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.
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.
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.
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.
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
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
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
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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
)
|
|
$
|
|
|
(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.
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.
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.
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
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.
|
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.
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.
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.
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.
|
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
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.
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
“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
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.
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.
(“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
Facility
—
On 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.
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
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
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.
|
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
|
|
|
|
(29,251
|
)
|
|
|
(12,536
|
)
|
|
|
(29,251
|
)
|
Adjustment
for losses on cash flow hedging
instruments
included in net income, net of
taxes
|
|
9,259
|
|
|
|
—
|
|
|
|
7,642
|
|
|
|
—
|
|
Unrecognized gains (losses) on cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging
instruments, net of taxes
|
|
9,755
|
|
|
|
(29,251
|
)
|
|
|
(4,894
|
)
|
|
|
(29,251
|
)
|
Change
in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustments,
net of taxes
|
|
(79
|
)
|
|
|
272
|
|
|
|
(144
|
)
|
|
|
476
|
|
Other
comprehensive income (loss)
|
|
14,844
|
|
|
|
(24,016
|
)
|
|
|
(48,359
|
)
|
|
|
(12,144
|
)
|
Comprehensive
income (loss)
|
$
|
(106,732
|
)
|
|
$
|
128,749
|
|
|
$
|
(2,880,422
|
)
|
|
$
|
153,602
|
|
NOTE
13: OTHER MATTERS
Media Ownership Rules
—Various
aspects of the Company’s operations are subject to regulation by governmental
authorities in the United States. The Company’s television and radio
broadcasting operations are subject to Federal Communications Commission
(“FCC”)
jurisdiction
under the Communications Act of 1934, as amended. FCC rules, among other things,
govern the term, renewal and transfer of radio and television broadcasting
licenses, and limit the number of media interests in a local market that a
single entity can own. Federal law also regulates the rates charged
for political advertising and the quantity of advertising within children’s
programs.
On Nov.
30, 2007, the FCC issued an order (the “Order”) granting applications of the
Company to transfer control of the Company from the shareholders to the
ESOP. In the Order, the FCC granted the Company temporary waivers of
the newspaper/broadcast cross-ownership rule in Miami, Florida (WSFL-TV and the
South Florida
Sun-Sentinel
); Hartford, Connecticut (WTXX-TV/WTIC-TV and the
Hartford Courant
); and Los
Angeles, California (KTLA-TV and the
Los Angeles Times
) for a
six-month period beginning Jan. 1, 2008. The waiver also encompassed
New York, New York (allowing for the common ownership of WPIX-TV and
Newsday
); however, following
the consummation of the NMG transaction on July 29, 2008 (see Note 2), the
Company no longer has an attributable interest in both a television station and
a newspaper in that market. The six-month waiver could be
automatically extended under two conditions: (1) if the Company appeals the
Order, the waivers are extended for the longer of two years or six months after
the conclusion of the litigation over the Order; or (2) if the FCC adopts a
revised newspaper-broadcast cross-ownership rule prior to Jan. 1, 2008, the
waivers are extended for a two-year period to allow the Company to come into
compliance with any revised rule, provided that in the event the revised rule is
the subject of a judicial stay, the waiver is extended until six months after
the expiration of any such stay.
The Order
also granted the Company a permanent waiver of the newspaper-broadcast
cross-ownership rule to permit continued common ownership of WGN-AM, WGN-TV and
the Chicago Tribune in Chicago, Illinois; a permanent “failing station” waiver
of the television duopoly rule to permit continued common ownership of WTIC-TV
and WTXX-TV in Hartford, Connecticut; and granted satellite station status to
WTTK-TV, Kokomo, Indiana to permit continued common ownership with WTTV-TV,
Bloomington, Indiana.
Various
parties have filed petitions for reconsideration of the Order with the FCC,
which the Company opposed. The Company also filed an appeal of the
Order in the United States Court of Appeals for the District of Columbia Circuit
on Dec. 3, 2007, thus automatically extending the waivers for two years or until
six months after the conclusion of that appeal, whichever is
longer. The appeal has been held in abeyance pending FCC action on
the petitions for reconsideration. Intervenors have filed a motion to
dismiss the appeal, which the Company opposed. A decision on the
motion to dismiss has been deferred until briefing on the merits.
On Dec.
18, 2007, the FCC announced in an FCC news release the adoption of revisions to
the newspaper/broadcast cross-ownership rule. The FCC, on Feb. 4, 2008, released
the full text of the rule. The revised rule establishes a presumption
that the common ownership of a daily newspaper of general circulation and either
a television or a radio broadcast station in the top 20 Nielsen Designated
Market Areas (“DMAs”) would serve the public interest, provided that, if the
transaction involves a television station, (i) at least eight independently
owned and operating major media voices (defined to include major newspapers and
full-power commercial television stations) would remain in the DMA following the
transaction and (ii) the cross-owned television station is not among the
top-four ranked television stations in the DMA. Other proposed
newspaper/broadcast transactions would be presumed not to be in the public
interest, except in the case of a “failing” station or newspaper, or in the
event that the proposed transaction results in a new source of news in the
market. The FCC did not further relax the television-radio cross-ownership
rules, the radio local ownership rules, or the television duopoly rules. Under
the rule adopted, the Company would be entitled to a presumption in favor of
common ownership in two of the three of the Company’s cross-ownership markets
(Los Angeles, California and Miami, Florida) not covered by the FCC’s grant of a
permanent waiver (Chicago, Illinois).
Various
parties, including the Company, have sought judicial review of the FCC’s order
adopting the new rule.
Congress
removed national limits on the number of broadcast stations a licensee may own
in 1996. However, federal law continues to limit the number of radio and
television stations a single owner may own in a local market, and caps the
percentage of the national television audience that may be reached by a
licensee’s television stations in the aggregate at 39%.
Television
and radio broadcasting licenses are subject to renewal by the FCC, at which time
they may be subject to petitions to deny the license renewal applications. At
Sept. 28, 2008, the Company had FCC authorization to operate 23 television
stations and one AM radio station. In order to expedite the renewal
grants, the Company entered into tolling agreements with the FCC for WPIX-TV,
New York, WDCW-TV, Washington, D.C., WGNO-TV, New Orleans, WXIN-TV,
Indianapolis, WXMI-TV, Grand Rapids, WGN-TV, Chicago, WPHL-TV, Philadelphia,
KWGN-TV, Denver, KHCW-TV, Houston, KTLA-TV, Los Angeles, KTXL-TV, Sacramento,
KSWB-TV, San Diego, KCPQ-TV, Seattle/Tacoma, WTIC-TV, and WPMT-TV Harrisburg,
Pennsylvania. The tolling agreements would allow the FCC to penalize
the Company for rule violations that occurred during the previous license term
notwithstanding the grant of renewal applications.
The
television industry is in the final stages of the transition to digital
television (“DTV”). By law, the transition to DTV is to occur by Feb. 17, 2009.
The FCC has issued an order with the final, post-transition DTV channel
assignments for every full power television station in the U.S. It also recently
completed a proceeding that established the operating rules for DTV stations
just before and after the transition in February 2009. Conversion to digital
transmission requires all television broadcasters, including those owned by the
Company, to invest in digital equipment and facilities. At Sept. 28, 2008, all
of the Company’s television stations were operating DTV stations in compliance
with the applicable FCC rules or policies.
The FCC
still has not resolved a number of issues relating to the operation of DTV
stations, including the possible imposition of additional “public interest”
obligations attached to broadcasters’ use of digital spectrum.
From time
to time, the FCC revises existing regulations and policies in ways that could
affect the Company’s broadcasting operations. In addition, Congress from time to
time considers and adopts substantive amendments to the governing communications
legislation. The Company cannot predict what regulations or legislation may be
proposed or finally enacted or what effect, if any, such regulations or
legislation could have on the Company’s broadcasting operations.
Variable Interest Entities
—The
Company holds significant variable interests, as defined by FASB Interpretation
No. 46R, “Consolidation of Variable Interest Entities,” in Newsday LLC,
Classified Ventures, LLC and Topix, LLC, but the Company has determined that it
is not the primary beneficiary of these entities. The Company’s
maximum loss exposure related to Classified Ventures, LLC and Topix, LLC is
limited to its equity investments in these entities, which were $33 million and
$22 million, respectively, at Sept. 28, 2008. The Company’s equity
investment in the parent company of Newsday LLC was $20 million at Sept. 28,
2008. As discussed in Note 2, 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 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.
New Operating
Agreements
—Effective Oct. 3, 2008, the Company entered into a shared
services agreement for its KPLR-TV station in St. Louis, Missouri and a local
marketing agreement for its KWGN-TV station in Denver, Colorado, each with
subsidiaries of Local TV Holdings, LLC (“Local TV”). The agreements
will allow the Company to combine the operations of these stations with the FOX
Network affiliates owned by Local TV in each market, including combining
operating facilities, news operations and sharing certain
programming.
Acquisition of TMCT Real
Properties
—
On
Sept. 22, 2006, the Company amended the terms of its lease agreement with TMCT,
LLC, an investment trust in which the Company formerly held an interest
following the Company’s acquisition of The Times Mirror Company in 2000 and from
which the Company leased eight real properties (see Note 8 to the consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended Dec. 30, 2007 for further information on the Company’s
interest in TMCT, LLC). Under the terms of the amended lease, the
Company was granted an accelerated option to acquire the eight properties during
the month of January 2008 for $175 million. The Company exercised this
option on Jan. 29, 2008 and the acquisition was completed on April 28,
2008. In connection with this acquisition, the related property
financing obligation of $28 million at April 28, 2008 was extinguished (see Note
10). No gain or loss was recorded as a result of the
acquisition.
New
A
ccounting
Standards
—In December 2007, the FASB issued FASB Statement No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an Amendment of
ARB No. 51” (“FAS No. 160”), which provides accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling ownership interest in a
subsidiary should be reported as a separate component of equity in the
consolidated financial statements, requires consolidated net income to include
the amounts attributable to both the parent and the noncontrolling interest and
provides for expanded disclosures in the consolidated financial statements. FAS
No. 160 is effective for financial statements issued for fiscal years beginning
after Dec. 15, 2008 and interim periods beginning within these fiscal years. The
Company is currently evaluating the impact of adopting FAS No. 160 on its
consolidated financial statements.
In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business
Combinations” (“FAS No. 141R”), which addresses, among other items, the
recognition and accounting for identifiable assets acquired and liabilities
assumed in business combinations. FAS No. 141R also establishes
expanded disclosure requirements for business combinations. FAS No.
141R is effective for financial statements issued for fiscal years beginning
after Dec. 15, 2008 and interim periods beginning within these fiscal
years. The Company is currently evaluating the impact of adopting FAS
No. 141R on its consolidated financial statements.
In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“FAS No. 161”), which requires enhanced disclosures for derivative and hedging
activities. FAS No. 161 is effective for financial statements issued
for fiscal years beginning after Dec. 15, 2008 and interim periods beginning
within these fiscal years. Early adoption is permitted. The Company
is currently evaluating the impact of adopting FAS No. 161 on its consolidated
financial statements.
