Hollinger Inc.

Hollinger Inc.

March 04, 2005 19:39 ET

Hollinger Inc.: Release Of Alternative Financial Information


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: HOLLINGER INC.

TSX SYMBOL: HLG.C
TSX SYMBOL: HLG.PR.B

MARCH 4, 2005 - 19:39 ET

Hollinger Inc.: Release Of Alternative Financial
Information

TORONTO, ONTARIO--(CCNMatthews - March 4, 2005) - Hollinger Inc.
("Hollinger") (TSX:HLG.C)(TSX:HLG.PR.B) today released financial
information in the form of an unaudited consolidated balance sheet as at
September 30, 2004, together with notes thereto, prepared on an
alternative basis, as described below (the "Alternative Financial
Information"). The Alternative Financial Information was prepared by
management of Hollinger and has not been audited or reviewed by
Hollinger's auditors.

The Alternative Financial Information includes the accounts of Hollinger
and those wholly-owned subsidiaries which carry out head office
functions and which do not represent investments. Investments in other
companies and subsidiaries, such as Hollinger International Inc.
("Hollinger International"), are not consolidated but rather are carried
as investments and are accounted for at their market value. The
Alternative Financial Information has been prepared in accordance with
Hollinger's traditional accounting policies with the exception that it
has been prepared as though Hollinger had always accounted for its
assets and liabilities at their market values.

The alternative financial information is presented in lieu of the filing
by Hollinger of its statutory financial statements with applicable
Canadian securities regulatory authorities. Hollinger has been unable to
file its statutory financial statements as at and for the year ended
December 31, 2003 and the first three quarters of 2004 as a result of a
series of difficulties Hollinger has experienced, including Hollinger's
loss of control of Hollinger International in or about November, 2003
and the continued insufficient co-operation by Hollinger International
and Hollinger International's auditors.

Hollinger intends to continue to provide bi-weekly updates on its
affairs until such time as it is current with its filing obligations
under applicable Canadian securities laws.

Company Background

Hollinger's principal asset is its interest in Hollinger International
which is a newspaper publisher, the assets of which include the Chicago
Sun-Times, a large number of community newspapers in the Chicago area
and a portfolio of news media investments, and a portfolio of
revenue-producing and other commercial real estate in Canada, including
its head office building located at 10 Toronto Street, Toronto, Ontario.




HOLLINGER INC.

Market Value Information
Consolidated Balance Sheet
September 30, 2004
(in thousands of Canadian dollars)
(unaudited)

ASSETS
Current assets
Cash and cash equivalents $ 15,328
Restricted cash (note 3) 13,743
Accounts receivable 1,051
Amounts due from related parties (note 4) 72,127
Prepaid expenses 1,148
-------------
103,397

Investments (note 5) 367,463
Property and equipment (note 6) 8,495
Deferred financing costs 14,078
-------------
$ 493,433
-------------
-------------

LIABILITIES
Current liabilities
Accounts payable and accrued expenses $ 32,646
Amounts due to related parties (note 4) 28,183
Income taxes payable (note 7) 6,358
-------------
67,187

Long-term debt (note 9) 117,626
Retractable preference shares (note 8) 17,352
Amounts due to related parties (note 4) 25,738
Future income taxes (note 7) 39,147
Other liabilities (note 4) 679
-------------
267,729
-------------

Net assets representing shareholders' equity
Capital stock (note 10) 286,602
Net unrealized decline in assets (67,354)
Net unrealized decrease in liabilities 603
Retained earnings 5,853
-------------
225,704
-------------
$ 493,433
-------------
-------------

Net asset value per retractable common share $ 6.46
-------------
-------------

Contingencies and commitments (note 11)
Subsequent events (note 13)

See accompanying notes.


HOLLINGER INC.
Notes to Consolidated Balance Sheet
September 30, 2004
(Tabular amounts are in thousands of dollars except where noted)
(unaudited)


1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

As part of the Company's 1997 issuer bid, Hollinger Inc. (the
"Corporation") became an open-end investment holding company. The
Corporation's retractable common shares (the "Common Shares") are
retractable at the option of the holder for an amount based on the
market value of the Corporation's assets, on a non-consolidated basis,
and during 1999, the Corporation's Series II preference shares became
retractable for an amount based on the market value of Hollinger
International Inc. ("International") common shares.

This consolidated balance sheet includes the accounts of the Corporation
and those wholly-owned subsidiaries which carry out head office
functions and which do not represent investments (together, the
"Company"). Investments in other companies and subsidiaries are not
consolidated but rather are carried as investments and are accounted for
at their market value.

This consolidated balance sheet has been prepared in accordance with the
Corporation's traditional accounting policies with the exception that it
has been prepared as though the Corporation had always accounted for its
assets and liabilities at their market values.

This consolidated balance sheet has not been audited or reviewed by the
Corporation's auditors. This alternative financial information is
presented in lieu of statutory financial statements as a result of the
Corporation's inability to file its statutory financial statements as at
and for the year ended December 31, 2003 and the first three quarters of
2004. This inability results from a series of difficulties the
Corporation has experienced including the Corporation's loss of control
of International on or about November 17, 2003 and International's and
International's auditors' continued insufficient co-operation with the
Corporation.

