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 JUNE 29, 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 August 13, 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 SECOND QUARTER FORM 10-Q


Item No.
Page
PART I.  FINANCIAL INFORMATION
   

1.        Financial Statements (Unaudited)
  
Condensed Consolidated Statements of Operations for the Second Quarters
and First Halves Ended June 29, 2008 and July 1, 2007
1
Condensed Consolidated Balance Sheets at June 29, 2008 and Dec. 30, 2007
2
Condensed Consolidated Statements of Cash Flows for the First Halves Ended
June 29, 2008 and July 1, 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
9
Note 4:            Stock-Based Compensation
11
Note 5:            Employee Stock Ownership Plan
12
Note 6:            Pension and Other Postretirement Benefits
13
Note 7:            Non-Operating Items
14
Note 8:            Inventories
15
Note 9:            Goodwill and Other Intangible Assets
15
Note 10:          Debt
17
Note 11:          Fair Value of Financial Instruments
24
Note 12:          Comprehensive Income (Loss)
25
Note 13:          Other Matters
25
Note 14:          Segment Information
28
2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
3.         Quantitative and Qualitative Disclosures About Market Risk 
51
4.         Controls and Procedures                                                                                                                            
54
   
PART II.  OTHER INFORMATION
 
1.         Legal Proceedings                                                                                                                            
55
1A.      Risk Factors                                                                                                                            
57
6.         Exhibits                                                                                                                            
57


 
 
 

 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

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

 
Second Quarter Ended
    
First Half Ended
  
 
June 29, 2008
    
July 1, 2007
    
June 29, 2008
    
July 1, 2007
  
                               
Operating Revenues    
$
1,109,809
    
$
1,176,537
    
$
2,115,588
    
$
2,264,234
  
                               
Operating Expenses
                              
Cost of sales (exclusive of items shown below)
  
611,674
      
599,969
      
1,148,531
      
1,152,184
  
Selling, general and administrative   
  
277,459
      
350,289
      
549,432
      
666,427
  
Depreciation    
  
47,560
      
46,454
      
94,917
      
93,839
  
Amortization of intangible assets   
  
4,647
      
4,727
      
9,320
      
9,355
  
Write-downs of intangible assets (Note 9)
  
3,843,111
      
—
      
3,843,111
      
—
  
    Total operating expenses
  
4,784,451
      
1,001,439
      
5,645,311
      
1,921,805
  
                               
Operating Profit (Loss)   
  
(3,674,642
)
    
175,098
      
(3,529,723
)
    
342,429
  
                               
Net income on equity investments  
  
18,172
      
28,710
      
34,929
      
41,394
  
Interest and dividend income  
  
3,196
      
3,827
      
7,126
      
6,979
  
Interest expense 
  
(211,055
)
    
(112,408
)
    
(463,004
)
    
(195,658
)
Gain (loss) on change in fair values of PHONES and
  related investment
  
 
36,440
      
 
(27,395
)
    
106,320
      
(97,175
)
Strategic transaction expenses  
  
—
      
(20,926
)
    
—
      
(35,398
)
Other non-operating gain (loss), net
  
(10,286
)
    
17,978
      
(11,145
)
    
21,515
  
                               
Income (Loss) from Continuing Operations
     Before Income Taxes
  
 
(3,838,175
)
    
 
64,884
      
(3,855,497
)
    
84,086
  
                               
Income taxes (Note 3)                              
  
8,912
      
(29,614
)
    
1,862,752
      
(43,152
)
                               
Income (Loss) from Continuing Operations
  
(3,829,263
)
    
35,270
      
(1,992,745
)
    
40,934
  
                               
Income (Loss) from Discontinued Operations,                              
       net of tax (Note 2)
  
(704,686
)
    
1,006
      
(717,742
)
    
(27,953
)
                               
Net Income (Loss)  
$
(4,533,949
)
  
$
36,276
    
$
(2,710,487
)
  
$
12,981
  



See Notes to Condensed Consolidated Financial Statements.

 
1
 

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

 
June 29, 2008
    
Dec. 30, 2007
  
               
Assets
              
               
Current Assets
              
Cash and cash equivalents                                                                                
$
160,895
    
$
233,284
  
Accounts receivable, net                                                                                
  
602,768
      
732,853
  
Inventories                                                                                
  
33,077
      
40,675
  
Broadcast rights                                                                                
  
224,543
      
287,045
  
Prepaid expenses and other                                                                                
  
132,497
      
91,166
  
Assets held for disposition                                                                                
  
113,274
      
—
  
Total current assets                                                                                
  
1,267,054
      
1,385,023
  
               
Properties
              
Property, plant and equipment                                                                                
  
3,424,534
      
3,564,436
  
Accumulated depreciation                                                                                
  
(1,887,077
)
    