In
October 2008, the FASB issued Staff Position No. 157-3, “Determining the Fair
Value of a Financial Asset when the Market for that Asset is not Active” (“FSP
No. 157-3”), which clarifies the application of FAS No. 157 in a market that is
not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. This pronouncement was effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption of FSP No. 157-3 did not have a material impact on
the Company’s consolidated financial statements.
In April
2008, the FASB issued Staff Position No. 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP No. 142-3”), which requires that in developing
assumptions about renewal or extension used to
determine
the useful life of a recognized intangible asset, an entity shall consider its
own historical experience in renewing or extending similar arrangements;
however, these assumptions should be adjusted for entity-specific factors.
In the absence of that experience, an entity shall consider the
assumptions that market participants would use about renewal or extension
(consistent with the highest and best use of the asset by market participants),
adjusted for the entity-specific factors. For a recognized intangible
asset, an entity shall disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity’s intent and/or ability to
renew or extend the arrangement. This guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods beginning within these fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a recognized
intangible asset shall be applied prospectively to intangible assets acquired
after the effective date. The disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to, the
effective date. The Company is currently evaluating the impact of adopting
FSP No. 142-3 on its consolidated financial statements.
NOTE
14: SEGMENT INFORMATION
Financial
data for each of the Company’s business segments, from continuing operations,
was as follows (in thousands):
|
|
Third
Quarter
|
|
|
First
Three Quarters
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
$
|
653,590
|
|
|
$
|
752,502
|
|
|
$
|
2,068,242
|
|
|
$
|
2,340,769
|
|
Broadcasting and
entertainment
|
|
|
383,356
|
|
|
|
406,051
|
|
|
|
1,084,292
|
|
|
|
1,082,018
|
|
Total
operating revenues
|
|
$
|
1,036,946
|
|
|
$
|
1,158,553
|
|
|
$
|
3,152,534
|
|
|
$
|
3,422,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
(loss)
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing(2)
|
|
$
|
(26,218
|
)
|
|
$
|
110,372
|
|
|
$
|
(3,755,915
|
)
|
|
$
|
317,298
|
|
Broadcasting and
entertainment
|
|
|
74,289
|
|
|
|
117,787
|
|
|
|
312,887
|
|
|
|
286,903
|
|
Corporate
expenses
|
|
|
(11,008
|
)
|
|
|
(11,329
|
)
|
|
|
(49,632
|
)
|
|
|
(44,902
|
)
|
Total
operating profit (loss)
|
|
$
|
37,063
|
|
|
$
|
216,830
|
|
|
$
|
(3,492,660
|
)
|
|
$
|
559,299
|
|
|
|
Sept.
28, 2008
|
|
|
Dec.
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Publishing(3)
|
|
$
|
2,821,396
|
|
|
$
|
8,121,133
|
|
Broadcasting and
entertainment(3)
|
|
|
3,747,588
|
|
|
|
3,993,933
|
|
Corporate
|
|
|
882,829
|
|
|
|
1,000,873
|
|
Assets
held for
disposition
|
|
|
152,382
|
|
|
|
33,780
|
|
Total
assets
|
|
$
|
7,604,195
|
|
|
$
|
13,149,719
|
|
(1)
|
Operating
profit (loss) for each segment excludes interest and dividend income,
interest expense, equity income and losses, non-operating items and income
taxes.
|
(2)
|
The
operating loss for the third quarter of 2008 for the publishing segment
included 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 (see Note 7). The
first three quarters of 2008 operating loss for the publishing segment
included non-cash pretax impairment write-downs of intangible assets
totaling $3,843 million recorded in the second quarter of 2008 (see Note
9).
|
(3)
|
Publishing
and broadcasting and entertainment segment assets include receivables of
$267 million and $222 million, respectively, which are pledged as
collateral under the Company’s Trade Receivables Securitization Facility
(see Note 10).
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF
OPERATIONS.
The
following discussion compares the results of operations of Tribune Company and
its subsidiaries (the “Company”) for the third quarter and first three quarters
of 2008 to the third quarter and first three quarters of 2007. This
commentary should be read in conjunction with the Company’s unaudited condensed
consolidated financial statements, which are also presented in this Form
10-Q. Certain prior year amounts have been reclassified to conform
with the 2008 presentation.
FORWARD-LOOKING
STATEMENTS
The
discussion contained in this Item 2 (including, in particular, the
discussion under “Liquidity and Capital Resources”), the information contained
in the preceding notes to the unaudited condensed consolidated financial
statements and the information contained in Part I, Item 3, “Quantitative and
Qualitative Disclosures about Market Risk,” contain certain comments and
forward-looking statements that are based largely on the Company’s current
expectations. Forward-looking statements are subject to certain
risks, trends and uncertainties that could cause actual results and achievements
to differ materially from those expressed in the forward-looking statements
including, but not limited to, the items discussed 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 Part II, Item 1A, “Risk Factors” in this Form
10-Q. Such risks, trends and uncertainties, which in some instances
are beyond the Company’s control, include: our ability to generate sufficient
cash to service the significant debt levels and other financial obligations that
resulted from the Leveraged ESOP Transactions (as defined below in “Significant
Events”); our ability to comply with or obtain modifications or waivers of the
financial covenants contained in our senior credit facilities, and the potential
impact to our operations and liquidity as a result of the restrictive covenants
in such senior credit facilities; continuing instability or disruptions in the
credit and financial markets; the impact of continuing adverse economic
conditions; our dependency on dividends and distributions from our subsidiaries
to make payments on our indebtedness; increased interest rate risk due to our
higher level of variable rate indebtedness; the ability to maintain our
subchapter S corporation status; changes in advertising demand, circulation
levels and audience shares; consumer, advertiser and general market acceptance
of various new marketing and product initiatives that the Company has introduced
or may pursue in the future and the Company’s ability to implement such
initiatives without disruption or other adverse impact on the Company’s business
and operations; regulatory and judicial rulings, including changes in tax laws
or policies; availability and cost of broadcast rights; competition and other
economic conditions; changes in newsprint prices; changes in the Company’s
credit ratings and interest rates; changes in the market value of the Company’s
pension plan assets; changes in accounting standards; adverse results from
litigation, governmental investigations or tax-related proceedings or audits;
the effect of labor strikes, lock-outs and negotiations; the effect of
acquisitions, joint ventures, investments and divestitures; the effect of
derivative transactions; the Company’s reliance on third-party vendors for
various services; and other events beyond the Company’s control that may result
in unexpected adverse operating results.
The words “believe,” “expect,”
“anticipate,” “estimate,” “could,” “should,” “intend,” “continue,” “will,”
“plan,” and similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on such
forward-looking statements, which are being made as of the date of this
filing. The Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
SIGNIFICANT
EVENTS
Write-downs of Intangible
Assets
—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”)
Statement No. 142, “Goodwill and Other Intangible Assets” (“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. Due to the decline in actual and projected newspaper
advertising revenues, the Company performed an impairment review of goodwill
attributable to its newspaper reporting unit and of newspaper masthead
intangible assets in the second quarter of 2008. The review was
conducted after $830 million of newspaper reporting unit goodwill and $380
million of newspaper masthead intangible assets were allocated to the Newsday
Media Group (“NMG”) transaction (see the discussion under “Discontinued
Operations” below). As a result of the impairment review conducted in
the second quarter of 2008, 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 Company’s
unaudited condensed consolidated statements of operations in Part I, Item 1,
hereof. These non-cash impairment charges do not affect the Company’s
operating cash flows or its compliance with its financial debt
covenants. See Note 9 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof for a further
discussion of the methodology the Company utilized to perform this impairment
review.
Under FAS
No. 142, the impairment review of goodwill and other intangible assets not
subject to amortization must be based on estimated fair values. 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.
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 Employee Stock Ownership Plan, the
Company’s sole shareholder (see Note 5 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof), will not be taxed
on the share of income that is passed through to it because the Employee Stock
Ownership Plan 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.
Leveraged ESOP Transactions
—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 (the “Zell Entity”) 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.
The
Leveraged ESOP Transactions consisted of a series of transactions that included
the following:
●
|
On
April 1, 2007, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with GreatBanc 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) providing 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
April 1, 2007, the ESOP purchased 8,928,571 shares of the Company’s common
stock from the Company at a price of $28.00 per share. 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 annual 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 and represent the only
outstanding shares of capital stock of the Company after the
Merger.
|
●
|
On
April 23, 2007, pursuant to a purchase agreement dated April 1, 2007 (the
“Zell Entity Purchase Agreement”), the Zell Entity made an initial
investment of $250 million in the Company in exchange for (1) 1,470,588
shares of the Company’s common stock at a price of $34.00 per share and
(2) an unsecured subordinated exchangeable promissory note of the Company
in the principal amount of $200 million. The shares were
converted at the effective time of the Merger into the right to receive
$34.00 per share in cash, and the unsecured subordinated exchangeable
promissory note, including approximately $6 million of interest accrued
thereon, was repaid by the Company immediately prior to the
Merger. Pursuant to the Zell Entity Purchase Agreement, on May
9, 2007, Mr. Zell was appointed as a member of the
Board.
|
●
|
On
April 25, 2007, the Company commenced a tender offer to repurchase up to
126 million shares of the Company’s common stock that were then
outstanding at a price of $34.00 per share in cash (the “Share
Repurchase”). The tender offer expired on May 24, 2007 and 126 million
shares of the Company’s common stock were repurchased and subsequently
retired on June 4, 2007 utilizing proceeds from the Credit Agreement (as
defined in the “Credit Agreements” section
below).
|
●
|
The
Company granted registration rights to Chandler Trust No. 1 and Chandler
Trust No. 2 (together, the “Chandler Trusts”), which were significant
shareholders of the Company prior to the Company’s entry into the
Leveraged ESOP Transactions. On April 25, 2007, the Company filed a shelf
registration statement in connection with the registration rights granted
to the Chandler Trusts.
|
●
|
On
June 4, 2007, the Chandler Trusts entered into an underwriting agreement
with Goldman, Sachs & Co. (“Goldman Sachs”) and the Company, pursuant
to which the Chandler Trusts sold an aggregate of 20,351,954 shares of the
Company’s common stock, which represented the remainder of the shares of
the Company’s common stock owned by them following the Share Repurchase,
through a block trade underwritten by Goldman Sachs. The shares were
offered pursuant to the shelf registration statement filed by the Company
on April 25, 2007.
|
●
|
On
Dec. 20, 2007, the Company completed its merger with Merger Sub, with the
Company surviving the Merger. Pursuant to the terms of the Merger
Agreement, each share of common stock of the Company, par value $0.01 per
share, issued and outstanding immediately prior to the Merger, other
|
|
than
shares held by the Company, the ESOP or Merger Sub immediately prior to
the Merger (in each case, other than shares held on behalf of third
parties) and shares held by shareholders who validly exercised appraisal
rights, was cancelled and automatically converted into the right to
receive $34.00, without interest and less any applicable withholding
taxes, and the Company became wholly-owned by the
ESOP.
|
●
|
Following
the consummation of the Merger, the Zell Entity purchased from the
Company, for an aggregate of $315 million, a $225 million subordinated
promissory note and a 15-year warrant. For accounting purposes,
the subordinated promissory note and 15-year warrant were recorded at fair
value based on the relative fair value method. The warrant entitles the
Zell Entity
to purchase
43,478,261 shares of the Company’s common stock (subject to adjustment),
which represents approximately 40% of the economic equity interest in the
Company following the Merger (on a fully-diluted basis, including after
giving effect to share equivalents granted under a new management equity
incentive plan which is described in Note 4 to the Company’s unaudited
condensed consolidated financial statements in Part I, Item 1, hereof).