As a result of the inability by the Corporation to file its statutory
financial statements on a timely basis, the Ontario Securities
Commission and certain other provincial securities regulatory
authorities issued cease trade orders that prohibit certain current and
former directors, officers and insiders of the Corporation from trading
in securities of the Corporation, until two full business days after the
Corporation's required filings are brought up to date in compliance with
applicable Canadian securities law. The Corporation has been granted an
extension of the time for calling its 2004 annual meeting of
shareholders to June 30, 2005.

The Company has experienced significant operating cash flow deficiencies
and is restricted from making certain payments under the terms of the
senior secured notes (note 9) and escrow agreement (notes 13 d) and e)).
Because of International special dividends received in 2005 (note 13),
despite the funds being held in escrow, the Company has sufficient funds
available for general corporate purposes. This consolidated balance
sheet has been prepared on the basis that the Company will continue to
operate as a going concern.

Accrual method of accounting

This consolidated balance sheet has been prepared using the accrual
method of accounting.

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. Foreign exchange gains
and losses are included in shareholders' equity on the balance sheet.

Cash and cash equivalents

Cash and cash equivalents include certain highly liquid investments with
original maturities of three months or less.

Investments

Investments are carried at market value determined on the following
bases:

(i) Liquid investments such as cash, short-term government bonds and
deposit certificates are valued at cost plus accrued interest.

(ii) Investments having quoted market values on a recognized stock
exchange are valued at the closing market price. Investments that are
not listed on a recognized exchange but that are convertible or
exchangeable into such an investment are valued based on the quoted
market value of the investment into which they are exchangeable or
convertible.

(iii) Other investments are valued at management's estimate of market
value.

(iv) If an investment is denominated or quoted in a foreign currency its
market value is converted to Canadian dollars at the mid-day Toronto
exchange rate at the balance sheet date.

The difference between cost and market value has been recorded as an
unrealized gain or loss on investments and included in shareholders'
equity on the consolidated balance sheet.

Property and equipment

Property and equipment are stated at either cost or market value where
determinable. Cost represents the cost of acquisition, including the
direct costs of financing until the asset is ready for use.

Property and equipment are amortized 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


Liabilities

Liabilities for which there is a public market, other than the senior
secured notes (note 9), or which are associated with a recognized stock
exchange are recorded at the greater of principal amount plus accrued
interest or equivalent market value; or, the present value of all
payments that management expects will be made in respect of the
liability. For liabilities that are exchangeable or convertible, if
management expects that investments will be delivered in satisfaction of
those rights, payments will include those investments at their market
values.

Liabilities include shares that are redeemable at the option of the
holder other than Common Shares.

With respect to the Corporation's Series II preference shares (as more
fully described in note 8), the liability is marked to market for
fluctuations in the market price of the shares of Class A Common Stock
of International and foreign exchange rates. The resulting gains or
losses have been recorded as an unrealized gain or loss on liabilities
and included in shareholders' equity on the balance sheet.

Derivative financial instruments

Derivative financial instruments include options, forward contracts and
swaps related to investments or to liabilities. These are valued based
on management's estimates of their asset value or liability value.
Management is guided by public market information in assessing these
values where such information is available. Any gain or loss is included
in unrealized gain on investments, until sold or cancelled.

Deferred financing costs

Deferred financing costs consist of certain costs incurred in connection
with debt financings. They are stated at cost and are amortized on a
straight-line basis over the term of the related debt being up to eight
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 value will not be realized.

Stock-based compensation and other stock-based payments

Effective January 1, 2004, the Company adopted Section 3870 of the CICA
Handbook, "Stock based Compensation and Other Stock-based Payments".
This standard requires the Company to recognize an expense in the
financial statements for all forms of employee stock-based compensation,
including stock options. The adoption of this new accounting principle
did not have an impact on the consolidated balance sheet.

Use of estimates

The preparation of this consolidated balance sheet requires the
Corporation to make estimates and judgments that affect the reported
amounts of assets, liabilities, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Corporation evaluates
its estimates, including those related to bad debts, investments, income
taxes, pensions and other post-retirement benefits, and contingencies
and litigation. The Corporation 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.

Certain of the Company's investments and liabilities are valued at
management's estimate of market value. These fair value estimates are
made at a specific point in time, based on assumptions concerning amount
and timing of estimated future cash flows and assumed discount rates.
The estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore may not accurately
represent future realizable values.

2. CHANGE IN ACCOUNTING PRESENTATION

As described in note 1 above, the Corporation is an open-end investment
corporation. Following accepted accounting practices for such
corporations, the Corporation has retroactively adopted "investment
company" accounting practices. The most significant results of this
change in the basis of presentation are:

(a) investments are carried at market value rather than on the basis of
cost, equity or consolidation;

(b) dividends from investees are recorded as investment income and
unrealized gains and losses on investments are recorded in shareholders'
equity as they occur, and realized gains and losses are credited
directly to retained earnings, rather than recording such investments on
an equity or consolidated basis;

(c) liabilities, other than the senior secured notes, are recorded at
their fair values, where determinable;

(d) financial instruments other than the Common Shares are recorded
entirely as liabilities rather than partly as liabilities and partly as
equity; and

(e) net unrealized gains and losses on assets and liabilities are
included in shareholders' equity and realized gains and losses on assets
and liabilities are credited directly to retained earnings.



