1d Certificate of Amendment and Articles of Amendment, dated May 30, 1996
1.1e Certificate of Amendment and Articles of Amendment, dated September 11, 1997
1.1f Certificate of Amendment and Articles of Amendment, dated November 7, 1997
1.1g Certificate of Amendment and Articles of Amendment, dated June 3, 1998
1.1h Certificate of Amendment and Articles of Amendment, dated April 28, 1999
1.1i Certificate of Amendment and Articles of Amendment, dated April 22, 2003
1.2a By-Law Number A24, dated March 14, 1984
1.2b By-Law Number A25, dated June 28, 1984
1.2c By-Law Number A26, dated February 27, 2002
4.1 Trust Indenture, dated as of March 10, 2003, among Hollinger Inc., Ravelston Management
Inc., 504468 N.B. Inc. and Wachovia Trust Company, National Association, Ravelston
Corporation Limited and Sugra Limited
4.2 Registration Rights Agreement, dated as of March 5, 2003 among Hollinger Inc., Ravelston
Management Inc., 504468 N.B. Inc., and Wachovia Securities, Inc.
4.3 Form of Note
8.1 List of Subsidiaries - see Item 4f. - "Organizational Structure"
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
86
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
HOLLINGER INC. (Registrant)
By: /s/ Conrad M. Black
------------------------------------
Lord Black of Crossharbour, PC(C),
OC, KCSG
Chairman and Chief Executive Officer
87
CERTIFICATION
I, The Lord Black of Crossharbour PC(C), OC, KCSG,
certify that:
1. I have reviewed this annual report on Form 20-F of Hollinger Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 25, 2003
/s/ Conrad M. Black
-----------------------
The Lord Black of Crossharbour PC(C), OC, KCSG
Chairman and Chief Executive Officer
88
CERTIFICATION
I, Frederick A. Creasey,
certify that:
1. I have reviewed this annual report on Form 20-F of Hollinger Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 25, 2003
/s/ Frederick A. Creasey
-----------------------
Frederick A. Creasey
Vice President and Chief Financial Officer
Hollinger Inc.
89
Exhibit 1.1 a
[CANADA LOGO]
CERTIFICATE OF AMALGAMATION CERTIFICAT DE FUSION
CANADA BUSINESS LOI SUR LES SOCIETES
CORPORATIONS ACT COMMERCIALES CANADIENNES
HOLLINGER INC. 197578-1
------------------------------------------------- -----------------------
Name of corporation - Denomination de la societes Number - Numero
I hereby certify that the above- Je certifie par les presentes que la
mentioned Corporation resulted from societe mentionnee ci-haut resulte de
the amalgamation of the following la fusion des societes ci-dessous, en
Corporations under Section 179 of vertu de l'article 179 de la Loi sur
the Canada Business Corporations las societes commerciales canadiennes.
Act, as set out in the attached articles tel qu'indique dans les statuts de
of Amalgamation. fusion ci-joints.
ARGCEN HOLDINGS INC.
HOLLINGER ARGUS LIMITED
LABMIN RESOURCES LIMITED
September 17, 1985
le 17 Septembre 1985
Director-Directeur Date of Amalgamation - Date de fusion
CORPORATIONS ACT
FORM 9 [LOGO] FORMULE 9
ARTICLES OF AMALGAMATION STATUTS DE FUSION
(SECTION 179) (ARTICLE 179)
------------------------------------------------------------------------------------------------------------------------------------
1 - Name of Amalgamated Corporation Denomination de la societe issue de la fusion
LINGER INC.
------------------------------------------------------------------------------------------------------------------------------------
2 - The place within Canada where the registered office is to be situated Lieu au Canada ou doit etre situe ie siege social
Municipality of Metropolitan Toronto, Province of Ontario
------------------------------------------------------------------------------------------------------------------------------------
3 - The classes and any maximum number of shares that the corporation Categories et tout nombre maximal d'actions que la
is authorized to issue societe est autorisee a emettre
(1) Unlimited number of common shares
(2) Unlimited number of preference shares issuable in series, of which 1,850,000
shall form the first series and be designated as Floating Rate Cumulative
Convertible Preference Shares Series A.
The rights, privileges, restrictions and conditions attaching to such shares
are set forth in Appendices A and B annexed hereto.
------------------------------------------------------------------------------------------------------------------------------------
4 - Restrictions if any on share transfers Restrictions sur le transfer des actions sily a lieu
None
------------------------------------------------------------------------------------------------------------------------------------
5 - Number (or minimum and maximum number) of directors Nombre (ou nombre minimum et maximum)
(See Appendix C) d'administrateurs
------------------------------------------------------------------------------------------------------------------------------------
6 - Restrictions if any on business the corporation may carry on Limites imposees quant aux activities que la societe
peut expiorter, s'il y a lieu.
None
------------------------------------------------------------------------------------------------------------------------------------
7 - Other provisions if any Autres dispositions s'il y a lieu
N/A
------------------------------------------------------------------------------------------------------------------------------------
8 - The amalgamation agreement has been approved by special [X] La convention de fusion a ete approuvee par resolutions
resolutions of shareholders of each of the amalgamating speciales des actionnaures de chacune des societes
corporations listed in Item 10 below in accordance fusionnantes enumerecs a la rubrique 10 Ci-dessous, en
with Section 177 of the Canada Business Corporations conformite de I'article 177 de la Lor sur les societes
Act. commerciales canadiennes.
The amalgamation has been approved by a resolution of the [ ] La fusion a ete approuvee par resolution des administrateurs
directors of each of the amalgamating corporations de chacune des societes fusionnantes enumerates a la rubrique
listed in Item 10 below in accordance with Section 178 10 ci-dessous en conformite de I'article 178 de la Loi sur
of the Canada Business Corporations Act. These articles les societes commerciales canadiennes. Les presents statuts
of amalgamation are the same as the articles of de fusion aont les memes que les statuts constitutifs de
incorporation of (name the designated amalgamating (nommer la societe fusionnante designee).
corporation).
------------------------------------------------------------------------------------------------------------------------------------
9 - Name of the amalgamating corporation the by-laws of
which are to be the by-laws of the amalgamated
corporation.
Hollinger Argus Limited
------------------------------------------------------------------------------------------------------------------------------------
10 - Name of Amalgamating Corporations Corporation No. Description of Office
Denomination des societes No de la societe Signature Date Description du posie
------------------------------------------------------------------------------------------------------------------------------------
Argcen Holdings Inc. 173149-1 Sept. Secretary
17/85
------------------------------------------------------------------------------------------------------------------------------------
Hollinger Argus Limited 173617-5 Sept. Secretary
17/85
------------------------------------------------------------------------------------------------------------------------------------
Labmin Resources Limited 197565-0 Sept. Secretary
17/85
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY A L'USAGE DU MINISTERE SEULEMENT
Corporation No. - No. de la societe Filed -
197578-1
September 17, 1985
APPENDIX A
PREFERENCES, RIGHTS, CONDITIONS, RESTRICTIONS, LIMITATIONS AND PROHIBITIONS
ATTACHING TO THE PREFERENCE SHARES
1. Directors' Right to Issue in One or More Series
The Preference Shares may at any time or from time to time be issued in
one or more series. Before any shares of a particular series other than the
first series are issued, the Board of Directors of the Corporation shall fix the
number of shares that will form such series and shall subject to the limitations
set out herein, by resolution determine the designation, rights, privileges,
restrictions and conditions to be attached to the Preference Shares of such
series, including, but without in any way limiting or restricting the generality
of the foregoing, the rate, amount or method of calculation of dividends
thereon, the time and place of payment of dividends, the consideration and the
terms and conditions of any purchase for cancellation, retraction or redemption
thereof, conversion rights (if any), voting rights attached thereto (if any),
and the terms and conditions of any share purchase plan or sinking fund, the
whole subject to the filing with the Director (as defined in the Canada Business
Corporations Act) of Articles of Amendment containing a description of such
series, including the designation, rights, privileges, restrictions and
conditions determined by the Board of Directors.
2. Ranking of Preference Shares
The Preference Shares of each series shall rank on a parity with the
Preference Shares of every other series with respect to accumulated dividends
and return of capital. The Preference Shares shall be entitled to preference
over the Common Shares and over any other shares ranking junior to the
Preference Shares with respect to priority in the payment of dividends and in
the distribution of assets in the event of the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs. If any cumulative dividends or amounts
payable on a return of capital are not paid in full, the Preference Shares of
all series shall participate rateably in respect of such dividends, including
accumulations, if any, in accordance with the sums that would be payable on such
shares if all such dividends were declared and paid in full, and in respect of
any repayment of capital in accordance with the sums that would be payable on
such repayment of capital if all sums so payable were paid in full; provided
however, that in the event of there being insufficient assets to satisfy in full
all such claims as aforesaid, the claims of the holders of the Preference Shares
with respect to repayment of capital shall first be paid and satisfied and any
assets remaining thereafter shall be applied towards the payment and
satisfaction of claims in respect dividends. The Preference Shares of any series
may also be given such other preferences not inconsistent with paragraphs 1 to 5
hereof over the Common Shares and over any other shares ranking junior to the
Preference Shares as may be determined in the case of such series of Preference
Shares.
3. Voting Rights
Except as hereinafter referred to or as required by law or in
accordance with any voting rights which may from time to time be attached to any
series of Preference Shares, the holders of the Preference Shares as a class
shall not be entitled as such to receive notice of, to attend or to vote at any
meeting of the shareholders of the Corporation.
4. Amendment with Approval of Holders of Preference Shares
The rights, privileges, restrictions and conditions attaching to the
Preference Shares as a class may be added to, changed or removed but only with
the approval of the holders of Preference Shares given as hereinafter specified.
5. Approval of Holders of Preference Shares
The approval of the holders of Preference Shares to add to, change or
remove any right, privilege, restriction or condition attaching to the
Preference Shares as a class or of any other matter requiring the consent of the
holders of the Preference Shares may be given in such manner as may then be
required by law, subject to a minimum requirement that such approval be given by
resolution passed by the affirmative vote of at least 66 2/3% of the votes cast
at a meeting of the holders of Preference Shares duly called for that purpose.
The formalities to be observed in respect of the giving of notice of
any such meeting or any adjourned meeting and the conduct thereof shall be those
from time to time prescribed in the by-laws of the Corporation with respect to
meetings of shareholders or, if not so prescribed, as required by the Canada
Business Corporations Act. On every poll taken at a meeting of holders of
Preference Shares as a class, or at a joint meeting of the holders of two or
more
series of Preference Shares, each holder of Preference Shares entitled to vote
thereat shall have one vote in respect of each $1.00 of the issue price of each
Preference Share held by him.
COMMON SHARES
The Common Shares shall carry and be subject to the following rights,
privileges, restrictions and conditions:
1. Voting Rights
The holders of the Common Shares shall be entitled to receive notice of
and to attend all meetings of shareholders of the Corporation, other than
separate meetings of the holders of another class or series of the Corporation,
and to vote at any such meeting on the basis of one vote for each Common Share
held.
2. Dividend Rights
Subject to the prior rights of the holders of the Preference Shares and
any other shares ranking senior to the Common Shares with respect to priority in
the payment of dividends, all dividends which the directors may declare in any
fiscal year of the Corporation shall be declared and paid in equal or equivalent
amounts per share on all Common Shares at the time outstanding without
preference or priority.
3. Liquidation, Dissolution or Winding Up
In the event of the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its shareholders for the purpose
of winding up its affairs, the holders of the Common Shares shall be entitled,
subject to the prior right of the holders of the Preference Shares and any other
shares ranking senior to the Common Shares, to the remaining property and assets
of the Corporation.
APPENDIX B
RIGHTS, PRIVILEGES, RESTRICTIONS AND CONDITIONS ATTACHING TO THE SERIES A
PREFERENCE SHARES
The rights, privileges, restrictions and conditions attaching to the
Series A Preference Shares (in addition to the rights, privileges, restrictions
and conditions attaching to the Preference Shares as a class) shall be as
follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions.
In these conditions attaching to the Series A Preference Shares:
(a) "average prime rate" for any dividend calculation period means
the arithmetic mean (rounded to the nearest 0.01%) of the
prime rate for each day during such period:
(b) "business day" means any day other than a Saturday, Sunday or
statutory holiday in the province in which the registered
office of the Corporation is located;
(c) "close of business" means the normal closing hour of the
principal office of the transfer agent and registrar in the
city in which the registered office of the Corporation is
located;
(d) "Common Shares" means the Common Shares in the capital of the
Corporation as constituted on the Effective Date or as
subsequently consolidated, subdivided, reclassified or
otherwise changed, or any voting shares and other securities
that holders of such shares are entitled to receive as a
result of any reorganization of the capital of the
Corporation;
(e) "Conversion Ratio" at any date means the quotient obtained by
dividing the stated value per Series A Preference Share at
such date by the Current Market Price per Common Share
determined by such date;
(f) "Current Market Price per Common Share" at any date means the
weighted average closing price (expressed in Canadian dollars)
at which the Common Shares have traded on The Toronto Stock
Exchange during the 20 trading days (on each of which at least
100 Common Shares were traded in at least one board lot)
immediately preceding the fifth trading day before such date
(or if the Common Shares are not then listed on The Toronto
Stock Exchange, on such stock exchange on which such shares
are listed as may be selected for such purpose by the
Directors) and, if the Common Shares are not then listed on
any stock exchange, the "Current Market Price per Common
Share" shall be the fair market value of the Common Shares as
determined by the auditors of the Corporation (or if such
auditors are unable or unwilling to act, by a national firm of
chartered accountants selected by the Directors satisfactory
to the Holders);
(g) "Date of Conversion" has the meaning given to that expression
in Section 3.3;
(h) "Directors" means the board of directors of the Corporation,
and reference without more to action by the Directors shall
mean action by the Directors as a board or by any authorized
committee thereof;
(i) "dividend calculation period" means a period beginning on a
dividend payment date and ending on the sixth day immediately
prior to the next subsequent dividend payment date;
(j) "dividend payment date" means the first day of March, June,
September and December in each year and with respect to
partial dividends, means the date on which any such partial
dividend is payable;
(k) "dividend payment period" means a period beginning on a
dividend payment date and ending on the day immediately prior
to the next subsequent dividend payment date;
(l) "Dividend Rate" for any dividend payment period means the sum
of 2.00% plus one-half of the average prime rate for the
dividend calculation period ending on the sixth day
immediately prior to the next dividend payment date, provided
that in the event that the Directors fail to declare and pay
any dividend as provided in Section 2.2, the dividend rate for
any dividend payment period in respect of which dividends are
not declared or paid in full will be the sum of 4.00% and
one-half of the average prime rate
for the dividend calculation period ending on the sixth day
immediately prior to the dividend payment date; such dividend
rate to be effective for the dividend payment period for which
a dividend was not paid in full and the subsequent period of
time ending on the day immediately preceding the date of
payment of the dividend arrears;
(m) "Effective Date" means the date of the Certificate of
Amalgamation of the Corporation issued under the Canada
Business Corporations Act;
(n) "herein", "hereto", "hereunder", "hereof", "hereby" and
similar expressions mean or refer to these Series A Preference
Share provisions and not to any particular Section,
subsection, subdivision or portion hereof, and the expressions
"Article", "Section" and "subsection", followed by a number
and/or a letter mean and refer to the specified Article,
Section or subsection hereof;
(o) "Holder" means a registered holder of any Series A Preference
Shares;
(p) "prime rate" for any day means the rate of interest, expressed
as an annual rate, declared by the Canadian Imperial Bank of
Commerce or its successors to be the Bank's prime interest
rate for Canadian dollar commercial loans in Canada;
(q) "Notice of Redemption" means a notice in writing given, as
hereinafter provided, by the Corporation to the Holders
setting forth the Redemption Price, (as at the date of such
notice) and the place at which redemption is to take place;
(r) "Redemption Date" means the date fixed by the Directors for
redemption of Preference Shares set forth in a Notice of
Redemption;
(s) "Redemption Price" means the price per Series A Preference
Share, including all accrued and unpaid dividends, specified
in Section 5.4;
(t) "trading day" means a day on which the relevant stock exchange
referred to in paragraph (f) hereof is open for business; and
(u) "transfer agent and registrar" means the person or persons
from time to time appointed by the Directors as the transfer
agent and registrar in Canada for the Series A Preference
Shares, and failing any such appointment, means the
Corporation.
1.2 Words importing the singular number only include the plural and vice
versa and words importing any gender include all genders.
1.3 All dollar amounts referred to herein shall be in lawful money of
Canada.
1.4 The division of these Series A Preference Share provisions into
Articles, Sections, subsections, clauses, subclauses or other subdivisions and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation hereof.
1.5 In the event that any date upon which any dividends on the Series A
Preference Shares are payable by the Corporation, or upon or by which any other
action is required to be taken by the Corporation hereunder is not a business
day, then such dividend shall be payable or such other action shall be required
to be taken on or by the next succeeding day which is a business day.
ARTICLE 2
DIVIDENDS
2.1 Payment of Dividends. The Holders shall be entitled to receive, and,
subject to Section 2.4, the Corporation shall pay, as and when declared by the
Directors out of monies of the Corporation available for the payment of
dividends, cumulative preferential cash dividends in the amounts determined from
time to time in accordance with the provisions hereof. Dividends on the Series A
Preference Shares shall accrue from day to day from and including the date of
issue thereof to and including the day immediately preceding a dividend payment
date, and shall be payable on each dividend payment date to the Holders of
record at the close of business on the fifth business day preceding such
dividend payment date. Cheques drawn on a Canadian chartered bank and payable at
par at any branch in Canada of such bank shall be issued in respect of such
dividends to the Holders entitled thereto. The mailing of such cheques shall
satisfy and discharge all liability for such dividends to the extent of the sums
represented thereby, unless such cheques are not paid on due presentation. If on
any dividend payment date dividends payable on such date are not paid in full on
all the Series A Preference Shares then issued and outstanding, such dividends
or the unpaid part thereof shall be paid on a subsequent date or dates as
determined by the Directors. The Holders shall not be entitled to any dividends
other than or in excess of the cash dividends provided for herein. A dividend
which is represented by a cheque which has not been presented for payment within
six years after it was issued or that otherwise remains unclaimed for a period
of six years from the date it was declared to be payable and set apart for
payment shall be forfeited to the Corporation.
2.2 Amount of Dividends. Subject to the provisions hereof, the amount of
the dividend payable on any dividend payment date on any Series A Preference
Share then outstanding shall be equal to the amount, (rounded to the nearest
$0.0001) calculated by applying the Dividend Rate for the dividend payment
period ending on the day immediately prior to such dividend payment date to the
amount of $20.00 per share, and multiplying the result by a fraction of which
the numerator is the lesser of (i) the number of days such share has been
outstanding and (ii) the number of days in such dividend payment period, and of
which the denominator is the number of days in the calendar year in which such
dividend payment date falls.
2.3 Partial Dividends. The amount of the dividend payable on any Series A
Preference Share for any period which is less than a full dividend payment
period with respect to such Series A Preference Share:
(a) which is issued, redeemed, purchased or converted: or
(b) where assets of the Corporation are distributed to the Holders
pursuant to the conditions in that respect attaching to the
Preference Shares as a class;
shall be equal to the amount (rounded to the nearest $0.0001) calculated by
applying the Dividend Rate for the dividend payment period in which such issue,
redemption, purchase, conversion or distribution occurs to the amount of $20.00
per share, and multiplying the result by a fraction of which the numerator is
the number of days in the dividend payment period such share has been
outstanding (including the dividend payment date at the beginning of such period
if such share was outstanding on that date and excluding the dividend payment
date at the end of such period if such share was outstanding on that date or the
date on which such dividend became payable, as the case may be) and the
denominator is the number of days in the calendar year in which such issue,
redemption, purchase, conversion or distribution occurs.
2.4 Avoidance of Fractions. Dividend payments shall be adjusted to avoid
payments of a fraction of a cent.
2.5 Dividends on Conversion. The Holders as of the record date for any
dividend declared to be payable on the Series A Preference Shares shall be
entitled to such dividend notwithstanding that such share is converted after
such record date and before the dividend payment date of such dividend and the
registered holder of any share issued upon conversion of a Series A Preference
Share shall be entitled to any dividend declared to be payable to Holders of
such shares of record on any date after the Date of Conversion. Subject as
aforesaid, upon the conversion of any Series A Preference Share the Corporation
shall make no payment or adjustment on account of any dividends on the Series A
Preference Shares so converted or on account of any dividends on the Common
Shares issuable upon such conversion.
2.6 Notification of Dividend Rate. On or before each dividend payment date
the Corporation shall give notice to each Holder of the dividend rate for the
dividend payment period immediately preceding such dividend payment date and the
particulars of the calculation thereof.
ARTICLE 3
CONVERSION INTO COMMON SHARES
3.1 Conversion Privilege. Subject to Section 3.2, the Series A Preference
Shares shall be convertible in whole as a series at any time, and in multiples
of 250.000 Series A Preference Shares from time to time, after the close of
business on July 31, 1989 into fully paid and non-assessable Common Shares on
the basis of the Conversion Ratio in effect on the Date of Conversion.
3.2 Conversion on Default. Notwithstanding the provisions of Section 3.1,
if the Corporation has failed to pay dividends on the Series A Preference Shares
when legally entitled to do so, or is in breach or default of any of the
provisions of Sections 3.8. 3.9, 4.1, 4.2 or 5.4, each Series A Preference Share
shall be convertible into such number
of fully paid and non-assessable Common Shares as is determined by the
Conversion Ratio in effect on the Date of Conversion, at any time during the
period during which such non-payment, breach or default is continuing.
3.3 Conversion Procedure. In order to exercise the conversion right, a
Holder shall present and surrender to the transfer agent and registrar for the
Common Shares the respective certificates representing the Series A Preference
Shares in respect of which the Holder wishes to exercise his right of
conversion, together with written notice of conversion (which shall be and be
deemed to be irrevocable) signed by such Holder or his agent stating that he
elects to convert such Series A Preference Shares. Such notice of conversion
shall also state the name or names (with addresses) in which the certificate or
certificates for Common Shares which shall be issuable on such conversion shall
be issued. If any of the Common Shares into which such Series A Preference
Shares are to be converted are to be issued to a person or persons other than
the Holder, the signature of such Holder on such notice of conversion shall be
guaranteed in a manner satisfactory to the transfer agent and registrar and such
notice of conversion shall be accompanied by payment to the transfer agent and
registrar of any transfer tax which may be payable by reason thereof. The date
of receipt by the transfer agent and registrar of certificates representing such
Series A Preference Shares and such notice of conversion is herein referred to
as the "Date of Conversion" of such Series A Preference Shares.
As promptly as practicable after the Date of Conversion, the
Corporation shall issue or cause to be issued and deliver or cause to be
delivered to the Holder who has exercised the conversion right in respect of any
Series A Preference Shares, or on his written order, a certificate or
certificates in the name or names of the person or persons specified in the
applicable notice of conversion for the number of Common Shares deliverable upon
the conversion of such Series A Preference Shares and provision shall be made in
respect of any fraction of a Common Share as provided in Section 3.4. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Date of Conversion and at such time the rights of the Holder
as Holder shall cease and the person or persons in whose name or names any
certificate or certificates for Common Shares shall be deliverable upon such
conversion shall be deemed to have thereupon become the holder or holders of
record of the Common Shares represented thereby; provided, however, that no
exercise of the conversion right on any date when the share transfer registers
for Common Shares of the Corporation shall be closed shall be effective to
constitute the person or persons entitled to receive the Common Shares upon such
conversion as the holder or holders of record of such Common Shares on such
date, but such exercise shall be effective to constitute the person or persons
entitled to receive such Common Shares as the holder or holders of record
thereof for all purposes at the close of business on the next succeeding day on
which such share transfer registers are open and such conversion shall be at the
Conversion Ratio in effect at the close of business on such next succeeding day.
Upon surrender to the transfer agent and registrar of any certificate
representing more than the number of Series A Preference Shares which are to be
converted, the Holder thereof shall be entitled to receive, without expense to
such Holder, one or more new certificates for the number of unconverted Series A
Preference Shares represented by the certificate surrendered.
3.4 Avoidance of Fractional Shares. Notwithstanding anything herein
contained, the Corporation shall in no case be required to issue a fraction of a
Common Share upon the conversion of any Series A Preference Share. If any
fractional interest in a Common Share would, except for the provisions of this
Section, be deliverable upon the conversion of any Series A Preference Share,
the Corporation shall issue or cause to be issued to the Holder of such
surrendered Series A Preference Share a non-voting and non-dividend-bearing
scrip certificate or certificates transferable by delivery entitling the Holder
thereof and of other similar certificates aggregating one full Common Share,
upon surrender of such certificates for consolidation at such place in Canada as
may be designated therein, to obtain from the Corporation a full Common Share
and to receive a share certificate therefor, as well as a further scrip
certificate representing the excess, if any, over one full Common Share of the
scrip certificates surrendered for consolidation. Such scrip certificates shall
be in such form and shall be subject to such terms and conditions as the
Corporation may determine and shall provide that the same shall be null and void
on and after a date to be fixed by the Directors, but no such date shall be less
than one year following the date of issue of the scrip certificate concerned.