(1,998,741
)
Net properties                                                                                
  
1,537,457
      
1,565,695
  
               
Other Assets
              
Broadcast rights                                                                                
  
219,689
      
301,263
  
Goodwill (Note 9)                                                                                
  
1,741,826
      
5,579,926
  
Other intangible assets, net (Note 9)                                                                                
  
1,430,049
      
2,663,152
  
Time Warner stock related to PHONES debt                                                                                
  
230,720
      
266,400
  
Other investments                                                                                
  
454,285
      
508,205
  
Prepaid pension costs                                                                                
  
428,423
      
514,429
  
Assets held for disposition                                                                                
  
682,973
      
33,780
  
Other                                                                                
  
243,091
      
331,846
  
Total other assets                                                                                
  
5,431,056
      
10,199,001
  
Total Assets                                                                                      
$
8,235,567
    
$
13,149,719
  



See Notes to Condensed Consolidated Financial Statements.

 
2
 

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

 
June 29, 2008
    
Dec. 30, 2007
  
               
Liabilities and Shareholders’ Equity (Deficit)
              
               
Current Liabilities
              
PHONES debt related to Time Warner stock (Note 10)
$
219,184
    
$
253,080
  
Other debt due within one year                                                                                   
  
1,479,703
      
750,239
  
Contracts payable for broadcast rights                                                                                   
  
287,915
      
339,909
  
Deferred income taxes                                                                                   
  
11,342
      
100,324
  
Deferred income                                                                                   
  
79,155
      
121,239
  
Accounts payable, accrued expenses and other current liabilities
  
529,154
      
625,175
  
Liabilities held for disposition                                                                                   
  
157,301
      
—
  
Total current liabilities                                                                                   
  
2,763,754
      
2,189,966
  
               
Long-Term Debt
              
PHONES debt related to Time Warner stock (Note 10)
  
56,816
      
343,960
  
Other long-term debt (less portions due within one year)
  
10,710,452
      
11,496,246
  
Total long-term debt                                                                                   
  
10,767,268
      
11,840,206
  
               
Other Non-Current Liabilities
              
Deferred income taxes                                                                                   
  
66,378
      
1,771,845
  
Contracts payable for broadcast rights                                                                                   
  
341,268
      
432,393
  
Deferred compensation and benefits                                                                                   
  
249,026
      
264,480
  
Liabilities held for disposition                                                                                   
  
7,962
      
—
  
Other obligations                                                                                   
  
208,138
      
164,769
  
Total other non-current liabilities                                                                                   
  
872,772
      
2,633,487
  
               
Common Shares Held by ESOP, net of Unearned
    Compensation (Note 5)                                                                                         
  
22,623
      
—
  
               
Shareholders’ Equity (Deficit)
              
        Stock purchase warrants                                                                                         
  
255,000
      
255,000
  
Retained earnings (deficit)                                                                                   
  
(6,088,018
)
    
(3,474,311
)
Accumulated other comprehensive income (loss)                                                                                   
  
(357,832
)
    
(294,629
)
Total shareholders’ equity (deficit)                                                                                   
  
(6,190,850
)
    
(3,513,940
)
Total Liabilities and Shareholders’ Equity (Deficit)
$
8,235,567
    
$
13,149,719
  



See Notes to Condensed Consolidated Financial Statements.

 
3
 

TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
 
First Half Ended
  
 
June 29, 2008
    
July 1, 2007
  
Operating Activities
              
Net income (loss)                                                                                                            
$
(2,710,487
)
  
$
12,981
  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
              
Stock-based compensation related to equity-classified awards
  
—
      
26,398
  
ESOP compensation       
  
22,623
      
—
  
Pension costs, net of contributions      
  
40,199
      
(5,480
)
Gain on sale of studio production lot        
  
(82,470
)
    
—
  
Gain on sales of other real estate        
  
(24,328
)
    
—
  
Write-off of Los Angeles Times plant equipment        
  
—
      
23,982
  
Depreciation           
  
103,559
      
105,855
  
Amortization of intangible assets      
  
9,944
      
10,247
  
Write-downs of intangible assets (Note 9)    
  
3,843,111
      
—
  
Net income on equity investments         
  
(34,929
)
    
(41,394
)
Distributions from equity investments               
  
62,518
      
57,233
  
Amortization of debt issuance costs            
  
36,838
      
9,408
  
(Gain) loss on change in fair values of PHONES and related investment
  
(106,320
)
    
97,175
  
Write-down of equity investment            
  
10,312
      
—
  
Subchapter S corporation election deferred income taxes adjustment (Note 3)
  
(1,859,358
)
    
—
  
Loss on dispositions of discontinued operations      
  
692,475
      
16,958
  
Changes in working capital items, excluding effects from acquisitions and dispositions:
              