3. RESTRICTED CASH

Restricted cash is comprised as follows:

Cash security under senior secured notes payable (note 9) $ 13,243

Cash security for directors' indemnities (note 12) 500
-----------
$ 13,743
-----------
-----------


On February 7, 2005, an additional $1,500,000 of cash was placed in
trust, which is intended to be used as additional security for
directors' indemnities.



4. RELATED PARTIES

Amounts due from and to related parties are comprised as follows:



Current amounts due from:
The Ravelston Corporation Limited ("RCL"), a
parent company (a) $ 14,374
Ravelston Management Inc. ("RMI"), a company subject
to common control (b) 57,393
International and its subsidiaries 79
Former director 281
-----------
$ 72,127
-----------
-----------

Amounts due to:
Former directors, under share unit plan $ 556
Lord Black (c) 19,868
International and its subsidiaries (d) and (e) 33,030
Companies controlled by former directors 467
-----------
53,921
Less current portion: 28,183
-----------
$ 25,738
-----------
-----------


(a) This balance relates primarily to three loans made to RCL. The
loans, in the principal amounts of $4,728,000, $4,803,000 and
$5,175,000, were made to assist RMI in meeting its obligations to the
Corporation under the Support Agreement and thereby assisting the
Corporation in meeting its obligations under the Indentures (note 9).
Each of the loans is supported by a demand promissory note bearing
interest at the prime lending rate plus 4% per annum, calculated and
payable monthly and a general security agreement of RCL. The principal
amounts of these loans and interest thereon remain outstanding.

(b) This balance is due in connection with RMI's obligations under the
Support Agreement (note 9). Amounts owing by RMI under the Support
Agreement do not accrue interest and are unsecured obligations of RMI.
RCL has unconditionally guaranteed RMI's obligations under the
Contribution Agreement (note 9), with such guarantee supported by a
pledge of RCL's shares of RMI.

The Company has been informed by RMI that it may dispute all but
approximately $4,100,000 of this receivable.

(c) The Corporation had a joint obligation, pursuant to a judgment, to
repay non-compete amounts of US$16,549,950 received by the Company in
prior years plus interest. This amount is included as part of the
receivable from RMI under the Support Agreement. Pursuant to an Order
and Final Judgment of the Delaware Court of Chancery dated June 28, 2004
(the "Order"), the Corporation and Lord Black, the Corporation's
controlling shareholder and former Chairman and Chief Executive Officer,
were ordered to jointly pay to International the non-compete amounts
plus interest. On July 16, 2004, the Company repaid to International
US$5,964,000 and the balance was paid by Lord Black. The terms of the
Company's obligation to make restitution to Lord Black, if any, have not
been resolved. Until such determination is made, the balance sheet shows
a payable to Lord Black. The Corporation is currently appealing the
Order.

(d) (i) This balance relates to an amended promissory note of the
Company dated March 10, 2003 in the principal amount of US$20,349,000.
The principal amount bears interest at a rate of 14.25% per annum if
interest is paid in cash (and 16.50% per annum if paid in kind where
certain conditions restrict payment of interest under the Corporation's
senior secured notes) for an aggregate of $31,171,000 at September 30,
2004. Interest is payable quarterly and the principal is payable on
demand after March 2, 2011. The reimbursement obligations under this
note are to be secured by a cash collateral account that RCL was
required to fund. The loan is guaranteed by RCL and secured by its
receivables under RCL's management services agreement with CanWest
Global Communications Corp. ("CanWest"). All amounts owing under the
note are subordinated to the Corporation's senior secured notes for so
long as the notes are outstanding (note 9).

(ii) The remaining amount due to International of $1,859,000 is the
result of prior shared business services.

(e) The Company had an informal agreement with International whereby the
Company would pay the costs of computer equipment and related products
and services at the Company's offices in Toronto in 2002 and
International would pay the costs in 2003. The Company and International
were to reconcile the spending and share the combined costs equally.
Based upon International's evaluation of the combined costs under this
arrangement, the Company owed approximately $200,000 to International.
This amount has not been agreed to by the Company but has been recorded.
The Company has not yet paid its share of the costs incurred and
continues to retain possession of the computer and related equipment it
had acquired.

(f) Included in accounts payable and accrued expenses on the
consolidated balance sheet is approximately $6,500,000 with respect to
legal fees incurred by Lord Black and F. David Radler, the Corporation's
former President, the reimbursement of which is being sought from the
Company under its indemnity of its directors and officers. The Company
has not, at this time, agreed to reimburse these amounts.

Related Party Contractual Obligations:

(g) The Company entered into a consulting agreement with Peter G. White
Management Ltd. ("PGWML"), a company controlled by Peter G. White, a
director and executive officer of the Corporation, effective December
23, 2003, which provides that Mr. White renders various services to the
Company. The agreement terminated on January 22, 2005 and was extended
for a further six-month term to July 22, 2005. The agreement may be
terminated on 30 days' notice. For its services under the agreement,
PGWML receives $75,000 per month.

(h) At 10 Toronto Street, RCL and RMI make use of the Company premises
and currently pay no rent. The Company is in discussion with RCL and RMI
with respect to a potential lease and related financial arrangements.

