10-Q 1 trbform10q3q2008.htm TRIBUNE COMPANY FORM 10-Q - THIRD QUARTER 2008 - DATED SEPTEMBER 28, 2008 trbform10q3q2008.htm




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

FORM 10-Q


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


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2008

Commission file number 1-8572

TRIBUNE COMPANY
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
   incorporation or organization)
36-1880355
(I.R.S. Employer
   Identification No.)
 
435 North Michigan Avenue, Chicago, Illinois
(Address of principal executive offices)
 
60611
(Zip code)

Registrant’s telephone number, including area code:  (312) 222-9100

No Changes
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes /ü/  No /  /

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer  /  /              Accelerated filer  /  /               Non-accelerated filer /ü/                Smaller Reporting Company  /  /   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes /  /   No /ü/

    At November 10, 2008, there were 56,521,739 shares of the Company’s Common Stock ($.01 par value per share) outstanding, all of which were held by the Tribune Employee Stock Ownership Plan.
 





TRIBUNE COMPANY
INDEX TO 2008 THIRD QUARTER FORM 10-Q


Item No.
Page
PART I.  FINANCIAL INFORMATION
   

1.   Financial Statements (Unaudited)
 
Condensed Consolidated Statements of Operations for the Third Quarters
and First Three Quarters Ended Sept. 28, 2008 and Sept. 30, 2007
1
Condensed Consolidated Balance Sheets at Sept. 28, 2008 and Dec. 30, 2007
2
Condensed Consolidated Statements of Cash Flows for the First Three Quarters Ended
Sept. 28, 2008 and Sept. 30, 2007                           
4
Notes to Condensed Consolidated Financial Statements
 
Note 1:         Basis of Preparation
5
Note 2:     Discontinued Operations and Assets and Liabilities Held for Disposition
6
Note 3:     Income Taxes
10
Note 4:     Stock-Based Compensation
11
Note 5:     Employee Stock Ownership Plan
12
Note 6:     Pension and Other Postretirement Benefits
13
Note 7:     Changes in Operations and Non-Operating Items
14
Note 8:     Inventories
16
Note 9:     Goodwill and Other Intangible Assets
16
Note 10:   Debt
19
Note 11:   Fair Value of Financial Instruments
26
Note 12:     Comprehensive Income (Loss)
27
Note 13:   Other Matters
28
Note 14:   Segment Information
31
2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
3.    Quantitative and Qualitative Disclosures About Market Risk 
56
4.    Controls and Procedures                                                                                                                            
59
   
PART II.  OTHER INFORMATION
 
1.         Legal Proceedings                                                                                                                            
60
1A.      Risk Factors                                                                                                                            
62
6.         Exhibits                                                                                                                            
63

 
 
 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
(Unaudited)

 
Third Quarter Ended
   
First Three Quarters
 
 
Sept. 28, 2008
   
Sept. 30, 2007
   
Sept. 28, 2008
   
Sept. 30, 2007
 
                               
Operating Revenues                                                                     
$
1,036,946
   
$
1,158,553
   
$
3,152,534
   
$
3,422,787
 
                               
Operating Expenses
                             
Cost of sales (exclusive of items shown below)
 
594,161
     
592,804
     
1,742,692
     
1,744,988
 
Selling, general and administrative 
 
353,220
     
298,048
     
902,652
     
964,435
 
Depreciation                                                                     
 
47,857
     
46,250
     
142,774
     
140,089
 
Amortization of intangible assets
 
4,645
     
4,621
     
13,965
     
13,976
 
Write-downs of intangible assets (Note 9)
 
     
     
3,843,111
     
 
Total operating expenses
 
999,883
     
941,723
     
6,645,194
     
2,863,488
 
                               
Operating Profit (Loss)                                                                     
 
37,063
     
216,830
     
(3,492,660
)
   
559,299
 
                               
Net income on equity investments 
 
23,201
     
26,559
     
58,130
     
67,953
 
Interest and dividend income  
 
2,610
     
4,923
     
9,736
     
11,902
 
Interest expense 
 
(231,803
)
   
(175,003
)
   
(694,807
)
   
(370,661
)
Gain (loss) on change in fair values of PHONES and related investment
 
(8,360
)
   
(84,969
)
   
97,960
     
(182,144
)
Strategic transaction expenses      
 
     
(3,160
)
   
     
(38,557
)
Gain on sales of investments, net 
 
78,675
     
     
67,375
     
516
 
Gain on TMCT transactions 
 
     
8,329
     
     
8,329
 
Other non-operating gain, net 
 
372
     
1,936
     
527
     
22,934
 
                               
Income (Loss) from Continuing Operations
Before Income Taxes
 
(98,242
)
   
(4,555
)
   
(3,953,739
)
   
79,571
 
                               
Income taxes (Note 3)
 
(25,919
)
   
88,106
     
1,836,833
     
44,914
 
                               
Income (Loss) from Continuing Operations
 
(124,161
)
   
83,551
     
(2,116,906
)
   
124,485
 
                               
Income (Loss) from Discontinued Operations,                              
net of tax (Note 2)
 
2,585
     
69,214
     
(715,157
)
   
41,261
 
                               
Net Income (Loss)  
$
(121,576
)
 
$
152,765
   
$
(2,832,063
)
 
$
165,746
 



See Notes to Condensed Consolidated Financial Statements.

 
1

 

TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)

 
Sept. 28, 2008
   
Dec. 30, 2007
 
               
Assets
             
               
Current Assets
             
Cash and cash equivalents                                                                                
$
259,900
   
$
233,284
 
Accounts receivable, net                                                                                
 
591,922
     
732,853
 
Inventories                                                                                
 
31,792
     
40,675
 
Broadcast rights                                                                                
 
256,696
     
287,045
 
Prepaid expenses and other                                                                                
 
109,383
     
91,166
 
Assets held for disposition                                                                                
 
59,797
     
 
Total current assets                                                                                
 
1,309,490
     
1,385,023
 
               
Properties
             
Property, plant and equipment                                                                                
 
3,405,742
     
3,564,436
 
Accumulated depreciation                                                                                
 
(1,927,896
)
   
(1,998,741
)
Net properties                                                                                
 
1,477,846
     
1,565,695
 
               
Other Assets
             
Broadcast rights                                                                                
 
259,700
     
301,263
 
Goodwill (Note 9)                                                                                
 
1,742,295
     
5,579,926
 
Other intangible assets, net (Note 9)                                                                                
 
1,431,389
     
2,663,152
 
Time Warner stock related to PHONES debt                                                                                
 
227,360
     
266,400
 
Other investments                                                                                
 
398,365
     
508,205
 
Prepaid pension costs                                                                                
 
410,251
     
514,429
 
Assets held for disposition                                                                                
 
92,585
     
33,780
 
Other                                                                                
 
254,914
     
331,846
 
Total other assets                                                                                
 
4,816,859
     
10,199,001
 
Total Assets                                                                                      
$
7,604,195
   
$
13,149,719
 



See Notes to Condensed Consolidated Financial Statements.

 
2

 

TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)

 
Sept. 28, 2008
   
Dec. 30, 2007
 
               
Liabilities and Shareholders’ Equity (Deficit)
             
               
Current Liabilities
             
  PHONES debt related to Time Warner stock (Note 10)
$
215,991
   
$
253,080
 
Other debt due within one year 
 
619,793
     
750,239
 
Contracts payable for broadcast rights
 
343,552
     
339,909
 
    Deferred income taxes  
 
7,598
     
100,324
 
Deferred income 
 
79,659
     
121,239
 
Accounts payable, accrued expenses and other current liabilities
 
605,935
     
625,175
 
Liabilities held for disposition   
 
92,995
     
 
Total current liabilities
 
1,965,523
     
2,189,966
 
               
Long-Term Debt
             
PHONES debt related to Time Warner stock (Note 10)
 
64,008
     
343,960
 
Other long-term debt (less portions due within one year)
 
10,922,221
     
11,496,246
 
Total long-term debt 
 
10,986,229
     
11,840,206
 
               
Other Non-Current Liabilities
             
Deferred income taxes  
 
92,289
     
1,771,845
 
Contracts payable for broadcast rights  
 
357,067
     
432,393
 
Deferred compensation and benefits 
 
241,359
     
264,480
 
Liabilities held for disposition   
 
5,858
     
 
Other obligations   
 
221,592
     
164,769
 
Total other non-current liabilities 
 
918,165
     
2,633,487
 
               
Common Shares Held by ESOP, net of Unearned
    Compensation (Note 5)                                                  
 
31,860
     
 
               
Shareholders’ Equity (Deficit)
             
Stock purchase warrants  
 
255,000
     
255,000
 
Retained earnings (deficit) 
 
(6,209,594
)
   
(3,474,311
)
Accumulated other comprehensive income (loss)    
 
(342,988
)
   
(294,629
)
Total shareholders’ equity (deficit)   
 
(6,297,582
)
   
(3,513,940
)
Total Liabilities and Shareholders’ Equity (Deficit)
$
7,604,195
   
$
13,149,719
 



See Notes to Condensed Consolidated Financial Statements.

 
3

 

TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
 
First Three Quarters
 
 
Sept. 28, 2008
   
Sept. 30, 2007
 
Operating Activities
             
Net income (loss)   
$
(2,832,063
)
 
$
165,746
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
             
Stock-based compensation related to equity-classified awards  
 
     
33,561
 
ESOP compensation     
 
31,860
     
 
Pension costs, net of contributions      
 
63,655
     
(8,023
)
Gain on sale of studio production lot   
 
(82,371
)
   
 
Gain on sales of other real estate    
 
(24,328
)
   
 
Write-off of capitalized software application costs  
 
24,804
     
 
Write-off of Los Angeles Times plant equipment   
 
     
24,216
 
Depreciation    
 
152,229
     
157,194
 
Amortization of intangible assets    
 
14,689
     
15,500
 
Write-downs of intangible assets (Note 9)  
 
3,843,111
     
 
Net income on equity investments    
 
(58,130
)
   
(67,953
)
Distributions from equity investments   
 
84,469
     
77,848
 
Amortization of debt issuance costs   
 
58,951
     
17,331
 
(Gain) loss on change in fair values of PHONES and related investment 
 
(97,960
)
   
182,144
 
Gain on sales of investments, net  
 
(67,375
)
   
(516
)
Gain on TMCT transactions   
 
     
(8,329
)
Subchapter S corporation election deferred income taxes adjustment (Note 3)
 
(1,859,358
)
   
 
Matthew Bender and Mosby income tax settlement   
 
     
(90,704
)
Non-cash loss on dispositions of discontinued operations  
 
681,055
     
20,025
 
Changes in working capital items, excluding effects from acquisitions and dispositions:
             
Accounts receivable  
 
49,085
     
14,003
 
Inventories, prepaid expenses and other current assets 
 
10,599
     
(12,423
)
Deferred income, accounts payable, accrued expenses and other current liabilities
 
(19,944
)
   
83,720
 
Income taxes   
 
72,256
     
(48,083
)
Deferred compensation   
 
(18,693
)
   
(49,031
)
Deferred income taxes, excluding subchapter S corporation election adjustment
 
(1,184
)
   
(99,191
)
Tax benefit on stock options exercised     
 
     
11,933
 
Prepaid rent from Newsday LLC (Note 2)   
 
18,000
     
 
Other, net  
 
42,006
     
32,597
 
Net cash provided by operating activities   
 
85,363
     
451,565
 
Investing Activities
             
Purchase of TMCT, LLC real estate (Note 13)   
 
(175,141
)
   
 
Other capital expenditures   
 
(65,012
)
   
(85,132
)
Acquisitions and investments   
 
(14,104
)
   
(21,942
)
Distribution from Newsday LLC (Note 2)   
 
612,000
     
 
Proceeds from sales of subsidiaries, intangibles, investments and real estate 
 
318,051
     
95,848
 
Net cash provided by (used for) investing activities   
 
675,794
     
(11,226
)
Financing Activities
             
Long-term borrowings    
 
25,000
     
7,015,000
 
Issuance of exchangeable promissory note  
 
     
200,000
 
Borrowings under former bridge credit facility 
 
     
100,000
 
Other borrowings    
 
1,978
     
 
Repayments under former bridge credit facility  
 
     
(1,410,000
)
Repayments of long-term debt      
 
(979,563
)
   
(1,633,655
)
Repayments of commercial paper, net  
 
     
(97,019
)
Borrowings under trade receivables securitization facility (Note 10)  
 
225,000
     
 
Long-term debt issuance costs   
 
(6,956
)
   
(134,085
)
Sales of common stock to employees, net
 
     
73,354
 
Sale of common stock to Zell Entity      
 
     
50,000
 
Purchases of Tribune common stock    
 
     
(4,289,192
)
Dividends      
 
     
(43,247
)
Net cash used for financing activities     
 
(734,541
)
   
(168,844
)
Net Increase in Cash and Cash Equivalents     
 
26,616
     
271,495
 
Cash and cash equivalents, beginning of year   
 
233,284
     
174,686
 
Cash and cash equivalents, end of quarter  
$
259,900
   
$
446,181
 

See Notes to Condensed Consolidated Financial Statements.