Accounts receivable     
  
44,477
      
35,836
  
Inventories, prepaid expenses and other current assets    
  
(19,220
)
    
(20,736
)
Deferred income, accounts payable, accrued expenses and other current liabilities
  
(53,417
)
    
21,477
  
Income taxes    
  
68,408
      
(41,650
)
Deferred compensation        
  
(10,796
)
    
(48,623
)
Deferred income taxes, excluding subchapter S corporation election adjustment
  
(23,116
)
    
(13,739
)
Tax benefit on stock options exercised                                             
  
—
      
11,770
  
Other, net                                                              
  
25,656
      
19,691
  
Net cash provided by operating activities   
  
35,679
      
277,389
  
Investing Activities
              
Purchase of TMCT, LLC real estate (Note 13)  
  
(175,141
)
    
—
  
Other capital expenditures          
  
(44,151
)
    
(52,224
)
Acquisitions and investments        
  
(2,533
)
    
(7,575
)
Proceeds from sales of subsidiaries, intangibles, investments and real estate
  
160,738
      
18,796
  
Net cash used for investing activities          
  
(61,087
)
    
(41,003
)
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
  
Repayments under former bridge credit facility       
  
—
      
(1,410,000
)
Repayments of long-term debt           
  
(71,981
)
    
(1,613,154
)
Repayments of commercial paper, net      
  
—
      
(97,019
)
Long-term debt issuance costs          
  
—
      
(134,085
)
Sales of common stock to employees, net     
  
—
      
72,195
  
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          
  
(46,981
)
    
(149,502
)
Net Increase (Decrease) in Cash and Cash Equivalents         
  
(72,389
)
    
86,884
  
Cash and cash equivalents, beginning of year   
  
233,284
      
174,686
  
Cash and cash equivalents, end of quarter        
$
160,895
    
$
261,570
  

See Notes to Condensed Consolidated Financial Statements.

 
4
 

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

NOTE 1:  BASIS OF PREPARATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of the financial position of Tribune Company and its subsidiaries (the “Company” or “Tribune”) as of June 29, 2008 and the results of their operations for the second quarters and first halves ended June 29, 2008 and July 1, 2007 and cash flows for the first halves ended June 29, 2008 and July 1, 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 wholly-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 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 Newsday LLC.  Concurrent with the closing of this transaction, Newsday LLC borrowed $650 million under a new secured credit facility, and the Company received a special distribution from Newsday LLC in the amount of $612 million in cash and $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, owns approximately 97% and the Company owns approximately 3% of the equity 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
 
5
 
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.  Due to the continuing decline in newspaper advertising revenues, the Company performed an impairment review of goodwill attributable to its newspaper reporting unit and 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 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.

As of June 29, 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 half ended June 29, 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 June 29, 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 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 Newsday LLC.  Concurrent with the closing of this transaction, Newsday LLC borrowed $650 million under a new secured credit facility, and the Company received a special distribution from Newsday LLC in the amount of $612 million in cash and $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.

6
 
As a result of these transactions, CSC, through NMG Holdings, Inc., owns approximately 97% and the Company owns approximately 3% of the equity of Newsday LLC.  CSC has operational control over Newsday LLC.  Borrowings by Newsday LLC under its secured credit facility are guaranteed by CSC and NMG Holdings, Inc. and secured by a lien on the assets of Newsday LLC, 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 under its 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 to the extent of the payments made pursuant to the indemnity.  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 will account for its remaining $20 million equity interest in 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.  The net carrying value of the NMG assets at June 29, 2008, which totaled $651 million, is included in assets held for disposition and the net carrying value of the NMG liabilities at June 29, 2008, which totaled $30 million, is included in liabilities held for disposition.

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 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.  

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.


 
7
 

Selected financial information related to discontinued operations is summarized as follows (in thousands):
 
   
Second Quarter
    
First Half
  
   
2008
    
2007
    
2008
    
2007
  
                                 
Operating revenues
  
$
117,229
    
$
147,399
    
$
226,102
    
$
284,738
  
                                 
Operating profit (loss)        
  
$
(3,220
)
  
$
21,741
    
$
(4,851
)
  
$
33,865
  
Interest income       
    
—
      
2
      
2
      
4
  
Interest expense    
    
(8,403
)
    
(3,456
)
    
(19,732
)
    
(3,454
)
Non-operating loss, net(1)        
    
—
      
(12,000
)
    
—
      
(15,000
)
Gain (loss) on dispositions of discontinued
operations       
    
(691,960
)
    
2,484
      
(692,475
)
    
(16,958
)
Income (loss) from discontinued operations
before income taxes
    
(703,583
)
    
8,771
      
(717,056
)
    
