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 MARCH 30, 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 May 8,
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 FIRST QUARTER FORM 10-Q
Item
No.
|
Page
|
PART
I. FINANCIAL INFORMATION
|
|
|
1.
Financial
Statements (Unaudited)
|
|
Condensed
Consolidated Statements of Operations for the First Quarters
Ended
March
30, 2008 and April 1,
2007
|
1
|
Condensed
Consolidated Balance Sheets at March 30, 2008 and Dec. 30,
2007
|
2
|
Condensed
Consolidated Statements of Cash Flows for the First Quarters
Ended
March
30, 2008 and April 1,
2007
|
4
|
Notes
to Condensed Consolidated Financial Statements
|
|
Note
1:
Basis of
Preparation
|
5
|
Note
2:
Discontinued Operations and
Assets Held for Sale
|
6
|
Note
3:
Income
Taxes
|
7
|
Note
4:
Stock-Based
Compensation
|
8
|
Note
5:
Employee
Stock Ownership Plan
|
9
|
Note
6:
Pension and
Other Postretirement Benefits
|
10
|
Note
7:
Non-Operating
Items
|
10
|
Note
8:
Inventories
|
11
|
Note
9:
Goodwill
and Other Intangible Assets
|
12
|
Note
10:
Debt
|
13
|
Note
11: Fair Value of Financial Instruments
|
19
|
Note
12: Comprehensive Income
|
20
|
Note
13: Other Matters
|
21
|
Note
14: Segment Information
|
24
|
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
3. Quantitative
and Qualitative Disclosures About Market
Risk
|
42
|
4. Controls
and
Procedures
|
45
|
|
|
PART
II. OTHER INFORMATION
|
1. Legal
Proceedings
|
46
|
1A. Risk
Factors
|
48
|
6. Exhibits
|
48
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
TRIBUNE
COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands of dollars)
(Unaudited)
|
First
Quarter Ended
|
|
|
March
30, 2008
|
|
|
April
1, 2007
|
|
|
|
|
|
|
|
|
|
Operating
Revenues
|
$
|
1,114,648
|
|
|
$
|
1,209,379
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of items shown
below)
|
|
599,657
|
|
|
|
614,751
|
|
Selling,
general and
administrative
|
|
315,006
|
|
|
|
355,881
|
|
Depreciation
|
|
51,648
|
|
|
|
51,823
|
|
Amortization
of intangible
assets
|
|
4,985
|
|
|
|
5,007
|
|
Total
operating
expenses
|
|
971,296
|
|
|
|
1,027,462
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
143,352
|
|
|
|
181,917
|
|
|
|
|
|
|
|
|
|
Net
income on equity
investments
|
|
16,757
|
|
|
|
12,684
|
|
Interest
and dividend
income
|
|
3,931
|
|
|
|
3,154
|
|
Interest
expense
|
|
(263,275
|
)
|
|
|
(83,249
|
)
|
Gain
(loss) on change in fair values of PHONES and related
investment
|
|
69,880
|
|
|
|
(69,780
|
)
|
Strategic
transaction
expenses
|
|
—
|
|
|
|
(14,473
|
)
|
Other
non-operating gain (loss),
net
|
|
(859
|
)
|
|
|
538
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Continuing Operations Before Income Taxes
|
|
(30,214
|
)
|
|
|
30,791
|
|
|
|
|
|
|
|
|
|
Income
taxes (Note
3)
|
|
1,854,224
|
|
|
|
(19,441
|
)
|
|
|
|
|
|
|
|
|
Income
from Continuing
Operations
|
|
1,824,010
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
Loss from Discontinued
Operations, net of tax
(Note 2)
|
|
(548
|
)
|
|
|
(34,645
|
)
|
|
|
|
|
|
|
|
|
Net
Income
(Loss)
|
$
|
1,823,462
|
|
|
$
|
(23,295
|
)
|
See Notes
to Condensed Consolidated Financial Statements.
TRIBUNE
COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands of dollars)
(Unaudited)
|
March
30, 2008
|
|
|
Dec.