 
4

 

TRIBUNE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1:  BASIS OF PREPARATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the financial position of Tribune Company and its subsidiaries (the “Company” or “Tribune”) as of Sept. 28, 2008 and the results of their operations for the third quarters and first three quarters ended Sept. 28, 2008 and Sept. 30, 2007 and cash flows for the first three quarters ended Sept. 28, 2008 and Sept. 30, 2007.  All adjustments reflected in the accompanying unaudited condensed consolidated financial statements are of a normal recurring nature.  Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.  Certain prior year amounts have been reclassified to conform to the 2008 presentation.

On April 1, 2007, the Company’s board of directors (the “Board”), based on the recommendation of a special committee of the Board comprised entirely of independent directors, approved a series of transactions (collectively, the “Leveraged ESOP Transactions”) with a newly formed Tribune Employee Stock Ownership Plan (the “ESOP”), EGI-TRB, L.L.C., a Delaware limited liability company majority-owned by Sam Investment Trust (a trust established for the benefit of Samuel Zell and his family), and Samuel Zell. On Dec. 20, 2007, the Company completed the Leveraged ESOP Transactions which culminated in the cancellation of all issued and outstanding shares of the Company’s common stock as of that date, other than shares held by the Company or the ESOP, and the Company becoming wholly-owned by the ESOP. The Company has significant continuing public debt and has accounted for these transactions as a leveraged recapitalization and, accordingly, has maintained a historical cost presentation in its consolidated financial statements.

On May 11, 2008, the Company entered into an agreement (the “Formation Agreement”) with CSC Holdings, Inc. (“CSC”) and NMG Holdings, Inc., each a wholly-owned subsidiary of Cablevision Systems Corporation (“Cablevision”), to form a new limited liability company (“Newsday LLC”).  On July 29, 2008, the Company consummated the closing of the transactions contemplated by the Formation Agreement.  Under the terms of the Formation Agreement, the Company, through Newsday, Inc. and other subsidiaries of the Company, contributed certain assets and related liabilities of the Newsday Media Group business (“NMG”) to Newsday LLC, and CSC contributed cash of $35 million and newly issued senior notes of Cablevision with a fair market value of $650 million to the parent company of Newsday LLC.  Concurrent with the closing of this transaction, Newsday LLC and its parent company borrowed $650 million under a new secured credit facility, and the Company received a special distribution of $612 million from Newsday LLC in cash as well as $18 million of prepaid rent under leases for certain facilities used by NMG and located in Melville, New York with an initial term ending in 2018.  As a result of these transactions, CSC, through NMG Holdings, Inc., owns approximately 97% and the Company owns approximately 3% of the equity of the parent company of Newsday LLC.  CSC has operational control of Newsday LLC.  These transactions are further described in Note 2.  NMG’s operations consist of Newsday, a daily newspaper circulated primarily in Nassau and Suffolk counties on Long Island, New York, and in the borough of Queens in New York City; four specialty magazines circulated primarily on Long Island; several shopper guides; amNY, a free daily newspaper in New York City; and several websites including newsday.com and amny.com.

On Feb. 12, 2007, the Company announced an agreement to sell the New York edition of Hoy, the Company’s Spanish-language daily newspaper (“Hoy, New York”).  The Company completed the sale of Hoy, New York on May 15, 2007.  In March 2007, the Company announced its intentions to sell its Southern Connecticut Newspapers—The Advocate (Stamford) and Greenwich Time (collectively “SCNI”).  The sale of SCNI closed on Nov. 1, 2007, and excluded the SCNI real estate in Stamford and Greenwich, Connecticut, which was sold in a separate transaction that closed on April 22, 2008.  During the third quarter of 2007, the Company began actively pursuing the sale of the stock of one of its subsidiaries, EZ Buy & EZ Sell Recycler Corporation (“Recycler”).  The sale of Recycler closed on Oct. 17, 2007.  The accompanying unaudited condensed consolidated financial statements reflect these businesses, including the NMG business as described above, as
 
5

 
discontinued operations for all periods presented.  The prior year condensed consolidated statements of operations have been reclassified to conform to the presentation of these businesses as discontinued operations.  See Note 2 for further discussion.

As described in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007, the Company reviews goodwill and certain intangible assets no longer being amortized for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with Financial Accounting Standards Board (“FASB”) No. 142 (“FAS No. 142”), “Goodwill and Other Intangible Assets.”  During 2008, each of the Company’s major newspapers has experienced significant continuing declines in advertising revenues due to a variety of factors, including weak national and local economic conditions, which has reduced advertising demand, and increased competition, particularly from on-line media.  In the second quarter of 2008, the Company performed an impairment review of goodwill attributable to its newspaper reporting unit and newspaper masthead intangible assets due to the continuing decline in newspaper advertising revenues.  The review was conducted after $830 million of newspaper reporting unit goodwill and $380 million of newspaper masthead assets were allocated to the NMG transaction (see Note 2).  As a result of the impairment review, the Company recorded non-cash pretax impairment charges in the second quarter of 2008 totaling $3,843 million ($3,832 million after taxes) to write down its newspaper reporting unit goodwill by $3,007 million ($3,006 million after taxes) and four newspaper mastheads by a total of $836 million ($826 million after taxes).  These non-cash impairment charges are reflected as write-downs of intangible assets in the accompanying unaudited condensed consolidated statements of operations.  The impairment charges do not affect the Company’s operating cash flows or its compliance with its financial debt covenants.  See Note 9 for a further discussion of the methodology the Company utilized to perform this impairment review in the second quarter of 2008.

As of Sept. 28, 2008, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007, have not changed from Dec. 30, 2007, except for the adoption of FASB Statement No. 157, “Fair Value Measurements” (“FAS No. 157”) and FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS No. 159”), both of which were adopted effective Dec. 31, 2007.  The Company has elected to account for its PHONES debt utilizing the fair value option under FAS No. 159.  The effects of this election were recorded as of Dec. 31, 2007, and included a $177 million decrease in PHONES debt related to Time Warner stock, a $62 million increase in deferred income tax liabilities, an $18 million decrease in other assets, and a $97 million increase in retained earnings.  In accordance with FAS No. 159, the $97 million retained earnings increase was not included in the Company’s unaudited condensed consolidated statement of operations for the first three quarters ended Sept. 28, 2008.  See Note 10 for additional information regarding the Company’s adoption of FAS No. 159.  The adoption of FAS No. 157 had no impact on the Company’s consolidated financial statements.  See Note 11 for additional disclosures related to the fair value of financial instruments included in the Company’s unaudited condensed consolidated balance sheet at Sept. 28, 2008.
 
NOTE 2:   DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR
          DISPOSITION

Discontinued Operations—As discussed in Note 1, on May 11, 2008, the Company entered into the Formation Agreement with CSC and NMG Holdings, Inc. to form Newsday LLC. On July 29, 2008, the Company consummated the closing of the transactions contemplated by the Formation Agreement.  Under the terms of the Formation Agreement, the Company, through Newsday, Inc. and other subsidiaries of the Company, contributed certain assets and related liabilities of NMG to Newsday LLC, and CSC contributed $35 million of cash and newly issued senior notes of Cablevision with a fair market value of $650 million to the parent company of Newsday LLC.  Concurrent with the closing of this transaction, Newsday LLC and its parent company borrowed $650 million under a new secured credit facility, and the Company received a special distribution of $612 million from Newsday LLC in cash as well as $18 million in prepaid rent under leases for certain facilities used by NMG and located in Melville, New York with an initial term ending in 2018.  The Company retained ownership of these facilities following the transaction.  Annual lease payments
 
6

 
due under the terms of the leases total $1.5 million in each of the first five years of the lease terms and $6 million thereafter.

As a result of these transactions, CSC, through NMG Holdings, Inc., owns approximately 97% and the Company owns approximately 3% of the equity of the parent company of Newsday LLC.  CSC has operational control over Newsday LLC.  Borrowings by Newsday LLC and its parent company under the secured credit facility are guaranteed by CSC and NMG Holdings, Inc. and secured by a lien on the assets of Newsday LLC and the assets of its parent company, including the senior notes of Cablevision contributed by CSC.  The Company agreed to indemnify CSC and NMG Holdings, Inc. with respect to any payments that CSC or NMG Holdings, Inc. makes under their guarantee of the $650 million of borrowings by Newsday LLC and its parent company under the secured credit facility.  In the event the Company is required to perform under this indemnity, the Company will be subrogated to and acquire all rights of CSC and NMG Holdings, Inc. against Newsday LLC and its parent company to the extent of the payments made pursuant to the indemnity.  From the closing date of July 29, 2008 through the third anniversary of the closing date, the maximum amount of potential indemnification payments (the “Maximum Indemnification Amount”) is $650 million.  After the third year, the Maximum Indemnification Amount is reduced by $120 million, and each year thereafter by $35 million until January 1, 2018, at which point the Maximum Indemnification Amount is reduced to $0.  Following the transaction, the Company used $589 million of the net cash proceeds to pay down borrowings under the Company’s Tranche X facility (see Note 10).  The Company accounts for its remaining $20 million equity interest in the parent company of Newsday LLC as a cost method investment.

The fair market value of the contributed NMG net assets exceeded their tax basis due to the Company's low tax basis in the contributed intangible assets.  However, the transaction did not result in an immediate taxable gain because the transaction was structured to comply with the partnership provisions of the United States Internal Revenue Code and related regulations.

During the second quarter of 2008, the Company recorded a pretax loss of $692 million ($693 million after taxes) to write down the net assets of NMG to estimated fair value.  NMG’s net assets included, before the write-down, allocated newspaper reporting unit goodwill and a newspaper masthead intangible asset of $830 million and $380 million, respectively.  In the third quarter of 2008, the Company recorded a favorable $1 million after-tax adjustment to the loss on this transaction.  