3.5 Notice to Holders of Series A Preference Shares. In the event that the
Corporation shall determine to:
(a) declare on its Common Shares any cash dividend per share which
when added to the sum of the last four cash dividends per
share paid on its Common Shares would exceed the sum of such
last four cash dividends per share by more than 50%;
(b) declare on its Common Shares any dividends payable in shares
of the Corporation (other than a stock dividend in lieu of a
cash dividend paid in the ordinary course) or make any other
distribution on its Common Shares (other than a cash
dividend);
(c) offer for subscription pro rata to the holders of all or
substantially all of its Common Shares any additional
securities or shares of any class convertible into or
exchangeable for Common Shares or issue any other options,
rights or warrants to all or substantially all of such
holders;
(d) effect a reclassification or change of the Common Shares of
the nature referred to in Section 3.6 or an amalgamation or
merger of the Corporation with or into any other corporation
or a sale, transfer or other disposition of all or
substantially all of the assets of the Corporation; or
(e) proceed with a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation;
then, in each such case, the Corporation shall give notice to each Holder of the
action proposed to be taken and the date on which (i) the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution, subscription rights or other options, rights or warrants, or (ii)
such reclassification, change, amalgamation, merger, sale, transfer or other
disposition, dissolution, liquidation or winding-up shall take place, as the
case may be, provided that the Corporation shall only be required to specify in
such notice such particulars of such action as shall have been fixed and
determined at the date on which such notice is given. Such notice shall also
specify the date as of which the holders of Common Shares of record shall
participate in such dividend, distribution, subscription rights or other
options, rights or warrants, or shall be entitled to exchange their Common
Shares for securities or other property deliverable upon such reclassification,
change, amalgamation, merger, sale, transfer or other disposition, dissolution,
liquidation or winding-up, as the case may be. Such written notice shall be
given with respect to the actions described in paragraphs (a), (b) and (c)
above, not less than 14 days and, with respect to the actions described in
paragraphs (d) and (e) above, not less than 30 days, in each case prior to the
record date or the date on which the Corporation's transfer books are to be
closed with respect thereto.
3.6 Substitution for Common Shares. In the event of any reclassification of
or change in the Common Shares (other than a change as a result of a subdivision
or consolidation), or in the event of any amalgamation of the Corporation with,
or merger of the Corporation into, any other corporation (other than an
amalgamation or merger in which the Corporation is the continuing corporation
and which does not result in any reclassification or change of the Common
Shares), or in the event of any sale, transfer or other disposition of all or
substantially all of the assets of the Corporation, the Holder of each Series A
Preference Share then outstanding shall be entitled to receive and shall accept
upon the conversion of a Series A Preference Share at any time on the effective
date or thereafter, in lieu of the Common Shares which he is otherwise entitled
to receive at the time he exercises the conversion right, the kind and amount of
shares and other securities and property that such holder would have been
entitled to receive as a result of such reclassification, change, amalgamation,
merger, sale, transfer or other disposition if, on the effective date thereof he
had been the registered holder of the number of Common Shares that he is
otherwise entitled to receive at the time he exercises the conversion right,
subject to such adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article. The provisions of
this Section shall similarly apply to successive reclassifications, changes,
amalgamations, mergers, sales, transfers or other dispositions.
3.7 Treatment of Converted Shares. Series A Preference Shares surrendered
upon the exercise of the conversion privilege shall be cancelled by the transfer
agent and registrar, and shall not be restored to the status of authorized but
unissued Series A Preference Shares.
3.8 Maintenance of Common Shares. So long as any of the Series A Preference
Shares are outstanding, the Corporation shall take any corporate action which
may, in the opinion of counsel, be necessary in order that the Corporation shall
have unissued and reserved the number of authorized Common Shares to which the
Holders are entitled on the full exercise of their conversion rights in
accordance with the provisions hereof.
3.9 Registration of Common Shares. If any Common Shares reserved or to be
reserved for the purpose of conversion of the Series A Preference Shares
hereunder require registration with or approval of any governmental authority
under any Canadian or provincial law before such shares may be validly issued
upon conversion, the Corporation will take such action as may be necessary to
secure such registration or approval, as the case may be.
ARTICLE 4
RESTRICTIONS ON DIVIDENDS. ISSUE AND RETIREMENT OF SHARES
4.1 Restriction. So long as any of the Series A Preference Shares are
outstanding, the Corporation shall not, without the prior approval of the
Holders given as provided in Article 7:
(a) declare, pay or set apart for payment any dividends (other
than stock dividends in shares of the Corporation ranking
junior to the Series A Preference Shares) on any shares of the
Corporation ranking junior to the Series A Preference Shares,
unless all dividends then payable on the Series A Preference
Shares and on all other shares ranking on a parity with or in
priority to the Series A Preference Shares have been declared
and paid or set apart for payment;
(b) create or issue any shares ranking prior to the Series A
Preference Shares;
(c) create or issue any shares ranking on a parity with the Series
A Preference Shares unless the consolidated net cash flow of
the Corporation for the most recently completed 12-month
fiscal period is at least equal to two times the aggregate
annual dividend requirements in respect of the Series A
Preference Shares and all shares ranking or to rank on a
parity with the Series A Preference Shares, calculated on a
pro forma basis;
(d) redeem, retract, purchase or otherwise acquire any shares of
the Corporation ranking junior to the Series A Preference
Shares, except pursuant to a sinking fund or purchase
obligation attaching to shares of the Corporation heretofore
or hereafter issued (and in the case of such sinking fund or
other mandatory purchase), not in excess of five percent, in
any 12 month period, of the value or number of such shares
outstanding at the time of such redemption, retraction,
purchase or other acquisition), or make any capital
distribution on or in respect of any other shares of the
Corporation ranking on a parity with or junior to the Series A
Preference Shares in respect of the payment of dividends and
the distribution of assets in the event of the liquidation,
dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
provided, however, that the Corporation may purchase its
Common Shares at any time and from time to time provided that
all dividends then payable on the Series A Preference Shares
and all other shares ranking on a parity with or in priority
to the Series A Preference Shares have been declared and paid
or set apart for payment; or
(e) amalgamate, consolidate or combine with, merge into or
otherwise join with any other corporation or sell, transfer or
dispose of all or substantially all of its assets unless the
resulting, successor or acquiring corporation is a corporation
incorporated under or subject to the laws of Canada or a
province thereof and the common shares of such corporation are
listed and posted for trading on at least one of The Toronto
Stock Exchange, The Montreal Exchange and the Vancouver Stock
Exchange.
4.2 Obligation. So long as any of the Series A Preference Shares are
outstanding, on, from and after July 31, 1989 the Corporation shall, except as
otherwise permitted by the Holders acting as provided in Article 7, cause its
Common Shares, or the common shares of any corporation resulting from an
amalgamation, consolidation, merger, combination or other joining by the
Corporation with any other corporation, or of any successor corporation to the
Corporation, to be listed and posted for trading on at least one of the Toronto,
Montreal or Vancouver stock exchanges.
ARTICLE 5
DIVIDEND RATE ADJUSTMENT AND OPTIONAL REDEMPTION
5.1 Interpretation. For the purposes of this Article:
(a) "Taxable Holder" means any registered Holder or, in the case
of shares registered in the name of a nominee, any beneficial
owner, of Series A Preference Shares which is a "taxable
Canadian corporation" for the purposes of the Income Tax Act
(Canada); and
(b) any reference to any statute shall be deemed to be a reference
to such statute as amended or re-enacted from time to time.
5.2 Notice of Tax Amendment. In the event that any amendment to the Income
Tax Act (Canada) or the Corporations Tax Act (Ontario) or to any Regulation
under either such statute is announced, included in a budget or Notice of Ways
and Means Motion, enacted or passed which affects the income tax treatment of
the dividends on the Series A Preference Shares received or to be received by
any Taxable Holder in such a manner that any income tax or corporation income
tax is or would be payable thereon, or in the event that any Taxable Holder is
subject to a reassessment or believes, on reasonable grounds that it will be
subject to a reassessment arising from or related to its holding of the Series A
Preference Shares, such Taxable Holder may give to the Corporation a written
notice stating that it is a Taxable Holder and that such amendment has been
announced, included in a budget or Notice of Ways and Means Motion, enacted or
passed, or that such a reassessment has occurred or has been threatened.
5.3 Effect of Share Reclassification. In the event that any securities or
property which is substituted for the Common Shares as a result of a
reclassification, change, amalgamation, merger, sale, transfer or other
disposition as contemplated by Section 3.6 are securities or property which
affects the income tax treatment of the dividends on the Series A Preference
Shares received or to be received by any Taxable Holder in such a manner that
any income tax or corporate income tax is or would be payable thereon, such
Taxable Holder may give to the Corporation a written notice stating that it is a
Taxable Holder and that such securities or property have or will have such
effect.
5.4 Redemption at Corporation's Option. Upon the giving of any notice in
accordance with Sections 5.2 or 5.3, and subject to Section 5.7, the Corporation
may, at its option, redeem at any time thereafter all of the outstanding Series
A Preference Shares in respect of which a supplement is payable under Section
5.6, on payment for each such Series A Preference Share to be redeemed of $20.00
plus all accrued and unpaid dividends.
5.5 Redemption Procedure. A Notice of Redemption shall be given by the
Corporation not less than 15 days nor more than 40 days prior to the date fixed
for redemption to each Holder of Series A Preference Shares to be redeemed.
Accidental failure or omission to give such notice to one or more of such
Holders shall not affect the validity of such redemption. On and after the
Redemption Date, the Corporation shall pay or cause to be paid to or to the
order of the Holders of the Series A Preference Shares to be redeemed the
Redemption Price on presentation and surrender at the place of redemption of the
respective certificates representing such shares. Such payment shall be made by
cheque drawn on a Canadian chartered bank and payable at par at any branch in
Canada of such bank. Such shares in respect of which the Redemption Price has
been paid as aforesaid shall thereupon be redeemed. If less than all the Series
A Preference Shares represented by any certificate shall be redeemed, a new
certificate for the balance shall be issued. From and after the Redemption Date,
the Holders of the Series A Preference Shares called for redemption shall cease
to be entitled to dividends or to exercise any of the rights of Holders in
respect thereof unless payment of the Redemption Price shall not be made in
accordance with the foregoing provisions, in which case the rights of the
Holders shall remain unimpaired. The Corporation shall have the right at any
time after mailing a Notice of Redemption to deposit the Redemption Price of the
shares thereby called for redemption, or such part thereof as at the time of
deposit has not been claimed by the persons entitled thereto, in any Canadian
chartered bank or trust company in Canada specified in the Notice of Redemption
or in a subsequent notice to the Holders in respect of which the deposit is
made, in a special account for the Holders of such shares, and upon such deposit
being made or upon the Redemption Date, whichever is later, the Series A
Preference Shares in respect of which such deposit shall have been made shall be
deemed to be redeemed and the rights of each Holder shall be limited to
receiving, without interest, his proportionate part of the Redemption Price so
deposited upon presentation and surrender of the certificate representing his
shares to be redeemed. Any interest on such deposit shall belong to the
Corporation.
5.6 Increased Dividends. If any notice is given in accordance with Sections
5.2 or 5.3, the amount of each dividend payable thereafter or at a subsequent
time specified in such notice on each Series A Preference Share held or owned by
the Taxable Holder giving notice, or by any successor Taxable Holder, shall,
subject to Section 5.8, be increased by an additional amount (the "supplement")
which, after deducting therefrom an amount equal to the tax paid or payable
thereon by such Taxable Holder, will equal the amount of tax paid or payable by
such Taxable Holder in respect of the amount of such dividend accruing after
such notice is given. For this purpose, the amount of any tax referred to herein
arising in connection with the Series A Preference Shares held or owned by any
Taxable Holder shall be conclusively determined by a report of the chartered
accountant or accountants for the time being holding appointment as auditors of
such Taxable Holder given to the Corporation no later than the 25th day after
notice is given under Sections 5.2 or 5.3 or, failing such report, by the report
of a firm of independent chartered accountants appointed by the Corporation and
approved by such Taxable Holder who will make available to such
accountants all information reasonably necessary to make such determination. If
any supplement is payable in accordance with this Section in respect of a
dividend that has otherwise been paid (whether as part of a Redemption Price or
otherwise) before the date that the amount of the supplement is determined, the
Corporation shall pay the supplement to the payee of that dividend no later than
the 10th day after the Corporation receives such accountant's report. Except as
provided in this Section or in paragraph (1) of Section 1.1. there shall be no
increase in the amount of dividends payable on any Series A Preference Share.
5.7 Limitation on Redemption. The Corporation may not redeem any of the
Series A Preference Shares at any time without the prior approval of the Holders
given in accordance with Article 7 if any pan of the Redemption Price which
constitutes a repayment of paid-up capital would, for the purposes of the Income
Tax Act (Canada) as amended or re-enacted from time to time:
(a) be deemed to have been paid as a dividend which is subject to
income tax in the hands of any such Holder, or
(b) give rise to a taxable capital gain in the hands of any such
Holder who or whose predecessor shall have continuously held
such Series A Preference Shares since their issuance;
unless at the time of giving a Notice of Redemption the Corporation delivers to
each Holder whose Series A Preference Shares are to be redeemed an undertaking
and covenant to indemnify such Holder in full for the amount of any income tax
or corporation income lax paid or payable by such Holder as a result of such
redemption.
5.8 Refunds. To the extent any of the tax relating to a supplement which
has been paid is refunded or is determined not to be payable by the Taxable
Holder in respect of whose tax liability or purported liability the supplement
was paid, the payee of the supplement shall promptly repay to the Corporation
without interest the supplement, less any unrecovered tax paid in respect of
such supplement.
5.9 Notice to Corporation. Any notice from any Taxable Holder shall be
sufficiently given if delivered or sent by registered mail, postage prepaid, to
the Corporation at its registered office addressed to the attention of the
Secretary. Any notice so mailed shall be deemed to have been given on the third
business day after the date of mailing.
ARTICLE 6
VOTING RIGHTS
6.1 General. Except as provided in the provisions attaching to the
Preference Shares as a class, the Holders shall not be entitled as such to
receive notice of or to attend or to vote at any meeting of shareholders of the
Corporation.
ARTICLE 7
MISCELLANEOUS
7.1 Modification. The rights, privileges, restrictions and conditions
attaching to the Series A Preference Shares may be repealed, altered, modified,
amended or varied in whole or in part only with the prior approval of the
Holders given in the manner provided in Section 7.2 in addition to any other
approval required by the Canada Business Corporations Act or any other
applicable statutory provision of like or similar effect, from time to time in
force.
7.2 Approval of Holders of Series A Preference Shares. The approval of the
Holders with respect to any and all matters hereinbefore referred to may be
given by at least 66 2/3% of the votes cast at a meeting of the Holders duly
called for that purpose and held upon at least 21 days' notice, at which the
Holders of a majority of the outstanding Series A Preference Shares are present
or represented by proxy. If at any such meeting the Holders of a majority of the
outstanding Series A Preference Shares are not present or represented by proxy
within 30 minutes after the time appointed for such meeting, then the meeting
shall be adjourned to such date being not less than 30 days later and to such
time and place as may be appointed by the chairman of the meeting and not less
than 21 days' notice shall be given of such adjourned meeting but it shall not
be necessary in such notice to specify the purpose for which the meeting was
originally called. At such adjourned meeting, the Holders present or represented
by proxy shall constitute a quorum and may transact the business for which the
meeting was originally called and a resolution passed thereat by not less than
66 2/3% of the votes cast at such adjourned meeting shall be effective
notwithstanding hat the Holders of a majority of the outstanding Series A
Preference Shares are not present or represented by proxy
and the conduct thereof shall be from time to time prescribed by the by-laws of
the Corporation with respect to meetings of shareholders. On every poll taken at
every such meeting or adjourned meeting every Holder shall be entitled to one
vote in respect of each Series A Preference Share held by him.
7.3 Notice. Any notice required or permitted to be given to a Holder shall
be mailed by letter, postage prepaid, or delivered to such Holder at his address
as it appears on the records of the Corporation or in the event of the address
of any such shareholder not so appearing then to the last known address of such
shareholder. The accidental failure to give notice to one or more of such
Holders shall not affect the validity of any action requiring the giving of
notice by the Corporation. Any notice given as aforesaid shall be deemed to be
given on the date upon which it is mailed or delivered.
APPENDIX C
Item 5
The Board of Directors shall consist of a minimum of 3 and a maximum of 21
directors and the number within such range shall be determined from time to time
by the Board of Directors.
PROVINCE OF ONTARIO ) IN THE MATTER OF the Canada
) Business Corporation Act and the
JUDICIAL DISTRICT OF ) Articles of Amalgamation of
) ARGCEN HOLDINGS INC., HOLLINGER
YORK ) ARGUS LIMITED and LABMIN
) RESOURCES LIMITED
TO WIT: )
I, Charles G. Cowan, of the City of Toronto, in the Province of
Ontario,
SOLEMNLY DECLARE THAT:
1. I am the Secretary of ARGCEN HOLDINGS INC. (the "Corporation") and have
knowledge of the matters herein declared.
2. There are reasonable grounds for believing that:
(i) the Corporation is and the corporation (the "Amalgamated
Corporation") resulting from the amalgamation of the
Corporation, Hol linger Argus Limited and Labmin Resources
Limited will be able to pay its liabilities as they become
due;
(ii) the realizable value of the Amalgamated Corporation's assets
will not be less than the aggregate of its liabilities and
stated capital of all classes; and
(iii) no creditor will be prejudiced by the amalgamation.
AND I make this solemn Declaration conscientiously believing it to be
true, and knowing that it is of the same force and effect as if made under oath.
SWORN BEFORE me at the )
)
City of Toronto, in the )
)
Province of Ontario )
)
this 17th day of )
)
September, 1985. )
/s/ Charles G. Cowan
-----------------------------
Charles G. Cowan
[SEAL]
PROVINCE OF ONTARIO ) IN THE MATTER OF the Canada
) Business Corporation Act and the
JUDICIAL DISTRICT OF ) Articles of Amalgamation of
) ARGCEN HOLDINGS INC., LABMIN
YORK ) RESOURCES LIMITED and
) HOLLINGER ARGUS LIMITED
TO WIT: )
I, Charles G. Cowan, of the City of Toronto, in the Province of
Ontario,
SOLEMNLY DECLARE THAT:
1. I am the Secretary of HOLLINGER ARGUS LIMITED (the "Corporation") and
have knowledge of the matters herein declared.
2. There are reasonable grounds for believing that:
(i) the Corporation is and the corporation (the "Amalgamated
Corporation") resulting from the amalgamation of the
Corporation, Argcen Holdings Inc. and Labmin Resources Limited
will be able to pay its liabilities as they become due;
(ii) the realizable value of the Amalgamated Corporation's assets
will not be less than the aggregate of its liabilities and
stated capital of all classes; and
(iii) no creditor will be prejudiced by the amalgamation.
AND I make this solemn Declaration conscientiously believing it to be
true, and knowing that it is of the same force and effect as if made under oath.
SWORN BEFORE me at the )
)
City of Toronto, in the )
)
Province of Ontario )
)
this 17th day of )
)
September, 1985. )
/s/ Charles G. Cowan
-----------------------------
Charles G. Cowan
[SEAL]
PROVINCE OF ONTARIO ) IN THE MATTER OF the Canada
) Business Corporation Act and the
JUDICIAL DISTRICT OF ) Articles of Amalgamation of
) ARGCEN HOLDINGS INC., HOLLINGER
YORK ) ARGUS LIMITED and LABMIN
) RESOURCES LIMITED
TO WIT: )
I, Charles G. Cowan, of the City of Toronto, in the Province of
Ontario,
SOLEMNLY DECLARE THAT:
1. I am the Secretary of LABMIN RESOURCES LIMITED (the "Corporation") and
have knowledge of the matters herein declared.
2. There are reasonable grounds for believing that:
(i) the Corporation is and the corporation (the "Amalgamated
Corporation") resulting from the amalgamation of the
Corporation, Argcen Holdings Inc. and Hollinger Argus Limited
will be able to pay its liabilities as they become due;
(ii) the realizable value of the Amalgamated Corporation's assets
will not be less than the aggregate of its liabilities and
stated capital of all classes; and
(iii) no creditor will be prejudiced by the amalgamation.
AND I make this solemn Declaration conscientiously believing it to be
true, and knowing that it is of the same force and effect as if made under oath.
SWORN BEFORE me at the )
)
City of Toronto, in the )
)
Province of Ontario )
)
this 17th day of )
)
September, 1985. )
/s/ Charles G. Cowan
-----------------------------
Charles G. Cowan
[SEAL]
Exhibit 1.1 b
THIS AMALGAMATION AGREEMENT made as of the 23rd day of August, 1985.
BETWEEN:
ARGCEN HOLDINGS INC.,
a corporation continued under the laws of Canada,
(hereinafter referred to as "Argcen")
OF THE FIRST PART
-- and --
HOLLINGER ARGUS LIMITED,
a corporation continued under the laws of Canada,
(hereinafter referred to as "Hollinger")
OF THE SECOND PART
-- and --
LABMIN RESOURCES LIMITED,
a corporation incorporated under the laws of the Province of
Newfoundland and to be continued under the laws of Canada,
(hereinafter referred to as "Labmin")
OF THE THIRD PART
WHEREAS Argcen is a corporation continued under the laws of Canada by
Certificate and Articles of Continuance dated July 13, 1984;
AND WHEREAS Hollinger is a corporation continued under the laws of
Canada by Certificate and Articles of Continuance dated July 24, 1984;
AND WHEREAS Labmin is a corporation incorporated under the laws of the
Province of Newfoundland by Certificate of Incorporation dated May 5, 1983 and
to be continued under the laws of Canada by Certificate and Articles of
Continuance prior to the amalgamation contemplated herein;
AND WHEREAS the authorized capital of Argcen consists of an unlimited
number of common shares ("Argcen Common Shares") and an unlimited number of
Class A Preference Shares issuable in series ("Argcen Preference Shares");
AND WHEREAS there are 13,038,312 Argcen Common Shares and no Argcen
Preference Shares issued and outstanding as fully paid and non-assessable as of
the date hereof;
AND WHEREAS the authorized capital of Hollinger consists of an
unlimited number of common shares ("Hollinger Common Shares") and an unlimited
number of preferred shares issuable in series ("Hollinger Preferred Shares") of
which 1,850,000 have been designated as the first series of Hollinger Preferred
Shares ("Hollinger Series A Preferred Shares");
AND WHEREAS there are 5,696,030 Hollinger Common Shares and 1,850,000
Hollinger Series A Preferred Shares issued and outstanding as fully paid and
non-assessable shares.
AND WHEREAS Argcen is the beneficial owner of 5,466,675 Hollinger
Common Shares as of the date hereof;
AND WHEREAS the authorized capital of Labmin consists of 5,000,000
common shares without par value ("Labmin Common Shares") of which 4,168,003 are
issued and outstanding as fully paid and non-assessable;
AND WHEREAS Hollinger is the beneficial owner of 4,130,630 Labmin
Common Shares as of the date hereof;
AND WHEREAS each party hereto has made full and complete disclosure to
the other of its known assets and liabilities;
AND WHEREAS under the authority conferred by the Canada Business
Corporations Act, the parties hereto desire and have agreed to amalgamate upon
the terms and conditions hereinafter set forth and to continue as one
corporation:
NOW THEREFORE THIS AGREEMENT WITNESSETH as follows:
1. In this agreement:
(i) "Agreement" means this Amalgamation Agreement;
(ii) "Amalgamation" means the amalgamation of the Amalgamating
Corporations as contemplated in this Agreement;
(iii) "Amalgamating Corporations" means Argcen, Hollinger and
Labmin;
(iv) "Amalgamated Corporation" means the corporation continuing
from the amalgamation of the Amalgamating Corporations;
(v) "Act" means the Canada Business Corporations Act;
(vi) "Certificate of Amalgamation" means the certificate of
amalgamation issued pursuant to the Act with respect to the
amalgamation of the Amalgamating Corporations; and
(vii) "Effective Date" means the date on which the Certificate of
Amalgamation is issued under the Act.
Words and phrases used herein and defined in the Act shall have the
same meaning herein as in the Act unless the context otherwise requires.
2. Provided that Labmin has been continued under the Act, the
Amalgamating Corporations do hereby agree to amalgamate as of the Effective Date
and to continue as one corporation upon the terms and conditions herein set out.
3. The name of the Amalgamated Corporation shall be Hollinger
Inc.
4. The head office of the Amalgamated Corporation shall be
located in The Municipality of Metropolitan Toronto, in the Province of Ontario.
The address of the head office of the Amalgamated Corporation shall be 10
Toronto Street, Toronto. Ontario, M5C 2B7.
5. The authorized capital of the Amalgamated Corporation shall be
divided into an unlimited number of common shares ("Common Shares") and an
unlimited number of preference shares ("Preference Shares") issuable in series,
of which 1,850,000 shall form the first series and be designated as Floating
Rate Cumulative Convertible Preference Shares Series A ("Series A Preference
Shares").
6. The Common Shares and the Preference Shares as a class of the
Amalgamated Corporation shall have attached thereto the rights, privileges,
restrictions and conditions set forth in Appendix A hereto. The Series A
Preference Shares of the Amalgamated Corporation shall have attached thereto the
rights, privileges, restrictions and conditions set forth in Appendix B hereto.