(i) Certain employees of the Company provide services to RCL, RMI and
Argus Corporation Limited, a parent company. As well, certain employees
of RMI provide services to the Company. No re-allocation of these costs
has been made to date. This is currently under review.

All such employees were formerly employees of RMI. Employment contracts
of these employees were transferred to the Company effective January 1,
2004. The employees retained all seniority, pension benefits and other
entitlements earned while at RMI upon transfer. As a result, the Company
has fully provided for the actuary's estimate of the pension obligation
with respect to these employees in this consolidated balance sheet. No
agreement with RCL and RMI as to the Company's and their legal
obligations with respect to the RCL pension plan has been made to date.



5. INVESTMENTS

(i) Investments having quoted market values

Number of Amount
Shares/Units
----------------------------
International Class A Shares (a) (note 8) 792,560 $ 17,352
Class B Shares (a) (note 9) 14,990,000 328,186
----------------------------
15,782,560 345,538
----------------
----------------

Hollinger Canadian Newspapers,
Limited Partnership Units 150,000 150

(ii) Investments at estimated market values

Percentage held
------------------
Cayman Free Press Common shares 39.993% 3,670
Real estate division
of Domgroup Ltd.
("DRE") (b) - 100% 17,998
Other - - 107
------------
$ 367,463
------------
------------


(a) International Class A and Class B Common Shares

International's shares of Class A Common Stock ("International Class A
Shares") and Class B Common Stock ("International Class B Shares") have
identical rights with respect to cash dividends and in any sale or
liquidation, but different voting rights. Each International Class A
Share is entitled to one vote per share and each International Class B
Share is entitled to ten votes per share on all matters, where the two
classes vote together as a single class, including the election of
International directors. International Class B Shares are convertible at
any time at the option of the Company into International Class A Shares
on a share-for-share basis and are transferable by the Company under
certain conditions. Where the Company does not meet these conditions,
and there is a change of control of International, the International
Class B Shares are automatically converted on a share-for-share basis
into International Class A Shares. The market value of the International
Class B Shares, which do not trade, is stated at the closing market
price of the International Class A Shares with no control premium taken
into account.

(b) DRE includes the Vancouver division of Domgroup Ltd. and all of the
cash of Domgroup Ltd.



6. PROPERTY AND EQUIPMENT

Carried at cost
Machinery, equipment and other $ 4,008
Accumulated depreciation and amortization
Machinery, equipment and other 3,113
---------------------------------------------------------------------
895

Carried at market value
Land and buildings 7,600
---------------------------------------------------------------------
Net book value $ 8,495
---------------------------------------------------------------------
---------------------------------------------------------------------


7. INCOME TAXES

(a) Current income tax liability

Current income tax includes the estimated tax liability arising on the
2004 retraction of Series II preference shares.

A substantial portion of the current income tax liability, once paid,
could be refundable to the Company upon payment of dividends or upon
retraction or redemption of Common Shares or Series II preference shares
including on a going private transaction.

(b) Future income taxes

The Company has operating losses carried forward for tax purposes of
approximately $56,600,000, the tax benefit of which has been reflected
in the consolidated balance sheet as a reduction of future income taxes.
These losses expire as follows:



2007 $ 3,000
2008 300
2009 11,700
2010 38,000
2011 3,600
----------
$ 56,600
----------
----------


The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities are
presented below:




---------------------------------------------------------------------
Future tax assets:
Net operating loss carry forwards $ 23,434
Compensation and accrued pension 245
Investments 1,860
Other 4,304
---------------------------------------------------------------------
Gross future tax assets 29,843
Less valuation allowance -
---------------------------------------------------------------------
Net future tax assets 29,843
---------------------------------------------------------------------
Future tax liabilities:
Property and equipment, principally due to
differences in depreciation 306
Investments 67,669
Other 1,015
---------------------------------------------------------------------
Gross future tax liabilities 68,990
---------------------------------------------------------------------
Net future income tax liabilities $ 39,147
---------------------------------------------------------------------
---------------------------------------------------------------------


Due to the Corporation's mutual fund corporation status for tax
purposes, it is possible that some or a large portion of the income
taxes disclosed above could be refundable.

8. RETRACTABLE PREFERENCE SHARES

The 1,722,951 outstanding Series II preference shares are exchangeable
at the holder's option for 0.46 of an International Class A Share held
by the Company for each Series II preference share for an aggregate of
792,560 International Class A Shares. The Company has the option to make
a cash payment of equivalent value on the redemption of any of the
Series II preference shares.

At September 30, 2004, a licensed trust company was holding 792,560
International Class A Shares held by the Company in support of exchange
requests made by holders of Series II preference shares from time to
time. The Company intends to honour any future retractions of its Series
II preference shares with these International Class A Shares.

9. LONG-TERM DEBT

At September 30, 2004, the Company had US$78,000,000 ($98,654,000)
aggregate principal amount of 11.875% senior secured notes due March 1,
2011 (the "Senior Notes") and US$15,000,000 ($18,972,000) aggregate
principal amount of 11.875% senior secured notes due March 1, 2011 (the
"Second Priority Notes" and, together with the Senior Notes, the
"Notes"). The Notes are carried at cost on this consolidated balance
sheet as they are not subject to redemption until March 1, 2007, at
which time a premium is to be paid on the redemption of any of the Notes.