The Company announced an agreement to sell Hoy, New York on Feb. 12, 2007.  The Company completed the sale of Hoy, New York on May 15, 2007 and recorded a pretax gain on the sale of $2.5 million ($.1 million after taxes) in the second quarter of 2007.  In March 2007, the Company announced its intentions to sell SCNI.  The sale of SCNI closed on Nov. 1, 2007, and excluded the SCNI real estate in Stamford and Greenwich, Connecticut, which was sold in a separate transaction that closed on April 22, 2008 (see “Assets and Liabilities Held for Disposition” section below).  In the first quarter of 2007, the Company recorded a pretax loss of $19 million ($33 million after taxes) to write down the net assets of SCNI to estimated fair value, less costs to sell.  In the third quarter of 2007, the Company recorded a favorable $2.8 million after-tax adjustment to the expected loss on the sale of SCNI.  In the first quarter of 2008, the Company recorded an additional $.5 million after-tax loss on the sale of SCNI. During the third quarter of 2007, the Company began actively pursuing the sale of the stock of Recycler.  The sale of Recycler closed on Oct. 17, 2007.  The Company recorded a pretax loss on the sale of Recycler of $1 million in the third quarter of 2007.  Due to the Company’s high tax basis in the Recycler stock, the sale generated a significantly higher capital loss for income tax purposes.  As a result, the Company recorded a $65 million income tax benefit in the third quarter of 2007, resulting in an after-tax gain of $64 million.

These businesses were considered components of the Company’s publishing segment as their operations and cash flows could be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company.  The operations and cash flows of these businesses have been eliminated from the ongoing operations of the Company as a result of these transactions, and the Company will not have any significant continuing involvement in their operations.  Accordingly, the results of operations for each of these businesses
 
7

 
are reported as discontinued operations in the accompanying unaudited condensed consolidated statements of operations.

Selected financial information related to discontinued operations is summarized as follows (in thousands):
 
   
Third Quarter
   
First Three Quarters
 
   
2008
   
2007
   
2008
   
2007
 
                                 
Operating revenues  
 
$
32,260
   
$
132,187
   
$
258,362
   
$
416,925
 
                                 
Operating profit (loss)
 
$
4,441
   
$
12,390
   
$
(410
)
 
$
46,256
 
Interest income    
   
     
3
     
2
     
7
 
Interest expense    
   
(2,454
)
   
(11,810
)
   
(22,186
)
   
(15,264
)
Non-operating loss, net(1)  
   
     
     
     
(15,000
)
Gain (loss) on dispositions of discontinued                                
operations 
   
852
     
(3,067
)    
(691,623
)    
(20,025
)
Income (loss) from discontinued operations
before income taxes
   
2,839
     
(2,484
)
   
(714,217
)
   
(4,026
)
Income taxes(2) 
   
(254
)
   
71,698
     
(940
)
   
45,287
 
Income (loss) from discontinued operations
                               
net of tax
 
$
2,585
   
$
69,214
   
$
(715,157
)
 
$
41,261
 
 
(1)  
Discontinued operations for the first three quarters of 2007 included a pretax non-operating charge of $15 million for a civil forfeiture payment related to the inquiry by the United States Attorney’s Office for the Eastern District of New York into the circulation practices of Newsday and Hoy, New York.  See Note 5 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007, for further information.
 
(2)  
Income taxes for the first three quarters of 2008 included tax expense of $1 million related to the $691 million pretax loss on the NMG transaction.  NMG’s net assets included, before the write-down of these assets to fair value in connection with the transaction, allocated newspaper reporting unit goodwill of $830 million and a newspaper masthead intangible asset of $380 million, most of which are not deductible for income tax purposes. The Company recorded an income tax benefit of $72 million related to a pretax loss of $2 million in the third quarter of 2007 and an income tax benefit of $45 million related to a pretax loss of $4 million in the first three quarters of 2007.  Due to the Company’s high tax basis in the Recycler stock, the sale of Recycler generated a significantly higher capital loss for income tax purposes.  As a result, the Company recorded a $65 million income tax benefit in the third quarter of 2007, resulting in an after-tax gain of $64 million on the sale of Recycler.  The pretax loss in the first three quarters of 2007 also included $48 million of allocated newspaper group goodwill, most of which is not deductible for income tax purposes.
 
The Company allocated corporate interest expense of $2.5 million and $11.8 million in the third quarters of 2008 and 2007, respectively, and $22.2 million and $15.3 million in the first three quarters of 2008 and 2007, respectively, to discontinued operations.  In accordance with Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to Discontinued Operations”, the amount of corporate interest allocated to discontinued operations was based on the amount of the net proceeds from the NMG transaction that were used to pay down borrowings under the Company’s Tranche X facility and applying the interest rate applicable to the Tranche X facility for the periods in which these borrowings under the Tranche X facility were outstanding.
 
 
8

 

Assets and Liabilities Held for Disposition—Assets and liabilities held for disposition at Sept. 28, 2008 and Dec. 30, 2007 are summarized as follows (in thousands):
 
   
Sept. 28, 2008
   
Dec. 30, 2007
 
   
Assets
   
Liabilities
   
Assets
   
Liabilities
 
                                 
Chicago Cubs and Wrigley Field
 
$
136,903
   
$
98,853
   
$
   
$
 
Studio production lot, Hollywood, California
   
     
     
23,322
     
 
SCNI real estate
   
     
     
5,485
     
 
Other real estate
   
15,479
     
     
4,973
     
 
Total assets and liabilities held for disposition
 
$
152,382
   
$
98,853
   
$
33,780
   
$
 

The Company is in the process of disposing of an interest in its Chicago Cubs operations which include the baseball team, Wrigley Field and the Company’s 25% investment in Comcast SportsNet Chicago.  The Company expects to complete the transaction within the next year.  Accordingly, the net book value of the baseball team and Wrigley Field is included in assets and liabilities held for disposition at Sept. 28, 2008.  The Company’s investment in Comcast SportsNet Chicago continues to be included in other investments in the accompanying unaudited condensed consolidated balance sheets.  The disposition of an interest in the Chicago Cubs baseball team is subject to the approval of Major League Baseball.

During the third quarter of 2007, the Company commenced a process to sell the real estate and related assets of its studio production lot located in Hollywood, California. Accordingly, the $23 million carrying value of the land, building and equipment of the studio production lot was included in assets held for disposition at Dec. 30, 2007.  The sale of the studio production lot closed on Jan. 30, 2008, and the Company received net proceeds of $122 million, of which $119 million was placed into an escrow fund immediately following the closing of the sale. Simultaneous with the closing of the sale, the Company entered into a five-year operating lease for a portion of the studio production lot utilized by the Company’s KTLA-TV station. The sale resulted in a total pretax gain of $99 million.  The pretax gain related to the portion of the studio production lot currently utilized by the Company’s KTLA-TV station was $16 million and represented more than a minor portion of the fair value of the studio production lot.  Accordingly, this gain was deferred and will be amortized as reduced rent expense over the five-year life of the related operating lease.  The remaining pretax gain of $83 million recorded in the first quarter of 2008 was included as a reduction of selling, general and administrative expenses.

As noted above, the Company sold the SCNI real estate in Stamford and Greenwich, Connecticut on April 22, 2008.  The $5 million carrying value of the real estate was included in assets held for disposition at Dec. 30, 2007.  The Company received net proceeds of $29 million on the sale of the SCNI real estate, which proceeds were placed into an escrow fund immediately following the closing of the sale.  The Company recorded a pretax gain of $23 million as a reduction of selling, general and administrative expenses in the second quarter of 2008.  On April 28, 2008, the $29 million of net proceeds from the sale of the SCNI real estate, the $119 million of net proceeds from the sale of the studio production lot and available cash were utilized to purchase eight real properties that were previously leased from TMCT, LLC (see Note 13 for additional information pertaining to the Company’s acquisition of the TMCT real properties).  The purchase was structured as a like-kind exchange, which allowed the Company to defer income taxes on nearly all of the gains from these dispositions.  In December 2006, the Company commenced a process to sell the land and building of one of its other facilities.  The $5 million carrying value of the land and building approximates fair value less costs to sell and is also included in assets held for disposition at Sept. 28, 2008 and Dec. 30, 2007.  During the third quarter of 2008, the Company commenced a process to sell two of the properties acquired in April 2008 as part of the acquisition of the eight real properties from TMCT, LLC.  On Oct. 31, 2008, the Company concluded a transaction to sell one of these properties for net proceeds of approximately $5 million.  The Company will recognize a pretax gain of approximately $1 million on the sale in the fourth quarter of 2008.  The $10 million carrying value of these two properties approximates fair value less costs to sell and is also included in assets held for disposition at Sept. 28, 2008.
 
 
9


NOTE 3:   INCOME TAXES

S Corporation Election—On March 13, 2008, the Company filed an election to be treated as a subchapter S corporation under the Internal Revenue Code, which election is effective as of the beginning of the Company’s 2008 fiscal year.  The Company also elected to treat nearly all of its subsidiaries as qualified subchapter S subsidiaries.  Subject to certain limitations (such as the built-in gain tax applicable for ten years to gains accrued prior to the election), the Company is no longer subject to federal income tax.  Instead, the Company’s income will be required to be reported by its shareholders.  The Company’s ESOP, the Company’s sole shareholder (see Note 5), will not be taxed on the share of income that is passed through to it because the ESOP is a qualified employee benefit plan.  Although most states in which the Company operates recognize the S corporation status, some impose income taxes at a reduced rate.

As a result of the election and in accordance with FASB Statement No. 109, “Accounting for Income Taxes”, the Company eliminated approximately $1,859 million of net deferred income tax liabilities as of Dec. 31, 2007, and recorded such adjustment as a reduction in the Company’s provision for income tax expense in the first quarter of 2008.  The Company continues to report deferred income taxes relating to states that assess taxes on S corporations, subsidiaries which are not qualified subchapter S subsidiaries, and potential asset dispositions that the Company expects will be subject to the built-in gain tax.

PHONES Interest—In connection with the routine examination of the Company’s federal income tax returns for 2000 through 2003, the Internal Revenue Service (“IRS”) proposed that the Company capitalize the interest on the PHONES as additional tax basis in the Company’s 16 million shares of Time Warner common stock, rather than allowing the Company to currently deduct such interest. The National Office of the IRS has issued a Technical Advice Memorandum that supports the proposed treatment. The Company disagrees with the IRS’s position and requested that the IRS administrative appeals office review the issue. The effect of the treatment proposed by the IRS would be to increase the Company’s tax liability by approximately $199 million for the period 2000 through 2003 and by approximately $259 million for the period 2004 through the third quarter of 2008.

During the fourth quarter of 2006, the Company reached an agreement with the IRS appeals office regarding the deductibility of the PHONES interest expense. The agreement will apply for the tax years 2000 through the 2029 maturity date of the PHONES. In December of 2006, under the terms of the agreement reached with the IRS appeals office, the Company paid approximately $81 million of tax plus interest for tax years 2000 through 2005. The tax payments were recorded as a reduction in the Company’s deferred tax liability, and the interest was recorded as a reduction in the Company’s income tax reserves.  The Company filed its 2006 and 2007 tax returns reflecting the agreement reached with the IRS appeals office.  The agreement reached with the appeals office is being reviewed by the Joint Committee on Taxation.  A decision from the Joint Committee on Taxation is expected within the next twelve months.