The warrant has an initial aggregate exercise price of $500 million,
increasing by $10 million per year for the first 10 years of the warrant,
for a maximum aggregate exercise price of $600 million (subject to
adjustment). Thereafter, the Zell Entity assigned minority interests in
the subordinated promissory note and the warrant to certain permitted
assignees.
|
●
|
On
Dec. 20, 2007, the Company notified the New York Stock Exchange (the
“NYSE”) that the Merger was consummated and requested that the Company’s
common stock (and associated Series A junior participating preferred stock
purchase rights) be suspended from the NYSE, effective as of the close of
the market on Dec. 20, 2007. Subsequently, the NYSE filed with
the Securities and Exchange Commission an application on Form 25 reporting
that the shares of the Company’s common stock and associated Series A
junior participating preferred stock purchase rights are no longer listed
on the NYSE.
|
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 “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 Share Repurchase
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 the 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 $300 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 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof), and $81 million of the net cash
proceeds from the sale of a 10 percent interest in CareerBuilder, LLC to Gannett
Co., Inc. (see Note 7 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof). These prepayments
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 (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 $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.
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 its
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. (“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
fair values of these instruments beginning in the fourth quarter of
2008. The Company will reclassify the previously unrecognized losses
on these instruments included in accumulated other comprehensive income (loss)
into interest expense 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
Facility
—
On 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
“Credits Agreements” section contained in this Item II. 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.
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.
Discontinued Operations
—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 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 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 retains 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 from the NMG
transaction to pay down borrowings under the Company’s Tranche X
facility. 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.
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. 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 the New York edition of
Hoy
, the Company’s
Spanish-language daily newspaper (“
Hoy
, New York”) on Feb. 12,
2007 and completed the sale 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. 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 of
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 one of its
subsidiaries, EZ Buy & EZ Sell Recycler Corporation
(“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 are reported as discontinued operations
in the accompanying unaudited condensed consolidated statements of
operations.
Critical Accounting
Policies
—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 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof 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 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof 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.
NON-OPERATING
ITEMS
The third
quarter and first three quarters of 2008 included several non-operating items,
summarized as follows:
|
Third
Quarter 2008
|
|
|
First
Three Quarters 2008
|
|
(in
millions)
|
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
|
$
|
(8.4
|
)
|
|
$
|
(8.3
|
)
|
|
$
|
98.0
|
|
|
$
|
96.8
|
|
Gain
on sales of investments, net
|
|
78.7
|
|
|
|
54.6
|
|
|
|
67.4
|
|
|
|
43.2
|
|
Other,
net
|
|
.4
|
|
|
|
.4
|
|
|
|
.5
|
|
|
|
.5
|
|
Income
tax adjustment
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,859.4
|
|
Total
non-operating items
|
$
|
70.7
|
|
|
$
|
46.7
|
|
|
$
|
165.9
|
|
|
$
|
1,999.9
|
|
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 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof 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. Following the transaction, the
Company used $81 million of the net cash proceeds to pay down borrowings under
the Company’s Tranche X facility. 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 to the Company’s unaudited
condensed consolidated financial statements in Part I, Item 1, hereof for
further information pertaining to the Company’s election to be treated as a
subchapter S corporation.
The third
quarter and first three quarters of 2007 included several non-operating items,
summarized as follows:
|
Third
Quarter 2007
|
|
|
First
Three Quarters 2007
|
|
(in
millions)
|
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
|
$
|
(85.0
|
)
|
|
$
|
(51.8
|
)
|
|
$
|
(182.1
|
)
|
|
$
|
(111.1
|
)
|
Strategic
transaction expenses
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
|
|
(38.6
|
)
|
|
|
(32.6
|
)
|
Gain
on TMCT transactions
|
|
8.3
|
|
|
|
5.1
|
|
|
|
8.3
|
|
|
|
5.1
|
|
Other,
net
|
|
1.9
|
|
|
|
1.2
|
|
|
|
23.5
|
|
|
|
14.3
|
|
Income
tax adjustment
|
|
—
|
|
|
|
90.7
|
|
|
|
—
|
|
|
|
90.7
|
|
Total
non-operating items
|
$
|
(77.9
|
)
|
|
$
|
42.0
|
|
|
$
|
(188.9
|
)
|
|
$
|
(33.6
|
)
|
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 as a result of the settlement of the Company’s appeal of the United
States Tax Court decision that disallowed the tax-free reorganizations of
Matthew Bender and Mosby, former subsidiaries of The Times Mirror Company (see
Note 3 to the Company’s unaudited condensed consolidated financial statements in
Part I, Item 1).
RESULTS
OF OPERATIONS
The
Company’s results of operations, when examined on a quarterly basis, reflect the
seasonality of the Company’s revenues. Second and fourth quarter
advertising revenues are typically higher than first and third quarter
revenues. Results for the second quarter reflect spring advertising,
while the fourth quarter includes advertising related to the holiday
season. Results for the 2008 and 2007 third quarters reflect these
seasonal patterns. The Company’s first three quarters of 2008
operating results included non-cash pretax impairment charges totaling $3,843
million recorded in the second quarter of 2008 to write down the Company’s
newspaper reporting unit goodwill by $3,007 million and four newspaper masthead
intangible assets by $836 million. Unless otherwise stated, the Company’s
discussion of its results of operations relates to continuing operations, and
therefore excludes NMG,
Hoy
, New York, SCNI and
Recycler. See the discussion below in the “Discontinued Operations”
section of this Item 2 for further information on the results from discontinued
operations.
CONSOLIDATED
The
Company’s consolidated operating results for the third quarters and first three
quarters of 2008 and 2007 are shown in the table below:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
1,037
|
|
$
|
1,159
|
|
-
|
10%
|
|
$
|
3,153
|
|
$
|
3,423
|
|
-
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
write-downs of intangible assets
|
$
|
37
|
|
$
|
217
|
|
-
|
83%
|
|
$
|
350
|
|
$
|
559
|
|
-
|
37%
|
Write-downs
of intangible assets(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,843
|
)
|
|
—
|
|
|
*
|
After
write-downs of intangible assets
|
$
|
37
|
|
$
|
217
|
|
-
|
83%
|
|
$
|
(3,493
|
)
|
$
|
559
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations(3)
|
$
|
(124
|
)
|
$
|
84
|
|
|
*
|
|
$
|
(2,117
|
)
|
$
|
124
|
|
|
*
|
Income
(loss) from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
3
|
|
|
69
|
|
-
|
96%
|
|
|
(715
|
)
|
|
41
|
|
|
*
|
Net income
(loss)
|
$
|
(122
|
)
|
$
|
153
|
|
|
*
|
|
$
|
(2,832
|
)
|
$
|
166
|
|
|
*
|
(1)
|
Operating
profit (loss) excludes interest and dividend income, interest expense,
equity income and losses, non-operating items and income
taxes.
|
(2)
|
Write-downs
of intangible assets included a $3,007 million non-cash write-down of the
Company’s newspaper reporting unit goodwill and an $836 million non-cash
write-down of newspaper masthead intangible assets recorded in the second
quarter of 2008.
|
(3)
|
Due
to the Company’s election to be treated as a subchapter S corporation
beginning in 2008, nearly all of its net deferred tax liabilities have
been eliminated as of Dec. 31, 2007. This resulted in a $1,859
million reduction in income tax expense in the first quarter of
2008.
|
* Not
meaningful
Operating Revenues and Profit
(Loss)
—Consolidated operating revenues and operating profit (loss) by
business segment for the third quarters and first three quarters of 2008 and
2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
$
|
654
|
|
$
|
753
|
|
-
|
13%
|
|
$
|
2,068
|
|
$
|
2,341
|
|
-
|
12%
|
Broadcasting and
entertainment
|
|
383
|
|
|
406
|
|
-
|
6%
|
|
|
1,084
|
|
|
1,082
|
|
|
—
|
Total
operating revenues
|
$
|
1,037
|
|
$
|
1,159
|
|
-
|
10%
|
|
$
|
3,153
|
|
$
|
3,423
|
|
-
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before write-downs of
intangible assets
|
$
|
(26
|
)
|
$
|
110
|
|
|
*
|
|
$
|
87
|
|
$
|
317
|
|
-
|
73%
|
Write-downs
of intangible assets(2)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,843
|
)
|
|
—
|
|
|
*
|
After
write-downs of intangible assets
|
|
(26
|
)
|
|
110
|
|
|
*
|
|
|
(3,756
|
)
|
|
317
|
|
|
*
|
Broadcasting and
entertainment
|
|
74
|
|
|
118
|
|
-
|
37%
|
|
|
313
|
|
|
287
|
|
+
|
9%
|
Corporate
expenses
|
|
(11
|
)
|
|
(11
|
)
|
+
|
3%
|
|
|
(50
|
)
|
|
(45
|
)
|
-
|
11%
|
Total
operating profit (loss)
|
$
|
37
|
|
$
|
217
|
|
-
|
83%
|
|
$
|
(3,493
|
)
|
$
|
559
|
|
|
*
|
(1)
|
Operating
profit (loss) for each segment excludes interest and dividend income,
interest expense, equity income and losses, non-operating items and income
taxes.
|
(2)
|
Write-downs
of intangible assets included a $3,007 million non-cash write-down of the
Company’s newspaper reporting unit goodwill and an $836 million non-cash
write-down of newspaper masthead intangible assets recorded in the second
quarter of 2008.
|
* Not
meaningful
Consolidated
operating revenues for the 2008 third quarter fell 10% to $1.04 billion from
$1.16 billion in 2007, and for the first three quarters of 2008 decreased 8% to
$3.15 billion from $3.42 billion. These declines were due to
decreases in publishing and broadcasting and entertainment revenues in the third
quarter of 2008 and a decline in publishing revenues for the first three
quarters of 2008. Broadcasting and entertainment revenues in the
third quarter of 2007 included an additional $18 million of cable copyright
royalties.