The Senior Notes are secured by a first priority lien on 14,990,000
International Class B Shares held by the Company plus $13,243,000 of
cash collateral. The cash collateral amount may be used to satisfy
future interest payment obligations on the outstanding Senior Notes. The
Senior Notes are fully and unconditionally guaranteed by RMI. The Second
Priority Notes are guaranteed by RMI and are secured by a second
priority lien on the collateral securing the Senior Notes.

Under the terms of the Indentures governing the Senior Notes and the
Second Priority Notes (collectively, the "Indentures"), the Company is
subject to certain financial covenants and other restrictions. As part
of the terms of the Notes, the Corporation was required to cause an
exchange offer registration statement to be declared effective with the
United States Securities and Exchange Commission (the "SEC") under the
United States Securities Act of 1933, as amended, within a certain
period of time. The registration of the securities is not being sought
by the Corporation at this time. As a result of this registration
default, the annual interest rate of the Notes has increased up to a
maximum additional interest rate of one percent per annum over the 11
7/8% interest rate until such time as the registration default is cured,
whereupon the interest rate will revert to the original level. As at
September 30, 2004, the Corporation was in compliance with all other
covenants and other restrictions in respect of the Senior Notes.

On March 10, 2003, the date the Corporation issued the Senior Notes, RMI
entered into a support agreement (the "Support Agreement") with the
Corporation under which RMI agreed to make annual support payments in
cash to the Corporation on a periodic basis by way of contributions to
the capital of the Corporation (without receiving any shares of the
Corporation) or subordinated debt. The Corporation, RMI and RCL also
entered into a contribution agreement (the "Contribution Agreement") in
this regard. The amount of the annual support payments is equal to the
greater of: (a) the non-consolidated negative net cash flow of the
Corporation (which does not extend to outlays for retractions and
redemptions in respect of the share capital of the Corporation), or (b)
US$14,000,000 per year (less any future payments of services agreement
fees directly to the Company, and any excess in the net dividend amount
received by the Company on the shares of International that is over
US$4,650,000 per year), in either case, as reduced by any permanent
repayment of debt owing by RCL to the Corporation. The timing of payment
of the annual support amount on a quarterly basis is specifically
defined in the Indentures to be within 45 days after the first three
quarters of the year and within 90 days of the last quarter of the year.
The Support Agreement terminates upon the repayment in full of the Notes.

As a result of the Corporation's inability to file its statutory
financial statements as at and for the year ended December 31, 2003 and
file its 2003 Form 20-F with the SEC, subsequent to June 30, 2004, the
Corporation was not in compliance with its obligations to deliver to
relevant parties such filings under the Indentures. This non-compliance
led to the occurrence of an event of default under the Indentures,
however on September 30, 2004, the Corporation sought and obtained a
waiver with respect of this event of default. At such time, the
Corporation also sought and obtained a consent for a temporary
suspension of the Corporation's obligation under the Indentures to
furnish to relevant parties periodic and other reports under applicable
U.S. federal securities laws until January 1, 2006.



10. CAPITAL STOCK

---------------------------------------------------------------------
Authorized
Unlimited number of retractable common shares
and an unlimited number of preference shares
Issued and fully paid
Preference shares
1,722,951 Series II shares $ -
Retractable common shares
34,945,776 shares 286,602
---------------------------------------------------------------------
$ 286,602
---------------------------------------------------------------------
---------------------------------------------------------------------


(a) The 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 International
Class A Shares of equivalent value or, at the Corporation's option,
cash. The retraction price determined each quarter (or, in certain
specific cases more frequently) 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 Corporation on its liquidation, dissolution or winding-up in
respect of any outstanding preference shares, and (ii) its liabilities,
including any tax liabilities that would arise on a sale by
International 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 Common Shares outstanding on such date.

(b) There is continued uncertainty regarding the Corporation's future
ability to complete retractions of the Common Shares and cash
retractions of Series II preference shares. Dividends on the Series II
preference shares are not payable until declared by the Board of
Directors which will take into account when dividends are considered
from time to time, among other things, the support payments to be made
to the Corporation by RMI. Under applicable corporate law, the
Corporation cannot redeem Common Shares or declare or pay dividends in
certain circumstances, including if there are reasonable grounds for
believing that the Company is, or would after such payment be, unable to
pay its liabilities as they become due. In such circumstances,
shareholders do not become creditors of the Corporation and remain as
shareholders until such time as the retraction is able to be completed
under applicable law. At present, the Corporation's uncertain ability to
make payments on future retractions of Common Shares or dividends on
Common Shares is because of the fact that liquidity of its assets is
limited under the terms of the Notes. Substantially all of the Company's
International shares were provided as security for the Notes limiting
the liquidity of the Company's assets. As of February 25, 2005, there
are retraction notices from holders of 395,665 Common Shares which are
unable to be completed at the present time.

(c) The Company has a stock option plan for its employees.

Details of the Corporation's stock option plan are as follows:

The Corporation has an Executive Share Option Plan, under which the
Corporation may grant options to certain key executives of the Company,
its subsidiaries or affiliated companies or its parent company, for up
to 5,560,000 Common Shares.