Matthew Bender and Mosby Income Tax Liability—During the third quarter of 2007, the Company settled its appeal of the United States Tax Court decision that disallowed the tax-free reorganization of Matthew Bender and Mosby, former subsidiaries of The Times Mirror Company, with the United States Court of Appeals for the Seventh Circuit.  As a result of the settlement, the Company received refunds of federal income taxes and interest of $4 million on Sept. 26, 2007 and $340 million on Oct. 1, 2007.  After consideration of income taxes on the interest received, the net cash proceeds totaled approximately $286 million.  These refunds, together with related state income tax benefits of $29 million, were accounted for as a $91 million reduction in third quarter 2007 income tax expense and a $224 million reduction in goodwill recorded on the Company’s consolidated balance sheet.  The September and October 2007 refunds of the previously paid income taxes and interest were accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination” (“EITF 93-7”).  The portion of the refunds representing after-tax interest applicable to periods following the acquisition of The Times Mirror reduced income tax expense, and the remainder reduced goodwill.
 
10

 
Other—Although management believes its estimates and judgments are reasonable, the resolutions of the Company’s tax issues are unpredictable and could result in tax liabilities that are significantly higher or lower than that which has been provided by the Company.

In the third quarter and first three quarters of 2008, income taxes applicable to continuing operations amounted to a net expense of $26 million and a net benefit of $1,837 million, respectively.  The net expense in the third quarter of 2008 included a provision of $27 million related to the Company’s gain on the sale of a 10 percent interest in CareerBuilder, LLC (see Note 7).  The net benefit in the first three quarters of 2008 included the favorable $1,859 million deferred income tax adjustment discussed above.  The $3,007 million write-down of the Company’s publishing goodwill in the second quarter of 2008 resulted in an income tax benefit of only $1 million for financial reporting purposes because almost all of the goodwill is not deductible for income tax purposes (see Note 9).  The effective tax rate on income from continuing operations in the 2007 third quarter and first three quarters were affected by certain non-operating items that were not deductible for tax purposes and the Matthew Bender/Mosby income tax adjustment (see Note 7 for a summary of non-operating items).  Excluding all non-operating items, the effective tax rate on income from continuing operations in the third quarter and first three quarters of 2007 were 43.3% and 41.1%, respectively.

NOTE 4:  STOCK-BASED COMPENSATION

Stock-based compensation expense for the third quarters and first three quarters of 2008 and 2007 was as follows (in thousands):

   
Third Quarter
   
First Three Quarters
 
   
2008
   
2007
   
2008
   
2007
 
                                 
Management equity incentive plan
 
$
2,922
   
$
   
$
15,456
   
$
 
Options(1)
   
     
555
     
     
1,879
 
Restricted stock units(1)
   
     
6,385
     
     
30,103
 
Employee stock purchase plan(2)
   
     
     
     
723
 
Total stock-based compensation expense
 
$
2,922
   
$
6,940
   
$
15,456
   
$
32,705
 
 
(1)  
Pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into by the Company on April 1, 2007 with Great Banc Trust Company, not in its individual or corporate capacity, but solely as trustee of the Tribune Employee Stock Ownership Trust, a separate trust which forms a part of the ESOP, Tesop Corporation, a Delaware corporation wholly-owned by the ESOP (“Merger Sub”), and the Zell Entity (solely for the limited purposes specified therein), which provided for Merger Sub to be merged with and into the Company, and following such merger, the Company to continue as the surviving corporation wholly-owned by the ESOP (the “Merger”), on Dec. 20, 2007, the Company redeemed for cash all outstanding stock awards, each of which vested in full upon completion of the Merger, with positive intrinsic value relative to $34.00 per share.  All remaining outstanding stock awards under the Tribune Company Incentive Plan (the “Incentive Plan”) as of Dec. 20, 2007 that were not cash settled pursuant to the Merger Agreement were cancelled.  The Company does not intend to grant any new equity awards under the Incentive Plan.
 
(2)  
In April 2007, the Company suspended further contributions to the employee stock purchase plan, which was discontinued as of Dec. 20, 2007, following the consummation of the Merger.

On Dec. 20, 2007, the Board approved the Company’s 2007 Management Equity Incentive Plan (the “MEIP”). The MEIP provides for phantom units (the “Units”) that generally track the fair value of a share of the Company’s common stock, as determined by the trustee of the Company’s Employee Stock Ownership Plan (see Note 5).  MEIP awards have been made to eligible members of the Company’s management and other key employees at the discretion of the Board.

The Company accounts for the Units issued under the MEIP as liability-classified awards.  As a result, the Company is required to adjust its MEIP liability to reflect the most recent estimate of the fair value of a share of the Company’s common stock.  In the third quarter and first three quarters of 2008, the Company recorded $2.9 million and $15.5 million of compensation expense, respectively, in connection with the MEIP, of which $3.8 million recorded in the third quarter of 2008 and $14.1 million recorded in the first three quarters of 2008
 
11

 
were based on the estimated fair value of the Company’s common stock.  The Company’s liability under the MEIP is included in other non-current liabilities on the Company’s unaudited condensed consolidated balance sheet and totaled $17 million and $16 million at Sept. 28, 2008 and Dec. 30, 2007, respectively.  The estimated fair value per share of the Company’s common stock did not change during the third quarter of 2008.

For the first three quarters of 2008, total stock-based compensation expense excluded $552,000 of costs related to discontinued operations.  For the third quarter of 2007, total stock-based compensation expense excluded $190,000 of costs related to discontinued operations and $32,000 of capitalized costs. For the first three quarters of 2007, total stock-based compensation expense excluded $678,000 of costs related to discontinued operations and $176,000 of capitalized costs.

NOTE 5:   EMPLOYEE STOCK OWNERSHIP PLAN

On April 1, 2007, the Company established the ESOP as a long-term employee benefit plan.  On that date, the ESOP purchased 8,928,571 shares of the Company’s common stock. The ESOP paid for this purchase with a promissory note of the ESOP in favor of the Company in the principal amount of $250 million, to be repaid by the ESOP over the 30-year life of the loan through its use of contributions from the Company to the ESOP and/or distributions paid on the shares of the Company’s common stock held by the ESOP.  Upon consummation of the Merger, the 8,928,571 shares of the Company’s common stock held by the ESOP were converted into 56,521,739 shares of common stock.

The ESOP provides for the allocation of the Company’s common shares it holds on a noncontributory basis to eligible employees of the Company.  None of the shares held by the ESOP had been committed for release or allocated to employees at Dec. 30, 2007.  For fiscal year 2008, as the ESOP repays the loan through its use of contributions from the Company, shares will be released and allocated to eligible employees in proportion to their eligible compensation.  The shares that are released for allocation on an annual basis will be in the same proportion that the current year’s principal and interest payments bear in relation to the total remaining principal and interest payments to be paid over the life of the $250 million ESOP loan.  The Company will recognize compensation expense based on the estimated fair value of the shares of the Company’s common stock that are allocated in each annual period.  In the third quarter and first three quarters of 2008, the Company recognized $9.3 million and $32 million, respectively, of compensation expense related to the ESOP.

The Company’s policy is to present unallocated shares held by the ESOP at book value, net of unearned compensation, and allocated shares, which include shares expected to be released as of the end of the year, at fair value in the Company’s consolidated balance sheet. Pursuant to the terms of the ESOP, participants who receive distributions of shares of the Company’s common stock can require the Company to repurchase those shares within a specified time period following such distribution.  Accordingly, the shares of the Company’s common stock held by the ESOP are classified outside of shareholders’ equity (deficit), net of unearned compensation, in the Company’s consolidated balance sheets. The amounts at Sept. 28, 2008 and Dec. 30, 2007 were as follows (in thousands):

   
Sept. 28, 2008
 
Dec. 30, 2007
 
               
ESOP shares (at fair value)(1)
 
$
31,860
 
$
 
Unallocated ESOP shares (at book value)
   
236,579
   
250,000
 
Unearned compensation related to ESOP
   
(236,579
)
 
(250,000
)
Common shares held by ESOP, net of unearned compensation
 
$
31,860
 
$
 
 
(1)  
Represents 3,034,342 shares expected to be released with respect to fiscal year 2008 as measured on Sept. 28, 2008.
 

12

 
At Sept. 28, 2008 and Dec. 30, 2007, the estimated fair value of the unallocated shares held by the ESOP was approximately $562 million and $593 million, respectively.  In accordance with the terms of the ESOP, the fair value per share of the Company’s common stock is determined as of each fiscal year end by the trustee of the ESOP.  The estimated fair value per share of the Company’s common stock has not been changed during the third quarter and first three quarters of 2008.

NOTE 6:  PENSION AND OTHER POSTRETIREMENT BENEFITS

The components of net periodic benefit cost (credit) for Company-sponsored pension and other postretirement benefits plans for the third quarters and first three quarters of 2008 and 2007 were as follows (in thousands):

 
Pension Benefits
   
Other Postretirement Benefits
 
Third Quarter
   
Third Quarter
 
2008
   
2007
   
2008
   
2007
                               
Service cost
$
5,216
   
$
611
   
$
219
   
$
322
 
Interest cost
 
21,942
     
21,232
     
1,946
     
2,125
 
Expected return on plans’ assets 
 
(36,016
)
   
(35,198
)
   
     
 
Recognized actuarial loss (gain) 
 
5,493
     
11,844
     
(396
)
   
127
 
Amortization of prior service costs (credits)
 
306
     
96
     
(203
)
   
(362
)
Special termination benefits(1)  
 
28,240
     
     
     
 
Curtailment gain(2) 
 
     
     
(4,544
)
   
 
Net periodic benefit cost (credit)(3) 
$
25,181
   
$
(1,415
)
 
$
(2,978
)
 
$
2,212
 

 
 
Pension Benefits
   
Other Postretirement Benefits
 
First Three Quarters
   
First Three Quarters
 
2008
   
2007
   
2008
   
2007
                               
Service cost 
$
16,334
   
$
1,484
   
$
738
   
$
968
 
Interest cost 
 
66,539
     
63,000
     
5,633
     
5,869
 
Expected return on plans’ assets   
 
(109,105
)
   
(104,524
)
   
     
 
Recognized actuarial loss (gain)   
 
16,809
     
35,326
     
(876
)
   
135
 
Amortization of prior service costs (credits)
 
1,042
     
165
     
(931
)
   
(1,084
)
Special termination benefits(1) 
 
59,528
     
     
     
 
Curtailment (gain) loss(2)  
 
17,147
     
     
(4,544
)
   
 
Net periodic benefit cost (credit)(3) 
$
68,294
   
$
(4,549
)
 
$
20
   
$
5,888
 
 
(1)  
Represents one-time pension benefits related to the elimination of approximately 700 positions in the third quarter of 2008 and 1,600 positions in the first three quarters of 2008.  The first three quarters of 2008 includes $7.4 million of one-time pension benefits related to discontinued operations.  These position eliminations in the first three quarters of 2008, excluding those related to discontinued operations, did not constitute a curtailment as defined in FASB Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”.   Additional position eliminations in the fourth quarter of 2008 may result in a curtailment and remeasurement of Company-sponsored pension plan obligations and assets.
 
(2)  
Relates entirely to the NMG transaction and is included in discontinued operations.
 
(3)  
Includes benefit costs related to discontinued operations, other than the amounts related to special termination benefits and the curtailment (gain) loss described above, of $.6 million and $.3 million for the third quarters of 2008 and 2007, respectively, and $1.8 million and $.8 million for the first three quarters of 2008 and 2007, respectively.

For the year ending Dec. 28, 2008, the Company plans to contribute $6 million to certain of its union and non-qualified pension plans and $13 million to its other postretirement plans.  In the first three quarters of 2008, the Company made $5 million of contributions to its union and non-qualified pension plans and $10 million of contributions to its other postretirement plans.
 