Consolidated
operating profit decreased 83%, or $180 million, in the 2008 third quarter and
consolidated operating profit before write-downs of intangible assets decreased
37%, or $209 million, in the first three quarters of 2008. Publishing
incurred an operating loss of $26 million in the third quarter of 2008 compared
to operating profit of $110 million in the third quarter of 2007. The
Publishing operating loss in the third quarter of 2008 reflected severance and
related charges of $13 million, special termination benefits of $28 million, a
charge of $25 million for the write-off of certain capitalized software
application costs, and stock-based compensation of $1 million related to the
Company’s new management equity incentive plan. In the first three
quarters of 2008, Publishing operating profit before write-downs of intangible
assets decreased 73%, or $230 million, and included severance and related
charges of $34 million, special termination benefits of $52 million, the $25
million capitalized software application costs write-off, and stock-based
compensation of $8 million related to the Company’s new management equity
incentive plan, which were offset in part by a $23 million gain on the sale of
the SCNI real estate in Stamford and Greenwich,
Connecticut. Publishing operating profit in the third quarter of 2007
included severance and related charges of $4 million and stock-based
compensation of $4 million. Publishing operating profit in the first
three quarters of 2007 included severance and related charges of $29 million, a
charge of $24 million for the write-off of
Los Angeles Times
plant
equipment related to the previously closed San Fernando Valley facility and
stock-based compensation of $16 million. Broadcasting and
entertainment operating profit was down 37%, or $43 million, in the 2008 third
quarter and included severance and related charges of $4 million and stock-based
compensation related to the Company’s new management equity incentive plan of $1
million. In the first three quarters of 2008, Broadcasting and
entertainment operating profit increased 9%, or $26 million, and included a gain
of $82 million from the sale of the Company’s studio production lot located in
Hollywood, California, partially offset
by
severance and related charges of $13 million. Broadcasting and
entertainment operating profit in the 2007 third quarter and in the first three
quarters of 2007 included stock-based compensation of $2 million and $6 million,
respectively.
Operating
Expenses
—Consolidated operating expenses for the third quarters and first
three quarters of 2008 and 2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of items shown below)
|
$
|
594
|
|
$
|
593
|
|
|
—
|
|
$
|
1,743
|
|
$
|
1,745
|
|
|
—
|
Selling,
general and administrative
|
|
353
|
|
|
298
|
|
+
|
19%
|
|
|
903
|
|
|
964
|
|
-
|
6%
|
Depreciation
and amortization
|
|
53
|
|
|
51
|
|
+
|
3%
|
|
|
157
|
|
|
154
|
|
+
|
2%
|
Total
operating expenses before write-downs
of
intangible assets
|
|
1,000
|
|
|
942
|
|
+
|
6%
|
|
|
2,802
|
|
|
2,863
|
|
-
|
2%
|
Write-downs
of intangible assets(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,843
|
|
|
—
|
|
|
*
|
Total
operating expenses
|
$
|
1,000
|
|
$
|
942
|
|
+
|
6%
|
|
$
|
6,645
|
|
$
|
2,863
|
|
|
*
|
(1)
|
Write-downs
of intangible assets included a $3,007 million non-cash write-down of the
Company’s newspaper reporting unit goodwill and an $836 million non-cash
write-down of newspaper masthead intangible assets recorded in the second
quarter of 2008.
|
* Not
meaningful
Cost of
sales was flat in both the third quarter and first three quarters of
2008. Compensation expense was flat in both the third quarter and
first three quarters of 2008 as the decrease in compensation expense at
publishing for these periods due to lower staffing levels was offset by
increased compensation at broadcasting and entertainment, principally at the
Chicago Cubs. Newsprint and ink expense was flat in the 2008 third
quarter as a result of an 18% drop in consumption, offset by a 25% increase in
average newsprint costs. Newsprint and ink expense decreased 8%, or
$22 million, in the first three quarters of 2008 as a result of a 15% drop in
consumption, offset by an 11% increase in average newsprint
costs. Circulation distribution expense increased 2%, or $2 million,
in the third quarter of 2008 and 3%, or $11 million, in the first three quarters
of 2008 due to the delivery of additional third-party publications including
certain Sun-Times Media Group publications in the Chicago metropolitan
area.
Selling,
general and administrative (“SG&A”) expenses increased 19%, or $55 million,
in the 2008 third quarter and decreased 6%, or $62 million, in the first
three quarters of 2008. SG&A expenses in the third quarter and
first three quarters of 2008 included severance and related charges of $16
million and $63 million, respectively, special termination benefits of $28
million and $52 million, respectively, and stock-based compensation of $3
million and $15 million, respectively. These expenses were partially
offset in both the third quarter and first three quarters of 2008 by lower
compensation expense due to staff reductions and the Company’s efforts to reduce
costs in 2008. The special termination benefits will be provided
through enhanced pension benefits payable by the Company’s pension
plan. The severance and related charges included approximately $11
million and $51 million of costs related to the Company’s transitional
compensation plan in the 2008 third quarter and first three quarters of 2008,
respectively. SG&A expenses in the 2008 third quarter and first three
quarters of 2008 included a charge of $25 million for the write-off of certain
capitalized software application costs. SG&A expenses in
the first three quarters of 2008 included a $23 million gain on the sale of the
SCNI real estate in Stamford and Greenwich, Connecticut and a net gain of $82
million on the sale of the studio production lot. SG&A expenses
in the third quarter and first three quarters of 2007 included severance and
related charges of $4 million and $32 million, respectively, and stock-based
compensation of $7 million and $32 million, respectively. The first
three quarters of 2007 included a charge of $24 million for the write-off of
Los Angeles Times
plant
equipment related to the previously closed San Fernando Valley
facility.
PUBLISHING
Operating Revenues and Profit
(Loss)
—The following table presents publishing operating revenues,
operating expenses and operating profit (loss) for the third quarters and first
three quarters of 2008 and 2007. References in this discussion to
individual daily newspapers include their related businesses.
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
654
|
|
$
|
753
|
|
-
|
13%
|
|
$
|
2,068
|
|
$
|
2,341
|
|
-
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before write-downs of
intangible assets
|
$
|
680
|
|
$
|
642
|
|
+
|
6%
|
|
$
|
1,981
|
|
$
|
2,023
|
|
-
|
2%
|
Write-downs
of intangible assets(1)
|
|
—
|
|
|
—
|
|
|
-
|
|
|
3,843
|
|
|
—
|
|
|
*
|
After
write-downs of intangible assets
|
$
|
680
|
|
$
|
642
|
|
+
|
6%
|
|
$
|
5,824
|
|
$
|
2,023
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before write-downs of
intangible assets
|
$
|
(26
|
)
|
$
|
110
|
|
|
*
|
|
$
|
87
|
|
$
|
317
|
|
-
|
73%
|
Write-downs
of intangible assets(1)
|
|
—
|
|
|
—
|
|
|
-
|
|
|
(3,843
|
)
|
|
—
|
|
|
*
|
After
write-downs of intangible assets
|
$
|
(26
|
)
|
$
|
110
|
|
|
*
|
|
$
|
(3,756
|
)
|
$
|
317
|
|
|
*
|
(1)
|
Write-downs
of intangible assets included a $3,007 million non-cash write-down of the
Company’s newspaper reporting unit goodwill and an $836 million non-cash
write-down of newspaper mastheads recorded in the second quarter of
2008.
|
* Not
meaningful
Publishing
operating revenues decreased 13%, or $99 million, in the 2008 third quarter and
12%, or $273 million, in the first three quarters of 2008 primarily due to lower
advertising revenue at each of the Company’s daily newspapers. The
largest declines in advertising revenue were at Los Angeles, Chicago and South
Florida.
Operating
profit for the 2008 third quarter decreased $137 million primarily due to the
decline in revenues and an increase in operating expenses. Operating
profit before write-downs of intangible assets decreased 73%, or $230 million,
in the first three quarters of 2008 primarily due to the decline in revenues,
partially offset by lower operating expenses before write-downs of intangible
assets.
Publishing
operating revenues, by classification, for the third quarters and first three
quarters of 2008 and 2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
$
|
220
|
|
$
|
243
|
|
-
|
10%
|
|
$
|
692
|
|
$
|
758
|
|
-
|
9%
|
National
|
|
112
|
|
|
142
|
|
-
|
21%
|
|
|
375
|
|
|
435
|
|
-
|
14%
|
Classified
|
|
135
|
|
|
193
|
|
-
|
30%
|
|
|
443
|
|
|
618
|
|
-
|
28%
|
Total
advertising
|
|
467
|
|
|
578
|
|
-
|
19%
|
|
|
1,511
|
|
|
1,811
|
|
-
|
17%
|
Circulation
|
|
107
|
|
|
110
|
|
-
|
2%
|
|
|
328
|
|
|
337
|
|
-
|
3%
|
Other
|
|
79
|
|
|
65
|
|
+
|
22%
|
|
|
229
|
|
|
193
|
|
+
|
19%
|
Total
revenues
|
$
|
654
|
|
$
|
753
|
|
-
|
13%
|
|
$
|
2,068
|
|
$
|
2,341
|
|
-
|
12%
|
Total
advertising revenue decreased 19%, or $111 million, in the 2008 third quarter
and 17%, or $300 million, in the first three quarters of 2008. Retail
advertising revenues were down 10%, or $24 million, in the 2008 third quarter
and 9%, or $66 million, in the first three quarters of 2008 primarily due
to declines in the
furniture/home
furnishings, hardware/home improvement stores, department stores, specialty
merchandise, personal services, and other retail categories. Preprint
revenues, which are primarily included in retail advertising, decreased 15%, or
$20 million, in the 2008 third quarter and 11%, or $46 million, in the first
three quarters of 2008 primarily due to decreases at Los Angeles, Chicago, South
Florida, Baltimore and Hartford. National advertising revenues
decreased 21%, or $30 million, in the 2008 third quarter primarily due to
decreases in the movies, telecom/wireless, auto, media and transportation
categories. National advertising revenues declined 14%, or $60
million, in the first three quarters of 2008 primarily due to decreases in the
telecom/wireless, movies, auto, transportation, and resorts categories,
partially offset by an increase in the healthcare
category. Classified advertising revenues decreased 30%, or $58
million, in the 2008 third quarter and 28%, or $174 million, in the first three
quarters of 2008. The decline in the 2008 third quarter was primarily
due to a 44% decrease in real estate, a 37% drop in help wanted, and an 11%
reduction in auto advertising. The decline in the first three
quarters of 2008 was primarily due to a 42% decrease in real estate, a 35% drop
in help wanted, and a 10% reduction in auto
advertising. Interactive revenues, which are included in the above
advertising categories, decreased 7%, or $4 million, in the 2008 third quarter
and 4%, or $7 million, in the first three quarters of 2008 due to a decline in
classified advertising, partially offset by increases in retail and national
advertising.