7. The shares in the capital of the Amalgamating Corporations
which are issued and outstanding immediately prior to the Amalgamation herein
provided for shall be convened on the Amalgamation into issued and outstanding
shares of the Amalgamated Corporation as follows:
(i) the issued and outstanding Argcen Common Shares shall be
converted into fully paid and non-assessable common shares of
the Amalgamated Corporation on the basis of one common share
of the Amalgamated Corporation for each Argcen Common Share;
(ii) the Hollinger Common Shares held by Argcen immediately prior
to the Amalgamation shall be cancelled without any repayment
of capital in respect thereof;
(iii) the issued and outstanding Hollinger Common Shares shall be
converted into fully-paid and non-assessable common shares of
the Amalgamated Corporation on the basis of 2.5 common shares
of the Amalgamated Corporation for each Hollinger Common
Share;
(iv) the issued and outstanding Hollinger Series A Preferred Shares
shall be converted into fully-paid and non-assessable Series A
Preference Shares of the Amalgamated Corporation on the basis
of one Series A Preference Share of the Amalgamated
Corporation for each Hollinger Series A Preferred Share;
(v) the Labmin Common Shares held by Hollinger immediately prior
to the Amalgamation shall be cancelled without any repayment
of capital in respect thereof; and
(vi) the issued and outstanding Labmin Common Shares shall be
converted into common shares of the Amalgamated Corporation on
the basis of 3.5 common shares of the Amalgamated Corporation
for each Labmin Common Share.
8. The stated capital of the Amalgamated Corporation shall on the
Effective Date be equal to the aggregate of the stated capitals of each of
Argcen, Hollinger and Labmin immediately before the Amalgamation becomes
effective, subject to the decrease provided for in paragraphs 7(ii) and (v) and
as a result of the purchase of fractional interests as provided for in paragraph
9. The stated capital of the Amalgamated Corporation on the Effective Date,
shall be allocated as follows:
(a) the stated capital attributable to the issued Series A
Preference Shares of the Amalgamated Corporation shall be
$37,000,000; and
(b) the balance of the stated capital of the Amalgamated
Corporation shall be attributable to the issued common shares
of the Amalgamated Corporation.
9. On and after the Effective Date, the former shareholders of
the Amalgamating Corporations shall, when requested by the Amalgamated
Corporation, surrender for cancellation the certificate(s) representing the
shares held by them in the Amalgamating Corporations and shall, if they are
entitled thereto, subject as hereinafter provided, receive certificates for
shares of the Amalgamated Corporation on the basis set forth in this
Amalgamation Agreement; provided that where a former shareholder of one of the
Amalgamating Corporations becomes entitled to a fraction of a common share of
the Amalgamated Corporation on the basis aforesaid, he shall not be entitled to
be registered on the records of the Amalgamated Corporation in respect thereof
but shall receive a cash payment in respect of such fractional interest
multiplied by the closing trading price of Argcen Common Shares on August 15,
1985.
10. The number of directors of the corporation shall be not less
than 3 and not more than 21, as may be determined from time to time by the
directors. The board of directors of the Amalgamated Corporation shall
initially, until otherwise changed in accordance with the Act, be fixed at 15
directors. The first directors of the Amalgamated Corporation shall be the
persons whose names and addresses appear below:
NAME ADDRESS
---- -------
Ralph M. Barford ..................... Toronto
Edward G. Battle ..................... Toronto
Conrad M. Black ...................... Toronto
G. Montegu Black ..................... Toronto
Edmund C. Bovey, C.M.................. Toronto
Dixon S. Chant ....................... Toronto
Charles G. Cowan, Q.C................. Toronto
Fredrik S. Eaton ..................... Toronto
P. C. Finlay, Q.C..................... Toronto
Hon. W. John McKeag .................. Winnipeg
Andre Monast, Q.C..................... Quebec
Beryl A. Plumptre .................... Ottawa
F. David Radler ...................... Vancouver
Ronald T. Riley ...................... Montreal
Trumbull Warren ...................... Puslinch
The said first directors shall hold office until the first annual
meeting of shareholders of the Amalgamated Corporation or until their successors
are elected or appointed.
11. The by-laws of the Amalgamated Corporation shall be the
by-laws of Hollinger, with such amendments thereto as may be necessary to give
effect to this Agreement, until repealed or amended.
12. The auditors of the Amalgamated Corporation shall be Thorne
Riddell until otherwise determined in accordance with the Act.
13. The transfer agent and registrar of the common shares of the
Amalgamated Corporation shall be Central Trust Company until otherwise
determined by the board of directors of the Amalgamated Corporation.
14. In addition to the borrowing powers conferred on the board of
directors of the Amalgamated Corporation under the Act, the board of directors
may, without authorization of the shareholders, from time to time, by authentic
deed, (for the purpose of securing any bonds, debentures or debenture-stock
which it is by law entitled to issue), hypothecate, mortgage or pledge any
property, movable or immovable, present or future, which it may own. For greater
certainty, the foregoing powers conferred on the directors shall be deemed to
include the powers conferred on a company by Section 27 of Division VII of the
Special Corporate Powers Act, being chapter 275 of the Revised Statutes of
Quebec, 1964 and every statutory provision that may be substituted therefor or
for any provision therein.
15. Each of Argcen, Hollinger and Labmin shall contribute to the
Amalgamated Corporation all of its assets, subject to its liabilities, as such
assets and liabilities exist immediately prior to the Effective Date.
16. All rights of creditors against the property, rights and
assets of each of the Amalgamating Corporations and all liens upon their
property, rights and assets shall be unimpaired by the Amalgamation herein
provided for and all debts, contracts, liabilities and duties of each of the
Amalgamating Corporations shall thenceforth attach to the Amalgamated
Corporation and may be enforced against it.
17. No action or proceeding by or against either of the
Amalgamating Corporations shall abate or be affected by the Amalgamation.
18. The Amalgamated Corporation shall possess all of the property,
rights, privileges and franchises and shall be subject to all of the
liabilities, contracts, disabilities and debts of each of the Amalgamating
Corporations, as such exist immediately prior to the Effective Date.
19. This Agreement may, prior to the Effective Date, be terminated
by any of the boards of directors of Argcen, Hollinger or Labmin for any reason
whatsoever, either before or after the approval of the terms and conditions
hereof by the shareholders of Argcen, Hollinger and Labmin.
20. Each of the Amalgamating Corporations may by resolution of its
board of directors authorize any amendments to this Agreement approved by the
shareholders of each of the Amalgamating Corporations.
21. Upon the shareholders of each of the Amalgamating Corporations
approving this Agreement in accordance with the Act, but subject to Sections 19
and 20 hereof, the Amalgamating Corporations shall jointly file Articles of
Amalgamation under the Act and such other documents as may be required.
22. Each of Argcen, Hollinger and Labmin covenants and agrees with
each other that it will submit this Agreement to its shareholders for approval
as provided by the Act, at a special meeting of shareholders to be held on or
before September 30, 1985.
23. This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which when taken together
shall constitute one and the same agreement.
24. This Agreement shall be governed by and construed in
accordance with the laws of the Province of Ontario.
IN WITNESS WHEREOF this agreement has been executed by the parties
hereto under their respective seals.
ARGCEN HOLDINGS INC.
(Signed) CONRAD M. BLACK
Chairman of the Board and President
c/s
(Signed) C. G. COWAN
Secretary
HOLLINGER ARGUS LIMITED
(Signed) P. C. FINLAY
Chairman of the Board
c/s
(Signed) C. G. COWAN
Secretary
LABMIN RESOURCES LIMITED
(Signed) P. C. FINLAY
Chairman of the Board
c/s
(Signed) C. G. COWAN
Secretary
APPENDIX A
PREFERENCES, RIGHTS, CONDITIONS, RESTRICTIONS, LIMITATIONS AND PROHIBITIONS
ATTACHING TO THE PREFERENCE SHARES
1. Directors' Right to Issue in One or More Series
The Preference Shares may at any time or from time to time be issued in
one or more series. Before any shares of a particular series other than the
first series are issued, the Board of Directors of the Corporation shall fix the
number of shares that will form such series and shall, subject to the
limitations set out herein, by resolution determine the designation, rights,
privileges, restrictions and conditions to be attached to the Preference Shares
of such series, including, but without in any way limiting or restricting the
generality of the foregoing, the rate, amount or method of calculation of
dividends thereon, the time and place of payment of dividends, the consideration
and the terms and conditions of any purchase for cancellation, retraction or
redemption thereof, conversion rights (if any), voting rights attached thereto
(if any), and the terms and conditions of any share purchase plan or sinking
fund, the whole subject to the filing with the Director (as defined in the
Canada Business Corporations Act) of Articles of Amendment containing a
description of such series, including the designation, rights, privileges,
restrictions and conditions determined by the Board of Directors.
2. Ranking of Preference Shares
The Preference Shares of each series shall rank on a parity with the
Preference Shares of every other series with respect to accumulated dividends
and return of capital. The Preference Shares shall be entitled to preference
over the Common Shares and over any other shares ranking junior to the
Preference Shares with respect to priority in the payment of dividends and in
the distribution of assets in the event of the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its shareholders for the
purpose of winding up its affairs. If any cumulative dividends or amounts
payable on a return of capital are not paid in full, the Preference Shares of
all series shall participate rateably in respect of such dividends, including
accumulations, if any, in accordance with the sums that would be payable on such
shares if all such dividends were declared and paid in full, and in respect of
any repayment of capital in accordance with the sums that would be payable on
such repayment of capital if all sums so payable were paid in full; provided
however, that in the event of there being insufficient assets to satisfy in full
all such claims as aforesaid, the claims of the holders of the Preference Shares
with respect to repayment of capital shall first be paid and satisfied and any
assets remaining thereafter shall be applied towards the payment and
satisfaction of claims in respect dividends. The Preference Shares of any series
may also be given such other preferences not inconsistent with paragraphs 1 to 5
hereof over the Common Shares and over any other shares ranking junior to the
Preference Shares as may be determined in the case of such series of Preference
Shares.
3. Voting Rights
Except as hereinafter referred to or as required by law or in
accordance with any voting rights which may from time to time be attached to any
series of Preference Shares, the holders of the Preference Shares as a class
shall not be entitled as such to receive notice of, to attend or to vote at any
meeting of the shareholders of the Corporation.
4. Amendment with Approval of Holders of Preference Shares
The rights, privileges, restrictions and conditions attaching to the
Preference Shares as a class may be added to, changed or removed but only with
the approval of the holders of Preference Shares given as hereinafter specified.
5. Approval of Holders of Preference Shares
The approval of the holders of Preference Shares to add to, change or
remove any right, privilege, restriction or condition attaching to the
Preference Shares as a class or of any other matter requiring the consent of the
holders of the Preference Shares may be given in such manner as may then be
required by law, subject to a minimum requirement that such approval be given by
resolution passed by the affirmative vote of at least 66 2/3% of the votes cast
at a meeting of the holders of Preference Shares duly called for that purpose.
The formalities to be observed in respect of the giving of notice of
any such meeting or any adjourned meeting and the conduct thereof shall be those
from time to time prescribed in the by-laws of the Corporation with respect to
meetings of shareholders or, if not so prescribed, as required by the Canada
Business Corporations Act. On every poll taken at a meeting of holders of
Preference Shares as a class, or at a joint meeting of the holders of two or
more
6
series of Preference Shares, each holder of Preference Shares entitled to vote
thereat shall have one vote in respect of each $1.00 of the issue price of each
Preference Share held by him.
COMMON SHARES
The Common Shares shall carry and be subject to the following rights,
privileges, restrictions and conditions:
1. Voting Rights
The holders of the Common Shares shall be entitled to receive notice of
and to attend all meetings of shareholders of the Corporation, other than
separate meetings of the holders of another class or series of the Corporation,
and to vote at any such meeting on the basis of one vote for each Common Share
held.
2. Dividend Rights
Subject to the prior rights of the holders of the Preference Shares and
any other shares ranking senior to the Common Shares with respect to priority in
the payment of dividends, all dividends which the directors may declare in any
fiscal year of the Corporation shall be declared and paid in equal or equivalent
amounts per share on all Common Shares at the time outstanding without
preference or priority.
3. Liquidation, Dissolution or Winding Up
In the event of the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its shareholders for the purpose
of winding up its affairs, the holders of the Common Shares shall be entitled,
subject to the prior right of the holders of the Preference Shares and any other
shares ranking senior to the Common Shares, to the remaining property and assets
of the Corporation.
7
APPENDIX B
RIGHTS, PRIVILEGES, RESTRICTIONS AND CONDITIONS ATTACHING TO THE SERIES A
PREFERENCE SHARES
The rights, privileges, restrictions and conditions attaching to the
Series A Preference Shares (in addition to the rights, privileges, restrictions
and conditions attaching to the preference Shares as a class) shall be as
follows:
ARTICLE 1
INTERPRETATION
1.1 Definitions.
In these conditions attaching to the Series A Preference Shares:
(a) "average prime rate" for any dividend calculation period means
the arithmetic mean (rounded to the nearest 0.01%) of the
prime rate for each day during such period:
(b) "business day" means any day other than a Saturday. Sunday or
statutory holiday in the province in which the registered
office of the Corporation is located;
(c) "close of business" means the normal closing hour of the
principal office of the transfer agent and registrar in the
city in which the registered office of the Corporation is
located;
(d) "Common Shares" means the Common Shares in the capital of the
Corporation as constituted on the Effective Date or as
subsequently consolidated, subdivided, reclassified or
otherwise changed, or any voting shares and other securities
that holders of such shares are entitled to receive as a
result of any reorganization of the capital of the
Corporation;
(e) "Conversion Ratio" at any date means the quotient obtained by
dividing the stated value per Series A Preference Share at
such date by the Current Market Price per Common Share
determined by such date;
(f) "Current Market Price per Common Share" at any date means the
weighted average closing price (expressed in Canadian dollars)
at which the Common Shares have traded on The Toronto Stock
Exchange during the 20 trading days (on each of which at least
100 Common Shares were traded in at least one board lot)
immediately preceding the fifth trading day before such date
(or if the Common Shares are not then listed on The Toronto
Stock Exchange, on such stock exchange on which such shares
are listed as may be selected for such purpose by the
Directors) and, if the Common Shares are not then listed on
any stock exchange, the "Current Market Price per Common
Share" shall be the fair market value of the Common Shares as
determined by the auditors of the Corporation (or if such
auditors are unable or unwilling to act, by a national firm of
chartered accountants selected by the Directors satisfactory
to the Holders);
(g) "Date of Conversion" has the meaning given to that expression
in Section 3.3;
(h) "Directors" means the board of directors of the Corporation,
and reference without more to action by the Directors shall
mean action by the Directors as a board or by any authorized
committee thereof;
(i) "dividend calculation period" means a period beginning on a
dividend payment date and ending on the sixth day immediately
prior to the next subsequent dividend payment date;
(j) "dividend payment date" means the first day of March, June,
September and December in each year and with respect to
partial dividends, means the date on which any such partial
dividend is payable;
(k) "dividend payment period" means a period beginning on a
dividend payment date and ending on the day immediately prior
to the next subsequent dividend payment date;
(1) "Dividend Rate" for any dividend payment period means the sum
of 2.00% plus one-half of the average prime rate for the
dividend calculation period ending on the sixth day
immediately prior to the next dividend payment date, provided
that in the event that the Directors fail to declare and pay
any dividend as provided in Section 2.2, the dividend rate for
any dividend payment period in respect of which dividends are
not declared or paid in full will be the sum of 4.00% and
one-half of the average prime rate
8
for the dividend calculation period ending on the sixth day
immediately prior to the dividend payment date; such dividend
rate to be effective for the dividend payment period for which
a dividend was not paid in full and the subsequent period of
time ending on the day immediately preceding the date of
payment of the dividend arrears;
(m) "Effective Date" means the date of the Certificate of
Amalgamation of the Corporation issued under the Canada
Business Corporations Act;
(n) "herein", "hereto", "hereunder", "hereof", "hereby" and
similar expressions mean or refer to these Series A Preference
Share provisions and not to any particular Section,
subsection, subdivision or portion hereof, and the expressions
"Article", "Section" and "subsection", followed by a number
and/or a letter mean and refer to the specified Article,
Section or subsection hereof;
(o) "Holder" means a registered holder of any Series A Preference
Shares;
(p) "prime rate" for any day means the rate of interest, expressed
as an annual rate, declared by the Canadian Imperial Bank of
Commerce or its successors to be the Bank's prime interest
rate for Canadian dollar commercial loans in Canada;
(q) "Notice of Redemption" means a notice in writing given, as
hereinafter provided, by the Corporation to the Holders
setting forth the Redemption Price, (as at the date of such
notice) and the place at which redemption is to take place;
(r) "Redemption Date" means the date fixed by the Directors for
redemption of Preference Shares set forth in a Notice of
Redemption;
(s) "Redemption Price" means the price per Series A Preference
Share, including all accrued and unpaid dividends, specified
in Section 5.4;
(t) "trading day" means a day on which the relevant stock exchange
referred to in paragraph (f) hereof is open for business; and
(u) "transfer agent and registrar" means the person or persons
from time to time appointed by the Directors as the transfer
agent and registrar in Canada for the Series A Preference
Shares, and failing any such appointment, means the
Corporation.
1.2 Words importing the singular number only include the plural and vice
versa and words importing any gender include all genders.
1.3 All dollar amounts referred to herein shall be in lawful money of
Canada.
1.4 The division of these Series A Preference Share provisions into
Articles, Sections, subsections, clauses, subclauses or other subdivisions and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation hereof.
1.5 In the event that any date upon which any dividends on the Series A
Preference Shares are payable by the Corporation, or upon or by which any other
action is required to be taken by the Corporation hereunder is not a business
day, then such dividend shall be payable or such other action shall be required
to be taken on or by the next succeeding day which is a business day.
ARTICLE 2
DIVIDENDS
2.1 Payment of Dividends. The Holders shall be entitled to receive, and,
subject to Section 2.4, the Corporation shall pay, as and when declared by the
Directors out of monies of the Corporation available for the payment of
dividends, cumulative preferential cash dividends in the amounts determined from
time to time in accordance with the provisions hereof. Dividends on the Series A
Preference Shares shall accrue from day to day from and including the date of
issue thereof to and including the day immediately preceding a dividend payment
date, and shall be payable on each dividend payment date to the Holders of
record at the close of business on the fifth business day preceding such
dividend payment date. Cheques drawn on a Canadian chartered bank and payable at
par at any branch in Canada of such bank shall be issued in respect of such
dividends to the Holders entitled thereto. The mailing of such cheques shall
satisfy and discharge all liability for such dividends to the extent of the sums
9
represented thereby, unless such cheques are not paid on due presentation. If on
any dividend payment date dividends payable on such date are not paid in full on
all the Series A Preference Shares then issued and outstanding, such dividends
or the unpaid part thereof shall be paid on a subsequent date or dates as
determined by the Directors. The Holders shall not be entitled to any dividends
other than or in excess of the cash dividends provided for herein. A dividend
which is represented by a cheque which has not been presented for payment within
six years after it was issued or that otherwise remains unclaimed for a period
of six years from the date it was declared to be payable and set apart for
payment shall be forfeited to the Corporation.
2.2 Amount of Dividends. Subject to the provisions hereof, the amount of
the dividend payable on any dividend payment date on any Series A Preference
Share then outstanding shall be equal to the amount (rounded to the nearest
$0.0001) calculated by applying the Dividend Rate for the dividend payment
period ending on the day immediately prior to such dividend payment date to the
amount of $20.00 per share, and multiplying the result by a fraction of which
the numerator is the lesser of (i) the number of days such share has been
outstanding and (ii) the number of days in such dividend payment period, and of
which the denominator is the number of days in the calendar year in which such
dividend payment date falls.
2.3 Partial Dividends. The amount of the dividend payable on any Series A
Preference Share for any period which is less than a full dividend payment
period with respect to such Series A Preference Share:
(a) which is issued, redeemed, purchased or converted; or
(b) where assets of the Corporation are distributed to the Holders
pursuant to the conditions in that respect attaching to the
Preference Shares as a class;
shall be equal to the amount (rounded to the nearest $0.0001) calculated by
applying the Dividend Rate for the dividend payment period in which such issue,
redemption, purchase, conversion or distribution occurs to the amount of $20.00
per share, and multiplying the result by a fraction of which the numerator is
the number of days in the dividend payment period such share has been
outstanding (including the dividend payment date at the beginning of such period
if such share was outstanding on that date and excluding the dividend payment
date at the end of such period if such share was outstanding on that date or the
date on which such dividend became payable, as the case may be) and the
denominator is the number of days in the calendar year in which such issue,
redemption, purchase, conversion or distribution occurs.
2.4 Avoidance of Fractions. Dividend payments shall be adjusted to avoid
payments of a fraction of a cent.
2.5 Dividends on Conversion. The Holders as of the record date for any
dividend declared to be payable on the Series A Preference Shares shall be
entitled to such dividend notwithstanding that such share is converted after
such record date and before the dividend payment date of such dividend and the
registered holder of any share issued upon conversion of a Series A Preference
Share shall be entitled to any dividend declared to be payable to Holders of
such shares of record on any date after the Date of Conversion. Subject as
aforesaid, upon the conversion of any Series A Preference Share the Corporation
shall make no payment or adjustment on account of any dividends on the Series A
Preference Shares so converted or on account of any dividends on the Common
Shares issuable upon such conversion.
2.6 Notification of Dividend Rate. On or before each dividend payment date
the Corporation shall give notice to each Holder of the dividend rate for the
dividend payment period immediately preceding such dividend payment date and the
particulars of the calculation thereof.
ARTICLE 3
CONVERSION INTO COMMON SHARES
3.1 Conversion Privilege. Subject to Section 3.2, the Series A Preference
Shares shall be convertible in whole as a series at any time, and in multiples
of 250,000 Series A Preference Shares from time to time, after the close of
business on July 31,1989 into fully paid and non-assessable Common Shares on the
basis of the Conversion Ratio in effect on the Date of Conversion.
3.2 Conversion on Default. Notwithstanding the provisions of Section 3.1,
if the Corporation has failed to pay dividends on the Series A Preference Shares
when legally entitled to do so, or is in breach or default of any of the
provisions of Sections 3.8, 3.9, 4.1, 4.2 or 5.4, each Series A Preference Share
shall be convertible into such number
10
of fully paid and non-assessable Common Shares as is determined by the
Conversion Ratio in effect on the Date of Conversion, at any time during the
period during which such non-payment, breach or default is continuing.
3.3 Conversion Procedure. In order to exercise the conversion right a
Holder shall present and surrender to the transfer agent and registrar for the
Common Shares the respective certificates representing the Series A Preference
Shares in respect of which the Holder wishes to exercise his right of
conversion, together with written notice of conversion (which shall be and be
deemed to be irrevocable) signed by such Holder or his agent stating that he
elects to convert such Series A Preference Shares. Such notice of conversion
shall also state the name or names (with addresses) in which the certificate or
certificates for Common Shares which shall be issuable on such conversion shall
be issued. If any of the Common Shares into which such Series A Preference
Shares are to be converted are to be issued to a person or persons other than
the Holder, the signature of such Holder on such notice of conversion shall be
guaranteed in a manner satisfactory to the transfer agent and registrar and such
notice of conversion shall be accompanied by payment to the transfer agent and
registrar of any transfer tax which may be payable by reason thereof. The date
of receipt by the transfer agent and registrar of certificates representing such
Series A Preference Shares and such notice of conversion is herein referred to
as the "Date of Conversion" of such Series A Preference Shares.
As promptly as practicable after the Date of Conversion, the
Corporation shall issue or cause to be issued and deliver or cause to be
delivered to the Holder who has exercised the conversion right in respect of any
Series A Preference Shares, or on his written order, a certificate or
certificates in the name or names of the person or persons specified in the
applicable notice of conversion for the number of Common Shares deliverable upon
the conversion of such Series A Preference Shares and provision shall be made in
respect of any fraction of a Common Share as provided in Section 3.4. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Date of Conversion and at such time the rights of the Holder
as Holder shall cease and the person or persons in whose name or names any
certificate or certificates for Common Shares shall be deliverable upon such
conversion shall be deemed to have thereupon become the holder or holders of
record of the Common Shares represented thereby; provided, however, that no
exercise of the conversion right on any date when the share transfer registers
for Common Shares of the Corporation shall be closed shall be effective to
constitute the person or persons entitled to receive the Common Shares upon such
conversion as the holder or holders of record of such Common Shares on such
date, but such exercise shall be effective to constitute the person or persons
entitled to receive such Common Shares as the holder or holders of record
thereof for all purposes at the close of business on the next succeeding day on
which such share transfer registers are open and such conversion shall be at the
Conversion Ratio in effect at the close of business on such next succeeding day.
Upon surrender to the transfer agent and registrar of any certificate
representing more than the number of Series A Preference Shares which are to be
converted, the Holder thereof shall be entitled to receive, without expense to
such Holder, one or more new certificates for the number of unconverted Series A
Preference Shares represented by the certificate surrendered.
3.4 Avoidance of Fractional Shares. Notwithstanding anything herein
contained, the Corporation shall in no case be required to issue a fraction of a
Common Share upon the conversion of any Series A Preference Share. If any
fractional interest in a Common Share would, except for the provisions of this
Section, be deliverable upon the conversion of any Series A Preference Share,
the Corporation shall issue or cause to be issued to the Holder of such
surrendered Series A Preference Share a non-voting and non-dividend-bearing
scrip certificate or certificates transferable by delivery entitling the Holder
thereof and of other similar certificates aggregating one full Common Share,
upon surrender of such certificates for consolidation at such place in Canada as
may be designated therein, to obtain from the Corporation a full Common Share
and to receive a share certificate therefor, as well as a further scrip
certificate representing the excess, if any, over one full Common Share of the
scrip certificates surrendered for consolidation. Such scrip certificates shall
be in such form and shall be subject to such terms and conditions as the
Corporation may determine and shall provide that the same shall be null and void
on and after a date to be fixed by the Directors, but no such date shall be less
than one year following the date of issue of the scrip certificate concerned.