These options give the holder the right to purchase, subject to the
executive's entitlement to exercise, one Common Share 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 executive's 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 Common Shares, in which events, all
unexercised options become exercisable in full.

At September 30, 2004, there were 913,000 options outstanding having an
exercise price of $13.72 per share and a remaining contractual life to
December 8, 2004. All of the outstanding options at September 30, 2004
expired unexercised on December 8, 2004.

11. CONTINGENCIES AND COMMITMENTS

The Company has been named as defendant or co-defendant in a number of
legal actions. All claims made against the Company are being defended
vigorously. Except as otherwise stated, no provisions have been made for
any potential liability under these actions. Legal fees expected to be
incurred with respect to these actions total approximately $11,500,000.
This amount has been accrued in accounts payable and accrued expenses in
this consolidated balance sheet. The following actions have been taken
against or by the Company:

(a) The Company is named as a co-defendant in a complaint filed in the
State of Illinois by International claiming damages and recovery for
alleged breaches of fiduciary duty relating to management fees, sales
and transfers of assets and non-competition and other payments made.
International is seeking damages from all defendants of US$542,000,000
including pre-judgment interest of US$117,000,000. International is
seeking to hold the Company jointly and severally liable for the full
amount of the alleged damages under conspiracy and other theories.
Repayment has been made of certain non-compete payments (see note 4).

(b) The Company is named as a co-defendant in a number of class action
suits in Canada and the United States that allege, among other things,
securities fraud with respect to the use of management service fees to
misappropriate funds from International, improper non-compete payments,
inadequate Board oversight of executive pay, improper expenses and
related party transactions.

(c) International has named the Company as co-defendant in a suit
seeking enforcement of a November 15, 2003 restructuring proposal to
uphold a Shareholders' Rights Plan, a declaration that corporate by-laws
were invalid and to prevent the closing of a certain transaction. The
Company filed a counterclaim seeking to restrict the Shareholders'
Rights Plan that International sought to adopt to prevent a certain
transaction and claiming that the restructuring proposal was not
negotiated in good faith and had been breached by International. A
decision on International's claim was delivered on February 26, 2004
finding in favour of International which was confirmed on March 4, 2004
through a partial final judgment confirming the February 26, 2004
findings. Also on March 4, 2004, the Company filed a notice of appeal of
the February 26, 2004 decision, which has not yet been decided. On May
19, 2004, the Court issued a decision on a summary judgment motion
brought by International finding in favour of International and
dismissing in large part the Company's counterclaims. The ruling also is
on appeal.

(d) International has named the Company as co-defendant in a suit
seeking injunctive relief for the return of documents it claims
ownership of and the assistance and co-operation of the defendants in
recovering the documents and in having International and its auditors'
access to the corporate headquarters of the Company. No examinations for
discovery have been conducted to date. The parties negotiated and
executed a Protocol dated March 25, 2004, providing for access and
possession by International to the claimed records.

(e) On September 3, 2004, Mr. Justice Colin Campbell of the Ontario
Superior Court of Justice ordered (and on October 13, 2004 delivered his
reasons for) the appointment of an Inspector of the affairs of the
Company pursuant to section 229 of the Canada Business Corporations Act
(the "Order") upon the application of Catalyst Fund General Partner I
Inc. By further order (together with the Order, the "Orders") dated
October 27, 2004, Ernst & Young Inc. was named as inspector and
commenced its work (the "Inspection") soon thereafter. The Orders
broadly require an investigation into the affairs of the Company and
specifically into related party transactions, non-competition payments
for the period January 1, 1997 to the present and the current status of
the Company's audited financial statements for the year ended December
31, 2003. The Inspector has provided certain interim reports to the
court, primarily outlining its need for more time to conduct its work.
It is unclear as to whether ultimately the costs of the Inspection may
be shared more broadly, but initial costs of the Inspection are being
borne by the Company at a rate approaching $1,000,000 per month. The
cost of the inspection is anticipated to total approximately $8,000,000.
This amount has been accrued in addition to the legal fee accrual of
$11,500,000 described above in accounts payable and accrued expenses in
this consolidated balance sheet.

(f) CanWest filed suit against the Company and others including
International claiming damages under the agreement for the sale by
International of certain Canadian newspapers in November 2000, including
$22,500,000 for future losses relating to The National Post, $2,745,000
for capital and operating requirements and $752,000 for payment of
newsprint rebates. International paid $26,500,000 million of principal
plus interest with respect to the future losses relating to The National
Post in November 2004 in settlement of an August 2004 order.

Exchange of documents and examinations for discovery in respect of the
remaining two matters referred to above which have not yet been settled
is expected to proceed in early 2005.

(g) The Company was the guarantor under an aircraft lease that was
prematurely terminated in January, 2004. The lessor has commenced an
action against the Company for damages of approximately US$5,000,000.

(h) On November 15, 2004, the SEC filed an action in the United Status
District court for the Northern District of Illinois against Lord Black,
F. David Radler and the Company seeking injunctive, monetary and other
equitable relief.