Publishing
advertising volume for the third quarters and first three quarters of 2008 and
2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
Inches
(in thousands)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full
run
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
1,086
|
|
|
1,112
|
|
-
|
2%
|
|
|
3,374
|
|
|
3,433
|
|
-
|
2%
|
National
|
|
579
|
|
|
623
|
|
-
|
7%
|
|
|
1,841
|
|
|
1,875
|
|
-
|
2%
|
Classified
|
|
1,390
|
|
|
1,814
|
|
-
|
23%
|
|
|
4,605
|
|
|
5,570
|
|
-
|
17%
|
Total
full run
|
|
3,055
|
|
|
3,549
|
|
-
|
14%
|
|
|
9,820
|
|
|
10,878
|
|
-
|
10%
|
Part
run
|
|
3,188
|
|
|
4,121
|
|
-
|
23%
|
|
|
10,187
|
|
|
12,817
|
|
-
|
21%
|
Total
inches
|
|
6,243
|
|
|
7,670
|
|
-
|
19%
|
|
|
20,007
|
|
|
23,695
|
|
-
|
16%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preprint
pieces (in millions)
|
|
2,495
|
|
|
2,895
|
|
-
|
14%
|
|
|
7,855
|
|
|
8,955
|
|
-
|
12%
|
Full run
advertising inches decreased 14% in the 2008 third quarter and 10% in the first
three quarters of 2008. Full run retail advertising inches decreased
2% in the 2008 third quarter due to declines at Los Angeles, Newport News, and
Orlando, partially offset by increases at Allentown and Chicago. Full
run retail advertising inches decreased 2% in the first three quarters of 2008
as declines at Los Angeles, Chicago, Baltimore, and Orlando were partially
offset by an increase at South Florida. Full run national advertising
inches were down 7% in the 2008 third quarter due to declines at Chicago, South
Florida, and Orlando, partially offset by increases at Newport News and
Allentown. Full run national advertising inches were down 2% in the first
three quarters of 2008, as decreases at Chicago, South Florida, Hartford, and
Baltimore were partially offset by increases at Newport News and
Allentown. Full run classified advertising inches were down 23% in
the 2008 third quarter and 17% in the first three quarters of 2008, due to
decreases at all daily newspapers. Part run advertising inches
decreased 23% in the 2008 third quarter and 21% in the first three quarters of
2008 due to declines at all daily newspapers except Newport
News. Preprint advertising pieces decreased 14% in the 2008 third
quarter and 12% in the first three quarters of 2008 primarily due to declines
across all daily newspapers.
Circulation
revenues were down 2%, or $2 million, in the 2008 third quarter, and 3%, or $8
million, in the first three quarters of 2008 primarily due to a decline in total
net paid circulation copies for both daily (Mon-Fri) and Sunday, partially
offset by selective price increases. The largest revenue declines in
the third quarter and first three quarters of 2008 were at Chicago, Los Angeles
and Hartford. Circulation revenues increased at South Florida and
Orlando in both periods. Total daily net paid circulation for the
third quarter and first three quarters of 2008 averaged 2.2 million and 2.3
million copies, respectively, down 7% and 6%, respectively, from the comparable
prior year periods. Total Sunday net paid circulation for the third
quarter and first three
quarters
of 2008 averaged 3.3 million and 3.4 million copies, respectively, representing
a decline of 5% from the comparable prior year periods. Individually
paid circulation (home delivery plus single copy) in the third quarter and first
three quarters of 2008 was down 7% and 6%, respectively, for daily and down 6%
in both periods for Sunday.
Other
revenues are derived from advertising placement services; the syndication of
columns, features, information and comics to newspapers; commercial printing
operations; delivery of additional third-party publications; direct mail
operations; cable television news programming; distribution of entertainment
listings; and other publishing-related activities. Other revenues increased
22%, or $14 million, in the third quarter and 19%, or $36 million, in the first
three quarters of 2008 primarily due to higher delivery revenue for third-party
publications including certain Sun-Times Media Group publications in the Chicago
metropolitan area.
Operating Expenses
—Publishing
operating expenses for the third quarters and first three quarters of 2008 and
2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
$
|
281
|
|
$
|
259
|
|
+
|
8%
|
|
$
|
841
|
|
$
|
825
|
|
+
|
2%
|
Newsprint
and ink
|
|
83
|
|
|
83
|
|
|
-
|
|
|
252
|
|
|
274
|
|
-
|
8%
|
Circulation
distribution
|
|
103
|
|
|
101
|
|
+
|
2%
|
|
|
318
|
|
|
308
|
|
+
|
3%
|
Outside
services
|
|
57
|
|
|
63
|
|
-
|
9%
|
|
|
178
|
|
|
190
|
|
-
|
6%
|
Promotion
|
|
17
|
|
|
26
|
|
-
|
33%
|
|
|
54
|
|
|
68
|
|
-
|
21%
|
Depreciation
and amortization
|
|
39
|
|
|
38
|
|
+
|
4%
|
|
|
118
|
|
|
115
|
|
+
|
2%
|
Other
|
|
99
|
|
|
72
|
|
+
|
39%
|
|
|
220
|
|
|
244
|
|
-
|
10%
|
Total
operating expenses before write-downs of
intangible
assets
|
|
680
|
|
|
642
|
|
+
|
6%
|
|
|
1,981
|
|
|
2,023
|
|
-
|
2%
|
Write-downs
of intangible assets(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,843
|
|
|
—
|
|
|
*
|
Total
operating expenses
|
$
|
680
|
|
$
|
642
|
|
+
|
6%
|
|
$
|
5,824
|
|
$
|
2,023
|
|
|
*
|
(1)
|
Write-downs
of intangible assets included a $3,007 million non-cash write-down of the
Company’s newspaper reporting unit goodwill and an $836 million non-cash
write-down of newspaper masthead intangible assets recorded in the second
quarter of 2008.
|
* Not
meaningful
Operating
expenses increased 6%, or $38 million, in the 2008 third
quarter. Operating expenses before write-downs of intangible assets
decreased 2%, or $42 million, in the first three quarters of
2008. Compensation expense increased 8%, or $21 million, in the 2008
third quarter primarily due to an increase of $9 million in severance and
related charges and $28 million in special termination benefits, partially
offset by the impact of a 10% (1,300 full-time equivalent positions) reduction
in staffing and a decrease of $3 million in stock-based
compensation. Compensation expense increased 2%, or $15 million, in
the first three quarters of 2008 primarily due to an increase of $4 million in
severance and related charges and $52 million of special termination benefits,
offset by the impact of a 7% (1,000 full-time equivalent positions) reduction in
staffing and a decrease of $8 million in stock-based
compensation. Newsprint and ink expense was flat in the 2008 third
quarter as a result of an 18% drop in consumption, offset by a 25% increase
in average newsprint costs. Newsprint and ink expense decreased 8%,
or $22 million, in the first three quarters of 2008 as a result of a 15%
drop in consumption, offset by an 11% increase in average newsprint
costs. Circulation distribution expense increased 2%, or $2 million,
in the 2008 third quarter and 3%, or $11 million, in the first three quarters of
2008 due to the delivery of additional third-party publications including
certain Sun-Times Media Group publications in the Chicago metropolitan
area. Outside services expense was down 9%, or $6 million, in the
2008 third quarter and 6%, or $12 million, in the first three quarters of 2008
largely due to a decrease in outside printing. Promotion expense
decreased 33%, or $9 million, in the 2008 third quarter and 21%, or $14 million,
in the first three quarters of 2008 due to the Company’s efforts to reduce costs
in 2008. Other expenses in the third quarter and first three quarters
of 2008 included a charge of $25 million for the write-off
of
certain capitalized software application costs. Other expenses also
included for the first three quarters of 2008 a $23 million gain on the sale of
the SCNI real estate in Stamford and Greenwich, Connecticut and for the first
three quarters of 2007 a charge of $24 million for the write-off of
Los Angeles Times
plant
equipment related to the previously closed San Fernando Valley
facility.
BROADCASTING
AND ENTERTAINMENT
Operating Revenues and
Profit
—The following table presents broadcasting and entertainment
operating revenues, operating expenses and operating profit for the third
quarters and first three quarters of 2008 and 2007. Entertainment
includes Tribune Entertainment and the Chicago Cubs.
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
$
|
264
|
|
$
|
288
|
|
-
|
8%
|
|
$
|
834
|
|
$
|
840
|
|
-
|
1%
|
Radio/entertainment
|
|
119
|
|
|
118
|
|
+
|
1%
|
|
|
250
|
|
|
242
|
|
+
|
3%
|
Total
operating revenues
|
$
|
383
|
|
$
|
406
|
|
-
|
6%
|
|
$
|
1,084
|
|
$
|
1,082
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
$
|
211
|
|
$
|
201
|
|
+
|
5%
|
|
$
|
638
|
|
$
|
597
|
|
+
|
7%
|
Radio/entertainment(1)
|
|
98
|
|
|
87
|
|
+
|
12%
|
|
|
134
|
|
|
199
|
|
-
|
33%
|
Total
operating expenses
|
$
|
309
|
|
$
|
288
|
|
+
|
7%
|
|
$
|
771
|
|
$
|
795
|
|
-
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
$
|
53
|
|
$
|
87
|
|
-
|
39%
|
|
$
|
197
|
|
$
|
243
|
|
-
|
19%
|
Radio/entertainment(1)
|
|
21
|
|
|
31
|
|
-
|
31%
|
|
|
116
|
|
|
44
|
|
|
*
|
Total
operating profit
|
$
|
74
|
|
$
|
118
|
|
-
|
37%
|
|
$
|
313
|
|
$
|
287
|
|
|
9%
|
(1)
|
Radio/entertainment
operating expenses and operating profit for the first three quarters of
2008 included the gain of $82 million on the sale of the studio production
lot.
|
* Not
meaningful
Broadcasting
and entertainment operating revenues decreased 6%, or $23 million, in the 2008
third quarter and were essentially flat in the first three quarters of
2008. Television revenues were down 8%, or $24 million, in the 2008
third quarter, primarily due to lower cable copyright royalties and soft
advertising demand, partially offset by station revenue share gains in most
markets. The third quarter of 2007 included an additional $18 million
of cable copyright royalties at Chicago and WGN Cable. The additional
cable copyright royalties related to WGN-TV Chicago copyrighted programming
aired in prior years on WGN America (formerly SuperStation WGN) and distributed
on national cable and satellite systems. Television revenues were
down 1%, or $5 million, in the first three quarters of 2008 due to the lower
cable copyright royalties, partially offset by higher advertising
revenues. Radio/entertainment revenues were up 1%, or $1 million, in
the 2008 third quarter and 3%, or $8 million, in the first three quarters of
2008 as higher revenues for the Chicago Cubs and WGN Radio were partially offset
by lower revenues at Tribune Entertainment.
Operating
profit for broadcasting and entertainment decreased 37%, or $43 million, in the
2008 third quarter and increased 9%, or $26 million, in the first three quarters
of 2008. Television operating profit decreased 39%, or $34 million,
and 19%, or $46 million, in the 2008 third quarter and the first three quarters
of 2008, respectively, primarily due to the decrease in revenues and higher
operating expenses. Television operating expenses reflected increased
severance and related charges of $4 million and $13 million in the third quarter
and first three quarters of 2008, respectively. Radio/entertainment operating
profit decreased 31%, or $9 million, in the 2008 third quarter due to higher
player compensation at the Chicago Cubs and two fewer home
games in
2008, partially offset by lower operating expenses at Tribune Entertainment.