3.5 Notice to Holders of Series A Preference Shares: In the event that the
Corporation shall determine to:
(a) declare on its Common Shares any cash dividend per share which
when added to the sum of the last four cash dividends per
share paid on its Common Shares would exceed the sum of such
last four cash dividends per share by more than 50%;
11
(b) declare on its Common Shares any dividends payable in shares
of the Corporation (other than a stock dividend in lieu of a
cash dividend paid in the ordinary course) or make any other
distribution on its Common Shares (other than a cash
dividend);
(c) offer for subscription pro rata to the holders of all or
substantially all of its Common Shares any additional
securities or shares of any class convertible into or
exchangeable for Common Shares or issue any other options,
rights or warrants to all or substantially all of such
holders;
(d) effect a reclassification or change of the Common Shares of
the nature referred to in Section 3.6 or an amalgamation or
merger of the Corporation with or into any other corporation
or a sale, transfer or other disposition of all or
substantially all of the assets of the Corporation; or
(e) proceed with a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation;
then, in each such case, the Corporation shall give notice to each Holder of the
action proposed to be taken and the date on which (i) the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution, subscription rights or other options, rights or warrants, or (ii)
such reclassification, change, amalgamation, merger, sale, transfer or other
disposition, dissolution, liquidation or winding-up shall take place, as the
case may be provided that the Corporation shall only be required to specify in
such notice such particulars of such action as shall have been fixed and
determined at the date on which such notice is given. Such notice shall also
specify the date as of which the holders of Common Shares of record shall
participate in such dividend, distribution, subscription rights or other
options, rights or warrants, or shall be entitled to exchange their Common
Shares for securities or other property deliverable upon such reclassification,
change, amalgamation, merger, sale, transfer or other disposition, dissolution,
liquidation or winding-up, as the case may be. Such written notice shall be
given with respect to the actions described in paragraphs (a), (b) and (c)
above, not less than 14 days and, with respect to the actions described in
paragraphs (d) and (e) above, not less than 30 days, in each case prior to the
record date or the date on which the Corporation's transfer books are to be
closed with respect thereto.
3.6 Substitution for Common Shares. In the event of any reclassification of
or change in the Common Shares (other than a change as a result of a subdivision
or consolidation), or in the event of any amalgamation of the Corporation with,
or merger of the Corporation into, any other corporation (other than an
amalgamation or merger in which the Corporation is the continuing corporation
and which does not result in any reclassification or change of the Common
Shares), or in the event of any sale, transfer or other disposition of all or
substantially all of the assets of the Corporation, the Holder of each Series A
Preference Share then outstanding shall be entitled to receive and shall accept
upon the conversion of a Series A Preference Share at any time on the effective
date or thereafter, in lieu of the Common Shares which he is otherwise entitled
to receive at the time he exercises the conversion right, the kind and amount of
shares and other securities and property that such holder would have been
entitled to receive as a result of such reclassification, change, amalgamation,
merger, sale, transfer or other disposition if, on the effective date thereof he
had been the registered holder of the number of Common Shares that he is
otherwise entitled to receive at the time he exercises the conversion right,
subject to such adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article. The provisions of
this Section shall similarly apply to successive reclassifications, changes,
amalgamations, mergers, sales, transfers or other dispositions.
3.7 Treatment of Converted Shares. Series A Preference Shares surrendered
upon the exercise of the conversion privilege shall be cancelled by the transfer
agent and registrar, and shall not be restored to the status of authorized but
unissued Series A Preference Shares.
3.8 Maintenance of Common Shares. So long as any of the Series A Preference
Shares are outstanding, the Corporation shall take any corporate action which
may, in the opinion of counsel, be necessary in order that the Corporation shall
have unissued and reserved the number of authorized Common Shares to which the
Holders are entitled on the full exercise of their conversion rights in
accordance with the provisions hereof.
3.9 Registration of Common Shares. If any Common Shares reserved or to be
reserved for the purpose of conversion of the Series A Preference Shares
hereunder require registration with or approval of any governmental authority
under any Canadian or provincial law before such shares may be validly issued
upon conversion, the Corporation will take such action as may be necessary to
secure such registration or approval, as the case may be.
12
ARTICLE 4
RESTRICTIONS ON DIVIDENDS, ISSUE AND RETIREMENT OF SHARES
4.1 Restriction. So long as any of the Series A Preference Shares are
outstanding, the Corporation shall not, without the prior approval of the
Holders given as provided in Article 7:
(a) declare, pay or set apart for payment any dividends (other
than stock dividends in shares of the Corporation ranking
junior to the Series A Preference Shares) on any shares of the
Corporation ranking junior to the Series A Preference Shares,
unless all dividends then payable on the Series A Preference
Shares and on all other shares ranking on a parity with or in
priority to the Series A Preference Shares have been declared
and paid or set apart for payment;
(b) create or issue any shares ranking prior to the Series A
Preference Shares;
(c) create or issue any shares ranking on a parity with the Series
A Preference Shares unless the consolidated net cash flow of
the Corporation for the most recently completed 12-month
fiscal period is at least equal to two times the aggregate
annual dividend requirements in respect of the Series A
Preference Shares and all shares ranking or to rank on a
parity with the Series A Preference Shares, calculated on a
pro forma basis;
(d) redeem, retract, purchase or otherwise acquire any shares of
the Corporation ranking junior to the Series A Preference
Shares, except pursuant to a sinking fund or purchase
obligation attaching to shares of the Corporation heretofore
or hereafter issued (and in the case of such sinking fund or
other mandatory purchase), not in excess of five percent, in
any 12 month period, of the value or number of such shares
outstanding at the time of such redemption, retraction,
purchase or other acquisition), or make any capital
distribution on or in respect of any other shares of the
Corporation ranking on a parity with or junior to the Series A
Preference Shares in respect of the payment of dividends and
the distribution of assets in the event of the liquidation,
dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
provided, however, that the Corporation may purchase its
Common Shares at any time and from time to time provided that
all dividends then payable on the Series A Preference Shares
and all other shares ranking on a parity with or in priority
to the Series A Preference Shares have been declared and paid
or set apart for payment; or
(e) amalgamate, consolidate or combine with, merge into or
otherwise join with any other corporation or sell, transfer or
dispose of all or substantially all of its assets unless the
resulting, successor or acquiring corporation is a corporation
incorporated under or subject to the laws of Canada or a
province thereof and the common shares of such corporation are
listed and posted for trading on at least one of The Toronto
Stock Exchange, The Montreal Exchange and the Vancouver Stock
Exchange.
4.2 Obligation. So long as any of the Series A Preference Shares are
outstanding, on, from and after July 31,1989 the Corporation shall, except as
otherwise permitted by the Holders acting as provided in Article 7, cause its
Common Shares, or the common shares of any corporation resulting from an
amalgamation, consolidation, merger, combination or other joining by the
Corporation with any other corporation, or of any successor corporation to the
Corporation, to be listed and posted for trading on at least one of the Toronto,
Montreal or Vancouver stock exchanges.
ARTICLE 5
DIVIDEND RATE ADJUSTMENT AND OPTIONAL REDEMPTION
5.1 Interpretation. For the purposes of this Article:
(a) "Taxable Holder" means any registered Holder or, in the case
of shares registered in the name of a nominee, any beneficial
owner, of Series A Preference Shares which is a "taxable
Canadian corporation" for the purposes of the Income Tax Act
(Canada); and
(b) any reference to any statute shall be deemed to be a reference
to such statute as amended or re-enacted from time to time.
13
5.2 Notice of Tax Amendment. In the event that any amendment to the Income
Tax Act (Canada) or the Corporations Tax Act (Ontario) or to any Regulation
under either such statute is announced, included in a budget or Notice of Ways
and Means Motion, enacted or passed which affects the income tax treatment of
the dividends on the Series A Preference Shares received or to be received by
any Taxable Holder in such a manner that any income tax or corporation income
tax is or would be payable thereon, or in the event that any Taxable Holder is
subject to a reassessment or believes, on reasonable grounds that it will be
subject to a reassessment arising from or related to its holding of the Series A
Preference Shares, such Taxable Holder may give to the Corporation a written
notice stating that it is a Taxable Holder and that such amendment has been
announced, included in a budget or Notice of Ways and Means Motion, enacted or
passed, or that such a reassessment has occurred or has been threatened.
5.3 Effect of Share Reclassification. In the event that any securities or
property which is substituted for the Common Shares as a result of a
Reclassification, change, amalgamation, merger, sale, transfer or other
disposition as contemplated by Section 3.6 are securities or property which
affects the income tax treatment of the dividends on the Series A Preference
Shares received or to be received by any Taxable Holder in such a manner that
any income tax or corporate income tax is or would be payable thereon, such
Taxable Holder may give to the Corporation a written notice stating that it is a
Taxable Holder and that such securities or property have or will have such
effect.
5.4 Redemption at Corporation's Option. Upon the giving of any notice in
accordance with Sections 5.2 or 5.3, and subject to Section 5.7, the Corporation
may, at its option, redeem at any time thereafter all of the outstanding Series
A Preference Shares in respect of which a supplement is payable under Section
5.6, on payment for each such Series A Preference Share to be redeemed of $20.00
plus all accrued and unpaid dividends.
5.5 Redemption Procedure. A Notice of Redemption shall be given by the
Corporation not less than 15 days nor more than 40 days prior to the date fixed
for redemption to each Holder of Series A Preference Shares to be redeemed.
Accidental failure or omission to give such notice to one or more of such
Holders shall not affect the validity of such redemption. On and after the
Redemption Date, the Corporation shall pay or cause to be paid to or to the
order of the Holders of the Series A Preference Shares to be redeemed the
Redemption Price on presentation and surrender at the place of redemption of the
respective certificates representing such shares. Such payment shall be made by
cheque drawn on a Canadian chartered bank and payable at par at any branch in
Canada of such bank. Such shares in respect of which the Redemption Price has
been paid as aforesaid shall thereupon be redeemed. If less than all the Series
A Preference Shares represented by any certificate shall be redeemed, a new
certificate for the balance shall be issued. From and after the Redemption Date,
the Holders of the Series A Preference Shares called for redemption shall cease
to be entitled to dividends or to exercise any of the rights of Holders in
respect thereof unless payment of the Redemption Price shall not be made in
accordance with the foregoing provisions, in which case the rights of the
Holders shall remain unimpaired. The Corporation shall have the right at any
time after mailing a Notice of Redemption to deposit the Redemption Price of the
shares thereby called for redemption, or such part thereof as at the time of
deposit has not been claimed by the persons entitled thereto, in any Canadian
chartered bank or trust company in Canada specified in the Notice of Redemption
or in a subsequent notice to the Holders in respect of which the deposit is
made, in a special account for the Holders of such shares, and upon such deposit
being made or upon the Redemption Date, whichever is later, the Series A
Preference Shares in respect of which such deposit shall have been made shall be
deemed to be redeemed and the rights of each Holder shall be limited to
receiving, without interest, his proportionate part of the Redemption Price so
deposited upon presentation and surrender of the certificate representing his
shares to be redeemed. Any interest on such deposit shall belong to the
Corporation.
5.6 Increased Dividends. If any notice is given in accordance with Sections
5.2 or 5.3, the amount of each dividend payable thereafter or at a subsequent
time specified in such notice on each Series A Preference Share held or owned by
the Taxable Holder giving notice, or by any successor Taxable Holder, shall,
subject to Section 5.8, be increased by an additional amount (the "supplement")
which, after deducting therefrom an amount equal to the tax paid or payable
thereon by such Taxable Holder, will equal the amount of tax paid or payable by
such Taxable Holder in respect of the amount of such dividend accruing after
such notice is given. For this purpose, the amount of any tax referred to herein
arising in connection with the Series A Preference Shares held or owned by any
Taxable Holder shall be conclusively determined by a report of the chartered
accountant or accountants for the time being holding appointment as auditors of
such Taxable Holder given to the Corporation no later than the 25th day after
notice is given under Sections 5.2 or 5.3 or, failing such report, by the report
of a firm of independent chartered accountants appointed by the Corporation and
approved by such Taxable Holder who will make available to such
14
accountants all information reasonably necessary to make such determination. If
any supplement is payable in accordance with this Section in respect of a
dividend that has otherwise been paid (whether as pan of a Redemption Price or
otherwise) before the date that the amount of the supplement is determined, the
Corporation shall pay the supplement to the payee of that dividend no later than
the 10th day after the Corporation receives such accountant's report. Except as
provided in this Section or in paragraph (1) of Section 1.1, there shall be no
increase in the amount of dividends payable on any Series A Preference Share.
5.7 Limitation on Redemption. The Corporation may not redeem any of the
Series A Preference Shares at any time without the prior approval of the Holders
given in accordance with Article 7 if any part of the Redemption Price which
constitutes a repayment of paid-up capital would, for the purposes of the Income
Tax Act (Canada) as amended or re-enacted from time to time:
(a) be deemed to have been paid as a dividend which is subject to
income tax in the hands of any such Holder, or
(b) give rise to a taxable capital gain in the hands of any such
Holder who or whose predecessor shall have continuously held
such Series A Preference Shares since their issuance;
unless at the time of giving a Notice of Redemption the Corporation delivers to
each Holder whose Series A Preference Shares are to be redeemed an undertaking
and covenant to indemnify such Holder in full for the amount of any income tax
or corporation income tax paid or payable by such Holder as a result of such
redemption.
5.8 Refunds. To the extent any of the tax relating to a supplement which
has been paid is refunded or is determined not to be payable by the Taxable
Holder in respect of whose tax liability or purported liability the supplement
was paid, the payee of the supplement shall promptly repay to the Corporation
without interest the supplement, less any unrecovered tax paid in respect of
such supplement.
5.9 Notice to Corporation. Any notice from any Taxable Holder shall be
sufficiently given if delivered or sent by registered mail, postage prepaid, to
the Corporation at its registered office addressed to the attention of the
Secretary. Any notice so mailed shall be deemed to have been given on the third
business day after the date of mailing.
ARTICLE 6
VOTING RIGHTS
6.1 General. Except as provided in the provisions attaching to the
Preference Shares as a class, the Holders shall not be entitled as such to
receive notice of or to attend or to vote at any meeting of shareholders of the
Corporation.
ARTICLE 7
MISCELLANEOUS
7.1 Modification. The rights, privileges, restrictions and conditions
attaching to the Series A Preference Shares may be repealed, altered, modified,
amended or varied in whole or in part only with the prior approval of the
Holders given in the manner provided in Section 7.2 in addition to any other
approval required by the Canada Business Corporations Act or any other
applicable statutory provision of like or similar effect, from time to time in
force.
7.2 Approval of Holders of Series A Preference Shares. The approval of the
Holders with respect to any and all matters hereinbefore referred to may be
given by at least 66 2/3% of the votes cast at a meeting of the Holders duly
called for that purpose and held upon at least 21 days' notice, at which the
Holders of a majority of the outstanding Series A Preference Shares are present
or represented by proxy. If at any such meeting the Holders of a majority of the
outstanding Series A Preference Shares are not present or represented by proxy
within 30 minutes after the time appointed for such meeting, then the meeting
shall be adjourned to such date being not less than 30 days later and to such
time and place as may be appointed by the chairman of the meeting and not less
than 21 days' notice shall be given of such adjourned meeting but it shall not
be necessary in such notice to specify the purpose for which the meeting was
originally called. At such adjourned meeting, the Holders present or represented
by proxy shall constitute a quorum and may transact the business for which the
meeting was originally called and a resolution passed thereat by not less than
66 2/3% of the votes cast at such adjourned meeting shall be effective
notwithstanding that the Holders of a majority of the outstanding Series A
Preference Shares are not present or represented by proxy
15
and the conduct thereof shall be from time to time prescribed by the by-laws of
the Corporation with respect to meetings of shareholders. On every poll taken at
every such meeting or adjourned meeting every Holder shall be entitled to one
vote in respect of each Series A Preference Share held by him.
7.3 Notice. Any notice required or permitted to be given to a Holder shall
be mailed by letter, postage prepaid, or delivered to such Holder at his address
as it appearing on the records of the Corporation or in the event of the address
of any such shareholder not so appearing then to the last known address of such
shareholder. The accidental failure to give notice to one or more of such
Holders shall not affect the validity of any action requiring the giving of
notice by the Corporation. Any notice given as aforesaid shall be deemed to be
given on the date upon which it is mailed or delivered.
16
Exhibit 1.1 c
[CANADA LETTERHEAD]
Certificate of Amendment Certificat de modification
Canada Business Loi sur les societes
Corporations Act Commerciales canadiennes
HOLLINGER INC. 197578-1
NAME OF CORPORATION - DENOMINATION DE LA SOCIETE NUMBER - NUMERO
I hereby certify that the Je certifie par les presentes que
Articles of the above-mentioned les statuts dela societe
Corporation were amended mentionnee ci-haut ont ete modifies
(a) under Section 13 of the [ ] (a) en vertu de I' article 13 de la
Canada Business Corporations Loi sur les societes commerciales
Act in accordance with the canadiennes conformement a l'avis
attached notice; ci-joint;
(b) under Section 27 of the [X] (b) en vertu de l'article 27 de la
Canada Business Corporations Loi sur les societes commerciales
Act as set out in the attached canadiennes tel qu'indique dans les
Articles of Amendment clasuses modificatrices ci-joint
designating a series of shares; designant une serie d'actions;
(c)under Section 171 of the [ ] (c) en vertu de 1'article 171 de la
Canada Business Corporations Loi sur les societes commerciales
Act as set out in the attached canadiennes tel qu'indique dans les
Articles of Amendment; clauses modificatrices ci-jointes;
(d) under Section 185 of the [ ] (d) en vertu de 1'article 185 de la
Canada Business Corporations Loi sur les societes commerciales
Act as set out in the attached canadiennes tel qu'indique dans les
Articles of Reorganization; clauses de reorganisation ci-jointes;
(e) under Section 185.1 of the [ ] (e) en vertu de 1'article 185.1 de la
Canada Business Corporations Loi sur les societes commerciales
Act as set out in the attached canadiennes tel qu'indique dans les
Articles of Arrangement. clauses d'arrangement ci-jointes.
LE DIRECTEUR
JUNE 14, 1989/LE 14 JUIN 1989
DIRECTOR DATE OF AMENDMENT - DATE DE LA MODIFICATION
[CANADA LETTERHEAD]
FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
--------------------------------------------------------------------------------
1 - NAME OF CORPORATION 2 - CORPORATION NO.
HOLLINGER INC. 197578-1
--------------------------------------------------------------------------------
3 - THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
(i) by adding to paragraph 3 thereof the following:
(k) the Directors hereby fix the number of shares for the eighth
series of Preference Shares at 725,000;
(l) the eighth series of Preference Shares is hereby designated as
Non-Voting Non-Cumulative Redeemable Retractable Convertible
Preference Shares, Series H, and shall have attached thereto
the rights, privileges, restrictions and conditions (in
addition to the rights, privileges, restrictions and
conditions attaching to the Preference Shares as a class) set
out in Schedule "A" attached hereto, which Schedule "A" is
incorporated in and forms part of this Form;
(ii) by increasing the maximum number of directors from 21 to 25.
--------------------------------------------------------------------------------
DATE SIGNATURE TITLE
June 14, 1989 Vice-President & Secretary
--------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY
Filed 14/6/89
--------------------------
Schedule "A"
Number of, Designation of and Rights, Privileges,
Restrictions and Conditions attaching
to the Non-Voting Non-Cumulative
Redeemable Retractable Convertible
Preference Shares, Series H
The eighth series of Preference Shares of the Corporation shall consist
of 725,000 Preference Shares which shall be designated as Non-Voting
Non-Cumulative Redeemable Retractable Convertible Preference Shares, Series H
(hereinafter referred to as the "Series H Preference Shares") and which, in
addition to the rights, privileges, restrictions and conditions attached to the
Preference Shares as a class, shall have attached thereto the following rights,
privileges, restrictions and conditions:
1. Definitions
Wherever used herein, unless there is something in the subject matter
or context inconsistent therewith, the following words and terms shall have the
respective meanings ascribed to them as follows:
"Board of Directors" means the board of directors of the corporation.
- 2 -
"Corporation" means Hollinger Inc. and any successor corporation and
any reference herein to action by the Corporation means action by or under the
authority of its Board of Directors or a duly empowered committee appointed by
the Board of Directors.
"Conversion Period" means with respect to each Series H Preference
Share the period commencing on the Date of Grant relating to such Series H
Preference Share and terminating at the earlier of the date six (6) years
thereafter or the day preceding the date of redemption of such Series H
Preference Share.
"Conversion Price" means with respect to each Series H Preference Share
the price per Share at which the Series H Preference Share may be converted into
Shares. For this purpose the price per Share is determined on the basis of the
weighted average price per share for all board lots of Shares traded on The
Toronto Stock Exchange on each of the ten (10) consecutive trading days ending
on the third trading day preceding the Date of Grant less a discount of 10% from
such average price; for the purpose of this Plan, the expression "trading day"
means a day on which shares are traded on The Toronto Stock Exchange and on
which at least one board lot of Shares is traded.
- 3 -
"Conversion Rate" means the number or fraction thereof derived by
dividing the Purchase Price by the Conversion Price subject to such further
adjustments as may be required pursuant to clause 6.8 hereof.
"Date of Grant" means with respect to each Series H Preference Share
the date of the resolution of the Board of Directors granting the Eligible
Employee the right to purchase such Series H Preference Share.
"Expiration Date" means the last day of the Conversion Period.
"Eligible Employee" means a person who is an officer and/or employee of
a Participating Company and is designated by the Board of Directors or a duly
authorized committee of the Board of Directors as being eligible to obtain a
Loan and participate in this Plan.
"Loan" means the loan or loans made at any time and from time to time
by the Corporation or a Participating Company to an Eligible Employee to be used
by the Eligible Employee for the sole purpose of enabling or assisting the
Eligible Employee to purchase fully paid Series H Preference Shares from the
Corporation.
- 4 -
"Normal Retirement" means the last day of the month in which the 65th
birthday of the Eligible Employee occurs or such later date upon which the
Eligible Employee actually retires.
"Participating Company" means with respect to each Eligible Employee,
the Corporation and any subsidiary or affiliated company of the Corporation. A
"subsidiary company" is a company in which the Corporation directly or
indirectly may exercise voting rights with respect to more than fifty percent
(50%) of the issued and outstanding voting shares. An "affiliated company" is a
company other than a subsidiary company in which the Corporation directly or
indirectly may exercise voting rights with respect to a substantial percentage
of the issued and outstanding voting shares and is designated by the Board of
Directors as an affiliated company.
"Plan" means the Executive Share Purchase Plan of the Corporation
adopted by the Board of Directors and the holders of Shares of the Corporation
on June 2, 1987, as amended.
"Purchase Price" means with respect to each Series H Preference Share
the issue price of such Series H Preference Share which issue price shall be
equal in amount to the Conversion Price of such Series H Preference Shares.
- 5 -
"Redemption Price" means with respect to each Series H Preference Share
the Purchase Price of such Series H Preference Share.
"Series H Preference Share" means the Non-Voting Non-Cumulative
Redeemable Retractable Convertible Preference Shares, Series H of the
Corporation designated, created and authorized by the Board of Directors for the
purpose of the Plan.
"Shares" means the common shares of the Corporation and any shares or
securities of the Corporation into which such common shares are changed,
converted, subdivided, consolidated or reclassified.
Words importing the singular number only shall include the plural and
vice versa; words importing the use of any gender shall include all genders.
2. Consideration for Issue
The consideration for the issue of each Series H Preference Share shall
be $13.08 (the "Paid Up Amount").
- 6 -
3. Dividends
3.1 Payment of Dividends
The holders of the Series H Preference Shares shall be entitled to
receive, and the Corporation shall pay thereon, as and when declared by the
Board of Directors of the Corporation, in its discretion out of monies of the
Corporation properly applicable to the payment of dividends, non-cumulative
preferential cash dividends in lawful money of Canada.
3.2 Method of Payment
Dividends (less any tax required to be withheld by the Corporation) on
the Series H Preference Shares shall be paid by cheque payable in lawful money
of Canada at par at any branch in Canada of the Corporation's bankers for the
time being or by any other reasonable means the Corporation deems desirable. The
mailing of such cheque from the Corporation's registered office, or from the
principal office in Toronto of the registrar for the Series H Preference Shares,
or the payment by such other reasonable means as the Corporation deems
desirable, on or before the date on which such dividend is to be paid to a
holder of Series H Preference Shares shall be deemed to be payment of
- 7 -
the dividends represented thereby and payable on such date unless the cheque is
not paid upon presentation or payment by such other means is not received.
Dividends which are represented by a cheque which has not been presented to the
Corporation's bankers for payment or that otherwise remain unclaimed for a
period of 6 years from the date on which they were declared to be payable shall
be forfeited to the Corporation.
3.3 Entitlement to Dividends
The holders of Series H Preference Shares shall not be entitled to any
dividends other than or in excess of the non-cumulative preferential cash
dividends herein provided for.
4. Redemption
4.1 Optional Redemption
Subject to applicable law the Corporation may, without giving notice,
redeem the whole or any part of the then outstanding Series H Preference Shares
held by an Eligible Employee, on the next day following the earlier of the
Expiration Date and in the case of the cessation of employment of such Eligible
Employee on the expiration of the applicable time within which the Eligible
Employee or his personal
- 8 -
representative had the right to convert the Series H Preference Shares held by
him, on payment for each share to be redeemed of the Redemption Price together
with all accrued and unpaid dividends thereon up to but excluding the date fixed
for redemption, (the whole constituting and being herein referred to as the
"Total Redemption Price").