The SEC's allegations against the Company are as follows: (i) the
Company made material misstatements and omissions in its responses to
International's 1999 and 2000 proxy questionnaires and the Company's
2001 Form 40-F filing and 2002 Form 2-F, Form 40-F and proxy statement
filings with the SEC concerning US$16,500,000 million in payments it
allegedly fraudulently received in connection with non-compete
agreements associated with certain sales transactions; (ii) the Company
allegedly knew or was reckless in not knowing that International's
filings with the SEC were false and misleading because they failed to
disclose the non-compete payments made to the Company; and (iii) the
Company is liable for International's violations of certain federal
securities laws during this period as a result of its alleged failure to
properly disclose the non-compete payments it received.

The SEC complaint seeks the following from the Company: (i) disgorgement
of ill-gotten gains by the Company and unspecified civil penalties; (ii)
a voting trust upon the shares of International held directly or
indirectly by the Company; and (iii) an order enjoining the Company from
further violations of the federal securities laws.

(i) The affairs of the Company are presently under investigation by
certain securities regulatory authorities. The appropriateness of
certain transactions reported in previous financial statements as filed,
of the financial statements themselves and the completeness of other
regulatory filings are being questioned.

(j) The Company is subject to litigation from time to time in the
ordinary course of business. Although the amount of any liability with
respect to any such litigation cannot be determined, in the opinion of
management, such liability, if any, will not have a material adverse
effect on the Company's financial condition.

(k) The Company has incurred legal expense in the defence of various
actions brought against it and others in both the United States and
Canada. The Company has in turn advanced a claim against its directors'
and officers' liability insurers asserting that, under the terms and
conditions of the policies of insurance, these insurers are required to
indemnify the Company in respect of this legal expense incurred in
connection with some of the actions brought against the Company. The
claims made total approximately $3,700,000, however, the actual amount
of recovery is not determinable at the present time. The Company has not
recorded any recovery with respect to these claims in this consolidated
balance sheet.

12. GUARANTEES

Notes

In connection with the issuance of the Senior Notes, the Corporation has
agreed to indemnify the initial purchaser of the Senior Notes against
any losses or damages resulting from inaccuracy of financial statements,
taxes and compliance with securities legislation. The Corporation also
indemnified the Senior Noteholders against any related tax liabilities
arising from payments made with respect to the Senior Notes, except
taxes on Senior Noteholder's income. These indemnifications generally
extend for the term of the Senior Notes and do not provide for any limit
on the maximum potential liability.

The Corporation is unable to estimate the maximum potential liability
for these types of indemnifications as the Indentures and related
purchase agreement do not specify a maximum amount and the amounts are
dependent upon future contingent events, the nature and likelihood of
which cannot be determined at this time. No amount has been accrued in
this consolidated balance sheet with respect to these indemnifications
and the Corporation is unable to estimate amounts due for withholding
taxes, if any, at this time. Any such amounts will increase the future
effective cost of borrowing.

Property Leases

DRE has agreed to indemnify lessors of its operating leases against
liabilities, damages, costs, claims and actions resulting from damaged
property, violations of any lease covenants or any accident or injury
occurring on the leased premises.

The Company is unable to estimate the maximum exposure for these types
of indemnifications as the operating leases do not specify a maximum
amount and the amounts are dependent upon future contingent events, the
nature and likelihood of which cannot be determined at this time. No
amount with respect to these indemnifications has been considered in the
determination of the market value of the Company's investment in DRE in
this consolidated balance sheet.

Dispositions

In connection with certain dispositions of assets and/or businesses, the
Company has provided customary representations and warranties whose
terms range in duration and may not be explicitly defined. The Company
has also retained certain liabilities for events occurring prior to
sale, relating to tax, environmental, litigation and other matters.
Generally, the Company has indemnified the purchasers in the event that
a third party asserts a claim against the purchaser that relates to a
liability retained by the Company. These types of indemnification
guarantees typically extend for a number of years or in some cases
extend indefinitely.

The Company is unable to estimate the maximum potential liability for
these indemnifications as the underlying agreements do not always
specify a maximum amount and the amounts are dependent upon the outcome
of future contingent events, the nature and likelihood of which cannot
be determined at this time.

Historically, the Company has not made any significant indemnification
payments under such agreements and no amount has been accrued in this
consolidated balance sheet with respect to these indemnification
guarantees. The Company continues to monitor the conditions that are
subject to guarantees and indemnifications to identify whether it is
probable that a loss has occurred, and would recognize any such losses
under any guarantees or indemnifications when those losses are probable
and estimable.

Directors

The Corporation has entered into customary indemnification agreements in
favour of its current and former directors. With respect to one current
and one former director, the Corporation has entered into a trust and
contribution agreement with a third party trustee and deposited in trust
the amount of $500,000 to defend such directors from any claims made for
which they would be entitled to indemnity pursuant to their
indemnification agreements (see note 3). In February 2005, the
Corporation placed an additional $1,500,000 of cash in trust which is
intended to be used as additional security for directors' indemnities.

13. SUBSEQUENT EVENTS

(a) On October 28, 2004, the Corporation was advised that RCL intends
to support a going private transaction involving the Corporation,
structured as a consolidation of the outstanding Common Shares and
Series II preference shares (the "Proposed Transaction"). The Board
established a committee of independent directors to consider, evaluate
and make a recommendation to it concerning the Proposed Transaction.