Radio/entertainment operating profit increased $72 million in the first three
quarters of 2008 due to a gain of $82 million related to the sale of the
Company’s Hollywood studio production lot in the first quarter of 2008,
partially offset by lower revenues at Tribune Entertainment.
Operating
Expenses
—Broadcasting and entertainment operating expenses for the third
quarters and first three quarters of 2008 and 2007 were as follows:
|
Third
Quarter
|
|
First
Three Quarters
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
$
|
159
|
|
$
|
135
|
|
+
|
18%
|
|
$
|
393
|
|
$
|
346
|
|
+
|
13%
|
Programming
|
|
82
|
|
|
83
|
|
-
|
1%
|
|
|
254
|
|
|
247
|
|
+
|
3%
|
Depreciation
and amortization
|
|
13
|
|
|
13
|
|
|
—
|
|
|
38
|
|
|
38
|
|
|
—
|
Other
|
|
55
|
|
|
57
|
|
-
|
5%
|
|
|
169
|
|
|
164
|
|
+
|
3%
|
Gain
on sale of studio production lot assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
—
|
|
|
*
|
Total
operating expenses
|
$
|
309
|
|
$
|
288
|
|
+
|
7%
|
|
$
|
771
|
|
$
|
795
|
|
-
|
3%
|
* Not
meaningful
Broadcasting
and entertainment operating expenses increased 7%, or $21 million, in the 2008
third quarter and decreased 3%, or $24 million, in the first three quarters of
2008. Compensation expense increased 18%, or $24 million, in the 2008
third quarter and 13%, or $46 million, in the first three quarters of 2008
primarily due to higher player compensation at the Chicago Cubs, the expansion
of news programming at television, and higher severance charges of $4 million
and $13 million, respectively. Programming expense decreased 1%, or
$1 million, in the 2008 third quarter. Programming expense
increased 3%, or $7 million, in the first three quarters of 2008 due to higher
broadcast rights amortization. Other cash expenses were down 5%, or
$3 million, in the 2008 third quarter primarily due to a decrease in promotion
expense, partially offset by an increase in outside services. Other
cash expenses increased 3%, or $5 million, in the first three quarters of 2008
primarily due to news expansions, partially offset by a decrease in promotion
expense.
CORPORATE
EXPENSES
Corporate
expenses were down 3% in the 2008 third quarter. Corporate expenses
were up 11%, or $5 million, in the first three quarters of 2008 due to a $14
million increase in severance and related charges, offset by a decrease of $7
million in stock-based compensation expense and the impact of staff reductions
and other cost savings.
EQUITY
RESULTS
Net
income on equity investments decreased $3 million to $23 million in the 2008
third quarter, and declined $10 million to $58 million in the first three
quarters of 2008. The decrease in the 2008 third quarter was
primarily due to an additional $4 million write-down at one of the Company’s
interactive investments. The decrease in the first three quarters of
2008 was primarily due to a $16 million write-down at one of the Company’s
interactive investments, partially offset by an improvement at TV Food
Network.
INTEREST
AND DIVIDEND INCOME, INTEREST EXPENSE, AND INCOME TAXES
Interest
and dividend income for the 2008 third quarter decreased $2 million to $3
million in the third quarter of 2008 and declined $2 million to $10 million for
the first three quarters of 2008 primarily due to lower interest rates and lower
average cash balances, partially offset by an increase in Time Warner dividend
income. Interest expense applicable to continuing operations for the
2008 third quarter increased to $232 million from $175 million and for the first
three quarters of 2008 increased to $695 million from $371 million primarily due
to higher debt levels, partially offset by lower interest rates. Debt
was $11.8 billion at the end of
the 2008
third quarter, compared with $9.4 billion at the end of the third quarter of
2007. The increase in debt was primarily due to the consummation of
the Leveraged ESOP Transactions.
As
discussed further in the “Discontinued Operations” section below, the Company
allocated to discontinued operations 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.
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 to the Company’s
unaudited condensed consolidated financial statements in Part I, Item 1,
hereof). The net benefit in the first three quarters included the
favorable $1,859 million deferred income tax adjustment discussed in the
“Significant Events – S Corporation Election” section of this Item
2. 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 to the Company’s unaudited
condensed consolidated financial statements included in Part I, Item 1,
hereof). The effective tax rate on income from continuing operations
in the 2007 third quarter and first three quarters of 2007 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 to the Company’s
unaudited condensed consolidated financial statements included in Part I, Item
1, hereof 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 the first three quarters of 2007 was 43.3% and 41.1%,
respectively.
DISCONTINUED
OPERATIONS
As
discussed in the “Significant Events – Discontinued Operations” section of this
Item 2, 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 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 retains 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 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. 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. 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 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 are reported as discontinued operations
in the accompanying unaudited condensed consolidated statements of operations in
Part I, Item 1, hereof.
Selected
financial information related to discontinued operations is summarized as
follows:
|
|
Third
Quarter
|
|
|
First
Three Quarters
|
|
(in
thousands)
|
|
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 the Tranche X facility (see Note 10 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof) and applying the
interest rate applicable to the Tranche X facility for the periods in which
borrowings under the Tranche X facility were outstanding.
LIQUIDITY
AND CAPITAL RESOURCES
Cash flow
generated from operating activities is the Company’s primary source of
liquidity. Net cash provided by operating activities in the first
three quarters of 2008 was $85 million, down 81% from $452 million in 2007,
primarily due to lower operating profit and higher interest expense, partially
offset by more favorable changes in working capital items.
Net cash
provided by investing activities totaled $676 million in the first three
quarters of 2008. In the first three quarters of 2008, the Company
purchased real estate from TMCT LLC for $175 million (see discussion
below). The Company’s other capital expenditures and acquisitions and
investments totaled $65 million and
$14
million, respectively, in the first three quarters of 2008. The
Company received $318 million in net proceeds from the sales of real estate and
investments in the first three quarters of 2008, including $135 million from the
sale of a 10 percent interest in CareerBuilder, LLC to Gannett (see Note 7 to
the Company’s unaudited condensed consolidated financial statements in Part I,
Item 1, hereof), $122 million from the sale of the studio production lot located
in Hollywood, California, $29 million from the sale of the SCNI real estate in
Stamford and Greenwich, Connecticut, and $22 million from the sale of its
investment in ShopLocal. The Company also received a special
distribution of $612 million in connection with the NMG transaction (see Note 2
to the Company’s unaudited condensed consolidated financial statements in Part
I, Item 1, hereof).
On April
28, 2008, the Company acquired the real estate formerly leased from TMCT, LLC
for $175 million (see Note 13 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof). The proceeds from
the sales of the studio production lot and the SCNI real estate, along with
available cash, were used to fund the purchase. 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.
Net cash
used for financing activities was $735 million in the first three quarters 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 trade receivables securitization facility entered into on July 1,
2008 (see Note 10 to the Company’s unaudited condensed consolidated financial
statements in Part I, Item 1, hereof), $589 million of the net cash proceeds
from the NMG transaction and $81 million of the net cash proceeds from the
CareerBuilder transaction. In addition, the Company made $57 million
of scheduled Tranche B Facility amortization payments and reduced its property
financing obligation by $8 million prior to its retirement in connection with
the acquisition of the TMCT, LLC real estate described above. The
Company refinanced $25 million of its medium term notes with borrowings under
its Delayed Draw Facility and borrowed $225 million under the trade receivables
securitization facility.
On Oct.
6, 2008, the Company refinanced another $168 million of its medium-term notes
with additional borrowings under the Delayed Draw Facility and 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 commitments 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 the 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.
Since the
completion of the Leveraged ESOP Transactions in December 2007, the Company has
implemented management changes and has undertaken various new revenue
enhancement and cost reduction initiatives designed to strengthen the Company’s
market position and improve its financial performance. These
initiatives will require time before the intended benefits can be realized, and
given current adverse economic conditions and the rapidly changing media
landscape, it is impossible to predict what their possible financial
impact ultimately will be.
The
Company expects to fund capital expenditures, interest and principal payments
due in the next 12 months and other operating requirements through a combination
of cash flows from operations, available borrowings under the Revolving Credit
Facility, and, if necessary, disposals of assets or operations. The
Company’s ability to satisfy financial covenants in its credit agreements and 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 any such asset
dispositions can be completed. In addition, there can be no
assurances 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. The Company’s financial and operating performance,
and the market environment for divestiture transactions, are 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 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. As described in the “Credit Agreements” section
contained in this Item 2, the Credit Agreement and the Interim Credit Agreement
require that proceeds from the disposition of assets be used to repay borrowings
under such agreements, subject to certain exceptions. 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 maintain compliance with the financial covenants in its credit
agreements and Receivables Loan Agreement or 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. See 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 Part II, Item 1A, “Risk Factors” in this Form 10-Q, for further discussion
of the risks associated with the Company’s ability to service all of its
existing indebtedness and ability to maintain compliance with financial
covenants in its credit facilities. In addition, see the “Significant
Events” section of this Item 2 for additional information regarding the
Leveraged ESOP Transactions and a summary of the Company’s obligations under the
Credit Agreement and for definitions of capitalized terms used in this
discussion.
As of
Nov. 7, 2008, the Company’s corporate credit ratings were as follows: “B-” with
negative outlook by Standard & Poor’s Rating Services, “Caa2” with negative
outlook by Moody’s Investor Service and “CCC” with negative outlook by Fitch
Ratings.
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.
Off-Balance Sheet
Arrangements
—Off-balance sheet arrangements, as defined by the Securities
and Exchange Commission, include the following four categories: obligations
under certain guarantees or contracts; retained or contingent interests in
assets transferred to an unconsolidated entity or similar arrangements;
obligations under certain derivative arrangements; and obligations under
material variable interests. The Company has not entered into any
material arrangements that would fall under any of these four categories, which
would be reasonably likely to have a current or future material effect on the
Company’s financial condition, revenues or expenses, results of operations,
liquidity or capital expenditures.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The
following represents an update of the Company’s market-sensitive financial
information. This information contains forward-looking statements and
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the fiscal year ended Dec. 30, 2007.
INTEREST
RATE RISK
All of
the Company’s borrowings are denominated in U.S. dollars. The Company manages
interest rate risk by issuing a combination of both fixed and variable rate
debt. In addition, the Company enters into hedge arrangements as
required under the terms of the Credit Agreement as defined and described in the
“Significant Events” section contained in Part I, Item 2, hereof.