4.2 Partial Redemption
If a part only of the Series H Preference Shares represented by any
certificate shall be redeemed, a new certificate representing the balance of
such shares shall be issued to the holder thereof at the expense of the
Corporation upon presentation and surrender of the first mentioned certificate.
4.3 Method of Redemption
On and after the date specified for redemption, the Corporation shall
pay or cause to be paid to or to the order of the registered holders of the
Series H Preference Shares to be redeemed the Total Redemption Price of such
shares upon presentation and surrender, at the registered office of the
Corporation, of the certificate or certificates representing the Series H
Preference Shares to be redeemed. Payment in respect of Series H Preference
Shares being redeemed shall be made by
- 9 -
cheque payable to the holders thereof in lawful money of Canada at par at any
branch in Canada of the Corporation's bankers for the time being or by any other
reasonable means the Corporation deems desirable and such payment shall be a
full and complete discharge of the Corporation's obligation to pay the Total
Redemption Price owed to the holders of Series H Preference Shares to be
redeemed unless the cheque is not honoured when presented for payment or payment
by such other reasonable means is not received. From and after the date
specified for redemption, the Series H Preference Shares to be redeemed shall
cease to be entitled to dividends or any other participation in the assets of
the Corporation and the holders thereof shall not be entitled to exercise any of
their other rights as shareholders in respect thereof, other than the right to
receive the Total Redemption Price, unless payment of the Total Redemption Price
shall not be made upon presentation and surrender of the certificates in
accordance with the foregoing provisions, in which case the rights of the
holders shall remain unaffected. The Corporation shall have the right at any
time to deposit an amount equal to the aggregate Total Redemption Price of the
Series H Preference Shares so redeemed, or of such of the Series H Preference
Shares which are represented by certificates which have not at the date of such
deposit been surrendered by the holders thereof in connection with such
redemption, to a special account in any chartered bank or any trust company in
Canada in respect of which the deposit is made, to be paid
- 10 -
without interest to or to the order of the respective holders of Series H
Preference Shares so redeemed upon presentation and surrender to such bank or
trust company of the certificates representing such shares. Upon such deposit
being made the Series H Preference Shares in respect of which such deposit shall
have been made shall be deemed to be redeemed and the rights of the holders
thereof shall be limited to receiving, without interest, their proportionate
part of the amount so deposited upon presentation and surrender of the
certificate or certificates representing their Series H Preference Shares being
redeemed. Any interest allowed on any such deposit shall belong to the
Corporation.
Redemption monies that are represented by a cheque which has not been
presented to the Corporation's bankers for payment or that otherwise remain
unclaimed (including monies held on deposit to a special account as provided for
above) for a period of 6 years from the date specified for redemption shall be
forfeited to the Corporation.
5. Retraction at the Option of the Holder
5.1 Right to Require Redemption
Subject to applicable law and to the rights, privileges, restrictions
or conditions attaching to any shares
- 11 -
of the Corporation, a holder of Series H Preference Shares shall be entitled to
require the Corporation to redeem only that number of outstanding Series H
Preference Shares registered in his name (the date of redemption being herein
referred to as the "Retraction Date") in respect of which the pro rata portion
of a Loan from the Corporation to the holder becomes payable by the holder, at a
price per share equal to the Redemption Price plus an amount equal to all
accrued and unpaid dividends thereon to but excluding the Retraction Date (the
whole constituting and being herein referred to as the "Retraction Price").
5.2 Retraction Procedure
In order to elect to have the Corporation redeem Series H Preference
Shares pursuant to the retraction privilege, each holder of Series H Preference
Shares who is entitled and desires to have the Corporation redeem any or all of
the Series H Preference Shares registered in his name must tender to the
transfer agent (the "Transfer Agent") for the Series H Preference Shares the
certificate or certificates representing the Series H Preference Shares which
the holder wishes to have the Corporation redeem with the retraction panel on
such share certificate or such other election form as may be designated by the
Corporation for such purposes which includes at least substantially the same
information as the retraction panel on the date of initial issue of the Series H
Preference Shares, in
- 12 -
either case duly completed by the registered holder specifying the number of
Series H Preference Shares represented by such certificate that are to be
redeemed by the Corporation on the Retraction Date and specifying the Business
Day on which the holder desires to have the Corporation redeem such Series H
Preference Shares which Business Day (which shall be the Retraction Date) shall
not be less than 10 calendar days after the day on which the notice is given to
the Corporation. Such presentation and surrender of the Series H Preference
Shares for redemption and such specification of the Retraction Date shall be
irrevocable except with respect to those Series H Preference Shares which are
not redeemed by the Corporation on the Retraction Date.
Subject to applicable law and to the rights, privileges, conditions,
restrictions or conditions attaching to any shares of the Corporation, the
Corporation shall, on the Retraction Date, redeem, at a price per Series H
Preference Share equal to the Retraction Price, the Series H Preference Shares
in respect of which the certificates have been surrendered for redemption in
accordance with the provisions of this clause 5. Payment of the Retraction Price
may be made by cheque of the Corporation or any other reasonable means the
Corporation deems desirable and such payment of the Retraction Price shall be a
full and complete discharge of the Corporation's obligation to pay the
Retraction Price owed to the holders of Series H
- 13 -
Preference Shares so presented and surrendered for redemption. Subject as
hereinafter provided, the Series H Preference Shares so presented and
surrendered for redemption shall be and be deemed to be redeemed on the
Retraction Date. From and after the Retraction Date, a holder of any Series H
Preference Share presented and surrendered for redemption shall not be entitled
to dividends or to exercise any of the rights of a holder of Series H Preference
Shares in respect thereof except the right to receive the Retraction Price,
provided that if payment of the Retraction Price is not duly made by or on
behalf of the Corporation in accordance with the provisions hereof, then the
rights of such holder shall remain unaffected.
If part only of the Series H Preference Shares represented by any
certificate are redeemed as aforesaid, a new certificate for the balance of such
shares shall be issued at the expense of the Corporation.
5.3 Retraction Subject to Applicable Law
If on the Retraction Date, the Corporation determines that it will not
be permitted, under insolvency provisions, other provisions of any applicable
law or the rights, privileges, restrictions or conditions attaching to any
shares of the Corporation, to redeem all of the Series H Preference Shares
tendered for redemption, the Corporation shall redeem, on
- 14 -
the Retraction Date, that number of Series H Preference Shares which it is then
permitted to redeem in accordance with the aforementioned provisions of law
(rounded to the next lower multiple of 1,000) and the shares so to be redeemed
shall be selected pro-rata (disregarding fractions) in proportion to the total
number of Series H Preference Shares so presented and tendered for redemption by
each holder thereof. In such case if a part only of the Series H Preference
Shares represented by any certificate shall be redeemed, a new certificate for
the Series H Preference Shares not so redeemed shall be issued at the expense of
the Corporation and held on the terms hereinafter set out.
If the Corporation shall fail to redeem, because of any of the
aforementioned provisions, all Series H Preference Shares in respect of which
the holders thereof shall have exercised the retraction privilege (such shares
not so redeemed being hereinafter referred to as the "Deposited Shares" and the
holders who shall have exercised the retraction privilege in respect thereof
being hereinafter referred to as the "Retracting Shareholders"), the Corporation
shall continue to hold the Deposited Shares and shall, as soon as possible (but
in any event within 14 days) after the Retraction Date, send a notice to each
Retracting Shareholder stating:
(i) the number of Deposited Shares of such Retracting Shareholder held by
the Corporation,
- 15 -
(ii) the intention of the Corporation to redeem on the first day of each
subsequent month of March, June, September and December in each year (a
"Subsequent Retraction Date") thereafter from all Retracting
Shareholders who tendered in respect of the Retraction Date, on a
pro-rata basis, that number of Deposited Shares as it is then permitted
by applicable law to redeem, and
(iii) the right of such Retracting Shareholder to require the Corporation to
return to him all of the Deposited Shares with the result that the
obligation of the Corporation to redeem the Deposited Shares so
returned on any Subsequent Retraction Date shall cease.
The Corporation shall, on each Subsequent Retraction Date thereafter if it is
permitted on such date by insolvency provisions and other provisions of any
applicable law and the rights, privileges, restrictions or conditions attaching
to any shares of the Corporation, redeem, on a pro-rata basis as aforesaid from
all Retracting Shareholders whose Deposited Shares have not been returned as
aforesaid, that number of Deposited Shares as it is then permitted by applicable
law to redeem at the Redemption Price per share plus an amount equal to all
accrued and unpaid dividends thereon to but excluding the Subsequent Retraction
Date. The Series H Preference Shares to
- 16 -
be redeemed on a Subsequent Retraction Date shall be redeemed in accordance with
this clause 5 save and except that payment therefor shall be accompanied by a
statement to each Retracting Shareholder setting out the number of Deposited
Shares of such Retracting Shareholder redeemed and the number of Deposited
Shares remaining in the name of such Retracting Shareholder. Except as otherwise
provided herein, Retracting Shareholders shall continue to be entitled to
exercise all of the rights of shareholders in respect of the Deposited Shares
and to receive dividends thereon except that, in order to obtain possession of
the share certificate or certificates representing the Deposited Shares, a
Retracting Shareholder must give ten days written notice to the Corporation
(given not less than 20 days prior to any Subsequent Retraction Date) requiring
the Corporation to return to him all of the Deposited Shares held in his name by
the Corporation. Upon receipt of such written notice the Corporation shall
promptly send to such Retracting Shareholder a share certificate or share
certificates for that number of Series H Preference Shares which such Retracting
Shareholder has requested the Corporation to return. Such shares shall then
cease to be Deposited Shares and such Retracting Shareholder shall cease to have
any right to receive any payment with respect thereto pursuant to this clause 5.
- 17 -
If the directors of the Corporation have acted in good faith in making
any of the determinations referred to above as to the number of Series H
Preference Shares which the corporation was permitted at any time to redeem, the
Corporation shall have no liability in the event that any such determination
proves inaccurate.
6. Conversion at the Option of the Holders
6.1 Right of Conversion
(i) General
Upon and subject to the terns and conditions hereinafter set forth,
each holder of Series H Preference Shares received on original issue from the
Corporation shall have the right, subject to clauses (ii) and (iii) of this
clause 6.1, to convert up to the following maximum number of Series H Preference
Shares into fully paid and non-assessable common shares of the Corporation at
the Conversion Rate in effect on the date of conversion:
(A) on or after the first anniversary of the Date of
Grant up to twenty-five per cent (25%) of his Series
H Preference Shares subscribed for pursuant to such
grant;
- 18 -
(B) on or after the second anniversary of the Date of
Grant up to fifty per cent (50%) of his Series H
Preference Shares subscribed for pursuant to such
grant (including those previously converted as
provided in Subclause (A));
(C) on or after the third anniversary of the Date of
Grant, up to seventy-five per cent (75%) of his
Series H Preference Shares subscribed for pursuant to
such grant (including those previously converted as
provided in Subclauses (A) and (B)); and
(D) on or after the fourth anniversary of the Date of
Grant up to one hundred per cent (100%) of his Series
H Preference Shares subscribed for pursuant to such
grant.
(ii) On Cessation of Employment
(A) Retirement - If the Eligible Employee ceases to be
employed, either by the Corporation or a
Participating Company, as a result of Normal
Retirement, the conversion rights
- 19 -
attaching to all of the Series H Preference Shares of
such holder shall be immediately and fully
exercisable. Such conversion rights may be exercised
at any time during the period which commences on the
date of Normal Retirement, and ends on the earlier of
the date which is one (1) month thereafter, or the
Expiration Date, provided that if the Eligible
Employee dies during such exercise period, the
conversion rights may be exercised by his executor or
other personal representative, in whole or in part,
at any time or from time to time, during the period
which commences on the date of death and ends on the
earlier of six (6) months from the date of death of
the Eligible Employee or the Expiration Date.
(B) Termination - If the Eligible Employee ceases to be
employed, either by the Corporation or a
Participating Company as a result of (I) his
voluntarily leaving such employment (other than by
Normal Retirement referred to in Subclause (A) above)
or (II) being dismissed for cause, the Eligible
Employee's conversion rights attaching to the Series
H
- 20 -
Preference Shares of such holder shall be limited to
the number of Preference Shares in respect of which
they are exercisable immediately prior to the time he
ceased to be employed. Such limited conversion rights
may be exercised at any time during the period which
commences on the date of termination of employment
and ends on the earlier of the date which is one (1)
month thereafter or the Expiration Date.
(C) Death - In the case of termination of employment by
the Corporation or a Participating Company caused by
the death of the Eligible Employee, the conversion
rights attaching to all of the Series H Preference
Shares of such Eligible Employee shall be immediately
and fully exercisable, and such conversion rights may
be exercised by his executor or other personal
representative, in whole or in part, at any time or
from time to time, during the period which commences
on the date of death and ends on the earlier of the
date which is six (6) months thereafter or the
Expiration Date.
- 21 -
(D) Other Termination - If the Eligible Employee ceases
to be employed either by the Corporation or a
Participating Company for any reason other than the
ones referred to in Subclauses (A), (B) or (C) above,
the conversion rights attaching to all of the Series
H Preference Shares of such Eligible Employee shall
be immediately and fully exercisable, and such
conversion rights may be exercised, in whole or in
part, at any time or from time to time during the
period which commences on the date of termination of
employment and ends on the earlier of the date which
is one (1) month thereafter or the Expiration Date.
(iii) Offer
With respect to the Series H Preference Shares, in the event that an
offer is made:
(1) to all or substantially all of the holders of the
Shares of the corporation, or
- 22 -
(2) to all or substantially all of the holders of all the
Shares of the Corporation whose last address on the
records of the Company is in Canada,
at a price at least equal to the market price of the Shares
immediately prior to the making of the Offer then the
conversion rights attaching to all of the Series H Preference
Shares held by the purchaser of such. Series H Preference
Shares on original issue from the Corporation shall become
immediately and fully exercisable during the period of such
offer notwithstanding clause (i) and such holder may exercise
such conversion rights, in whole or in part, at any time or
from time to time during the period of such offer.
The initial Conversion Rate shall be one (1) common share for each
Series H Preference Share to be converted, subject to adjustment from time to
time as hereinafter provided. For the purposes of this clause 6, "common shares"
mean common shares in the capital of the Corporation as such shares were
constituted on June 2, 1987, and shares of any other class resulting from the
reclassification or change of such common shares and "Conversion Rate" at any
time means the number of common shares of the Corporation into which at such
time one
- 23 -
Series H Preference Share shall be convertible in accordance with the
provisions of this clause 6.
6.2 Exercise of Right
The conversion right herein provided for may be exercised by notice in
writing given to the Secretary of the Corporation at its registered office or to
the transfer agent of the Corporation for the Series H Preference Shares at any
office for the transfer of Series H Preference Shares, accompanied by the
certificate or certificates representing the Series H Preference Shares in
respect of which the holder thereof is entitled and desires to exercise such
right of conversion. Such notice shall be signed by such holder or his agent and
shall specify the number of Series H Preference Shares which the holder is
entitled and desires to have converted. If less than all the Series H Preference
Shares represented by any certificate or certificates accompanying any such
notice are to be converted, the holder shall be entitled to receive, at the
expense of the Corporation, a new certificate representing the Series H
Preference Shares comprised in the certificate or certificates surrendered as
aforesaid which are not to be converted.
- 24 -
6.3 Entitlement to Dividends
The registered holder of any Series H Preference Share on the record
date for any dividend payable on such shares shall be entitled to such dividend
notwithstanding that such shares shall have been converted into common shares
after such record date and before the payment date of such dividend, and the
registered holder of a common share resulting from such conversion shall be
entitled to rank equally per common share with the registered holders of all
other common shares in respect of all dividends payable to holders of common
shares of record on any date on or after the date of such conversion.
Subject to the foregoing, upon conversion of any Series H Preference
Shares there shall be no adjustment by the Corporation or by any holder of
Series H Preference Shares on account of any dividend either on the Series H
Preference Shares so converted or on the common shares resulting from such
conversion.
6.4 Shares Called For Redemption
In the case of any Series H Preference Shares which are called for
redemption, the right of conversion thereof shall terminate on the Expiration
Date provided, however, that if the
- 25 -
Corporation shall fail to redeem such Series H Preference Shares, the right of
conversion shall thereupon be restored.
6.5 Certificates
On any conversion of Series H Preference Shares, the share certificate
or certificates representing the common shares of the Corporation resulting
therefrom shall be issued at the expense of the Corporation in the name of the
holder of the Series H Preference Shares converted, provided that such holder
shall pay any applicable security transfer taxes.
6.6 Timing
The right of a holder of Series H Preference Shares to convert the same
into common shares shall be deemed to have been exercised, and the holder of
Series H Preference Shares to be converted, or any person or persons in whose
name or names such holder of Series H Preference Shares shall have directed a
certificate or certificates representing common shares to be issued as provided
in clause 6.5, shall be deemed to have become a holder of common shares of the
Corporation for all purposes on the date or dates of receipt by the Secretary of
the Corporation or the transfer agent of the Series H Preference Shares of the
certificate or certificates representing the Series H Preference
- 26 -
Shares to be converted accompanied by notice in writing as referred to in clause
6.2, notwithstanding any delay in the delivery of the certificate or
certificates representing the common shares into which such Series H Preference
Shares have been converted.
6.7 No Fractional Shares
The Corporation shall not issue fractional shares in satisfaction of
the conversion rights herein provided for but in lieu thereof may, in respect of
any fractional interest resulting from the exercise of conversion rights, either
pay a cash adjustment or issue or cause to be issued non-voting and non-dividend
bearing scrip certificates in a form approved by the Board of Directors which
scrip certificates will, subject to the conditions thereof, entitle the holder
thereof to receive a certificate for a full common share by exchanging scrip
certificates aggregating a full common share. The amount of any cash adjustment
shall equal the Current Market Price (as defined in paragraph (d) of clause 6.8)
of such fractional interest. If scrip certificates are issued, such scrip
certificates may contain provisions to the effect that, after the expiration of
one year from their date of issuance, the Corporation may sell or cause to be
sold all the shares then represented by unsurrendered scrip certificates and the
sole rights of the holders of the scrip certificates after the expiration of
said
- 27 -
period shall be, against surrender of their scrip certificates, to receive
payment of the proportionate amounts of the net proceeds of such sale, less
taxes and costs of sale, payable by cheque in lawful money of Canada at par at
any branch in Canada of the Corporation's bankers for the time being. Such scrip
certificates shall not confer on the holders thereof any rights as a
shareholder. If a cash adjustment or a proportionate amount of the net proceeds
of a sale is to be paid pursuant to the provisions of this clause 6.7, the
mailing from the Corporation's registered office or the principal office in
Toronto of the registrar for the Series H Preference Shares to a holder of
Series H Preference Shares who has exercised his right to convert shall be
deemed to be payment of the cash adjustment or the proportionate amount of the
net proceeds of a sale, as the case may be, resulting from such fractional
interest unless the cheque is not paid upon due presentation. Cash adjustments
or proportionate amounts that are represented by a cheque which has not been
presented to the Corporation's bankers for payment or that otherwise remain
unclaimed for a period of 6 years from the date on which the same became payable
shall be forwarded to the Corporation.
6.8 Adjustment of Conversion Rate
The Conversion Rate shall be subject to adjustment from time to time as
follows:
- 28 -
(a) in case the Corporation shall
(i) subdivide its outstanding common shares into a
greater number of shares,
(ii) consolidate its outstanding common shares into a
smaller number of shares, or
(iii) issue common shares (or securities convertible into
common shares) to the holders of its outstanding
common shares by way of a stock dividend (other than
an issue of common shares to shareholders pursuant to
their exercise of options to receive dividends in the
form of common shares in lieu of cash dividends
declared payable in the ordinary course by the
Corporation on its common shares),
the Conversion Rate in effect on the effective date of such
subdivision or consolidation or on the record date for such
issue of common shares (or securities convertible into common
shares) by way of a stock dividend, as the case may be, in the
case of the events referred to in (i) and (iii) above, shall
be increased in proportion to the increase in the number of
- 29 -
outstanding common shares resulting from such subdivision or
from such stock dividend or from such distribution assuming
the issue by the Corporation of the maximum number of common
shares into which such convertible securities are convertible
or, in the case of the event referred to in (ii) above, shall
be decreased in proportion to the decrease in the number of
outstanding common shares resulting from such consolidation;
such adjustment shall be made successively whenever any event
referred to in this paragraph (a) shall occur; any such issue
of common shares by way of a stock dividend shall be deemed to
have been made on the record date for the stock dividend for
the purpose of calculating the number of outstanding common
shares under paragraphs (b) and (c) of this clause 6.8;
(b) in case the Corporation shall fix a record date for the
issuance of rights, options or warrants to all or
substantially all the holders of its outstanding common shares
entitling them, for a period expiring no more than 45 days
after such record date, to subscribe for or purchase common
shares (or securities convertible into common shares) at a
price per share (or having a conversion price per share) less
than 95% of the Current Market Price (as hereinafter defined
in
- 30 -
paragraph (d) of this clause 6.8) of a common share on such
record date, the Conversion Rate shall be adjusted immediately
after such record date so that it shall equal the rate
determined by multiplying the Conversion Rate in effect on
such record date by a fraction, of which the denominator shall
be the total number of common shares outstanding on such
record date, plus a number of common shares equal to the
number arrived at by dividing the aggregate price of the total
number of additional common shares offered for subscription or
purchase (or the aggregate conversion price of the total
number of convertible securities so offered) by the Current
Market Price per common share on such record date, and of
which the numerator shall be the total number of common shares
outstanding on such record date plus the total number of
additional common shares offered for subscription or purchase
(or into which the total number of convertible securities so
offered are convertible); any common shares owned by or held
for the account of the Corporation shall be deemed not to be
outstanding for the purpose of any such computation; such
adjustment shall be made successively whenever such a record
date is fixed; to the extent that such rights, options or
warrants are not so issued or such rights, options or warrants
are not exercised prior to the expiration thereof, the
Conversion Rate
- 31 -
shall be readjusted immediately after the expiry date for the
exercise of such rights, options or warrants to the Conversion
Rate which would then be in effect if such record date had not
been fixed, or to the Conversion Rate which would then be in
effect based upon the number of common shares (or securities
convertible into common shares) actually delivered upon the
exercise of such rights, options or warrants, as the case may
be;
(c) in case the Corporation shall fix a record date for the making
of a distribution (including a distribution by way of a stock
dividend) to all or substantially all the holders of its
outstanding shares of
(i) shares of any class other than common shares
(excluding shares convertible into common shares
referred to in paragraph (a) of this clause 6.8), or
(ii) rights, options or warrants (excluding those referred
to in paragraph (b) of this clause 6.8), or
(iii) evidences of its indebtedness (excluding indebtedness
convertible into common shares
- 32 -
referred to in paragraph (a) of this clause 6.8), or
(iv) assets (excluding common shares issued by way of a
stock dividend and cash dividends declared payable in
the ordinary course),
then in each such case the Conversion Rate shall be adjusted
immediately after such record date so that it shall equal the
rate determined by multiplying the Conversion Rate in effect
on such record date by a fraction, of which the denominator
shall be the total number of common shares outstanding on such
record date multiplied by the Current Market Price per common
share on such record date, less the fair market value (as
determined by the Board of Directors, whose determination
shall be conclusive) of such shares or rights, options or
warrants or evidences of indebtedness or assets so
distributed, and of which the numerator shall be the total
number of common shares outstanding on such record date
multiplied by such Current Market Price per common share; any
common shares owned by or held for the account of the
Corporation shall be deemed not to be outstanding for the
purpose of any such computation; such adjustment shall be made
successively whenever such a record date
- 33 -
is fixed; to the extent that such distribution is not so made,
the Conversion Rate shall be readjusted to the Conversion Rate
which would then be in effect based upon such shares or
rights, options or warrants or evidences of indebtedness or
assets actually distributed.
(d) for the purpose of any such computation under paragraphs (b)
or (c) of this clause 6.8, the "Current Market Price" for a
common share at any date shall be determined by the Board of
Directors; provided that when the common shares are listed on
The Toronto Stock Exchange or on any other stock exchange in
Canada, the "Current Market Price" per common share at any
date shall be the weighted average closing price at which the
common shares of the Corporation traded on The Toronto Stock
Exchange (or if the common shares are not then listed and
posted for trading on The Toronto Stock Exchange, on such
stock exchange in Canada on which such shares are listed and
posted for trading as may be selected for such purpose by the
Board of Directors) during the 30 trading days (on each of
which at least 100 common shares were traded in at least one
board lot) immediately preceding the fifth trading day before
such date.
- 34 -
(e) no adjustments of the Conversion Rate shall be made pursuant
to paragraphs (b) or (c) of this clause 6.8 in respect of any
rights, options or warrants if identical rights, options or
warrants are issued to the holders of the Series H Preference
Shares as though and to the same effect as if they had
converted their Series H Preference Shares into common shares
prior to the issue of such rights, options or warrants.
(f) in any case in which this clause 6.8 shall require that an
adjustment shall become effective immediately after a record
date for an event referred to herein, the Corporation may
defer, until the occurrence of such event, issuing to the
holder of any Series H Preference Shares converted after such
record date and before the occurrence of such event, the
additional common shares issuable upon such conversion by
reason of the adjustment required by such event in addition to
the common shares issuable upon such conversion before giving
effect to such adjustment, provided, however, that the
Corporation shall deliver to such holder an appropriate
instrument evidencing such holder's rights to receive such
additional common shares upon the occurrence of the event
requiring such adjustment and the right to receive any
distributions on such additional common shares declared in
favour of holders
- 35 -
of record of common shares on or after the relevant date of
conversion.