13

 
The Company accounts for its company-sponsored pension and other postretirement benefits plans in accordance with FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)”, which requires the Company to recognize the overfunded or underfunded status of its defined benefit pension and other postretirement plans as an asset or liability in its statement of financial position.  Certain Company-sponsored pension plan assets are comprised of investments in stocks, bonds, fixed income securities, mutual funds and other investment securities.  As a result of the current global economic instability, the fair value of these pension plan assets has experienced increased volatility.  The funded status of the Company-sponsored pension plans presented in the Company’s consolidated balance sheet will be remeasured at Dec. 28, 2008 utilizing, among other things, updated actuarial assumptions and the fair value of pension plan assets as of that date.  In addition, the impact of potential changes in the fair value of pension plan assets on future minimum required contributions to these plans, if any, cannot be determined at this time.

NOTE 7:  CHANGES IN OPERATIONS AND NON-OPERATING ITEMS

Non-operating items—The third quarter and first three quarters of 2008 included several non-operating items, summarized as follows (in thousands):
 
 
Third Quarter 2008
   
First Three Quarters 2008
 
 
Pretax
Gain (Loss)
   
After-tax
Gain (Loss)
   
Pretax
Gain (Loss)
   
After-tax
Gain (Loss)
 
                               
Gain (loss) on change in fair values
of PHONES and related investment  
$
(8,360
)
 
$
(8,262
)
 
$
97,960
   
$
96,803
 
Gain on sales of investments, net  
 
78,675
     
54,594
     
67,375
     
43,202
 
Other, net   
 
372
     
368
     
527
     
523
 
Income tax adjustment   
 
     
     
     
1,859,358
 
Total non-operating items  
$
70,687
   
$
46,700
   
$
165,862
   
$
1,999,886
 

In the third quarter of 2008, the $8 million non-cash pretax loss on change in fair values of PHONES and related investment resulted primarily from a $4 million increase in the fair value of the Company’s PHONES and a $3 million decrease in the fair value of 16 million shares of Time Warner common stock.  In the first three quarters of 2008, the $98 million non-cash pretax gain on change in fair values of PHONES and related investment resulted primarily from a $140 million decrease in the fair value of the Company’s PHONES, partially offset by a $39 million decrease in the fair value of 16 million shares of Time Warner common stock.  Effective Dec. 31, 2007, the Company has elected to account for its PHONES utilizing the fair value option under FAS No. 159.  As a result of this election, the Company no longer measures just the changes in fair value of the derivative component of the PHONES, but instead measures the changes in fair value of the entire PHONES debt.  See Note 10 for further information pertaining to the Company’s adoption of FAS No. 159. On Sept. 2, 2008, the Company sold a 10 percent interest in CareerBuilder, LLC to Gannett Co., Inc. (“Gannett”) for $135 million and recorded a $79 million non-operating pretax gain in the third quarter of 2008. The Company utilized $81 million of the net proceeds from this transaction to pay down the Company’s Tranche X Facility (see Note 10).  On June 30, 2008, the Company sold its 42.5% investment in ShopLocal, LLC (“ShopLocal”) to Gannett and received net proceeds of $22 million. The Company recorded a $10 million non-operating pretax loss in the second quarter of 2008 to write down its investment in ShopLocal to the amount of net proceeds received. The favorable income tax adjustment of $1,859 million in the first three quarters of 2008 related to the Company’s election to be treated as a subchapter S corporation, which resulted in the elimination of nearly all of the Company’s net deferred tax liabilities. See Note 3 for further information pertaining to the Company’s election to be treated as a subchapter S corporation.


 
14

 

The third quarter and first three quarters of 2007 included several non-operating items, summarized as follows (in thousands):
 
 
Third Quarter 2007
   
First Three Quarters 2007
 
 
Pretax
Gain (Loss)
   
After-tax
Gain (Loss)
   
Pretax
Gain (Loss)
   
After-tax
Gain (Loss)
 
                               
Loss on change in fair values
of PHONES and related investment  
$
(84,969
)
 
$
(51,831
)
 
$
(182,144
)
 
$
(111,108
)
Strategic transaction expenses    
 
(3,160
)
   
(3,160
)
   
(38,557
)
   
(32,588
)
Gain on TMCT transactions   
 
8,329
     
5,081
     
8,329
     
5,081
 
Other, net   
 
1,936
     
1,180
     
23,450
     
14,305
 
Income tax adjustment   
 
     
90,704
     
     
90,704
 
Total non-operating items   
$
(77,864
)
 
$
41,974
   
$
(188,922
)
 
$
(33,606
)

In the third quarter of 2007, the $85 million non-cash pretax loss on change in fair values of PHONES and related investment resulted primarily from a $41 million increase in the fair value of the derivative component of the Company’s PHONES and a $43 million decrease in the fair value of 16 million shares of Time Warner common stock.  In the first three quarters of 2007, the $182 million non-cash pretax loss on change in fair values of PHONES and related investment resulted primarily from a $125 million increase in the fair value of the derivative component of the Company’s PHONES and a $55 million decrease in the fair value of 16 million shares of Time Warner common stock.  Strategic transaction expenses in the third quarter and first three quarters of 2007 related to the Company’s strategic review and the Leveraged ESOP Transactions.  These expenses for the first three quarters of 2007 included a $13.5 million pretax loss from refinancing certain credit agreements.  The gain on TMCT transactions in the third quarter of 2007 included an $8 million gain related to the redemption of the Company’s remaining interests in TMCT, LLC and TMCT II, LLC.  Other, net in the first three quarters of 2007 included an $18 million pretax gain from the settlement of the Company’s Hurricane Katrina insurance claim.  The third quarter of 2007 included a favorable $91 million income tax expense adjustment related to the settlement of the Company’s Matthew Bender and Mosby income tax appeal (see Note 3).

Employee reductions—The Company reduced staffing levels related to its continuing operations by approximately 800 positions in the third quarter of 2008 and 1,500 positions in the first three quarters of 2008.  The Company recorded pretax charges related to these reductions of $44.6 million and $115.2 million in the third quarter and first three quarters of 2008, respectively.  These amounts included $28.2 million and $52.1 million, respectively, of special termination benefits payable by the Company’s pension plan (see Note 6) and related to the elimination of approximately 700 positions in the third quarter of 2008 and 1,400 positions in the first three quarters of 2008.  The amounts for the first three quarters of 2008 excluded the elimination of approximately 200 positions and a pretax charge of $13.2 million related to discontinued operations, of which $7.4 million related to special termination benefits.

In the third quarter and the first three quarters of 2007, the Company reduced its staffing levels by approximately 120 and 580 positions, respectively, and recorded pretax charges of $4 million and $32 million, respectively.  These amounts for the first three quarters of 2007 excluded eliminations of approximately 20 positions and a pretax charge of $.3 million related to discontinued operations.

Write-off of capitalized software costs—During the third quarter of 2008, the Company recorded a non-cash pretax charge of $25 million for the write-off of certain capitalized software application costs related to software that the Company no longer intends to utilize.  This non-cash charge is included in selling, general and administrative expense in the Company’s unaudited condensed consolidated statement of operations.


 
15

 
 
NOTE 8:  INVENTORIES

Inventories consisted of the following (in thousands):

 
Sept. 28, 2008
 
Dec. 30, 2007
           
Newsprint
$
20,447
 
$
28,664
Supplies and other
 
11,345
   
12,011
Total inventories
$
31,792
 
$
40,675

Newsprint inventories valued under the LIFO method were less than current cost by approximately $17 million at Sept. 28, 2008 and $10 million at Dec. 30, 2007.

 
NOTE 9:  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consisted of the following (in thousands):

 
Sept. 28, 2008
   
Dec. 30, 2007
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Amount
   
Gross
Amount
 
Accumulated
Amortization
   
Net
Amount
                                       
Intangible assets subject to amortization
                                     
Subscribers (useful life of 15 to
 20 years)
$
174,980
 
$
(80,945
)
$
94,035
   
$
189,879
 
$
(81,698)
   
$
108,181
Network affiliation agreements
 (useful life of 40 years)(1)
 
278,034
   
(34,776
)
 
243,258
     
278,034
   
(29,552
)
   
248,482
Other (useful life of 3 to 40                                       
years)
 
30,610
   
(13,392
)
 
17,218
     
25,381
   
(11,707
)
   
13,674
Total
$
483,624
 
$
(129,113
)
 
354,511
   
$
493,294
 
$
(122,957
)
   
370,337
                                       
Goodwill and other intangible
assets not subject to
amortization
                                     
Goodwill
                                   
 
Publishing
             
301,667
                   
4,138,685
Broadcasting and entertainment
             
1,440,628
                   
1,441,241
Total goodwill
             
1,742,295
                   
5,579,926
Newspaper mastheads
             
197,000
                   
1,412,937
FCC licenses
             
871,946
                   
871,946
Tradename
             
7,932
                   
7,932
Total
             
2,819,173
                   
7,872,741
Total goodwill and other intangible
assets
           
$
3,173,684
                 
$
8,243,078

(1)  
Network affiliation agreements, net of accumulated amortization, included $170 million related to FOX affiliations, $70 million related to CW affiliations and $3 million related to MyNetworkTV affiliations as of Sept. 28, 2008.


 
16

 

The changes in the carrying amounts of intangible assets during the first three quarters ended Sept. 28, 2008 were as follows (in thousands):

 
Publishing
   
Broadcasting
and
Entertainment
   
Total
 
Intangible assets subject to amortization
                     
Balance as of Dec. 30, 2007  
$
70,905
   
$
299,432
   
$
370,337
 
Amortization expense  
 
(6,236
)
   
(7,729
)
   
(13,965
)
Acquisitions   
 
6,003
     
     
6,003
 
Disposition of discontinued operations (see Note 2)
 
(7,819
)
   
     
(7,819
)
Foreign currency translation adjustment   
 
(45
)
   
     
(45
)
Balance as of Sept. 28, 2008  
$
62,808
   
$
291,703
   
$
354,511
 
                       
Goodwill
                     
Balance as of Dec. 30, 2007  
$
4,138,685
   
$
1,441,241
   
$
5,579,926
 
Disposition of discontinued operations (see Note 2)
 
(830,481
)
   
     
(830,481
)
Reclassification to assets held for disposition (see Note 2)
 
     
(613
)
   
(613
)
Acquisitions  
 
475
     
     
475
 
Impairment write-down of goodwill  
 
(3,007,000
)
   
     
(3,007,000
)
Foreign currency translation adjustment  
 
(12
)
   
     
(12
)
Balance as of Sept. 28, 2008  
$
301,667
   
$
1,440,628
   
$
1,742,295
 
                       
Other intangible assets not subject to amortization
                     
Balance as of Dec. 30, 2007 
$
1,420,869
   
$
871,946
   
$
2,292,815
 
Disposition of discontinued operations (see Note 2)
 
(379,826
)
   
     
(379,826
)
Impairment write-down of newspaper masthead assets
 
(836,111
)
   
     
(836,111
)
Balance as of Sept. 28, 2008
$
204,932
   
$
871,946
   
$
1,076,878
 
                       
Total goodwill and other intangibles as of Sept. 28, 2008
$
569,407
   
$
2,604,277
   
$
3,173,684
 

 
On March 13, 2008, the Company filed an election to be treated as a subchapter S corporation under the Internal Revenue Code, which election was effective as of the beginning of the Company’s 2008 fiscal year.  As a result, approximately $1,859 million of the Company’s net deferred tax liabilities were eliminated and such adjustment was recorded as a reduction in the Company’s provision for income tax expense in the first quarter of 2008 (see Note 3).  This adjustment resulted in an increase in the carrying values of the Company’s reporting units.