30, 2007
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
246,801
|
|
|
$
|
233,284
|
|
Accounts receivable,
net
|
|
661,708
|
|
|
|
732,853
|
|
Inventories
|
|
44,284
|
|
|
|
40,675
|
|
Broadcast
rights
|
|
261,762
|
|
|
|
287,045
|
|
Deferred
income
taxes
|
|
24,771
|
|
|
|
—
|
|
Prepaid expenses and
other
|
|
109,230
|
|
|
|
91,166
|
|
Total current
assets
|
|
1,348,556
|
|
|
|
1,385,023
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
3,573,327
|
|
|
|
3,564,436
|
|
Accumulated
depreciation
|
|
(2,034,597
|
)
|
|
|
(1,998,741
|
)
|
Net
properties
|
|
1,538,730
|
|
|
|
1,565,695
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
Broadcast
rights
|
|
248,273
|
|
|
|
301,263
|
|
Goodwill
|
|
5,579,926
|
|
|
|
5,579,926
|
|
Other intangible assets,
net
|
|
2,658,225
|
|
|
|
2,663,152
|
|
Time Warner stock related to
PHONES
debt
|
|
221,920
|
|
|
|
266,400
|
|
Other
investments
|
|
460,619
|
|
|
|
508,205
|
|
Prepaid pension
costs
|
|
488,425
|
|
|
|
514,429
|
|
Assets held for
sale
|
|
10,432
|
|
|
|
33,780
|
|
Other
|
|
419,276
|
|
|
|
331,846
|
|
Total other
assets
|
|
10,087,096
|
|
|
|
10,199,001
|
|
Total
assets
|
$
|
12,974,382
|
|
|
$
|
13,149,719
|
|
See Notes
to Condensed Consolidated Financial Statements.
TRIBUNE
COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands of dollars)
(Unaudited)
|
March
30, 2008
|
|
|
Dec.
30, 2007
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
PHONES
debt related to Time Warner stock (Note 10)
|
$
|
210,824
|
|
|
$
|
253,080
|
|
Other debt due within one
year
|
|
752,138
|
|
|
|
750,239
|
|
Contracts payable for broadcast
rights
|
|
320,706
|
|
|
|
339,909
|
|
Deferred
income
taxes
|
|
—
|
|
|
|
100,324
|
|
Deferred
income
|
|
260,307
|
|
|
|
121,239
|
|
Accounts payable, accrued
expenses and other current liabilities
|
|
534,567
|
|
|
|
625,175
|
|
Total current
liabilities
|
|
2,078,542
|
|
|
|
2,189,966
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
PHONES debt related to Time
Warner stock (Note 10)
|
|
93,816
|
|
|
|
343,960
|
|
Other long-term debt (less
portions due within one year)
|
|
11,547,383
|
|
|
|
11,496,246
|
|
Total long-term
debt
|
|
11,641,199
|
|
|
|
11,840,206
|
|
|
|
|
|
|
|
|
|
Other
Non-Current Liabilities
|
|
|
|
|
|
|
|
Deferred income
taxes
|
|
73,737
|
|
|
|
1,771,845
|
|
Contracts payable for broadcast
rights
|
|
374,793
|
|
|
|
432,393
|
|
Deferred compensation and
benefits
|
|
251,610
|
|
|
|
264,480
|
|
Other
obligations
|
|
212,527
|
|
|
|
164,769
|
|
Total other non-current
liabilities
|
|
912,667
|
|
|
|
2,633,487
|
|
|
|
|
|
|
|
|
|
Common
Shares Held by ESOP, net of Unearned
Compensation
(Note
5)
|
|
10,688
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
Stock purchase
warrants
|
|
255,000
|
|
|
|
255,000
|
|
Retained earnings
(deficit)
|
|
(1,554,069
|
)
|
|
|
(3,474,311
|
)
|
Accumulated other comprehensive
income (loss)
|
|
(369,645
|
)
|
|
|
(294,629
|
)
|
Total shareholders’ equity
(deficit)
|
|
(1,668,714
|
)
|
|
|
(3,513,940
|
)
|
Total liabilities and
shareholders’ equity (deficit)
|
$
|
12,974,382
|
|
|
$
|
13,149,719
|
|
See Notes
to Condensed Consolidated Financial Statements.