(g) in the case of any reclassification of, or other change in,
the outstanding common shares other than a subdivision or
consolidation, the right of conversion shall be adjusted
immediately after the effective date for such reclassification
or other change so that holders of Series H Preference Shares
shall be entitled to receive such number of shares as they
would have received had such Series H Preference Shares been
converted into common shares of the Corporation immediately
prior to such reclassification or other change becoming
effective.
(h) no adjustment in the Conversion Rate shall be required unless
such adjustment would require an increase or decrease of at
least 1% in the conversion Price, provided, however, that any
adjustments which by reason of this paragraph (h) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment. "Conversion Price" at
any time means an amount equal to the Purchase Price divided
by the Conversion Rate in effect at such time.
- 36 -
(i) if any question shall at any time arise with respect to the
Conversion Price or any adjustments in the amount of the
Conversion Rate or with respect to the amount of any cash
payment made in lieu of issuing a fractional share, such
question shall be conclusively determined by the auditors from
time to time of the Corporation and shall be binding upon the
Corporation and all shareholders, transfer agents and
registrars of Series H Preference Shares and of common shares.
(j) for the purpose of this clause 6.8, "dividends declared
payable in the ordinary course" shall mean dividends paid on
the common shares in any fiscal year of the Corporation,
whether in (1) cash, (2) securities of the Corporation,
including rights, options or warrants (other than rights,
options or warrants referred to in paragraph (b) of clause
6.8) to purchase any securities of the Corporation or property
or other assets of the Corporation, or (3) property or other
assets of the Corporation, to the extent that the amount or
value of such dividend together with the amount or value of
all dividends theretofore paid during such fiscal year (any
such securities, property or other assets so distributed to be
valued at the fair market value of such securities, property
or other assets, as the case may be, as determined by the
Board of Directors, which
- 37 -
determination shall be conclusive) does not exceed the greater
of:
(i) 150% of the aggregate amount or value of dividends
paid by the Corporation on the common shares in the
period of twelve consecutive months ended immediately
prior to the first day of such fiscal year; or
(ii) 100% of the consolidated net income of the
Corporation before extraordinary items for the period
of twelve consecutive months ended immediately prior
to the first day of such fiscal year less the amount
of all dividends payable in respect of such
consecutive twelve-month period on all shares ranking
prior to or on a parity with the common shares in
respect of the payment of dividends (such
consolidated net income, extraordinary items and
dividends to be shown in the audited consolidated
financial statements of the Corporation for such
period of twelve consecutive months or if there are
no audited consolidated financial statements for such
period, computed in accordance with generally
accepted accounting principles, consistent with those
applied in the preparation of the most
- 38 -
recent audited consolidated financial statements of
the Corporation); or
(iii) 300% of the arithmetic mean of the aggregate amount
and/or value of the dividends paid by the Corporation
on the common shares during the period of those
12-month periods comprising the 36 consecutive months
ended immediately prior to the first day of such
fiscal year;
and for the purposes of subclauses (i), (ii) and (iii) above,
in determining the amount or value of dividends on the common
shares there shall be included, in respect of any period prior
to September 17, 1985, the amount or value of dividends paid
by any predecessor corporation on its common shares (excluding
the amount and/or value of dividends paid by any predecessor
corporation to another predecessor corporation).
6.9 Certificate as to Adjustment
Forthwith after the occurrence of any adjustment in the
Conversion Rate pursuant to clause 6.8 hereof, the corporation shall file with
the transfer agent of the Corporation for the Series H Preference Shares a
certificate certifying as to the amount of such adjustment and, in reasonable
detail, the event
- 39 -
requiring and the manner of completing such adjustment; the Corporation shall
also at such time give written notice to the holders of Series H Preference
Shares of the Conversion Rate following such adjustment.
6.10 Notification
If the Corporation intends to take any action which would require an
adjustment of the Conversion Rate pursuant to paragraph (a), (b) or (c) of
clause 6.3 hereof (other than the subdivision or consolidation of the
outstanding common shares of the Corporation), the Corporation shall, at least
14 days prior to the earlier of any record date fixed for any action or the
effective date for such action notify the holders of Series H Preference Shares
by written notice setting forth the particulars of such action to the extent
that such particulars have been determined at the time of giving the notice.
7. Purchase for Cancellation
Subject to applicable law, the Corporation may at any time or
from time to time purchase for cancellation all or any part of the outstanding
Series H Preference Shares at any price by tender to all the holders of record
of Series H Preference Shares then outstanding or through the facilities of any
stock exchange on which the Series H Preference Shares are listed. If
- 40 -
in response to an invitation for tenders under the provisions of this clause 7,
more Series H Preference Shares are tendered at a price or prices acceptable to
the Corporation than the Corporation is prepared to purchase, then the Series H
Preference Shares to be purchased by the Corporation shall be purchased as
nearly as may be pro rata according to the number of shares tendered by each
holder who submits a tender to the Corporation, provided that when shares are
tendered at different prices, the pro rating shall be effected only with respect
to the shares tendered at the price at which more shares were tendered than the
Corporation is prepared to purchase after the Corporation has purchased all the
shares tendered at lower prices. If part only of the Series H Preference Shares
represented by a certificate shall be purchased, a new certificate for the
balance of such shares shall be issued at the expense of the Corporation.
8. Issuance of Additional Series A Preference Shares
Notwithstanding anything herein contained, the Corporation
may, without the approval of the holders of the Series H Preference Shares,
issue up to that number of additional Preference Shares having rights,
privileges, restrictions and conditions substantially similar to those attaching
to the Floating Rate Cumulative Convertible Preference
- 41 -
Shares Series A which has an aggregate issue price of not more than $23 million.
9. Voting Rights
Subject to applicable law, the holders of the Series H
Preference Shares shall not be entitled to receive notice of or to attend or to
vote at any meetings of shareholders of the Corporation.
10. Liquidation, Dissolution or Winding Up
In the event of the liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its shareholders for the purpose
of winding up its affairs, the holders of the Series H Preference Shares shall
be entitled to receive from the assets of the Corporation an amount per share
equal to the Redemption Price plus all accrued and unpaid dividends thereon to
but excluding the date of payment, before any amount shall be paid to, or assets
of the Corporation distributed amongst, the holders of any other shares of the
Corporation ranking as to capital junior to the Series H Preference Shares.
After payment to the holders of the Series H Preference Shares of the amounts so
payable to them, they shall
- 42 -
not be entitled to share in any further distribution of the assets of the
Corporation.
11. Interpretation
In the event that any date on which any dividend on the Series
H Preference Shares is payable by the Corporation, or on or by which any other
action is required to be taken by the Corporation hereunder, is not a Business
Day, then such dividend shall be payable, or such other action shall be required
to be taken, on or by the next succeeding day that is a Business Day.
For the purposes of these share provisions:
(a) "Business Day" means a day other than a Saturday, a Sunday or
any other day that is treated as a statutory holiday in the
jurisdiction in which the Corporation's registered office is
located; and
(b) "ranking as to capital" means ranking with respect to the
distribution of assets in the event of a liquidation,
dissolution or winding up of the Corporation, whether
voluntary or involuntary, or in the event of any other
distribution of assets of the
- 43 -
Corporation among its shareholders for the purposes of winding
up its affairs.
12. Notice
Any notice, payment, request or demand (herein collectively
called a "Notice") required or permitted to be given or made hereunder shall be
in writing and shall be sufficiently given if delivered to the Corporation or to
the shareholder, as the case may be, or if sent by prepaid registered mail,
addressed, in the case of any Notice to the Corporation, to The Secretary,
Hollinger Inc., 10 Toronto Street, Toronto, Ontario, M5C 2B7, and in the case of
the shareholder, to such shareholder at the address set forth in the share
register of the Corporation, provided that the Corporation or the shareholder
may by notice in writing change its or the shareholder's address to a different
address stipulated in the Notice. Any Notice delivered by hand shall be
considered to have been given on the date of delivery. Any Notice mailed as
aforesaid shall be deemed to have been given on the third business day following
the date of such mailing.
- 44 -
13. Mail Service Interruption
If the Corporation determines that mail service is or is
threatened to be interrupted at the time when the Corporation is required or
elects to give any notice hereunder, or is required to send any cheque or any
share certificate to the holder of any Series H Preference Share, whether in
connection with the redemption of such share or otherwise, the Corporation may,
notwithstanding the provisions hereof:
(a) give such notice by delivery thereof to the holders of Series
H Preference Shares or by publication thereof once in a daily
English language newspaper of general circulation published in
Toronto and such notice shall be deemed to have been validly
given on the day next succeeding its delivery or publication,
as the case may be; and
(b) fulfill the requirement to send such cheque or such share
certificate by arranging for the delivery thereof to such
holder by the Corporation or by the transfer agent for the
Series H Preference Shares at its principal office in the city
of Toronto, and such cheque and/or certificate shall be deemed
to have been sent on the date on which notice of such
arrangement shall have been given as provided in (a) above,
- 45 -
provided that as soon as the Corporation determines that mail
service is no longer interrupted or threatened to be
interrupted, such cheque or share certificate, if not
theretofor delivered to such holder, shall be sent by mail as
herein provided. In the event that the Corporation is required
to mail such cheque or share certificate, such mailing shall
be made by prepaid mail to the registered address of each
person who at the date of mailing is a registered holder and
who is entitled to receive such cheque or certificate.
14. Amendments
The rights, privileges, restrictions and conditions attached
to the Series H Preference Shares may be added to, changed or removed by
Articles of Amendment but only with the prior approval of the holders of the
Series H Preference Shares given as specified in clause 15 and as may then be
required by law.
- 46 -
15. Approval of Holders of Series H Preference Shares
15.1 Approval
Any approval of the holders of the Series H Preference Shares
with respect to any matters requiring the consent of the holders of the Series
H Preference Shares may be given in such manner as may then be required by law,
subject to a minimum requirement that such approval be given by resolution
signed by all the holders of outstanding Series H Preference Shares or passed
by the affirmative vote of at least 66-2/3% of the votes cast by the holders of
Series H Preference Shares who voted in respect of that resolution at a meeting
of the holders of the Series H Preference Shares duly called for that purpose
and at which a quorum as required by the by-laws of the Corporation is present.
15.2 Formalities, etc.
The proxy rules applicable to, the formalities to be observed
in respect of the giving of notice of, and the formalities to be observed in
respect of the conduct of, any meeting or any adjourned meeting of holders of
Series H Preference Shares shall be those from time to time prescribed by the
by-laws of the Corporation with respect to meetings of shareholders or, if not
so prescribed, as required by law. On
- 47 -
every poll taken at every meeting of holders of Series H Preference Shares, each
holder of Series H Preference Shares entitled to vote thereat shall have one
vote in respect of each Series H Preference Share held.
Exhibit 1.1 d
[CANADA LETTERHEAD] Industry Canada Industrie Canada
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
HOLLINGER INC. 197578-1
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the above-named corporation Je certifie que les statuts de la societe susmentionnee
were amended ont ete modifies :
(a) under section 13 of the Canada Business Corporations Act in [ ] a) en vertu de l'article 13 de la Loi canadienne sur les
accordance with the attached notice; societes par actions, conformement a l'avis ci-joint;
(b) under section 27 of the Canada Business Corporations Act as [ ] b) en vertu de l'article 27 de la Loi canadienne sur les
set out in the attached articles of amendment designating a societes par actions, tel qu'il est indique dans les
series of shares; clauses modificatrices ci-jointes designant une sreie
d'actions;
(c) under section 179 of the Canada Business Corporations Act as [x] c) en vertu de l'article 179 de la Loi canadienne sur les
set out in the attached articles of amendment; societes par actions, tel qu'il est indique dans les
clauses modificatrices ci-jointes;
(d) under section 191 of the Canada Business Corporations Act as [ ] d) en vertu de l'article 191 de la Loi canadienne sur les
set out in the attached articles of reorganization. societes par actions, tel qu'il est indique dans les
clauses de reorganisation ci-jointes.
MAY 30, 1996/LE 30 MAI 1996
Director - Directeur DATE OF AMENDMENT - DATE DE MODIFICATION
[CANADA LETTERHEAD]
FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
--------------------------------------------------------------------------------
1 - NAME OF CORPORATION 2 - Corporation No.
Hollinger Inc. 197578-1
--------------------------------------------------------------------------------
3 - THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
The Articles of the Corporation be amended to change the place in which
its registered office is situated from the City of Vancouver in the
Province of British Columbia to the Municipality of Metropolitan Toronto
in the Province of Ontario.
--------------------------------------------------------------------------------
DATE SIGNATURE TITLE
/s/ Charles G. Cowan
May 29,1996 Charles G. Cowan Vice-President & Secretary
--------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY
Filed
--------------------------
[LETTERHEAD CANADA]
FORM 3
NOTICE OF REGISTERED OFFICE
OR NOTICE OF CHANGE
OF REGISTERED OFFICE
(SECTION 19)
--------------------------------------------------------------------------------
1 - NAME OF CORPORATION 2 - CORPORATION NO.
Hollinger Inc. 197578-1
--------------------------------------------------------------------------------
3 - PLACE IN CANADA WHERE THE REGISTERED OFFICE IS SITUATED
Municipality of Metropolitan Toronto in the Province of Ontario
4 - ADDRESS OF REGISTERED OFFICE
10 Toronto Street
Toronto, Ontario [LSARF/CBCA STAMP]
M5C 2B7
CAUTION: Address of registered office must be within place specified in
articles, otherwise an amendment is required (Form 4) in addition to this form
5 - EFFECTIVE DATE OF CHANGE
Upon the filing of articles of amendment
6 - PREVIOUS ADDRESS OF REGISTERED OFFICE
1827 West 5th Avenue
Vancouver, British Columbia
V6J IPS
--------------------------------------------------------------------------------
DATE SIGNATURE TITLE
/s/ Charles G. Cowan
May 29, 1996 Charles G.Cowan Vice-President & Secretary
--------------------------------------------------------------------------------
Filed
--------------------------
Exhibit 1.1 e
[CANADA LETTERHEAD] Industry Canada Industrie Canada
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
HOLLINGER INC. 197578-1
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the above-named corporation Je certifie que les statuts de la societe susmentionnee
were amended ont ete modifies :
(a) under section 13 of the Canada Business Corporations Act in [ ] a) en vertu de l'article 13 de la Loi canadienne sur les
accordance with the attached notice; societes par actions, conformement a l'avis ci-joint;
(b) under section 27 of the Canada Business Corporations Act as [ ] b) en vertu de l'article 27 de la Loi canadienne sur les
set out in the attached articles of amendment designating a societes par actions, tel qu'il est indique dans les
series of shares; clauses modificatrices ci-jointes designant une serie
d'actions;
c) under section 179 of the Canada Business Corporations Act as
set out in the attached articles of amendment; [x] c) en vertu de l'article 179 de la Loi canadienne sur
les societes par actions, tel qu'il est indique dans les
clauses modificatrices ci-jointes;
(d) under section 191 of the Canada Business Corporations Act as [ ] d) en vertu de l'article 191 de la Loi canadienne sur
set out in the attached articles of reorganization. les societes par actions, tel qu'il est indique dans les
clauses de reorganisation ci-jointes.
September 11, 1997/le 11 septembre 1997
Director - Directeur Date of Amendment - Date de modification
[CANADA LETTERHEAD]
FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
--------------------------------------------------------------------------------
1 - NAME OF CORPORATION 2 - CORPORATION NO.
HOLLINGER INC. 197578-1
--------------------------------------------------------------------------------
3 - THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
the certificate and articles of the Corporation are amended to create the
twelfth series of Preference Shares, unlimited in number, to be designated
as Retractable Shares, and to have attached thereto the rights, privileges,
restrictions and conditions set forth in annexed Schedule A.
--------------------------------------------------------------------------------
DATE SIGNATURE TITLE
Sept. 11/97 Vice-President & Secretary
--------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY
Filed
--------------------------
SCHEDULE A
NUMBER AND DESIGNATION OF AND
RIGHTS, PRIVILEGES, RESTRICTIONS AND CONDITIONS
ATTACHING TO THE RETRACTABLE SHARES
The twelfth series of Preference Shares of the Corporation
shall consist of an unlimited number of Preference Shares which shall be
designated as Retractable Shares (hereinafter referred to as the "Retractable
Shares") and which, in addition to the rights, privileges, restrictions and
conditions attached to the Preference Shares as a class, shall have attached
thereto the following rights, privileges, restrictions and conditions:
1. INTERPRETATION
1.1. DEFINITIONS
For the purposes hereof:
(a) "Act" means the Canada Business Corporations Act, as amended,
re-enacted or replaced from time to time;
(b) "Board" means the board of directors of the Corporation, the
Executive Committee thereof or any other committee
contemplated by section 3.2 hereof;
(c) "Business Day" means a day other than Saturday, Sunday or any
other day that is treated as a statutory holiday in the
jurisdiction in which the Corporation's registered office is
located;
(d) "Canadian Dollar Equivalent" means in respect of an amount
expressed in a foreign currency (the "Foreign Currency
Amount") at any date the product obtained by multiplying (A)
the Foreign Currency Amount by (B) the exchange rate for such
foreign currency in effect at 12 o'clock noon (eastern time)
on such date as posted by Canadian Imperial Bank of Commerce
or such other exchange rate on such date for such foreign
currency as may be deemed by the Board to be appropriate for
such purpose;
(e) "Class A Common Shares" means shares of Class A common stock
of Hollinger International Inc., par value U.S. $0.01 per
share, and any other securities into which such shares may be
changed or for which such shares may be exchanged (whether or
not Hollinger International Inc. shall be the issuer of such
other securities) or any other consideration which may be
received by the holders of such shares pursuant to a
recapitalization, reconstruction, reorganization or
reclassification of, or amalgamation, merger, liquidation or
similar transaction affecting, such shares;
-2-
(f) "Common Shares" means the common shares of the Corporation;
(g) "Current Class A Market Price" means in respect of a Class A
Common Share on any date, the Canadian Dollar Equivalent of
the per share closing price (or if no closing price is
recorded, the average of the bid and the ask prices) of Class
A Common Shares on the last full trading day preceding such
date as such price is reported on the NYSE Composite
Transactions Tape, or if the Class A Common Shares are not
listed on the NYSE, such other national, regional or
provincial securities exchange or automated quotation system
upon which the Class A Common Shares are listed or quoted, as
the case may be, as may be selected by the Board for such
purpose; provided, however, that if in the opinion of the
Board the public distribution or trading activity of Class A
Common Shares is inadequate to create a market that reflects
the fair market value of a Class A Common Share then the
Current Class A Market Price shall be determined by the Board
based upon the advice of such qualified independent financial
advisors as the Board may deem to be appropriate, and provided
further that any such selection, opinion or determination by
the Board shall be conclusive and binding;
(h) "Current Value" as at any date means the aggregate Fair Market
Value of all of the assets of the Corporation (including any
refundable tax previously paid by the Corporation which, in
the opinion of the Board, is refundable as at such time) less
the aggregate of:
(i) the maximum amount payable at such date by the
Corporation on its liquidation, dissolution or
winding-up in respect of any outstanding Preference
Shares other than the Retractable Shares; and
(ii) the Corporation's liabilities, including any tax
liabilities that would arise on a sale by the
Corporation of all or substantially all of its assets
which in the opinion of the Board would not be
refundable as at such date;
all as determined by the Board;
(i) "Fair Market Value" as of any date of any asset means:
(i) with respect to shares of Class B common stock of
Hollinger International Inc., the value of that
number of Class A Common Shares into which such
shares are convertible as determined below;
(ii) subject to clause (i) above, with respect to any
security listed and posted on a stock exchange, the
weighted average price at which such security traded
for the 20 trading days immediately preceding such
date (or such lesser period as the Board may
determine from time to time) on the stock exchange on
which the greatest volume of trading in the security
occurred. during such period;
-3-
(iii) subject to clause (i) above, with respect to a
security not listed and posted on a stock exchange
but traded in an over-the-counter market, the
weighted average trading price of such security on
such over-the-counter market for the 20 trading days
preceding such date or such lesser period as the
Board may determine from time to time; and
(iv) for any other asset, the fair market value thereof as
determined by the Board;
(j) "NYSE" means the New York Stock Exchange, Inc.;
(k) "Retractable Shares" means the Retractable Shares of the
Corporation; and
(l) "Retraction Price" on any date shall be 90% of the quotient
obtained by dividing the Current Value on such date by the
total number of Retractable Shares and Common Shares
outstanding on such date.
1.2. HEADINGS
The headings in these share provisions do not affect their
interpretation.
1.3. NUMBER AND GENDER
Words importing the singular include the plural and vice-versa
and words importing gender include all genders.
1.4. DATES
In the event that any date on which any dividend on the
Retractable Shares is payable by the Corporation, or on or by which any other
action is required to be taken by the Corporation or the holders of Retractable
Shares hereunder, is not a Business Day, then such dividend shall be payable, or
such other action shall be required to be taken, on or by the next succeeding
date that is a Business Day.
1.5. CURRENCY
All cash amounts paid by the Corporation in respect of the
Retractable Shares shall be made in Canadian dollars and all references herein
to monetary amounts shall be construed accordingly.
2. DIVIDENDS
The holders of the Retractable Shares shall be entitled to
receive, and the Corporation shall pay thereon, as and when declared by the
board of directors of the Corporation, subject to the insolvency provisions of
applicable law, dividends in equal or equivalent amounts
-4-
per share to any dividends which the board of directors may declare on the
Common Shares from time to time. No dividend on the Common Shares shall be
declared or paid unless an equal or equivalent dividend per share on the
Retractable Shares is contemporaneously declared or paid.
3. RETRACTION RIGHT
3.1. RIGHT OF RETRACTION
A holder of Retractable Shares shall be entitled at any time
after the earlier of December 31,1997 and the date specified by the Corporation
in a notice given in the manner set out in section 3.2(a), subject to the
provisions of the Act and in the manner hereinafter provided, to surrender for
retraction all or any of the Retractable Shares registered in the name of such
holder.
3.2. RETRACTION PRICE
(a) The Board shall determine the Retraction Price as of the end
of each fiscal quarter of the Corporation and as soon as
practicable thereafter the Corporation shall give notice
thereof (a "Retraction Price Notice") in the same manner in
which dividend notices are required to be given by law or any
stock exchange on which the Retractable Shares (or units
comprised in part of Retractable Shares) are listed for
trading from time to time. Subject to the following sentence,
the Retraction Price set out in a Retraction Price Notice
shall be in effect for all retractions subsequent to the date
on which the Retraction Price Notice is given to and including
the date on which the next Retraction Price Notice is given.
Notwithstanding the foregoing, the Board shall have the
absolute discretion to change the Retraction Price at any time
as set out below if fluctuations in the trading price of
publicly-traded securities owned by the Corporation cause a
change of more than 10% in the Current Value during a fiscal
quarter of the Corporation. To effect such a change the
Retraction Price shall be determined as of such date as is
selected by the Board and shall become effective as of the
next Business Day following the date on which a press release
is issued by the Corporation setting out the new Retraction
Price or such later date as is specified in such press
release.
(b) The Corporation shall set out in any Retraction Price Notice
the number and designation of publicly-traded securities owned
by it (other than Class A Common Shares) if fluctuations in
the trading price thereof during a fiscal quarter of the
Corporation could reasonably be expected to cause a change of
more than 10% in the Current Value during the fiscal quarter.
(c) All determinations to be made by the Board relating to the
Retraction Price may be made by the Executive Committee of the
Board of Directors of the Corporation or any other committee
of the Board of Directors to which such authority is delegated
and shall be conclusive and binding on all shareholders of the
Corporation.
-5-
3.3. RETRACTION PROCEDURE
(a) Retractable Shares may be retracted only by the registered
holder thereof presenting and surrendering at any place where
the Retractable Shares may be transferred or at such other
place or places as shall be specified in writing by the
Corporation to the holders of the Retractable Shares from time
to time, the share certificate or certificates representing
the Retractable Shares to be redeemed, duly completed and
endorsed in the manner prescribed thereon, together with a
request in writing in such form as may be acceptable to the
Corporation (in this section 3.3, the "Retraction Notice")
from such holder specifying the number of Retractable Shares
to be redeemed by the Corporation. The date on which a holder
duly tenders the documents described above is referred to
herein as the "Retraction Date."
(b) Subject to sections 3.5.2, 3.6 and Article 4 hereof, the
Corporation shall redeem the appropriate number of Retractable
Shares by sending or causing to be sent to or to the order of
the registered holder thereof not later than 14 days after the
Retraction Date a certificate representing that number of
Class A Common Shares equal to (i) the Retraction Price of the
Retractable Shares to be redeemed divided by (ii) the Current
Class A Market Price on the Retraction Date.
(c) If less than all of the Retractable Shares represented by any
certificate or certificates so endorsed are to be redeemed,
the Corporation shall issue and deliver to such holder, at the
expense of the Corporation, a new share certificate
representing the Retractable Shares which are not being
surrendered for retraction.
3.4. ELECTION IRREVOCABLE
Subject to paragraph 3.6 hereof, the election by any
registered holder of Retractable Shares to surrender any Retractable Shares for
retraction shall be irrevocable upon receipt by the Corporation or its agent of
the Retraction Notice and the certificate and certificates representing the
Retractable Shares to be redeemed; provided that the Corporation may, in its
unfettered discretion, permit withdrawal of any such election at any time prior
to payment of the Retraction Price for the Retractable Shares to be redeemed.
