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

FORM 10-Q


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


FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2008

Commission file number 1-8572

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

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

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

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

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

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

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



TRIBUNE COMPANY
INDEX TO 2008 THIRD QUARTER FORM 10-Q


Item No.
Page
PART I.  FINANCIAL INFORMATION
   

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

 
 
 
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

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

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



See Notes to Condensed Consolidated Financial Statements.

 
1
 

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

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



See Notes to Condensed Consolidated Financial Statements.

 
2
 

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

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



See Notes to Condensed Consolidated Financial Statements.

 
3
 

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

See Notes to Condensed Consolidated Financial Statements.

 
4
 

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

NOTE 1:  BASIS OF PREPARATION

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

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

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

On Feb. 12, 2007, the Company announced an agreement to sell the New York edition of Hoy, the Company’s Spanish-language daily newspaper (“Hoy, New York”).  The Company completed the sale of Hoy, New York on May 15, 2007.  In March 2007, the Company announced its intentions to sell its Southern Connecticut Newspapers—The Advocate (Stamford) and Greenwich Time (collectively “SCNI”).  The sale of SCNI closed on Nov. 1, 2007, and excluded the SCNI real estate in Stamford and Greenwich, Connecticut, which was sold in a separate transaction that closed on April 22, 2008.  During the third quarter of 2007, the Company began actively pursuing the sale of the stock of one of its subsidiaries, EZ Buy & EZ Sell Recycler Corporation (“Recycler”).  The sale of Recycler closed on Oct. 17, 2007.  The accompanying unaudited condensed consolidated financial statements reflect these businesses, including the NMG business as described above, as
 
5
 
discontinued operations for all periods presented.  The prior year condensed consolidated statements of operations have been reclassified to conform to the presentation of these businesses as discontinued operations.  See Note 2 for further discussion.

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

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

Discontinued Operations—As discussed in Note 1, on May 11, 2008, the Company entered into the Formation Agreement with CSC and NMG Holdings, Inc. to form Newsday LLC. On July 29, 2008, the Company consummated the closing of the transactions contemplated by the Formation Agreement.  Under the terms of the Formation Agreement, the Company, through Newsday, Inc. and other subsidiaries of the Company, contributed certain assets and related liabilities of NMG to Newsday LLC, and CSC contributed $35 million of cash and newly issued senior notes of Cablevision with a fair market value of $650 million to the parent company of Newsday LLC.  Concurrent with the closing of this transaction, Newsday LLC and its parent company borrowed $650 million under a new secured credit facility, and the Company received a special distribution of $612 million from Newsday LLC in cash as well as $18 million in prepaid rent under leases for certain facilities used by NMG and located in Melville, New York with an initial term ending in 2018.  The Company retained ownership of these facilities following the transaction.  Annual lease payments
 
6
 
due under the terms of the leases total $1.5 million in each of the first five years of the lease terms and $6 million thereafter.

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

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

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

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

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

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

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

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

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

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

NOTE 3:   INCOME TAXES

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

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

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

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

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

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

NOTE 4:  STOCK-BASED COMPENSATION

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

   
Third Quarter
    
First Three Quarters
  
   
2008
    
2007
    
2008
    
2007