As disclosed in Note 1 and in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007, the Company reviews goodwill and certain intangible assets no longer being amortized for impairment annually in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with FAS No. 142.   

During 2008, each of the Company’s major newspapers has experienced significant continuing declines in advertising revenues due to a variety of factors, including weak national and local economic conditions, which has reduced advertising demand, and increased competition, particularly from on-line media.  The largest decreases in advertising revenue have been in the real estate and recruitment classified advertising categories.  The advertising shortfalls have caused significant declines in the Company’s publishing segment operating profit.  Due to the declines in actual and projected newspaper advertising revenues, the Company performed an impairment review of goodwill attributable to its newspaper reporting unit and newspaper mastheads in the second quarter of 2008.  The review was conducted after $830 million of newspaper reporting unit goodwill and $380 million of the newspaper masthead assets were allocated to the NMG transaction (see Note 2). As a result of the impairment review conducted in the second quarter of 2008, the Company recorded non-cash pretax impairment charges totaling $3,843 million ($3,832 million after taxes) to write down its newspaper reporting unit goodwill by $3,007 million ($3,006 million after taxes) and four newspaper mastheads by a total
 
 
17

 
of $836 million ($826 million after taxes).  These non-cash impairment charges are reflected as write-downs of intangible assets in the Company’s unaudited condensed consolidated statements of operations.  The impairment charges do not affect the Company’s operating cash flows or its compliance with its financial debt covenants.

In accordance with FAS No. 142, the impairment review performed in the second quarter of 2008 was based on estimated fair values.  The total fair value of the Company’s newspaper reporting unit was estimated based on projected future discounted cash flow analyses and market valuations of comparable companies.  Under FAS No. 142, the estimated fair value of goodwill of a reporting unit is determined by calculating the residual fair value that remains after the total estimated fair value of the reporting unit is allocated to its net assets other than goodwill.  The Company’s impairment review performed in the second quarter of 2008 resulted in an estimated fair value for newspaper reporting unit goodwill of $185 million, which compared to a book value before the impairment charge at June 29, 2008 of $3,192 million following the reclassification of goodwill attributable to NMG (see Note 2) and therefore resulted in the pretax impairment charge of $3,007 million for goodwill.  The estimated fair values of the Company’s newspaper mastheads were based on discounted future cash flows calculated utilizing the relief-from-royalty method.  Newspaper mastheads had a total book value of $1,413 million at Dec. 30, 2007, and pertained to five newspapers, including Newsday, which were acquired as part of the Company’s purchase of The Times Mirror Company in 2000.

The determination of estimated fair values of goodwill and other intangible assets not being amortized requires many judgments, assumptions and estimates of several critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, as well as specific economic factors in the publishing and broadcasting industries.  Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in additional non-cash impairment charges related to the Company’s publishing and/or broadcasting and entertainment segments.


 
18

 

NOTE 10:  DEBT

Debt consisted of the following (in thousands):
 
 
Sept. 28, 2008
 
Dec. 30, 2007
           
Tranche B Facility due 2014, interest rate of 5.79% and 7.91%, respectively
$
7,554,825
 
$
7,587,163
Tranche X Facility due 2009, interest rate of 5.54% and 7.99%,
respectively
 
512,000
   
1,400,000
Bridge Facility due 2008, interest rate of 8.79% and 9.43%, respectively
 
1,600,000
   
1,600,000
Medium-term notes due 2008, weighted average interest rate of 5.6% in
2008 and 2007
 
237,585
   
262,585
Trade receivables securitization facility due July 1, 2010, interest rate of 4.90%
 
225,000
   
Property financing obligation, effective interest rate of 7.7% (Note 13)
 
   
35,676
4.875% notes due 2010, net of unamortized discount of $295 and $410,
respectively
 
449,705
   
449,589
7.25% debentures due 2013, net of unamortized discount of $1,536 and
$1,794, respectively
 
80,547
   
80,289
5.25% notes due 2015, net of unamortized discount of $1,087 and $1,205,
respectively
 
328,913
   
328,795
7.5% debentures due 2023, net of unamortized discount of $3,555 and $3,732,
respectively
 
95,194
   
95,016
6.61% debentures due 2027, net of unamortized discount of $2,017 and $2,095,
respectively
 
82,943
   
82,864
7.25% debentures due 2096, net of unamortized discount of $17,785 and
$17,926, respectively
 
130,215
   
130,073
Subordinated promissory notes due 2018, effective interest rate of 17%, net
of unamortized discount of $164,935 and $165,000, respectively
 
68,343
   
               60,315
Interest rate swaps
 
131,629
   
119,029
Other notes and obligations
 
45,115
   
15,091
Total debt excluding PHONES
 
11,542,014
   
12,246,485
2% PHONES debt related to Time Warner stock, due 2029
 
279,999
   
597,040
Total debt
$
11,822,013
 
$
12,843,525

Debt was classified as follows in the unaudited condensed consolidated balance sheets (in thousands):
 
 
Sept. 28, 2008
 
Dec. 30, 2007
           
Current liabilities:
         
    PHONES debt related to Time Warner stock  
$
215,991
 
$
253,080
    Other debt due within one year   
 
619,793
   
750,239
    Total current debt     
 
835,784
   
1,003,319
Long-term debt:
         
    PHONES debt related to Time Warner stock     
 
64,008
   
343,960
    Other long-term debt   
 
10,922,221
   
11,496,246
    Total long-term debt  
 
10,986,229
   
11,840,206
Total debt                                                                                              
$
11,822,013
 
$
12,843,525

Credit Agreements—On May 17, 2007, the Company entered into a $8.028 billion senior secured credit agreement, as amended on June 4, 2007 (collectively, the “Credit Agreement”). The Credit Agreement consists of the following facilities: (a) a $1.50 billion Senior Tranche X Term Loan Facility (the “Tranche X Facility”), (b) a $5.515 billion Senior Tranche B Term Loan Facility (the “Tranche B Facility”), (c) a $263 million Delayed Draw Senior Tranche B Term Loan Facility (the “Delayed Draw Facility”) and (d) a $750 million Revolving Credit Facility (the “Revolving Credit Facility”). The Credit Agreement also provided a commitment for an additional $2.105 billion in new incremental term loans under the Tranche B Facility (the
 
19

 
“Incremental Facility”). Accordingly, the aggregate amount of the facilities under the Credit Agreement equals $10.133 billion.

On June 4, 2007, proceeds from the Tranche X Facility and the Tranche B Facility were used by the Company in connection with the consummation of the Company’s tender offer to repurchase 126 million shares of the Company’s common stock that were then outstanding at a price of $34.00 per share in cash and to refinance the Company’s former five-year credit agreement and former bridge credit agreement.

The Revolving Credit Facility includes a letter of credit subfacility in an amount up to $250 million and a swing line facility in an amount up to $100 million.  As of Sept. 28, 2008, the Company had $98 million of letters of credit outstanding. Borrowings under the Revolving Credit Facility may be used for working capital and general corporate purposes. On Oct. 17, 2008, the Company sent a notice to draw $250 million in principal amount under the Revolving Credit Facility, of which $237 million was funded.  The shortfall of approximately $13 million is a result of the fact that Lehman Brothers Commercial Bank, which provides a commitment in the amount of $40 million under the Company’s $750 million Revolving Credit Facility, declined to participate in the Company’s $250 million funding request.  Lehman Brothers Commercial Bank is an affiliate of Lehman Brothers Holdings Inc., which filed a petition under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York on Sept. 15, 2008.  Although Lehman Brothers Commercial Bank is not a party to that bankruptcy proceeding, it has informed the Company that it does not intend to participate in any funding requests under the Revolving Credit Facility.  The Company can provide no assurances that it could obtain replacement loan commitments from other banks.  The Company borrowed under the Revolving Credit Facility to increase its cash position to preserve its financial flexibility in light of current uncertainty in the credit markets.  The remaining undrawn amount available under the Revolving Credit Facility after giving effect to this borrowing and the $98 million of outstanding letters of credit is approximately $415 million, including the $40 million Lehman Brothers Commercial Bank commitment.

On Dec. 20, 2007, the Company entered into (i) a $1.6 billion senior unsecured interim loan agreement (the “Interim Credit Agreement”) and (ii) a number of increase joinders pursuant to which the Incremental Facility became a part of the Tranche B Facility under the Credit Agreement (the Incremental Facility and Tranche B Facility are hereinafter referred to collectively as the Tranche B Facility). The Interim Credit Agreement contains a $1.6 billion twelve-month bridge facility (the “Bridge Facility”). The total proceeds of $3.705 billion from the Bridge Facility and the Incremental Facility were used by the Company, among other ways, in connection with the consummation of the Merger and for general corporate purposes.

Prior to the consummation of the Merger, the Tranche X Facility bore interest per annum at a variable rate equal to, at the Company’s election, the applicable base rate plus a margin of 150 basis points or LIBOR plus a margin of 250 basis points. Pursuant to the terms of the Credit Agreement, following the closing of the Merger, the margins applicable to the Tranche X Facility increased to 175 basis points and 275 basis points, respectively.

The Tranche B Facility, Delayed Draw Facility and Revolving Credit Facility bear interest per annum at a variable rate equal to, at the Company’s election, the applicable base rate plus a margin of 200 basis points or LIBOR plus a margin of 300 basis points.  All undrawn amounts under the Delayed Draw Facility and the Revolving Credit Facility accrue commitment fees at a per annum rate of 75 basis points and 50 basis points, respectively. With respect to the Revolving Credit Facility only, the margin applicable to base rate advances, the margin applicable to LIBOR advances and the commitment fee applicable to undrawn amounts are subject to decreases based on a leverage-based grid.

On June 29, 2007, the Company repaid $100 million of the $1.5 billion of borrowings under the Tranche X Facility.  During the third quarter of 2008, the Company repaid an aggregate of $888 million of the borrowings under the Tranche X Facility, utilizing the net cash proceeds of $218 million from a million trade receivables securitization facility entered into on July 1, 2008 (see discussion below), $589 million of the net cash proceeds from the NMG transaction (see Note 2) and $81 million of the net cash proceeds from the sale of a
 
20

 
10 percent interest in CareerBuilder, LLC to Gannett (see Note 7).  The prepayments in the third quarter of 2008 satisfied a required principal repayment of $650 million on the Tranche X Facility that was otherwise due on Dec. 4, 2008. The remaining principal balance on the Tranche X facility of $512 million must be repaid on June 4, 2009, which amount may be adjusted to reflect additional prepayments or other mandatory prepayments (as described below) applied thereto prior to that date.

The Tranche B Facility is a seven-year facility which matures on June 4, 2014 and also amortizes at a rate of 1.0% per annum (payable quarterly). The Revolving Credit Facility is a six-year facility and matures on June 4, 2013.  In February 2008, the Company refinanced $25 million of its medium-term notes with borrowings under the Delayed Draw Facility.  The Delayed Draw Facility automatically becomes part of the Tranche B Facility as amounts are borrowed and amortizes based upon the Tranche B Facility amortization schedule. On Oct. 6, 2008, the Company refinanced an additional $168 million of the remaining medium-term notes with additional borrowings under the Delayed Draw Facility.  The Company intends to use the Delayed Draw Facility to refinance the remaining $70 million of its medium-term notes as they mature during 2008.  Accordingly, the Company has classified its medium-term notes as long-term at Sept. 28, 2008 and Dec. 30, 2007.

Borrowings under the Credit Agreement are prepayable at any time prior to maturity without penalty, and the unutilized portion of the commitments under the Revolving Credit Facility or the Delayed Draw Facility may be reduced at the option of the Company without penalty.