(1,543
)
Income taxes(2)                                                             
    
(1,103
)
    
(7,765
)
    
(686
)
    
(26,410
)
Income (loss) from discontinued operations,                                
     net of tax
  
$
(704,686
)
  
$
1,006
    
$
(717,742
)
  
$
(27,953
)
 
(1)  
Discontinued operations for the second quarter and first half of 2007 included pretax non-operating charges of $12 million and $15 million, respectively, 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 second quarter and first half of 2008 included tax expense of $1 million related to the $692 million pretax loss on the NMG transaction.  The pretax loss included $830 million of allocated newspaper reporting unit goodwill, most of which is not deductible for income tax purposes.  Income taxes for the first half of 2007 included tax expense of $16 million related to the $17 million pretax loss on dispositions of discontinued operations.  The pretax loss included $58 million of allocated newspaper reporting unit goodwill, most of which is not deductible for income tax purposes.
 
The Company allocated corporate interest expense of $8.4 million and $3.4 million in the second quarters of 2008 and 2007, respectively, and $19.4 million and $3.4 million in the first halves 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 Company’s Tranche X facility and applying the interest rate applicable to the Tranche X facility for the periods in which borrowings under the Tranche X facility were outstanding.
 
Assets and Liabilities Held for Disposition—Assets and liabilities held for disposition at June 29, 2008 and Dec. 30, 2007 are summarized as follows (in thousands):
 
   
June 29, 2008
    
Dec. 30, 2007
  
   
Assets
    
Liabilities
    
Assets
    
Liabilities
  
                                 
NMG
  
$
651,398
    
$
29,722
    
$
—
    
$
—
  
Chicago Cubs and Wrigley Field
    
139,415
      
135,541
      
—
      
—
  
Studio production lot, Hollywood, California
    
—
      
—
      
23,322
      
—
  
SCNI real estate
    
—
      
—
      
5,485
      
—
  
Other real estate
    
5,434
      
—
      
4,973
      
—
  
Total assets and liabilities held for disposition
  
$
796,247
    
$
165,263
    
$
33,780
    
$
—
  

As discussed above, the Company contributed the NMG assets and related liabilities to Newsday LLC on July 29, 2008.  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
 
8
 
baseball team and Wrigley Field is included in assets and liabilities held for disposition at June 29, 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 was recorded as a reduction of selling, general and administrative expenses in the first quarter of 2008.

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 June 29, 2008 and Dec. 30, 2007.

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
 
9
 
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 second 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 by the end of 2008.

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 second quarter and first half of 2008, income taxes applicable to continuing operations amounted to a net benefit of $9 million and $1,863 million, respectively.  The net benefit in the first half 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 second quarter and first half was 45.6% and 51.3%, respectively.  The effective tax rate for each of these periods was affected by certain non-operating items that were not deductible for tax purposes.  See Note 7 for a summary of non-operating items.  In the aggregate, non-operating items increased the effective tax rate for the second quarter and first half of 2007 by 5.1 and 11.0 percentage points, respectively.
 
10
 
NOTE 4:  STOCK-BASED COMPENSATION

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

   
Second Quarter
    
First Half
  
   
2008
    
2007
    
2008
    
2007
  
                                 
Management equity incentive plan
  
$
4,999
    
$
—
    
$
12,534
    
$
—
  
Options(1)
    
—
      
726
      
—
      
1,324
  
Restricted stock units(1)
    
—
      
6,804
      
—
      
23,718
  
Employee stock purchase plan(2)
    
—
      
192
      
—
      
723
  
Total stock-based compensation expense
  
$
4,999
    
$
7,722
    
$
12,534
    
$
25,765
  
 
(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)  
The Company’s employee stock purchase plan 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 the MEIP liability to reflect the most recent estimate of the fair value of a share of the Company’s common stock.  In the second quarter and first half of 2008, the Company recorded $5 million and $12.5 million of compensation expense, respectively, in connection with the MEIP.  The first half of 2008 included $2.2 million of accelerated expense recorded in the first quarter of 2008 related to early termination payments made pursuant to the terms of the plan.  The remaining $5 million and $10.3 million in the second quarter and first half of 2008, respectively, 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 $21 million and $16 million at June 29, 2008 and Dec. 30, 2007, respectively.  The estimated fair value per share of the Company’s common stock did not change during the second quarter of 2008.

For the second quarter and first half of 2008, total stock-based compensation expense excluded $.3 million and $.7 million, respectively, of costs related to discontinued operations.  For the second quarter of 2007, total stock-based compensation expense excluded $254,000 of costs related to discontinued operations and $25,000 of capitalized costs. For the first half of 2007, total stock-based compensation expense excluded $490,000 of costs related to discontinued operations and $144,000 of capitalized costs.
 
11
 
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