Information
pertaining to the Company’s debt at Sept. 28, 2008 is shown in the table below
(in thousands):
Maturities
|
Fixed Rate
Debt
|
|
Weighted Avg
Interest Rate
|
|
Variable Rate
Debt
|
|
Weighted Avg
Interest Rate
|
|
Total
Debt
|
2008(1)
|
$
|
216,467
|
|
|
2.0
|
%
|
|
$
|
24,242
|
|
|
5.8
|
%
|
|
$
|
240,709
|
2009(2)
|
|
3,939
|
|
|
6.0
|
%
|
|
|
613,653
|
|
|
5.6
|
%
|
|
|
617,592
|
2010(3)
|
|
451,825
|
|
|
4.9
|
%
|
|
|
353,402
|
|
|
5.2
|
%
|
|
|
805,227
|
2011
|
|
2,284
|
|
|
8.4
|
%
|
|
|
86,499
|
|
|
5.8
|
%
|
|
|
88,783
|
2012
|
|
2,479
|
|
|
8.5
|
%
|
|
|
123,449
|
|
|
5.8
|
%
|
|
|
125,928
|
Thereafter(4)
|
|
1,123,976
|
|
|
4.1
|
%
|
|
|
8,819,798
|
|
|
6.3
|
%
|
|
|
9,943,774
|
Total
at Sept. 28, 2008
|
$
|
1,800,970
|
|
|
|
|
|
$
|
10,021,043
|
|
|
|
|
|
$
|
11,822,013
|
Fair
value at Sept. 28, 2008(6)
|
$
|
1,098,287
|
|
|
|
|
|
$
|
6,332,847
|
|
|
|
|
|
$
|
7,431,134
|
(1)
|
Fixed
rate debt includes $216 million of the Company’s 2% PHONES which
represents the cash exchange value of the PHONES at Sept. 28,
2008.
Variable rate debt
includes
$20 million related to the Tranche B facility, which is
payable in quarterly increments of approximately $20 million until
maturity in 2014 when the remaining principal balance is due in full (see
Note 10 to the Company’s unaudited condensed consolidated financial
statements in
Part I, Item 1,
hereof
).
|
(2)
|
Variable
rate debt includes a $512 million principal payment due under the Tranche
X facility on June 4, 2009 and $16 million related to an interest rate
swap agreement through 2009 on $750 million of the variable rate
borrowings under the Tranche B facility effectively converting the
variable rate to a fixed rate of 5.25% plus a margin of 300 basis
points.
|
(3)
|
Variable
rate debt includes $40 million related to an interest rate swap agreement
through 2010 on $1 billion of the variable rate borrowings under the
Tranche B facility effectively converting the variable rate to a fixed
rate of 5.29% plus a margin of 300 basis
points.
|
(4)
|
Fixed
rate debt includes the remaining $64 million of book value related to
the Company’s 2% PHONES, due 2029. The Company may redeem the
PHONES at any time for the greater 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.
Quarterly interest payments are made to the PHONES holders at an annual
rate of 2% of the initial principal. Fixed rate debt also includes
$31 million related to the interest rate swap agreement on the
$100 million 7.5% debentures due in 2023 effectively converting the
fixed 7.5% rate to a variable rate based on LIBOR. Fixed rate
debt also includes $238 million related to the Company’s medium-term
notes. On Oct. 6, 2008, the Company refinanced $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. Variable rate debt includes $45 million related to an
interest rate swap agreement through 2012 on $750 million of the variable
rate borrowings under the Tranche B facility effectively converting the
variable rate to a fixed rate of 5.39% plus a margin of 300 basis
points. Variable rate debt also includes the $1.6 billion
Bridge Facility, which has been classified as long-term because the
borrowings under the Bridge Facility will be exchanged for long-term
senior exchange notes or similar instruments prior to the Bridge
Facility’s initial maturity date of Dec. 20, 2008 (see Note 10 to the
Company’s unaudited consolidated financial statements in
Part I, Item 1,
hereof
). Variable rate debt also includes $7.2 billion
related to the amount due in 2014
|
|
on
the Tranche B facility after all quarterly payments have been made (see
Note 10 to the Company’s unaudited condensed consolidated financial
statements in
Part I, Item 1,
hereof
).
|
(5)
|
Fair
value of the Company’s variable rate borrowings, senior notes and
debentures was estimated based on quoted market prices for similar issues
or on current rates available to the Company for debt of the same
remaining maturities and similar terms. The carrying value of
all other components of the Company’s debt approximates fair
value.
|
Variable Interest Rate Debt
—As
described in the “Significant Events” section contained in Part I, Item 2,
hereof, on June 4, 2007 and Dec. 20, 2007, the Company entered into borrowings
under the Credit Agreement and the Interim Credit Agreement. In general,
borrowings under the Credit Agreement bear interest at a variable rate based on
LIBOR plus a spread ranging from 275 basis points to 300 basis
points. Upon execution of the Interim Credit Agreement, loans under
the Bridge Facility bore interest based on LIBOR plus 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 each subsequent quarter, subject to
specified caps
. As of Sept. 28, 2008, the Company had $9.667
billion of variable rate borrowings outstanding under these credit
facilities. At this borrowing level, and before consideration of the
Company’s existing interest rate swap agreements and interest rate cap, a
hypothetical one percent increase in the underlying interest rates for the
Company’s variable rate borrowings under these agreements would result in an
additional $97 million of annual pretax interest expense. 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.
The Company also 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. T
he Company is currently a party to four interest rate
swap agreements and an interest rate cap. One of the swap agreements
relates to the $100 million fixed 7.5% rate debentures due in 2023 and
effectively converts the fixed 7.5% rate to a variable rate based on
LIBOR. The other three swap agreements were initiated on July 3,
2007, and effectively converted $2.5 billion of the variable rate borrowings to
a weighted-average fixed rate of 5.31% plus a margin of 300 basis
points. On Aug. 14, 2008, the Company entered into an interest rate
cap confirmation that effectively caps LIBOR at 4.25% with respect to $2.5
billion in variable rate borrowings for a three-year period expiring July 21,
2011. As a result of the election made by the Company on Oct. 21,
2008, the Company will no longer account for the three interest rate swaps
initiated on July 3, 2007 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 fair values of these instruments beginning in the fourth quarter of
2008.
On July
1, 2008, the Company and Receivables Subsidiary, entered into a $300 million
trade receivables securitization facility. 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. Advances
under the Receivables Loan Agreement that are funded through commercial paper
issued by the Lenders (Receivables Loan Agreement and Lenders each as defined in
the “Significant Events – Trade Receivables Securitization Facility” section
included in Part I, Item 2, hereof) 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. At Sept.
28, 2008, the applicable interest rate for this facility was
4.9%. See Note 10 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof, for a further description of the
terms of this facility.
EQUITY
PRICE RISK
Available-For-Sale
Securities
—The Company has common stock investments in publicly traded
companies that are subject to market price volatility. Except for 16
million shares of Time Warner common stock (see discussion below), these
investments are classified as available-for-sale securities and are recorded on
the balance sheet at fair value with unrealized gains or losses, net of related
tax effects, reported in the accumulated other comprehensive income (loss)
component of shareholders’ equity (deficit).
The
following analysis presents the hypothetical change at Sept. 28, 2008 in the
fair value of the Company’s common stock investments in publicly traded
companies that are classified as available-for-sale, assuming hypothetical stock
price fluctuations of plus or minus 10%, 20% and 30% in each stock’s
price. As of Sept. 28, 2008, these investments consisted primarily of
203,790 shares of Time Warner common stock unrelated to the PHONES (see
discussion below in “Derivatives and Related Trading Securities”) and 3.4
million shares of AdStar, Inc.
|
Valuation
of Investments
Assuming
Indicated Decrease
in
Stock’s Price
|
|
|
|
Valuation
of Investments
Assuming
Indicated Increase
in
Stock’s Price
|
(in
thousands)
|
-30%
|
|
-20%
|
|
-10%
|
|
Sept. 28, 2008
Fair Value
|
|
+10%
|
|
+20%
|
|
+30%
|
Common
stock investments in
public
companies
|
$2,151
|
|
$2,458
|
|
$2,765
|
|
$3,073
(1)
|
|
$3,380
|
|
$3,687
|
|
$3,995
|
(1)
|
Excludes
16 million shares of Time Warner common stock. See discussion
below in “Derivatives and Related Trading
Securities.”
|
During
the last 12 quarters preceding Sept. 28, 2008, market price movements have
caused the fair value of the Company’s common stock investments in publicly
traded companies that are classified as available-for-sale to change by 10% or
more in five of the quarters, by 20% or more in five of the quarters and by 30%
or more in two of the quarters.
Derivatives and Related Trading
Securities
—The Company issued 8 million PHONES in April 1999 indexed to
the value of its investment in 16 million shares of Time Warner common
stock. Since the second quarter of 1999, this investment in Time
Warner has been classified as a trading security, and changes in its fair value,
net of the changes in the fair value of the PHONES, have been recorded in the
statement of operations. On Sept. 26, 2008, 20 PHONES were exchanged,
at the election of the holders of those PHONES, for cash based on 95% of the
market value of two shares of Time Warner common stock in accordance with the
terms of the PHONES.
At
maturity, the PHONES will be redeemed at the greater of the then market value of
two shares of Time Warner common stock or the principal value of the PHONES
($155.64 per PHONES at Sept. 28, 2008). At Sept. 28, 2008, the PHONES
carrying value was $280 million. Since the issuance of the PHONES in
April 1999, changes in the fair value of the PHONES have partially offset
changes in the fair value of the related Time Warner shares. There
have been and may continue to be periods with significant non-cash increases or
decreases to the Company’s net income pertaining to the PHONES and the related
Time Warner shares.
The
following analysis presents the hypothetical change in the fair value of the
Company’s 16 million shares of Time Warner common stock related to the PHONES,
assuming hypothetical stock price fluctuations of plus or minus 10%, 20% and 30%
in the stock’s price.
|
Valuation
of Investment
Assuming
Indicated Decrease
in
Stock’s Price
|
|
|
|
Valuation
of Investment
Assuming
Indicated Increase
in
Stock’s Price
|
(in
thousands)
|
-30%
|
|
-20%
|
|
-10%
|
|
Sept.
28, 2008
Fair Value
|
|
+10%
|
|
+20%
|
|
+30%
|
Time
Warner common
stock
|
$159,152
|
|
$181,888
|
|
$204,624
|
|
$227,360
|
|
$250,096
|
|
$272,832
|
|
$295,568
|
|
During
the last 12 quarters preceding Sept. 28, 2008, market price movements have
caused the fair value of the Company’s 16 million shares of Time Warner common
stock to change by 10% or more in three of the quarters, by 20% or more in one
of the quarters and by 30% or more in none of the quarters.
ITEM
4. CONTROLS AND PROCEDURES.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
its principal executive officer and principal financial officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of Sept. 28,
2008. Based upon that evaluation, the principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective.
Changes
in Internal Control Over Financial Reporting
There has
been no change in the Company’s internal control over financial reporting that
occurred during the Company’s fiscal quarter ended Sept. 28, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
Tribune
Company and its subsidiaries are defendants from time to time in actions for
matters arising out of their business operations. In addition,
Tribune Company and its subsidiaries are involved from time to time as parties
in various regulatory, environmental and other proceedings with governmental
authorities and administrative agencies.