3.5. RELATING TO THE DELIVERY OF CLASS A COMMON SHARES
3.5.1. QUALIFICATION AND LISTING
The Corporation shall satisfy the following
conditions in respect of Class A Common Shares delivered on a
redemption of Retractable Shares:
(a) the qualification of the Class A Common Shares by
the filing of a prospectus and obtaining a final receipt
therefor from the securities regulatory authorities in each of
the provinces of Canada in which the distribution of such
Class A Common Shares occurs, unless there exists an
applicable exemption to
-6-
qualification thereunder that allows such Class A Common
Shares (other than those issued to a person who is in a
position by himself or in combination with others to
materially affect control of the Corporation) to be
immediately traded free of resale restrictions under
applicable securities legislation; and
(b) the effectiveness of a registration statement
under the U.S. Securities Act of 1933 ("U.S. Securities Act")
with respect to the delivery of such Class A Common Shares,
unless an exemption from the registration requirements of the
U.S. Securities Act is available which would allow such Class
A Common Shares to be immediately traded free of resale
restrictions; and
(c) the listing of such Class A Common Shares on each
stock exchange on which the Class A Common Shares are then
listed.
3.5.2. FRACTIONS OF CLASS A COMMON SHARES
The Corporation shall not deliver a fraction of a
Class A Common Share on a redemption of Retractable Shares. In lieu
thereof the Corporation shall make a cash payment equal to the amount
which would have been satisfied by the fraction of the Class A Common
Share.
3.6. RETRACTION LIMITATION
(a) If the redemption by the Corporation of all Retractable Shares
surrendered for retraction on a Retraction Date would be
contrary to applicable law, the Corporation shall redeem only
the maximum number of Retractable Shares which it is then
permitted to redeem selected pro rata (disregarding fractions
of shares) from the Retractable Shares surrendered for
retraction according to the number of Retractable Shares
surrendered for retraction by each holder thereof. Thereupon,
each such holder shall be entitled, by notice to the
Corporation, to withdraw all or part only of the Retractable
Shares surrendered by such holder for retraction on such
Retraction Date which have not been redeemed by the
Corporation and the Corporation shall, at its expense, issue
and deliver to each holder who exercises such right of
withdrawal a new share certificate representing the
Retractable Shares so withdrawn. Thereafter, the Corporation
shall redeem on a date or dates determined by the Board on
which the Corporation shall have sufficient assets to permit
such redemption, the maximum number of Retractable Shares as
have been surrendered for retraction and not previously
withdrawn or redeemed which the Corporation determines it is
then permitted to redeem, selected pro rata (disregarding
fractions of shares) from such Retractable Shares according to
the number of such Retractable Shares then held by each holder
thereof and so on until all such Retractable Shares have been
redeemed.
(b) If the Board has acted in good faith in making any of the
determinations referred to in paragraph 3.6(a) hereof, the
Board and the Corporation shall have no liability if such
determination proves to be inaccurate.
-7-
(c) If the Corporation does not redeem all Retractable Shares
surrendered for retraction on a Retraction Date the
Corporation shall forthwith after such date notify each holder
whose Retractable Shares have not been redeemed on such date
of such holder's right to withdraw the Retractable Shares to
surrendered and not redeemed by the Corporation.
3.7. CESSATION OF RIGHTS
The Retractable Shares redeemed pursuant to this Article 3
shall cease to be entitled to dividends or any participation in the assets of
the Corporation and the registered holder thereof shall not be entitled to
exercise any of the rights of holders of Retractable Shares in respect thereof,
unless payment therefor is not made as required herein, in which event the
rights of the registered holder of such Retractable Shares shall remain
unaffected.
4. REDEMPTION RIGHT ON RECEIPT OF RETRACTION NOTICE
4.1. RIGHT OF REDEMPTION
On receipt of a Retraction Notice duly tendered pursuant to
section 3.3 together with the share certificate or certificates representing
Retractable Shares to be redeemed, the Corporation shall be entitled to redeem
all or any part of such Retractable Shares pursuant to this Article 4 for a cash
payment equal to the Retraction Price per share on the Retraction Date in lieu
of redeeming them in the manner set out in Article 3.
4.2. CASH PAYMENT OF REDEMPTION PRICE
The Corporation shall exercise its redemption right pursuant
to this Article 4 by sending or causing to be sent to or to the order of the
registered holder of Retractable Shares to be redeemed not later than 14 days
after the Retraction Date a cheque payable at any branch of the Corporation's
bankers for the Retraction Price of such shares.
4.3. PRO RATA TREATMENT
The Corporation shall exercise its redemption right pursuant
to this Article 4 so that, subject to section 3.5.2, all holders of Retractable
Shares to be redeemed on any Retraction Date shall receive the same portion of
the Retraction Price payable to them in the form of Class A Common Shares and
cash.
4.4. PROCEDURE
The provisions of sections 3.6 and 3.7 shall apply, mutatis
mutandis, to a redemption of Retractable Shares pursuant to this Article 4.
-8-
5. VOTING RIGHTS
The holders of the Retractable Shares shall be entitled to
receive notice of and to attend at all meetings of the shareholders of the
Corporation, other than separate meetings of the holders of another class or
series of shares, and to vote at any such meeting together with the holders of
Common Shares on the basis of one vote for each Retractable Share held.
6. LIQUIDATION, DISSOLUTION OR WINDING - UP
In the event of the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its shareholders for the purpose
of winding up its affairs, the holders of the Retractable Shares shall be
entitled to receive from the assets of the Corporation an amount for each
Retractable Share held by them equal or equivalent to any amount per share to be
paid or distributed to holders of the Common Shares, the whole before any amount
shall be paid by the Corporation or any assets of the Corporation shall be
distributed to holders of shares of any class of the Corporation ranking with
respect to the distribution of assets in such event junior to the Retractable
Shares. After payment to the holders of the Retractable Shares of the amounts so
payable to them, they shall not be entitled to share in any further distribution
of the assets of the Corporation.
7. AMENDMENT
The rights, privileges, restrictions and conditions attached
to the Retractable Shares may be added to, changed or removed by Articles of
Amendment, but only with the approval of the holders of the Retractable Shares
given as hereinafter specified in addition to any vote or authorization required
by law.
8. APPROVAL OF HOLDERS OF THE RETRACTABLE SHARES
The approval of the holders of the Retractable Shares to add
to, change or remove any right, privilege, restriction or condition attaching to
the Retractable Shares as a series or in respect of any other matter requiring
the consent of the holders of the Retractable Shares may be given in such manner
as may then be required by law, subject to a minimum requirement that such
approval be given by resolution signed by all the holders of the Retractable
Shares or passed by the affirmative vote of at least 2/3 of the votes cast at a
meeting of the holders of the Retractable Shares duly called for that purpose.
The formalities to be observed with respect to the giving of
notice of any such meeting or any adjourned meeting, the quorum required
therefor and the conduct thereof shall be those from time to time prescribed by
the by-laws of the Corporation with respect to meetings of shareholders, or if
not so prescribed, as required by the Act as in force at the time of the meeting
or as otherwise required by law. On every poll taken at every meeting of holders
of Retractable Shares as a series, each holder of Retractable Shares entitled to
vote thereat shall have one vote in respect of each Retractable Share held.
Exhibit 1.1 f
[CANADA LETTERHEAD] Industry Canada Industrie Canada
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
HOLLINGER INC. 197578-1
----------------------------------------------------------------- ----------------------------------------------------------
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the above-named corporation Je certifie que les statuts de la societe susmentionnee
were amended ont ete modifies :
(a) under section 13 of the Canada Business Corporations Act in [ ] a) en vertu de l'article 13 de la Loi canadienne sur les
accordance with the attached notice; societes par actions, conformement a l'avis ci-joint;
(b) under section 27 of the Canada Business Corporations Act as [x] b) en vertu de l'article 27 de la Loi canadienne sur les
set out in the attached articles of amendment designating a societes par actions, tel qu'il est indique dans les
series of shares; clauses modificatrices ci-jointes designant une serie
d'actions;
(c) under section 179 of the Canada Business Corporations Act as [ ] c) en vertu de l'article 179 de la Loi canadienne sur les
set out in the attached articles of amendment; societes par actions, tel qu'il est indique dans les
clauses modificatrices ci-jointes;
(d) under section 191 of the Canada Business Corporations Act as [ ] d) en vertu de l'article 191 de la Loi canadienne sur les
set out in the attached articles of reorganization. societes par actions, tel qu'il est indique dans les
clauses de reorganisation ci-jointes.
NOVEMBER 7, 1997/LE 7 NOVEMBRE 1997
Director - Directeur Date of Amendment - Date de modification
Canada
[CANADA LETTERHEAD]
FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
--------------------------------------------------------------------------------
1 - NAME OF CORPORATION 2 - CORPORATION NO.
HOLLINGER INC. 197578-1
--------------------------------------------------------------------------------
3 - THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
The certificate and articles of the Corporation are amended to create the
thirteenth series of Preference Shares, unlimited in number, to be
designated Series I Exchangeable Non-Voting Preference Shares, and the
fourteenth series of Preference Shares, unlimited in number, to be
designated Series II Exchangeable Non-Voting Preference Shares, and to have
attached thereto the rights, privileges, restrictions and conditions set
forth in annexed Schedule A.
DATE SIGNATURE TITLE
November 7, 1997 Vice-President & Secretary
--------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY
Filed
--------------------------
SCHEDULE A
NUMBER AND DESIGNATION OF
AND RIGHTS, PRIVILEGES, RESTRICTIONS
AND CONDITIONS ATTACHING TO
THE SERIES I PREFERENCE SHARES
The thirteenth series of Preference Shares of the Corporation
shall consist of an unlimited number of Preference Shares which shall be
designated as Exchangeable Non-Voting Preference Shares Series I (hereinafter
referred to as the "Series I Preference Shares") and which, in addition to the
rights, privileges, restrictions and conditions attached to the Preference
Shares as a class, shall have attached thereto the following rights, privileges,
restrictions and conditions:
1. CONSIDERATION FOR ISSUE
1.1. The consideration for the issue of each Series I Preference
Share shall be $4.00.
2. INTERPRETATION
2.1. DEFINITIONS
For the purpose hereof:
(a) "Act" means the Canada Business Corporations Act, as amended,
re-enacted or replaced from time to time;
(b) "Board" means the board of directors of the Corporation or the
Executive Committee thereof;
(c) "Business Day" means a day other than Saturday, Sunday or any
other day that is treated as a statutory holiday in the
jurisdiction in which the Corporation's registered office is
located;
(d) "Canadian Dollar Equivalent" means in respect of an amount
expressed in a foreign currency (the "Foreign Currency
Amount") at any date the product obtained by multiplying (A)
the Foreign Currency Amount by (B) the exchange rate for such
foreign currency in effect at 12 o'clock noon (eastern time)
on such date as posted by Canadian Imperial Bank of Commerce
or, in the event such exchange rate is not available, such
exchange rate on such date for such foreign currency as may be
deemed by the Board to be appropriate for such purpose;
- 2 -
(e) "Class A Common Shares" means shares of Class A common stock
of Hollinger International Inc., par value U.S. $0.01 per
share, and any other securities into which such shares may be
changed or for which such shares may be exchanged (whether or
not Hollinger International shall be the issuer of such other
securities) or any other consideration which may be received
by the holders of such shares pursuant to a recapitalization,
reconstruction, reorganization or reclassification of, or
amalgamation, merger, liquidation or similar transaction
affecting, such shares;
(f) "Current Class A Market Price" means in respect of a Class A
Common Share on any date, the Canadian Dollar Equivalent of
the per share closing price (or if no closing price is
recorded, the average of the bid and the ask prices) of Class
A Common Shares on the last full trading day preceding such
date as such price is reported on the NYSE Composite
Transactions Tape, or if the Class A Common Shares are not
listed on the NYSE, such other national, regional or
provincial securities exchange or automated quotation system
upon which the Class A Common Shares are listed or quoted, as
the case may be, as may be selected by the Board for such
purpose; provided, however, that if in the opinion of the
Board the public distribution or trading activity of Class A
Common Shares is inadequate to create a market that reflects
the fair market value of a Class A Common Share then the
Current Class A Market Price shall be determined by the Board
based upon the advice of such qualified independent financial
advisors as the Board may deem to be appropriate, and provided
further that any such selection, opinion or determination by
the Board shall be conclusive and binding;
(g) "Determination Date" means the fifth Business Day prior to the
Initial Period Expiry Date;
(h) "Dividend Amount" means, as at any date, an amount equal to
the full amount of all dividends and distributions declared
and unpaid on each Series I Preference Share and all dividends
and distributions declared on a Class A Common Share in
respect of which a dividend has not been declared on each
Series I Preference Share in accordance with section 3.1.2, in
each case with a record date prior to such date;
(i) "Exchange Price" means an amount per Series I Preference Share
surrendered for retraction pursuant to section 5.2 equal to
(i) the Current Class A Market Price on the Retraction Date of
the Exchange Number of Class A Common Shares plus (ii) the
Dividend Amount, if any, on the Retraction Date;
(j) "Exchange Number" means, subject to adjustment from time to
time in accordance with sections 5.8 and 5.9, the result
obtained when $4.00 is divided by (A) if the Initial Period
Expiry Date is May 6, 1998, the weighted average trading
price of the Class A Common Shares on the NYSE for the 20
consecutive trading days (whether or not Class A Common Shares
traded on such day) ending on (and
- 3 -
including) the Determination Date and (B) if the Initial
Period Expiry Date is prior to May 6, 1998, the lesser of (i)
the weighted average trading price of the Class A Common
Shares on the NYSE for the 20 consecutive trading days
(whether or not Class A Common Shares traded on such day)
ending on (and including) the Determination Date and (ii) the
weighted average trading price of the Class A Common Shares on
the NYSE on the Determination Date, provided that if the Class
A Common Shares are not listed on the NYSE on the relevant
date(s), the weighted average trading prices referred to above
shall be calculated using trading prices on any stock exchange
on which such shares are listed as the Board may select for
this purpose, or if such shares are not listed on any stock
exchange, in such over-the-counter market as the Board may
select for such purpose;
(k) "HII Dividend Declaration Date" means the date on which the
Board of Directors of Hollinger International declares any
dividend or distribution on the Class A Common Shares;
(l) "Hollinger International Capital Reorganization" has the
meaning set out in section 5.8.3;
(m) "Hollinger International" means Hollinger International Inc.,
a Delaware corporation;
(n) "Initial Period" means the period from the date of initial
issue of the Series I Preference Shares to and including the
Initial Period Expiry Date;
(o) "Initial Period Expiry Date" means May 6, 1998 unless the
Board elects pursuant to section 2.2 to select an earlier date
in which case the Initial Period Expiry Date shall be such
earlier date;
(p) "Initial Retraction Price" has the meaning set out in section
5.1;
(q) "junior share" means a share of the Corporation ranking junior
to the Series I Preference Shares with respect to the payment
of dividends or the distribution of assets in the event of the
liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
(r) "Liquidation Event" has the meaning set out in section 8.1;
(s) "Liquidation Price" has the meaning set out in section 8.1;
(t) "NYSE" means the New York Stock Exchange;
- 4 -
(u) "ranking as to capital" means ranking with respect to the
distribution of assets in the event of a liquidation,
dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
(v) "Retraction Date" means any Business Day on which the
documents specified in section 5.3(a) are duly tendered by a
holder of Series I Preference Shares in respect of the
exercise of his or her retraction right pursuant to Article 5;
and
(w) "Retraction Notice" has the meaning set out in section 5.3(a).
2.2. ELECTION TO SHORTEN THE INITIAL PERIOD
The Board shall be entitled to select a date prior to May 6,
1998 as the Initial Period Expiry Date. If the Board elects to do so then at
least three Business Days prior to the Initial Period Expiry Date, the
Corporation shall issue a press release and on or before the Initial Period
Expiry Date the Corporation shall send by prepaid first class mail or deliver a
notice to all holders of Series I Preference Shares each of which shall set out
the Determination Date, the Initial Period Expiry Date and the Exchange Number
as of the Initial Period Expiry Date. If the Corporation intends to exercise its
redemption right pursuant to section 4.1 such press release and notice shall
also set out the information contemplated by section 4.1.2.
2.3. DATES
In the event that any date on which any dividend on the Series
I Preference Shares is payable by the Corporation, or on or by which any other
action is required to be taken by the Corporation or the holders of Series I
Preference Shares hereunder, is not a Business Day, then such dividend shall be
payable, or such other action shall be required to be taken, on or by the next
succeeding date that is a Business Day.
2.4. CURRENCY
All cash amounts paid by the Corporation in respect of the
Series I Preference Shares shall be made in Canadian dollars and all references
herein to monetary amounts shall be construed accordingly.
For greater certainty, the determination of (i) Dividend
Amount and (ii) Exchange Number, shall be based on, respectively, (i) the
Canadian Dollar Equivalent on the payment date thereof of dividends and
distributions declared on Class A Common Shares and (ii) the Canadian Dollar
Equivalent on the Determination Date of the relevant weighted average trading
price of the Class A Common Shares.
- 5 -
3. DIVIDENDS
3.1. PAYMENT OF DIVIDENDS
The holders of the Series I Preference Shares shall be
entitled to receive, and the Corporation shall pay thereon, as and when declared
by the Board, subject to the insolvency provisions of applicable law, cumulative
preferential cash dividends payable in lawful money of Canada as follows:
3.1.1. during the Initial Period, a fixed dividend of 7.00% per annum
of the issue price of $4.00 per share payable quarterly on each third
month anniversary of November 6, 1997; and
3.1.2. after the Initial Period, a dividend per share as follows:
(a) in the case of a cash dividend or distribution on
Class A Common Shares having a record date after the
Determination Date, in an amount in cash per Series I
Preference Share equal to the product of (i) the
Canadian Dollar Equivalent on the payment date
thereof of such cash dividend or distribution on each
Class A Common Share less any United States
withholding tax thereon payable by the Corporation or
any subsidiary thereof and (ii) the Exchange Number
as of the HII Dividend Declaration Date;
(b) in the case of a stock dividend or distribution
declared on a Class A Common Share to be paid in
Class A Common Shares having a record date after the
Determination Date in respect of which an adjustment
is not made pursuant to section 5.8, in that number
of Series I Preference Shares for each Series I
Preference Share equal to the product of (i) the
number of Class A Common Shares to be paid on each
Class A Common Share less any United States
withholding tax thereon payable by the Corporation or
any subsidiary thereof and (ii) the Exchange Number
as of the HII Dividend Declaration Date; or
(c) in the case of a dividend or distribution on the
Class A Common Shares to be paid in property other
than cash or Class A Common Shares, having a record
date after the Determination Date in respect of which
an adjustment is not made pursuant to section 5.8, in
such type and amount of property for each Series I
Preference Share as is the same as or economically
equivalent to (to be determined by the Board) the
type and amount of property declared as a dividend or
distribution on the Exchange Number (as of the HII
Dividend Declaration Date) of Class A Common Shares
less
- 6 -
any United States withholding tax thereon payable by
the Corporation or any subsidiary thereof.
For any period during the Initial Period which is less than a full
quarter with respect to any Series I Preference Share which is redeemed
or in respect of which assets of the Corporation are distributed to the
holders thereof pursuant to Article 8 during such quarter, dividends
shall be deemed to accrue on a daily basis and shall be equal to the
amount calculated by multiplying $0.28 by a fraction of which the
numerator is the number of days in such period and the denominator is
365.
3.2. METHOD OF PAYMENT
(a) Cheques payable in lawful money of Canada at any branch in
Canada of the Corporation's bankers shall be issued in respect
of any cash dividends or distributions on the Series I
Preference Shares (less any tax required to be withheld by the
Corporation). The mailing, by prepaid first class mail, of
such a cheque to a holder of Series I Preference Shares, shall
be deemed to be payment of the dividends represented thereby
unless the cheque is not paid upon presentation. Dividends
which are represented by a cheque which has not been presented
to the Corporation's bankers for payment or that otherwise
remain unclaimed for a period of six years from the date on
which they were declared to be payable shall be forfeited to
the Corporation.
(b) Certificates registered in the name of the registered holder
of Series I Preference Shares shall be issued or transferred
in respect of any stock dividends or other distribution on
Series I Preference Shares contemplated by section 3.2(b)
hereof and the sending of such a certificate to each-holder of
a Series I Preference Share shall satisfy the stock dividend
or other distribution of Series I Preference Shares
represented thereby.
(c) Such other type and amount of property in respect of any
dividends or distributions contemplated by section 3.2(c)
hereof shall be issued, distributed or transferred by the.
Corporation in such manner as it shall determine and the
issuance, distribution or transfer thereof by the Corporation
to each holder of a Series I Preference Share shall satisfy
the dividend or distribution represented thereby.
(d) Notwithstanding anything to the contrary herein the
Corporation shall pay to any shareholder whose latest address
as shown on the books of the Corporation is not in Canada all
dividends in United States dollars unless any such shareholder
requests payment in Canadian dollars. Any such payment in
United States dollars shall be in an amount equivalent to the
amount otherwise payable in Canadian
- 7 -
dollars converted to United States dollars at the Bank of
Canada noon rate of exchange on the applicable dividend
record date.
3.3. RECORD AND PAYMENT DATES
The record date for the determination of the holders of Series
I Preference Shares entitled to receive payment of, and the payment date for,
any dividend or distribution declared on the Series I Preference Shares under
section 3.1.2 hereof shall be the same as the record date and payment date,
respectively, for the corresponding dividend or distribution on the Class A
Common Shares.
3.4. PARTIAL PAYMENT
If on any payment date for any dividends or distributions
declared on the Series I Preference Shares under section 3.1 hereof the
dividends or distributions are not paid in full on all of the Series I
Preference Shares then outstanding, any such dividends or distributions that
remain unpaid shall be paid on a subsequent date or dates determined by the
Board on which the Corporation shall have sufficient money or other assets
properly applicable to the payment of such dividends or distributions.
4. REDEMPTION
4.1. OPTIONAL REDEMPTION AT END OF INITIAL PERIOD
4.1.1. On the 30th day following the Initial Period Expiry Date (the
"Redemption Date"), subject to the provisions of the Act, this Article
4 and to the rights, privileges, restrictions and conditions attaching
to any shares of the Corporation ranking prior to the Series I
Preference Shares, the Corporation may, upon giving notice as
hereinafter provided, redeem all or any part of the then outstanding
Series I Preference Shares on payment for each share to be redeemed of
$4.00 together with an amount equal to all dividends accrued and unpaid
thereon up to the Redemption Date (the whole constituting and being
herein referred to as the "Redemption Price"). In the case of a
redemption of less than all of the Series I. Preference Shares pursuant
to this section 4.1 the Corporation shall redeem as nearly as
practicable the same portion of Series I Preference Shares held by each
holder.
4.1.2. In case of redemption of Series I Preference Shares pursuant
to section 4.1, at least three Business Days prior to the Initial
Period Expiry Date the Corporation shall issue a press release and on
or before the Initial Period Expiry Date the Corporation shall send by
prepaid first class mail or deliver a notice to each person who at the
date of mailing or delivery is a holder of Series I Preference Shares
each of which shall state that the Corporation intends to redeem Series
I Preference Shares pursuant to this section 4.1 and set out the
Redemption Price and Redemption Date. Such notice shall be mailed or
- 8 -
delivered to each holder of Series I Preference Shares to be redeemed
at the last address of such holder as it appears on the securities
register of the Corporation, or in the event of the address of any such
holder not so appearing, then to the last address of such holder known
to the Corporation. Accidental failure or omission to give such notice
to one or more holders shall not affect the validity of such
redemption, but if such failure or omission is discovered notice as
aforesaid shall be given forthwith to such holder or holders and shall
have the same force and effect as if given in due time. The press
release shall also set out the portion of Series I Preference Shares to
be redeemed and the notice shall also set out the number of Series I
Preference Shares held by the person to whom it is addressed which are
to be redeemed and the place or places in Canada at which holders of
Series I Preference Shares may present and surrender the certificate or
certificates representing such shares for redemption.
On and after the Initial Period Expiry Date, the
Corporation shall pay or cause to be paid to or to the order of the
holders of the Series I Preference Shares to be redeemed the Redemption
Price of such shares on presentation and surrender, at the registered
office of the Corporation or any other place or places in Canada
specified in the notice of redemption, of the certificate or
certificates representing the Series I Preference Shares called for
redemption. Payment in respect of Series I Preference Shares being
redeemed shall be made by cheque payable to the respective holders
thereof in lawful money of Canada at any branch in Canada of the
Corporation's bankers. If a part only of the Series I Preference Shares
represented by any certificate shall be redeemed, a new certificate
representing the balance of such shares shall be issued to the holder
thereof at the expense of the Corporation upon presentation and
surrender of the first mentioned certificate.
The Corporation shall have the right, at any time
after the mailing or delivery of notice of its intention to redeem
Series I Preference Shares, to deposit the Redemption Price of the
Series I Preference Shares so called for redemption, or of such of the
Series I Preference Shares which are represented by certificates which
have not, at the date of such deposit, been surrendered by the holders
thereof in connection with such redemption, in a separate account in
any chartered bank or trust company in Canada named in the redemption
notice or in a subsequent notice in writing to the holders of the
Series I Preference Shares in respect of which the deposit is made, to
be paid without interest to or to the order of the respective holders
of the Series I Preference Shares called for redemption upon
presentation and surrender to such bank or trust company of the
certificates representing such shares. Upon such deposit being made or
upon the Redemption Date, whichever is the later, the Series I
Preference Shares in respect of which such deposit shall have been made
shall be deemed to be redeemed and the rights of the holders thereof
shall be limited to receiving, without interest, the Redemption Price
of their respective Series I Preference Shares being redeemed upon
presentation and surrender of the certificate or certificates
representing such shares. Any interest allowed on any such deposit
shall belong to the Corporation.