On October 28, 2004, the Board approved the following transactions which
would permit the Proposed Transaction to proceed and be considered by
the shareholders of the Corporation and would provide the necessary
financing to complete the Proposed Transaction:

(i) The Corporation received consents from holders of a majority in
aggregate principal amount of its outstanding Notes approving amendments
to the Indentures. The amendments permit, among other things, the
retirement of all outstanding Common Shares (other than those held
directly or indirectly by RCL) for cash pursuant to (i) the Proposed
Transaction, (ii) retraction requests, and/or (iii) payments in respect
of the due exercise of dissent rights of such shares in connection with
the Proposed Transaction and the retirement of all outstanding Series II
preference shares for International Class A Shares owned by the Company
pursuant to the Proposed Transaction and/or payments in respect of the
due exercise of dissent rights of such shares in connection with the
Proposed Transaction. The amendments to the Indentures also permit the
Corporation to incur additional indebtedness in an aggregate amount
outstanding not to exceed US$40,000,000 through the issuance of Second
Priority Notes.

The amendments will become effective if, and only if, all necessary
corporate and regulatory approvals in connection with the consolidation
of the outstanding Common Shares (the "Common Share Approvals") have
been obtained on or prior to March 31, 2005.

(ii) The Corporation received binding commitments for the issuance and
sale of up to US$40,000,000 in aggregate principal amount of Second
Priority Notes, such amount to be drawn down by the Corporation if, and
only if, the Common Share Approvals have been obtained on or prior to
March 31, 2005.

(iii) The Corporation entered into a non-binding commitment with an
arm's length lender with respect to bridge credit facilities with a term
of 12 months providing up to $16,000,000 in borrowings, which credit
facilities may only be drawn down if, among other things, the Common
Share Approvals have been obtained. If proceeded with, the Company would
be providing security to the lender in support of the credit facilities,
including first priority mortgages on certain real estate assets owned
by the Company.

On November 16, 2004, RCL indicated that it intends to support the
Proposed Transaction on the basis of $7.25 in cash for each Common Share
(other than the shares owned by it and certain of its affiliates) and
0.46 of an International Class A Share for each Series II preference
share.

(b) On November 2, 2004, Lord Black resigned his positions as Chairman,
Chief Executive Officer and a director of the Corporation. On November
18, 2004, Mr. Justice Campbell of the Ontario Superior Court of Justice
ordered the removal of three other related directors, F. David Radler,
J.A. Boultbee and Barbara Amiel Black. The Board is now comprised of six
directors. Gordon W. Walker was appointed as the initial Chairman of the
Board and Donald M.J. Vale assumed the function of President.

(c) On January 18, 2005, International filed its 2003 Form 10-K with the
SEC, which included restated audited financial results for the fiscal
years ended December 31, 1999 to 2002.

The foregoing was a necessary but not sufficient condition to permit the
Corporation to complete and file its 2003 annual consolidated financial
statements as the completion and audit of such consolidated financial
statements will require a level of co-operation from International,
which is in negotiation, and International's auditors.

(d) On January 18, 2005, International paid a special dividend on the
International Class A Shares and the International Class B Shares, which
resulted in approximately US$39,000,000 being received by the Company.
As part of its settlement discussions with staff of the SEC relating to
the action commenced by the SEC against the Company, Lord Black and F.
David Radler in the U.S. District Court, Northern District of Illinois,
the Company voluntarily agreed that it would enter into an arrangement
whereby it would deposit such amount and, subject to any overriding
rights of the holders of Notes, the amount of any subsequent
distribution made by International, net of applicable withholding taxes,
into an escrow account with a licensed trust company. The escrow will
terminate upon the conclusion of the SEC action as to all parties. The
escrow provides that the Company will have access to the escrowed funds
for ordinary business and certain other enumerated purposes.

(e) On March 1, 2005, International paid a second special dividend on
the International Class A Shares and the International Class B Shares.
The total amount of this second special dividend received by the Company
was approximately US$47,300,000. The net proceeds received are subject
to the same escrow agreement referred to in (d) above.

(f) On February 25, 2005, certain of the directors of the Corporation
filed a motion in the Ontario Superior Court of Justice for, inter alia,
advice and direction as to whether in the circumstances the Proposed
Transaction should be put to the Corporation's shareholders before Ernst
& Young Inc. delivers its final Inspection report. The motion also seeks
an order approving an increase of $10,000,000 as additional security for
directors' indemnities, confirmation of the deposit of $1,500,000 as
additional security for directors' indemnities (note 3) and the
establishment of an indemnification fund in favour of two financial
executives of the Corporation with a deposit of $500,000. The motion
further seeks an order approving payments to the directors of the
Corporation (other than Mr. White) in the event of the termination of
their tenure as directors and a retention bonus in the event that the
Corporation continues as a public company after March 31, 2005, in each
case, in an amount equal to a multiple of fees paid to such directors
since November 18, 2004. The motion is scheduled to be heard on March 7,
2005.

Materials filed with the court indicate that certain of the directors of
the Corporation have been advised that the Corporation and its
subsidiaries have claims against RCL and related corporations and
individuals for in excess of $200,000,000 and that the Corporation
should commence legal proceedings forthwith to enforce those claims. The
directors have further been informed that RCL intends to strenuously
resist any such claims.


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