Upon execution of the Interim Credit Agreement, loans under the Bridge Facility bore interest per annum at a variable rate equal to, at the Company’s election, the applicable base rate plus a margin of 350 basis points or LIBOR plus a margin of 450 basis points. Pursuant to the terms of the Interim Credit Agreement, such margins increased by 50 basis points per annum on March 20, 2008, June 20, 2008 and Sept. 20, 2008 and will continue to increase by this amount in each succeeding quarter, subject to specified caps, a portion of which interest may be payable through an interest payable-in-kind feature.  Subject to certain prepayment restrictions contained in the Credit Agreement, the Bridge Facility is prepayable at any time prior to maturity without penalty, including in connection with the issuance of up to $1.6 billion of high-yield notes.  Effective Oct. 21, 2008, the Company made an election under its Interim Credit Agreement to convert the variable interest rate applicable to its borrowings under the Bridge Facility from LIBOR plus a margin of 600 basis points to an applicable base rate plus 500 basis points.

If any loans under the Bridge Facility remain outstanding on Dec. 20, 2008, the lenders thereunder will have the option, subject to the terms of the Interim Credit Agreement, at any time and from time to time to exchange such initial loans for senior exchange notes that the Company will issue under a senior indenture, and the maturity date of any initial loans that are not exchanged for senior exchange notes will, unless a bankruptcy event of default has occurred and is continuing on such date, automatically be extended to Dec. 20, 2015 (the “Final Interim Credit Agreement Maturity Date”). Accordingly, the Company has classified the borrowings under the Bridge Facility as long-term at Sept. 28, 2008 and Dec. 30, 2007. The senior exchange notes will also mature on the Final Interim Credit Agreement Maturity Date. Holders of the senior exchange notes will have registration rights.

Loans under the Tranche X Facility, Tranche B Facility and Revolving Credit Facility are required to be repaid with the following proceeds, subject to certain exceptions and exclusions set forth in the Credit Agreement: (a) 100% of the net cash proceeds from the issuance or incurrence of debt for borrowed money by the Company or any subsidiary (other than debt permitted to be incurred under the negative covenants contained in the Credit Agreement (with certain exclusions)), (b) certain specified percentages of excess cash flow proceeds based on a leverage-based grid ranging from 50% to 0% and (c) 100% of the net cash proceeds from all asset sales, certain dispositions, share issuances by the Company’s subsidiaries and casualty events unless, in each case, the Company reinvests the proceeds pursuant to the terms of the Credit Agreement. As noted above, aggregate repayments of the Tranche X facility of $888 million were made during the third quarter of 2008 pursuant to these provisions.
 
 
21


Loans under the Bridge Facility are required to be repaid with the following proceeds, in each case after the obligations under the Credit Agreement have been repaid, either as required by the Credit Agreement or repaid at the election of the Company, subject to certain exceptions and exclusions set forth in the Interim Credit Agreement: (a) 100% of the net cash proceeds from the issuance or incurrence of certain debt for borrowed money by the Company or any subsidiary, (b) 100% of the net cash proceeds of any equity issuance consummated by the Company and (c) 100% of the net cash proceeds from all asset sales, certain dispositions, share issuances by the Company’s subsidiaries and casualty events unless, in each case, the Company reinvests the proceeds pursuant to the terms of the Interim Credit Agreement.

Borrowings under the Credit Agreement are guaranteed on a senior basis by certain of the Company’s direct and indirect U.S. subsidiaries and secured by a pledge of the equity interests of Tribune Broadcasting Holdco, LLC and Tribune Finance, LLC, two subsidiaries of the Company.  The Company’s other senior notes and senior debentures are secured on an equal and ratable basis with the borrowings under the Credit Agreement as required by the terms of the indentures governing such notes and debentures. Borrowings under the Interim Credit Agreement are unsecured, but are guaranteed on a senior subordinated basis by certain of the Company’s direct and indirect U.S. subsidiaries.

The Credit Agreement and the Interim Credit Agreement contain representations and warranties, affirmative and negative covenants, including restrictions on capital expenditures, and events of default, in each case subject to customary and negotiated exceptions and limitations, as applicable. If an event of default occurs, the lenders under the Credit Agreement and the Interim Credit Agreement will be entitled to take certain actions, including acceleration of all amounts due under the facilities.

Further, pursuant to the Credit Agreement, the Company is required to comply, on a quarterly basis, with a maximum total guaranteed leverage ratio and a minimum interest coverage ratio. For each of the four fiscal quarters of the Company’s 2008 fiscal year, the Credit Agreement covenants require a maximum “Total Guaranteed Leverage Ratio” of 9.00 to 1.00 and a minimum “Interest Coverage Ratio” (each as defined in the Credit Agreement) of 1.15 to 1.00.  Both of these financial covenant ratios are measured on a rolling four-quarter basis and become more restrictive on an annual basis.  For each of the four fiscal quarters of the Company’s 2009 fiscal year, the maximum Total Guaranteed Leverage Ratio required by the covenants will be reduced to 8.75 to 1.00 and the minimum Interest Coverage Ratio will be increased to 1.20 to 1.00.  At Sept. 28, 2008, the Company was in compliance with these financial covenants. The Company’s ability to maintain compliance with these financial covenants is dependent, however, on various factors, certain of which are outside of the Company’s control.  Such factors include the Company’s ability to generate sufficient revenues and earnings from operations, the Company’s ability to achieve reductions in it outstanding indebtedness, changes in interest rates, the impact on earnings, cash flow or indebtedness from sale, purchase, joint venture or similar transactions involving the Company’s assets, investments and liabilities and the other risks and uncertainties set forth in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007 and in Part II, Item 1A, “Risk Factors” in this Form 10-Q.

On March 13, 2008, the Company filed an election to be treated as a subchapter S corporation under the Internal Revenue Code, which election is effective as of the beginning of the Company’s 2008 fiscal year. The Credit Agreement and the Interim Credit Agreement contain affirmative covenants which required the Company to make such election and that the election be effective for fiscal year 2008. The Credit Agreement and Interim Credit Agreement further provide that if the Company fails to maintain the S corporation election for any year beginning with 2009, the Company will be required in each such year to obtain an investment in the Company in the form of common stock or subordinated debt in an amount of up to $100 million. There can be no assurance that the Company will be able to obtain such an investment and the failure to obtain such an investment in those circumstances could result in a default under the Credit Agreement and Interim Credit Agreement.

Under the terms of the Credit Agreement, the Company is required to enter into hedge arrangements to offset a percentage of its interest rate exposure under the Credit Agreement and other debt with respect to borrowed money.  On July 2, 2007, the Company entered into an International Swap and Derivatives Association, Inc.
 
22

 
(“ISDA”) Master Agreement, a schedule to the 1992 ISDA Master Agreement and, on July 3, 2007, entered into three interest rate swap confirmations (collectively, the “Swap Documents”) with Barclays Bank, which Swap Documents provide for (i) a two-year hedge with respect to $750 million in notional amount, (ii) a three-year hedge with respect to $1 billion in notional amount and (iii) a five-year hedge with respect to $750 million in notional amount. The Swap Documents effectively converted a portion of the variable rate borrowings under the Tranche B Facility in the Credit Agreement to a weighted average fixed rate of 5.31% plus a margin of 300 basis points. On Aug. 12, 2008, the Company entered into an ISDA Master Agreement, and, on Aug. 14, 2008, the Company entered into an interest rate cap confirmation with Citibank, N.A.  This transaction effectively caps LIBOR at 4.25% with respect to $2.5 billion in notional amount outstanding under the Tranche B Facility for a three-year period expiring July 21, 2011.  The premium owed under the interest rate cap confirmation is approximately $29 million, which represented the fair value of the interest rate cap at inception.  Through Sept. 28, 2008, the Company has accounted for these interest rate swaps and the interest rate cap as cash flow hedges in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS No. 133”).  Under FAS No. 133, a cash flow hedge is deemed to be highly effective if it is expected that changes in the cash flows of the hedged item are almost fully offset by changes in the cash flows of the hedging instrument. Effective Oct. 21, 2008, the Company made an election under its Credit Agreement to convert the variable interest rate applicable to its borrowings under the Tranche B Facility from LIBOR plus a margin of 300 basis points to an applicable base rate plus 200 basis points.  As a result of this election, the Company will no longer account for these interest rate swaps and the interest rate cap as cash flow hedges in accordance with FAS No. 133 and instead will recognize currently in its statement of operations the changes in the fair values of these instruments beginning in the fourth quarter of 2008.

As of Sept. 28, 2008, the Company had outstanding borrowings of $7.6 billion under the Tranche B Facility, $512 million under the Tranche X Facility, and $1.6 billion under the Bridge Facility.  As of Sept. 28, 2008, the applicable interest rate was 5.79% on the Tranche B Facility, 5.54% on the Tranche X Facility and 8.79% on the Bridge Facility.

Trade Receivables Securitization FacilityOn July 1, 2008, the Company and Tribune Receivables LLC, a wholly-owned subsidiary of the Company (the “Receivables Subsidiary”), entered into a $300 million trade receivables securitization facility with a term of two years.  The Receivables Subsidiary borrowed $225 million under this facility and incurred transaction costs totaling $7 million.  The net proceeds of $218 million were utilized to pay down the borrowings under the Tranche X Facility.

Pursuant to a receivables purchase agreement, dated as of July 1, 2008, among the Company, the Receivables Subsidiary and certain other subsidiaries of the Company (the “Operating Subsidiaries”), the Operating Subsidiaries sell certain trade receivables and related assets (the “Receivables”) to the Company on a daily basis.  The Company, in turn, sells such Receivables to the Receivables Subsidiary, also on a daily basis.  Receivables transferred to the Receivables Subsidiary are assets of the Receivables Subsidiary and not of the Company or any of the Operating Subsidiaries.

The Receivables Subsidiary has also entered into a receivables loan agreement, dated as of July 1, 2008 (the “Receivables Loan Agreement”), among the Company, as servicer, the Receivables Subsidiary, as borrower, certain entities from time to time parties thereto as conduit lenders and committed lenders (the “Lenders”), certain financial institutions from time to time parties thereto as funding agents, and Barclays Bank PLC, as administrative agent.  Pursuant to the Receivables Loan Agreement, the Lenders, from time to time, make advances to the Receivables Subsidiary.  The advances are secured by, and repaid through collections on, the Receivables owned by the Receivables Subsidiary.  The aggregate outstanding principal amount of the advances may not exceed $300 million.  The Receivables Loan Agreement requires the Company to comply with the financial covenants described in the “Credit Agreements” section of this Note 10.  The Company (directly and indirectly through the Operating Subsidiaries) services the Receivables, and the Receivables Subsidiary pays a fee to the Company for such services. The Receivables Subsidiary will pay a commitment fee on the undrawn portion of the facility and administrative agent fees.

 
 
23

 
In accordance with FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, the Company accounts for this arrangement as a secured borrowing by the Receivables Subsidiary and includes the pledged assets in accounts receivable and the cash advances as long-term debt in its consolidated balance sheet.  At Sept. 28, 2008, pledged assets included in accounts receivable were $489 million and outstanding advances under this facility were $225 million. Advances under the Receivables Loan Agreement that are funded through commercial paper issued by the Lenders will accrue interest based on the applicable commercial paper interest rate or discount rate, plus a margin. All other advances will accrue interest at (i) LIBOR, (ii) the prime rate or (iii) the federal funds rate, in each case plus an applicable margin.  As of Sept. 28, 2008, the applicable interest rate for this facility was 4.9%.  The Receivables Loan Agreement includes customary early amortization events and events of default for facilities of this nature.  The Receivables Subsidiary is required to repay the advances in full by no later than July 1, 2010.

