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.
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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
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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.
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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
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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.
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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
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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 In
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