- 9 -
4.2. OPTIONAL REDEMPTION RIGHT ON RECEIPT OF RETRACTION NOTICE
4.2.1. On receipt of a Retraction Notice in respect of Series I
Preference Shares duly tendered pursuant to section 5.3, the
Corporation shall be entitled to redeem all or any part of such Series
I Preference Shares for a cash payment equal to the Initial Retraction
Price or Exchange Price, as applicable. The Corporation shall exercise
this redemption right by sending or causing to be sent by prepaid first
class mail or delivering to the registered holder of Series I
Preference Shares to be redeemed not later than five days after the
Retraction Date a notice that the Corporation will redeem that number
of Series I Preference Shares specified in such notice pursuant to this
section 4.2.
4.2.2. The Corporation shall exercise this redemption right so that,
subject to rules applicable to fractional shares, all holders of Series
I Preference Shares to be redeemed on any date shall receive the same
portion of the Initial Retraction Price or Exchange Price, as
applicable, payable to them in the form of Class A Common Shares and
cash.
4.2.3. The Corporation shall redeem Series I Preference Shares
pursuant to this section 4.2 by sending or causing to be sent to or to
the order of the registered holder thereof not later than 14 days after
the Retraction Date a cheque payable at any branch of the Corporation's
bankers for the Initial Retraction Price or Exchange Price, as
applicable, of such shares.
4.3. CESSATION OF RIGHTS
Series I Preference Shares redeemed pursuant to this Article
4 shall cease to be entitled to dividends or any other participation in any
distribution of the assets of the Corporation and the holders thereof shall not
be entitled to exercise any of their other rights as shareholders in respect
thereof unless the payment to be made on redemption shall not be made as
required in which case the rights of the holders shall remain unaffected.
Redemption moneys which are represented by a cheque which has not been presented
to the Corporation's bankers for payment or that otherwise remain unclaimed
(including moneys held on deposit in a separate account as provided for above)
for a period of six years from the date specified for redemption shall be
forfeited to the Corporation.
5. RETRACTION RIGHTS
5.1. RIGHT OF RETRACTION DURING INITIAL PERIOD
At any time during the Initial Period a holder of Series I
Preference Shares shall be entitled, subject to the provisions of the Act and in
the manner hereinafter provided, to require the Corporation to redeem all or any
of the Series I Preference Shares registered in the name of such holder in
consideration for the transfer to such holder of that number of Class A Common
Shares for each Series I Preference Share to be redeemed equal to (i) $3.50 plus
accrued and
- 10 -
unpaid dividends per Series I Preference Share to and including the Retraction
Date (the "Initial Retraction Price") divided by (ii) the Current Class A Market
Price on the Retraction Date.
5.2. RIGHT OF RETRACTION AFTER INITIAL PERIOD
At any time after the Initial Period, a holder of Series I
Preference Shares shall be entitled, subject to the provisions of the Act and in
the manner hereinafter provided, to require the Corporation to redeem all or any
of the Series I Preference Shares registered in the name of the holder in
consideration for the transfer to such holder of that fraction or number of
Class A Common Shares for each Series I Preference Share to be redeemed equal to
(i) the Exchange Number in effect on the Retraction Date plus (ii) the quotient
obtained when the Dividend Amount, if any, as of the date of transfer of such
Class A Common Shares to such holder on the Hollinger International register is
divided by the Current Class A Market Price on such date.
5.3. RETRACTION PROCEDURE
(a) Series I Preference Shares may be retracted only by the
registered holder thereof presenting and surrendering to the
Corporation, at any place where the Series I Preference Shares
may be transferred or at such other place or places as shall
be specified in writing by the Corporation to the holders of
the Series I Preference Shares from time to time, the share
certificate or certificates representing the Series I
Preference Shares to be redeemed, duly completed and endorsed
in the manner prescribed thereon, together with a request in
writing in such form as may be acceptable to the Corporation
(in this section 5.3, the "Retraction Notice") from such
holder specifying the number of Series I Preference Shares to
be redeemed by the Corporation.
(b) Subject to sections 4.2 and 5.6 hereof, the Corporation shall
redeem the appropriate number of Series I Preference Shares by
sending or causing to be sent to or to the order of the
registered holder thereof not later than 14 days after the
Retraction Date a certificate representing that number of
Class A Common Shares to which the holder is entitled.
(c) If less than all of the Series I Preference Shares represented
by any certificate or certificates so endorsed are to be
redeemed, the Corporation shall issue and deliver to such
holder, at the expense of the Corporation, a new share
certificate representing the Series I Preference Shares which
are not being surrendered for retraction.
5.4. ELECTION IRREVOCABLE
Subject to paragraph 5.6 hereof, the election by a registered
holder of Series I Preference Shares to surrender any Series I Preference Shares
for retraction shall be irrevocable
- 11 -
upon receipt by the Corporation at its registered office of the Retraction
Notice and the certificate or certificates representing the Series I Preference
Shares to be redeemed; provided that the Corporation may, in its unfettered
discretion, permit withdrawal of any such election at any time prior to payment
of the Initial Retraction Price for the Series I Preference Shares to be
redeemed:
5.5. RELATING TO THE DELIVERY OF CLASS A COMMON SHARES
5.5.1. QUALIFICATION AND LISTING
The Corporation shall satisfy the following conditions in respect of
Class A Common Shares delivered on a redemption of Series I Preference
Shares:
(a) the qualification of the Class A Common Shares by the
filing of a prospectus and obtaining a final receipt
therefor from the securities regulatory authorities
in each of the provinces of Canada in which the
distribution of such Class A Common Shares occurs,
unless there exists an applicable exemption to
qualification thereunder that allows such Class A
Common Shares (other than those issued to a person
who is in a position by himself or in combination
with others to materially affect control of the
Corporation) to be immediately traded free of resale
restrictions under applicable securities legislation;
and
(b) the effectiveness of a registration statement under
the U.S. Securities Act of 1933 ("U.S. Securities
Act") with respect to the delivery of such Class A
Common Shares, unless an exemption from the
registration requirements of the U.S. Securities Act
is available which would allow such Class A Common
Shares to be immediately traded free of resale
restrictions; and
(c) the listing of such Class A Common Shares on each
stock exchange on which the Class A Common Shares are
then listed.
5.5.2. FRACTIONS OF CLASS A COMMON SHARES
The Corporation shall not deliver a fraction of a
Class A Common Share on redemption of Series I Preference Shares. In
lieu thereof, the Corporation shall make a cash payment equal to the
amount which would have been satisfied by the fraction of the Class A
Common Share.
- 12 -
5.6. RETRACTION LIMITATION
(a) If the redemption by the Corporation of all Series I
Preference Shares surrendered for retraction on a Retraction
Date would be contrary to applicable law, the Corporation
shall redeem only the maximum number of Series I Preference
Shares which it is then permitted to redeem selected pro rata
(disregarding fractions of shares) from the Series I
Preference Shares surrendered for retraction according to the
number of Series I Preference Shares surrendered for
retraction by each holder thereof. Thereupon, each such holder
shall be entitled, by notice to the Corporation to withdraw
all or part only of the Series I Preference Shares surrendered
by such holder for retraction on such Retraction Date which
have not been redeemed by the Corporation and the Corporation
shall, at its expense, issue and deliver to each holder who
exercises such right of withdrawal a new share certificate
representing the Series I Preference Shares so withdrawn.
Thereafter, the Corporation shall redeem on a date or dates
determined by the Board on which the Corporation shall have
sufficient assets to permit such redemption, the maximum
number of Series I Preference Shares as have been surrendered
for retraction and not withdrawn or redeemed which the
Corporation determines it is then permitted to redeem,
selected pro rata (disregarding fractions of shares) from such
Series I Preference Shares according to the number of such
Series I Preference Shares then held by each holder thereof
and so on until all such Series I Preference Shares have been
redeemed.
(b) If the Board has acted in good faith in making any of the
determinations referred to in paragraph 5.6(a) hereof, the
Board and the Corporation shall have no liability if such
determination proves to be inaccurate.
(c) If the Corporation does not redeem all Series I Preference
Shares surrendered for retraction on a Retraction Date the
Corporation shall forthwith after such date notify each holder
whose Series I Preference Shares have not been redeemed on
such date of such holder's right to withdraw the Series I
Preference Shares surrendered and not redeemed by the
Corporation.
5.7. CESSATION OF RIGHTS
Series I Preference Shares redeemed pursuant to this Article
5 shall cease to be entitled to dividends or any other participation in any
distribution of the assets of the Corporation and the holders thereof shall not
be entitled to exercise any of their other rights as shareholders in respect
thereof as of the date on which Class A Common Shares deliverable to them on
redemption are transferred to them on the Hollinger International register.
- 13 -
5.8. CHANGES AFFECTING THE CLASS A COMMON SHARES
5.8.1. If and whenever at any time after the Determination Date,
Hollinger International:
(a) subdivides its outstanding Class A Common
Shares into a greater number of Class A
Common Shares (including by way of a stock
dividend which the Board decides to treat as
a subdivision); or
(b) consolidates its outstanding Class A Common
Shares into a smaller number of Class A
Common Shares,
then the Exchange Number will be adjusted effective
immediately after the effective date or record date for such
event by multiplying the Exchange Number in effect immediately
prior to such effective date or record date by a fraction, the
numerator of which will be the number of Class A Common Shares
outstanding immediately after giving effect to such event and
the denominator of which will be the number of Class A Common
Shares outstanding on such effective date or record date
before giving effect to such event.
5.8.2. If and whenever at any time after the date hereof, there is a
reclassification of the Class A Common Shares at any time outstanding
or change of the Class A Common Shares into other shares or into other
securities or other capital reorganization (other than an event
described in section 5.8.1), or a consolidation, amalgamation,
arrangement or merger of Hollinger International with or into any other
corporation or other entity (other than a consolidation, amalgamation,
arrangement or merger which does not result in any reclassification of
the outstanding Class A Common Shares or a change of the Class A Common
Shares into other shares), or a transfer of the undertaking or assets
of Hollinger International as an entirety or substantially as an
entirety to another corporation or other entity in which the holders of
Class A Common Shares are entitled to receive shares, other securities
or other property (any of such events being called an "Hollinger
International Capital Reorganization"), a holder of Series I Preference
Shares will be entitled to receive on exercise of his or her retraction
right pursuant to section 5.2, and shall accept in lieu of Class A
Common Shares, the aggregate number of shares, other securities or
other property which such holder would have been entitled to receive as
a result of such Hollinger International Capital Reorganization if, on
the effective date thereof, the holder had been the registered holder
of the number of Class A Common Shares which such holder would have
received if the Retraction Date were immediately prior to such
effective date, subject in all such cases, to the Corporation's right
to redeem Series I Preference Shares pursuant to section 4.2. If
determined appropriate by the Board, appropriate adjustments will be
made as a result of any such Hollinger International Capital
Reorganization in the application of the provisions set forth in this
Article with respect to the rights and interests thereafter of holders
of Series I Preference Shares to the end that the provisions set forth
in this Article will thereafter
- 14 -
correspondingly be made applicable as nearly as may reasonably be in
relation to any shares, other securities or other property thereafter
deliverable upon the exercise of any Series I Preference Shares.
5.8.3. If and whenever at any time after the date hereof Hollinger
International takes any action affecting the Class A Common Shares
other than an action described in sections 3.1.2, 5.8.1 or 5.8.2 which
in the opinion of the Board would materially affect the rights of the
holders of Series I Preference Shares, the Exchange Number or other
terms of Article 5 will be adjusted in such manner, if any, and at such
time, by action by the Board, in their sole discretion, as they may
determine to be equitable in the circumstances, but subject in all
cases to any necessary regulatory approvals, including any approval
required by any stock exchange on which the Series I Preference Shares
may be listed. Failure of the taking of action by the Board so as to
provide for an adjustment on or prior to the effective date of any such
action will be conclusive evidence that the Board have determined that
it is equitable to make no adjustment in the circumstances.
5.9. RULES APPLICABLE TO ADJUSTMENTS
For the purposes of section 5.8:
5.9.1. The adjustments provided for in section 5.8 are cumulative and
will be made successively whenever an event referred to therein occurs,
subject to the following subsections of this section.
5.9.2. No adjustment of the Exchange Number will be required unless
such adjustment would result in a change of at least 1%; provided,
however, that any adjustments which, except for the provisions of this
subsection would otherwise have been required to be made, will be
carried forward and taken into account in any subsequent adjustment.
5.9.3. If at any time a dispute arises with respect to adjustments
such dispute will be conclusively determined by the Corporation's
auditors or if they are unable or unwilling to act, by such other firm
of independent chartered accountants as may be selected by action by
the Board and any such determination will be binding upon the
Corporation and the holders of Series I Preference Shares; such
auditors or accountants will be given access to all necessary records
of the Corporation.
5.9.4. If Hollinger International sets a record date to determine the
holders of Class A Common Shares to take any action and thereafter and
before the taking of such action, legally abandons its plan to take
such other action, then no adjustment will be required by reason of the
setting of such record date.
- 15 -
5.9.5. No adjustment need be made for a transaction referred to in
section 5.8 if holders of Series I Preference Shares participate in the
transaction on a basis and with notice that the Board determines to be
fair and appropriate in the circumstances.
6. VOTING RIGHTS
6.1. Except as herein referred to or as required by law, the
holders of the Series I Preference Shares as a series shall not be entitled as
such to receive notice of, to attend or to vote at any meeting of the
shareholders of the Corporation.
7. RESTRICTIONS ON DIVIDENDS AND RETIREMENT OF SHARES
7.1. So long as any of the Series I Preference Shares are
outstanding, the Corporation shall not, without the approval of the holders of
the Series I Preference Shares given as hereinafter specified:
7.1.1. declare, pay or set apart for payment any dividends on any
junior shares (other than dividends payable in shares of the
Corporation ranking as to capital and dividends junior to the Series I
Preference Shares);
7.1.2. call for redemption, redeem, purchase or otherwise pay off or
retire for value, or make any capital distributions in respect of, any
junior shares;
7.1.3. except in connection with the redemption of Series I
Preference Shares pursuant to Articles 4 or 5, call for redemption,
redeem, purchase or otherwise pay off or retire for value, or make any
capital distribution in respect of, less than all of the Series I
Preference Shares;
7.1.4. call for redemption, redeem, purchase or otherwise pay off or
retire for value, or make any capital distribution in respect of, any
shares ranking as to capital or dividends on a parity with the Series I
Preference Shares except in connection with the retirement thereof
pursuant to a retraction privilege attaching thereto or a redemption
right exercisable upon a retraction; or
7.1.5. issue any shares ranking as to capital or dividends prior to
or on a parity with the Series I Preference Shares;
unless, in each such case, (i) all dividends on the Series I Preference Shares
then outstanding and on all other shares of the Corporation ranking as to
dividends prior to or on a parity with the Series I Preference Shares which have
accrued up to and including the dividends payable on the immediately preceding
respective date or dates for the payment of dividends thereon shall have
- 16 -
been declared and paid or set apart for payment, (ii) the Corporation shall have
redeemed all of the Series I Preference Shares tendered for redemption pursuant
to Article 5, and (iii) the Corporation is not otherwise in default under the
rights, privileges, restrictions and conditions attached to the Series I
Preference Shares or any other shares of the Corporation ranking as to dividends
or as to capital prior to or on a parity with the Series I Preference Shares.
8. LIQUIDATION, DISSOLUTION OR WINDING-UP
8.1. In the event of the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its shareholders for the purpose
of winding up its affairs (any such event being herein referred to as a
"Liquidation Event"), the holders of the Series I Preference Shares shall be
entitled to receive from the assets of the Corporation the following amount:
(a) if the Liquidation Event occurs during the Initial Period, a
sum equal to $4.00 for each Series I Preference Share held by
them respectively, plus an amount equal to all dividends
accrued and unpaid thereon up to the date of payment; and
(b) if the Liquidation Event occurs after the Initial Period, an
amount per share equal to (i) the Current Class A Market Price
on the date of the Liquidation Event of the Exchange Number of
Class A Common Shares (the "Liquidation Price") which shall be
satisfied in full by the Corporation causing to be delivered
to such holder the Exchange Number of Class A Common Shares
for each Series I Preference Share or, at the option of the
Corporation, by payment in lawful money of Canada of the
Liquidation Price, plus (ii) the Dividend Amount, if any, on
the date of transfer of such Class A Common Shares to such
holder.
The whole of such amounts shall be paid before any amount shall be paid by the
Corporation or any assets of the Corporation shall be distributed to holders of
shares of any class of the Corporation ranking as to capital junior to the
Series I Preference Shares. After payment to the holders of the Series I
Preference Shares of the amounts so payable to them, they shall not be entitled
to share in any further distribution of the assets of the Corporation.
9. AMENDMENT
9.1. The rights, privileges, restrictions and conditions attached
to the Series I Preference Shares may be added to, changed or removed by
Articles of Amendment, but only with the approval of the holders of the Series I
Preference Shares given as hereinafter specified in addition to any vote or
authorization required by law.
- 17 -
10. APPROVAL OF HOLDERS OF THE SERIES I PREFERENCE SHARES
10.1. The approval of the holders of the Series I Preference Shares
to add to, change or remove any right, privilege, restriction or condition
attaching to the Series I Preference Shares as a series or in respect of any
other matter requiring the consent of the holders of the Series I Preference
Shares may be given in such manner as may then be required by law, subject to a
minimum requirement that such approval be given by resolution signed by all the
holders of the Series I Preference Shares or passed by the affirmative vote of
at least 2/3 of the votes cast at a meeting of the holders of the Series I
Preference Shares duly called for that purpose.
The formalities to be observed with respect to the giving of
notice of any such meeting or any adjourned meeting, the quorum required
therefor and the conduct thereof shall be those from time to time prescribed by
the by-laws of the Corporation with respect to meetings of shareholders or if
not so prescribed, as required by the Act in force at the time of the meeting or
as otherwise required by law. On every poll taken at every meeting of holders of
Series I Preference Shares as a series, each holder of Series I Preference
Shares entitled to vote thereat shall have one vote in respect of each Series I
Preference Share held.
- 18 -
NUMBER AND DESIGNATION OF
AND RIGHTS, PRIVILEGES, RESTRICTIONS
AND CONDITIONS ATTACHING TO
THE SERIES II PREFERENCE SHARES
The fourteenth series of Preference Shares of the Corporation
shall consist of an unlimited number of Preference Shares which shall be
designated as Exchangeable Non-Voting Preference Shares Series II (hereinafter
referred to as the "Series II Preference Shares") and which, in addition to the
rights, privileges, restrictions and conditions attached to the Preference
Shares as a class, shall have attached thereto the following rights, privileges,
restrictions and conditions:
1. CONSIDERATION FOR ISSUE
1.1. The consideration for the issue of each Series II Preference
Share shall be $10.00.
2. INTERPRETATION
2.1. DEFINITIONS
For the purpose hereof:
(a) "Act" means the Canada Business Corporations Act, as amended,
re-enacted or replaced from time to time;
(b) "Board" means the board of directors of the Corporation or the
Executive Committee thereof;
(c) "Business Day" means a day other than Saturday, Sunday or any
other day that is treated as a statutory holiday in the
jurisdiction in which the Corporation's registered office is
located;
(d) "Canadian Dollar Equivalent" means in respect of an amount
expressed in a foreign currency (the "Foreign Currency
Amount") at any date the product obtained by multiplying (A)
the Foreign Currency Amount by (B) the exchange rate for such
foreign currency in effect at 12 o'clock noon (eastern time)
on such date as posted by Canadian Imperial Bank of Commerce
or, in the event such
- 19 -
exchange rate is not available, such exchange rate on such
date for such foreign currency as may be deemed by the Board
to be appropriate for such purpose;
(e) "Class A Common Shares" means shares of Class A common stock
of Hollinger International Inc., par value U.S. $0.01 per
share, and any other securities into which such shares may be
changed or for which such shares may be exchanged (whether or
not Hollinger International shall be the issuer of such other
securities) or any other consideration which may be received
by the holders of such shares pursuant to a recapitalization,
reconstruction, reorganization or reclassification of, or
amalgamation, merger, liquidation or similar transaction
affecting, such shares;
(f) "Current Class A Market Price" means in respect of a Class A
Common Share on any date, the Canadian Dollar Equivalent of
the per share closing price (or if no closing price is
recorded, the average of the bid and the ask prices) of Class
A Common Shares on the last full trading day preceding such
date as such price is reported on the NYSE Composite
Transactions Tape, or if the Class A Common Shares are not
listed on the NYSE, such other national, regional or
provincial securities exchange or automated quotation system
upon which the Class A Common Shares are listed or quoted, as
the case may be, as may be selected by the Board for such
purpose; provided, however, that if in the opinion of the
Board the public distribution or trading activity of Class A
Common Shares is inadequate to create a market that reflects
the fair market value of a Class A Common Share then the
Current Class A Market Price shall be determined by the Board
based upon the advice of such qualified independent financial
advisors as the Board may deem to be appropriate, and provided
further that any such selection, opinion or determination by
the Board shall be conclusive and binding;
(g) "Determination Date" means the fifth Business Day prior to the
Initial Period Expiry Date;
(h) "Dividend Amount" means, as at any date, an amount equal to
the full amount of all dividends and distributions declared
and unpaid on each Series II Preference Share and all
dividends and distributions declared on a Class A Common Share
in respect of which a dividend has not been declared on each
Series II Preference Share in accordance with section 3.1.2,
in each case with a record date prior to such date;
(i) "Exchange Price" means an amount per Series II Preference
Share surrendered for retraction pursuant to section 5.2 equal
to (i) the Current Class A Market Price on the Retraction Date
of the Exchange Number of Class A Common Shares plus (ii) the
Dividend Amount, if any, on the Retraction Date;
(j) "Exchange Number" means, subject to adjustment from time to
time in accordance with sections 5.8 and 5.9, the result
obtained when $10.00 is divided
- 20 -
by (A) if the Initial Period Expiry Date is November 8, 1999,
the weighted average trading price of the Class A Common
Shares on the NYSE for the 20 consecutive trading days
(whether or not Class A Common Shares traded on such day)
ending on (and including) the Determination Date and (B) if
the Initial Period Expiry Date is prior to November 8, 1999,
the lesser of (i) the weighted average trading price of the
Class A Common Shares on the NYSE for the 20. consecutive
trading days (whether or not Class A Common Shares traded on
such day) ending on (and including) the Determination Date and
(ii) the weighted average trading price of the Class A Common
Shares on the NYSE on the Determination Date, provided that if
the Class A Common Shares are not listed on the NYSE on the
relevant date(s), the weighted average trading prices referred
to above shall be calculated using trading prices on any stock
exchange on which such shares are listed as the Board may
select for this purpose, or if such shares are not listed on
any stock exchange, in such over-the-counter market as the
Board may select for such purpose;
(k) "HII Dividend Declaration Date" means the date on which the
Board of Directors of Hollinger International declares any
dividend or distribution on the Class A Common Shares;
(1) "Hollinger International Capital Reorganization" has the
meaning set out in section 5.8.3;
(m) "Hollinger International" means Hollinger International Inc.,
a Delaware corporation;
(n) "Initial Period" means the period from the date of initial
issue of the Series II Preference Shares to and including the
Initial Period Expiry Date;
(o) "Initial Period Expiry Date" means November 8, 1999 unless the
Board elects pursuant to section 2.2 to select an earlier date
in which case the Initial Period Expiry Date shall be such
earlier date;
(p) "Initial Retraction Price" has the meaning set out in section
5.1;
(q) "junior share" means a share of the Corporation ranking junior
to the Series II Preference Shares with respect to the payment
of dividends or the distribution of assets in the event of the
liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
(r) "Liquidation Event" has the meaning set out in section 8.1;
- 21 -
(s) "Liquidation Price" has the meaning set out in section 8.1;
(t) "NYSE" means the New York Stock Exchange;
(u) "ranking as to capital" means ranking with respect to the
distribution of assets in the event of a liquidation,
dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or in the event of any other
distribution of assets of the Corporation among its
shareholders for the purpose of winding up its affairs;
(v) "Retraction Date" means any Business Day on which the
documents specified in section 5.3(a) are duly tendered by a
holder of Series II Preference Shares in respect of the
exercise of his or her retraction right pursuant to Article 5;
and
(w) "Retraction Notice" has the meaning set out in section 5.3(a).
2.2. ELECTION TO SHORTEN THE INITIAL PERIOD
The Board shall be entitled to select a date prior to November
8, 1999 (but not earlier than May 8, 1999) as the Initial Period Expiry Date. If
the Board elects to do so then at least three Business Days prior to the Initial
Period Expiry Date, the Corporation shall issue a press release and on or before
the Initial Period Expiry Date the Corporation shall send by prepaid first class
mail or deliver a notice to all holders of Series II Preference Shares each of
which shall set out the Determination Date, the Initial Period Expiry Date and
the Exchange Number as of the Initial Period Expiry Date. If the Corporation
intends to exercise its redemption right pursuant to section 4.1 such press
release and notice shall also set out the information contemplated by section
4.1.2.
2.3. DATES
In the event that any date on which any dividend on the
Series II Preference Shares is payable by the Corporation, or on or by which any
other action is required to be taken by the Corporation or the holders of Series
II Preference Shares hereunder, is not a Business Day, then such dividend shall
be payable, or such other action shall be required to be taken, on or by the
next succeeding date that is a Business Day.
2.4. CURRENCY
All cash amounts paid by the Corporation in respect of the
Series II Preference Shares shall be made in Canadian dollars and all references
herein to monetary amounts shall be construed accordingly.
Next Section
Previous Section