Interest Rate Hedging Instruments—As noted above, the Company is party to three interest rate swaps covered under the Swap Documents and an interest rate cap, each related to borrowings under the Tranche B Facility. At Sept. 28, 2008, the fair value of the three interest rate swaps had declined since their inception date of July 3, 2007 by $100 million, of which $16 million is included in short-term debt and $84 million is included in long-term debt.  The Company determined that $9 million of this change resulted from hedge ineffectiveness.  In addition, at Sept. 28, 2008, the fair value of the interest rate cap declined by $3 million since its inception date of Aug. 18, 2008.  The remaining $91 million change in fair value of the three interest rate swaps and the $3 million change in the fair value of the interest rate cap is included, net of taxes, in the accumulated other comprehensive income (loss) component of shareholders’ equity (deficit) at Sept. 28, 2008. As a result of the Company’s election on Oct. 21, 2008 described above to convert the variable interest rate applicable to its borrowings under the Tranche B Facility to an applicable base rate plus 200 basis points, the Company will reclassify the previously unrecognized losses on these instruments included in accumulated other comprehensive income (loss), net of taxes, into interest expense beginning in the fourth quarter of 2008.  At Sept. 28, these losses totaled $94 million before taxes.

The Company is also party to an additional interest rate swap agreement related to the $100 million 7.5% debentures due in 2023 which effectively converts the fixed 7.5% rate to a variable rate based on LIBOR.

Debt Due Within One Year—Debt due within one year at Sept. 28, 2008 included $512 million of borrowings under the Tranche X Facility, $79 million of borrowings under the Tranche B Facility, and $216 million related to PHONES. As noted above, during the third quarter of 2008, the Company repaid an aggregate of $888 million of the borrowings under the Tranche X facility.  Debt due within one year at Dec. 30, 2007 included $650 million of borrowings under the Tranche X Facility, $76 million of borrowings under the Tranche B Facility, $253 million related to PHONES, and $24 million of property financing and other obligations.  The Company expects to fund interest and principal payments due in the next twelve months through a combination of cash flows from operations, available borrowings under the Revolving Credit Facility, and, if necessary, dispositions of assets or operations.  The Company’s ability to make scheduled payments or prepayments on its debt and other financial obligations will depend on its future financial and operating performance and its ability to dispose of assets on favorable terms.  There can be no assurances that the Company’s businesses will generate sufficient cash flows from operations or that future borrowings under the Revolving Credit Facility will be available in an amount sufficient to satisfy debt maturities or to fund other liquidity needs or that any such asset dispositions can be completed.  The Company’s financial and operating performance is subject to prevailing economic and industry conditions and to financial, business and other factors, some of which are beyond the control of the Company.

If the Company’s cash flows and capital resources are insufficient to fund debt service obligations, the Company will likely face increased pressure to reduce or delay capital expenditures, dispose of assets or operations, further reduce the size of its workforce, seek additional capital or restructure or refinance its indebtedness. These actions could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, the Company cannot assure the ability to take any of these actions, that these actions would be successful and permit the Company to meet scheduled debt service
 
 
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obligations or that these actions would be permitted under the terms of the Company’s existing or future debt agreements, including the Credit Agreement and the Interim Credit Agreement.  For example, the Company may need to refinance all or a portion of its indebtedness on or before maturity. There can be no assurance that the Company will be able to refinance any of its indebtedness on commercially reasonable terms or at all.  In the absence of improved operating results and access to capital resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. The Credit Agreement and the Interim Credit Agreement provide certain restrictions on the Company’s ability to dispose of assets and the use of proceeds from the disposition.  The Company may not be able to consummate those dispositions or to obtain the proceeds realized.  Additionally, these proceeds may not be adequate to meet the debt service obligations then due.

If the Company cannot make scheduled payments or prepayments on its debt, the Company will be in default and, as a result, among other things, the Company’s debt holders could declare all outstanding principal and interest to be due and payable and the Company could be forced into bankruptcy or liquidation or be required to substantially restructure or alter business operations or debt obligations.

Exchangeable Subordinated Debentures due 2029 (“PHONES”)—In 1999, the Company issued 8 million PHONES for an aggregate principal amount of approximately $1.3 billion. The principal amount was equal to the value of 16 million shares of Time Warner common stock at the closing price of $78.50 per share on April 7, 1999. Quarterly interest payments are made to the PHONES holders at an annual rate of 2% of the initial principal. Effective Dec. 31, 2007, the Company has elected to account for the PHONES utilizing the fair value option under FAS No. 159.  Prior to the adoption of FAS No. 159, the Company recorded both cash and non-cash interest expense on the discounted debt component of the PHONES.  Following the adoption of FAS No. 159 for the PHONES, the Company records as interest expense only the cash interest paid on the PHONES.  See below for further information pertaining to the Company’s adoption of FAS No. 159.

The PHONES debenture agreement requires principal payments equal to any dividends declared on the 16 million shares of Time Warner common stock. A payment of $.125 per PHONES was made in the first, second and third quarters of 2008 for a Time Warner dividend declared in the fourth quarter of 2007 and in the first and second quarters of 2008. A payment of $.125 per PHONES will be due in the fourth quarter of 2008 for a Time Warner dividend declared in the third quarter of 2008.  The Company records the dividends it receives on its Time Warner common stock as dividend income and accounts for the related payments to the PHONES holders as reduction of principal.

The Company may redeem the PHONES at any time for the higher of the principal value of the PHONES ($155.64 per PHONES at Sept. 28, 2008) or the then market value of two shares of Time Warner common stock, subject to certain adjustments. At any time, holders of the PHONES may exchange a PHONES for an amount of cash equal to 95% (or 100% under certain circumstances) of the market value of two shares of Time Warner common stock. On Sept. 26, 2008, 20 PHONES were exchanged for cash pursuant to this provision.  At Sept. 28, 2008, the market value per PHONES was $35.00, and the market value of two shares of Time Warner common stock was $28.42. The amount PHONES holders could have received if they had elected to exchange their PHONES for cash on Sept. 28, 2008 was $216 million, which is included in current liabilities at Sept. 28, 2008.

Prior to the adoption of FAS No. 159, the Company accounted for the PHONES under the provisions of FAS No. 133.  Under FAS No. 133, the PHONES consisted of a discounted debt component, which was presented at book value, and a derivative component, which was presented at fair value. Changes in the fair value of the derivative component of the PHONES were recorded in the statement of operations. At Dec. 30, 2007, the Company performed a direct valuation of the derivative component of the PHONES utilizing the Black-Scholes option-pricing model.  As noted above, effective Dec. 31, 2007, the Company has elected to account for the PHONES utilizing the fair value option under FAS No. 159.  As a result of this election, the PHONES no longer consists of a discounted debt component, presented at book value, and a derivative component, presented at fair value, but instead is presented based on the fair value of the entire PHONES debt.  The
 
25

 
Company made this election as the fair value of the PHONES is readily determinable based on quoted market prices.  Changes in the fair value of the PHONES are recorded in the statement of operations.

The following table summarizes the impact of the adoption of FAS No. 159 for the PHONES on the Company’s unaudited condensed consolidated balance sheet (in thousands):

 
Balances Prior
To Adoption
 
Net Gain/(Loss)
Upon Adoption
 
Balances After
Adoption
                       
PHONES debt (current and long-term portions)
$
(597,040
)
 
$
177,040
   
$
(420,000
)
Unamortized debt issuance costs related to PHONES                      
included in other non-current assets 
$
18,384
     
(18,384
)   $
 
Pretax cumulative effect of adoption  
         
158,656
         
Increase in deferred income tax liabilities
         
(61,876
)
       
Cumulative effect of adoption (increase to
     retained earnings) 
       
$
96,780
         

In accordance with FAS No. 159, the $97 million after-tax cumulative effect of adoption was recorded directly to retained earnings and was not included in the Company’s unaudited condensed consolidated statement of operations for the first three quarters ended Sept. 28, 2008.

The market value of the PHONES, which are traded on the New York Stock Exchange, was $280 million and $420 million at Sept. 28, 2008 and Dec. 30, 2007, respectively.  The outstanding principal balance of the PHONES was $1,245 million and $1,248 million at Sept. 28, 2008 and Dec. 30, 2007, respectively.

NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS

As discussed in Note 1, the Company adopted FAS No. 157 effective Dec. 31, 2007.  FAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  In February 2008, the FASB issued Staff Position No. 157-2 (“FSP No. 157-2”) which defers the effective date of FAS No. 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until one year after the adoption of FAS No. 157.  The Company is currently evaluating the impact of FAS No. 157 on the Company’s assets and liabilities within the scope of FSP 157-2, the provisions of which will become effective beginning in the Company’s first quarter of 2009.
 
In accordance with FAS No. 157, the Company has categorized its financial assets and liabilities into a three-level hierarchy as outlined below.
 
·  
Level 1 – Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.  Level 1 financial assets for the Company include its investment in Time Warner stock related to its PHONES debt and other investments in the securities of public companies that are classified as available for sale.  Level 1 financial liabilities for the Company include its PHONES debt related to Time Warner stock (see Note 10 for additional information pertaining to the fair value of the Company’s PHONES debt).
·  
Level 2 – Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.  Level 2 financial assets and liabilities also include assets and liabilities whose values are derived from valuation models whose inputs are observable.  Level 2 financial assets and liabilities for the Company include its interest rate swaps and its interest rate cap (see Note 10 for additional information on the Company’s interest rate hedging instruments).
·  
Level 3 – Financial assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.  The Company does not currently have any Level 3 financial assets or liabilities.
 
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The following table presents the financial assets and liabilities measured at fair value on a recurring basis on the Company’s unaudited condensed consolidated balance sheet at Sept. 28, 2008 (in thousands):
 
 
Sept. 28, 2008
 
 
Level 1
   
Level 2
 
Financial assets:
             
   Time Warner stock related to PHONES  
$
227,360
   
$
 
   Other investments in securities of public companies    
 
3,073
     
 
   Interest rate hedging instruments   
 
     
61,601
 
Total  
$
230,433
   
$
61,601
 
               
Financial liabilities:
             
   PHONES debt related to Time Warner stock  
$
279,999
   
$
 
   Interest rate hedging instruments   
 
     
131,629
 
Total  
$
279,999
   
$
131,629
 

NOTE 12:  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) reflects all changes in the net assets of the Company during the period from transactions and other events and circumstances, except those resulting from stock issuances, stock repurchases and dividends.  The Company’s comprehensive income (loss) includes net income (loss) and other gains and losses.

The Company’s comprehensive income (loss) was as follows (in thousands):

  
Third Quarter
   
First Three Quarters
 
 
2008
   
2007
   
2008
   
2007
 
                               
Net income (loss)
$
(121,576
)
 
$
152,765
   
$
(2,832,063
)
 
$
165,746
 
Change in unrecognized benefit plan losses,
net of taxes
 
     
     
(57,109
)
   
 
Adjustment for previously unrecognized benefit
plan losses included in net income, net of taxes
 
5,278
     
7,072
     
15,994
     
21,071
 
Unrealized loss on marketable securities, net of
taxes
 
(110
)
   
(2,109
)
   
(2,206
)
   
(4,440
)
Unrecognized gains (losses) on cash flow hedging
instruments:
                             
Gains (losses) on cash flow hedging instruments
arising during the period, net of taxes
 
496