Newsday
and
Hoy
, New York Circulation
Misstatements
—In February 2004, a purported class action lawsuit was
filed in New York federal court by certain advertisers of
Newsday
and an affiliate
publication,
Hoy
, New
York, alleging that they were overcharged for advertising as a result of
inflated circulation numbers at these two publications. The purported class
action also alleges that entities that paid a
Newsday
subsidiary to deliver
advertising flyers were overcharged. The Company is vigorously
defending this suit. In July 2004, another lawsuit was filed in New
York federal court by certain advertisers of
Newsday
alleging damages
resulting from inflated
Newsday
circulation numbers
as well as federal and state antitrust violations. On Feb. 11, 2008,
this suit was settled with all remaining plaintiffs.
In
addition to the advertiser lawsuits, several class action and shareholder
derivative suits were filed against the Company and certain of its current and
former directors and officers as a result of the circulation misstatements at
Newsday
and
Hoy
, New
York. These suits alleged breaches of fiduciary duties and other
managerial and director failings under Delaware law, the federal securities laws
and the Employee Retirement Income Security Act (“ERISA”). The
consolidated shareholder derivative suit filed in Illinois state court in
Chicago was dismissed with prejudice on March 10, 2006. The appeal of
this dismissal to the Illinois State Court of Appeals was voluntarily dismissed
by the plaintiff following the closing of the Company’s going private
transaction. The consolidated securities class action lawsuit and the
consolidated ERISA class action lawsuit filed in Federal District Court in
Chicago were both dismissed with prejudice on Sept. 29, 2006. The
dismissals were appealed to the United States Court of Appeals for the Seventh
Circuit. On April 2, 2008, the Seventh Circuit issued an opinion
affirming the dismissal of both the securities class action lawsuit and the
ERISA class action lawsuit. Plaintiffs in the securities class action
lawsuit have filed a petition for a rehearing en banc by the Seventh Circuit,
which is currently pending. The Company continues to believe these
suits are without merit and will continue to vigorously defend
them.
PHONES Indenture
—The Company
received a letter dated April 9, 2007, (1) stating that it was written on behalf
of two hedge funds purporting to hold approximately 37% of the Company’s
8,000,000 PHONES Exchangeable Subordinated Debentures due 2029 (the “PHONES”),
(2) purporting to give a “notice of default” that the Company has violated the
“maintenance of properties” covenant in the indenture under which the PHONES
were issued (the “PHONES Indenture”) and (3) informing the Company that failure
to remedy such purported violation within 60 days of notice will result in an
“event of default” under the PHONES Indenture (which could, if properly
declared, result in an acceleration of principal and interest payable with
respect to the PHONES). On April 27, 2007, the Company received a
letter from the law firm purporting to represent the two hedge funds stating
that the law firm also purported to represent a third hedge fund, which,
together with the first two hedge funds, purported to hold 55% of the Company’s
PHONES and reiterating the claims set forth in the April 9, 2007
letter.
The
particular covenant in question, Section 10.05 of the PHONES Indenture, requires
the Company to “cause all properties used or useful in the conduct of its
business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order (normal wear and tear excepted) and supplied
with all necessary equipment… all as in the judgment of the Company may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times….” Section 10.05 of the
PHONES Indenture expressly provides that the covenant does not “prevent the
Company from discontinuing the operation and maintenance of any such properties,
or disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Company or of the Subsidiary concerned, desirable in the
conduct
of its business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders [of the PHONES].” The letters suggest
that the Company’s recent sales of three television stations, announced
intention to dispose of an interest in the Chicago Cubs baseball team and recent
and proposed issuances of debt and return of capital to stockholders violated or
will violate this maintenance of properties covenant.
On May 2,
2007, the Company sent a letter to the law firm purporting to represent the
hedge funds rejecting their purported “notice of default” as defective and
invalid because the Company was not in default of Section 10.05, the entities
the law firm purported to represent were not “Holders” as defined in the PHONES
Indenture, and because the law firm had provided no evidence that it was an
agent duly appointed in writing as contemplated by Section 1.04 of the PHONES
Indenture. The law firm sent a letter to the Company on May 8, 2007
responding to the Company’s May 2, 2007 letter, reiterating its claim that the
Company was in default of Section 10.05 and stating that it had properly noticed
a default pursuant to Section 5.01(4) of the Indenture. The Company further
responded by letter dated May 18, 2007 reaffirming its rejection of the
purported “notice of default” and reiterating its position that the Company was
not in default of Section 10.05 and that the entities the law firm purported to
represent were not entitled to provide a notice of default under Section 5.01(4)
of the PHONES Indenture.
On July
23, 2007, the Company received a letter from the law firm purporting to
represent the hedge funds, purported to hold 70% of the Company’s PHONES,
stating that the Company has breached Section 10.05 of the PHONES Indenture,
such breach was continuing on the date of such letter, which was more than 60
days after the purported “notice of default” had been given, and that pursuant
to Section 5.01(4) of the Indenture, an “event of default” under the PHONES
Indenture had occurred and was continuing. The July 23, 2007 letter
further stated that the hedge funds were declaring the outstanding principal of
$157 per share of all of the outstanding PHONES, together with all accrued but
unpaid interest thereon to be due and payable immediately, and were demanding
immediate payment of all such amounts. On July 27, 2007, the Company
sent a letter to the trustee under the PHONES Indenture and the law firm
purporting to represent the three hedge funds rejecting the allegations made in
such law firm’s July 23, 2007 letter and reiterating the Company’s position that
the Company is not in default of Section 10.05 and that such hedge funds are not
entitled under the PHONES Indenture to provide the purported notice of
default.
On Aug.
10, 2007, the law firm purporting to represent the three hedge fund holders sent
a letter to the trustee under the PHONES Indenture stating that the PHONES
holders intended to institute proceedings to confirm the alleged covenant
default and acceleration notice. On Sept. 17, 2007, the Company
received copies of default notices from Cede & Co., the record holder of the
PHONES, on behalf of the three hedge fund holders. These purported notices of
default indicate that they were issued at the request of each of the hedge funds
by Cede & Co., the holder of record for the notes beneficially owned by each
of the hedge funds. The letter stated that Tribune was required to
remedy the purported default within 60 days of the date of the letter and that
failure to do so would constitute an “Event of Default” under the PHONES
Indenture. On Dec. 26, 2007, the Company received copies of notices
of acceleration from Cede & Co., purportedly on behalf of the three hedge
fund holders. These purported notices of acceleration indicate that
they were issued at the request of each of the hedge funds by Cede & Co.,
the holder of record for the notes beneficially owned by each of the hedge
funds. To date, the trustee under the PHONES Indenture has not
initiated any action on behalf of the PHONES holders. On Jan. 9,
2008, the Company sent a letter to the trustee under the PHONES Indenture and
the law firm purporting to represent the three hedge funds rejecting the
purported notices of acceleration for the reasons previously set forth in the
Company’s July 27, 2007 letter.
The
Company continues to believe that the hedge funds’ claims are without merit and
that the Company remains in full compliance with Section 10.05 of the PHONES
Indenture. The Company will enforce and defend vigorously its rights
under the PHONES Indenture.
Other Matters
—In September
2008, a lawsuit was filed in the United States District Court for the Central
District of California by one current and five former employees of the
Los Angeles
Times
. The lawsuit names as defendants a former and certain
current directors of the Company, the trustee of the Tribune
Employee
Stock
Ownership Plan (the “ESOP), the Tribune Employee Benefits Committee, EGI-TRB,
L.L.C., and, nominally, the ESOP. The lawsuit alleges breaches by
defendants of duties and obligations under the Employer Retirement Income
Security Act of 1974 and state law. The lawsuit seeks relief,
including damages, for the benefit of the ESOP. The Company and other
defendants believe that this lawsuit is without merit and intend to defend the
lawsuit vigorously.
In
addition, the information contained in Note 3 and Note 13 to the unaudited
condensed consolidated financial statements in Part I, Item 1, hereof is
incorporated herein by reference.
ITEM
1A. RISK FACTORS.
The
following risk factor should be read in conjunction with the Company’s risk
factors as disclosed in Item 1A, “Risk Factors”, in the Company’s Annual Report
on Form 10-K for the fiscal year ended Dec. 30. 2007.
Continuing
Adverse Economic, Financial and Industry Conditions Could Affect Our Ability to
Maintain Compliance With Financial Covenants in Our Credit Facilities or to
Access the Credit Markets.
Certain
financial covenants in our Credit Agreement and our receivables loan agreement
entered into in connection with the trade receivables securitization facility
require us to comply, on a quarterly basis, with a maximum permitted “Total
Guaranteed Leverage Ratio” and a minimum permitted “Interest Coverage Ratio”
(each as defined in the Credit Agreement). 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 our 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
of 1.15 to 1.00. For each of the four fiscal quarters of our 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.
For the
four fiscal quarters ended Sept. 28, 2008, we were in compliance with both the
Total Guaranteed Leverage Ratio and Interest Coverage Ratio financial
covenants. Our ability to maintain compliance with these financial
covenants is dependent, however, on various factors, certain of which are
outside of our control. Such factors include our ability to generate
sufficient revenues and earnings from our operations, our ability to achieve
reductions in our outstanding indebtedness, changes in interest rates and the
impact on our earnings, cash flow or indebtedness from sale, purchase, joint
venture or similar transactions involving our assets, investments and
liabilities.
Given the
disruptions in the credit and financial markets in recent months, and the
continuing impact of adverse economic, financial and industry conditions on the
demand for advertising, uncertainty exists as to whether we will be able to
generate results from operations or consummate transactions sufficient to enable
us to remain in compliance with our financial covenants for the four quarters
ending Dec. 28, 2008 or subsequent periods.
The
disruptions in the credit and financial markets have also limited access to
capital and credit for many companies. We rely on a number of
financial institutions and the credit and financial markets to meet our
financial commitments and short-term liquidity needs if internal funds are not
available, and to execute transactions. Continuing instability or
disruptions of these markets could prohibit or make it more difficult for us to
access new capital, significantly increase the cost of capital or limit our
ability to refinance existing indebtedness or effect transactions.
ITEM
6. EXHIBITS.
(a)
Exhibits.
Exhibits
marked with an asterisk (*) are incorporated by reference to the documents
previously filed by Tribune Company with the Securities and Exchange Commission,
as indicated. All other documents are filed with this Report.
31.1 Rule
13a-14 Certification of Chief Executive Officer
31.2 Rule
13a-14 Certification of Chief Financial Officer
32.1 Section
1350 Certification of Chief Executive Officer
32.2 Section
1350 Certification of Chief Financial Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
TRIBUNE
COMPANY
(Registrant)
|
|
|
|
|
|
Date:
November 10, 2008
|
By:
|
/s/ Brian
Litman
|
|
|
|
Brian
Litman
|
|
|
|
Vice
President and Controller
|
|
|
|
(on
behalf of the registrant
|
|
|
|
and
as Chief Accounting Officer)
|
|
Tribune Debs 29 (NYSE:TXA)
Graphique Historique de l'Action
De Juin 2024 à Juil 2024
Tribune Debs 29 (NYSE:TXA)
Graphique Historique de l'Action
De Juil 2023 à Juil 2024