TRIBUNE
COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands of dollars)
(Unaudited)
|
First
Quarter Ended
|
|
March
30, 2008
|
|
April
1, 2007
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
Net
income
(loss)
|
$
|
1,823,462
|
|
|
$
|
(23,295
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Stock-based
compensation related to equity-classified
awards
|
|
—
|
|
|
|
18,338
|
|
ESOP
compensation
|
|
10,688
|
|
|
|
—
|
|
Pension
costs, net of
contributions
|
|
20,536
|
|
|
|
(865
|
)
|
Depreciation
|
|
51,648
|
|
|
|
52,424
|
|
Amortization
of intangible
assets
|
|
4,982
|
|
|
|
5,020
|
|
Net
income on equity
investments
|
|
(16,757
|
)
|
|
|
(12,684
|
)
|
Distributions
from equity
investments
|
|
58,717
|
|
|
|
45,202
|
|
Amortization
of debt issuance
costs
|
|
18,448
|
|
|
|
4,219
|
|
(Gain)
loss on change in fair values of PHONES and related
investment
|
|
(69,880
|
)
|
|
|
69,780
|
|
Gain
on sale of studio production
lot
|
|
(82,587
|
)
|
|
|
—
|
|
Loss
on sales of discontinued
operations
|
|
516
|
|
|
|
19,442
|
|
Subchapter
S corporation election deferred income taxes adjustment (Note
3)
|
|
(1,859,358
|
)
|
|
|
—
|
|
Changes
in working capital items, excluding effects from acquisitions and
dispositions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
71,145
|
|
|
|
84,604
|
|
Inventories,
prepaid expenses and other current
assets
|
|
(24,098
|
)
|
|
|
(29,547
|
)
|
Deferred
income, accounts payable, accrued expenses and other current
liabilities
|
|
(11,286
|
)
|
|
|
(8,961
|
)
|
Income
taxes
|
|
53,140
|
|
|
|
(21,570
|
)
|
Deferred
compensation
|
|
(12,688
|
)
|
|
|
(47,896
|
)
|
Deferred
income taxes, excluding subchapter S corporation election
adjustment
|
|
(10,444
|
)
|
|
|
(10,504
|
)
|
Tax
benefit on stock options
exercised
|
|
—
|
|
|
|
3,462
|
|
Other,
net
|
|
25,139
|
|
|
|
(11,971
|
)
|
Net
cash provided by operating
activities
|
|
51,323
|
|
|
|
135,198
|
|
Investing
Activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(23,082
|
)
|
|
|
(21,369
|
)
|
Acquisitions
and
investments
|
|
(1,810
|
)
|
|
|
(4,579
|
)
|
Proceeds
from sales of intangibles, investments and real
estate
|
|
131,001
|
|
|
|
10,400
|
|
Investment
in escrow fund related to real
estate
|
|
(118,610
|
)
|
|
|
—
|
|
Net
cash used for investing
activities
|
|
(12,501
|
)
|
|
|
(15,548
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
25,327
|
|
|
|
25
|
|
Borrowings
under former bridge credit
facility
|
|
—
|
|
|
|
100,000
|
|
Repayments
under former bridge credit
facility
|
|
—
|
|
|
|
(85,000
|
)
|
Repayments
of long-term
debt
|
|
(50,632
|
)
|
|
|
(6,280
|
)
|
Repayments
of commercial paper,
net
|
|
—
|
|
|
|
(97,019
|
)
|
Sales
of common stock to employees,
net
|
|
—
|
|
|
|
19,294
|
|
Dividends
|
|
—
|
|
|
|
(43,247
|
)
|
Net
cash used for financing
activities
|
|
(25,305
|
)
|
|
|
(112,227
|
)
|
Net
Increase in Cash and Cash
Equivalents
|
|
13,517
|
|
|
|
7,423
|
|
Cash
and cash equivalents, beginning of
year
|
|
233,284
|
|
|
|
174,686
|
|
Cash
and cash equivalents, end of
quarter
|
$
|
246,801
|
|
|
$
|
182,109
|
|
See Notes
to Condensed Consolidated Financial Statements.
TRIBUNE
COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1: BASIS OF PREPARATION
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary for a fair statement of
the financial position of Tribune Company and its subsidiaries (the “Company” or
“Tribune”) as of March 30, 2008 and the results of their operations and cash
flows for the first quarters ended March 30, 2008 and April 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 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 accompanying unaudited condensed consolidated
financial statements reflect these businesses as discontinued operations for all
periods presented. See Note 2 for further discussion.
As of
March 30, 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 Financial Accounting Standards Board (“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
quarter ended March 30, 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 March 30, 2008.
NOTE
2: DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Publishing Discontinued
Operations
—The Company announced an agreement to sell
Hoy
, New York on Feb. 12,
2007, and completed the sale on May 15, 2007. In March 2007, the
Company announced its intentions to sell 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 Held for Sale” 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 the sales,
and the Company will not have any significant continuing involvement in their
operations. Accordingly, the results of operations in 2007 for each
of these businesses are reported as discontinued operations in the unaudited
condensed consolidated statements of operations.
Summarized Financial
Information
—Selected financial information related to discontinued
operations is summarized as follows (in thousands):
|
First
Quarter
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
—
|
|
|
$
|
15,657
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
$
|
(63
|
)
|
|
$
|
(2,460
|
)
|
Loss
on sales of discontinued
operations
|
|
(516
|
)
|
|
|
(19,442
|
)
|
Loss
from discontinued operations before income taxes
|
|
(579
|
)
|
|
|
(21,902
|
)
|
Income
taxes(1)
|
|
31
|
|
|
|
(12,743
|
)
|
Loss
from discontinued operations, net of
tax
|
$
|
(548
|
)
|
|
$
|
(34,645
|
)
|
(1)
|
Income
taxes for the first quarter of 2007 included tax expense of $14 million
related to the $19 million pretax loss on sale of SCNI. The
pretax loss included $54 million of allocated newspaper group goodwill,
most of which is not deductible for income tax
purposes.
|
Assets Held for Sale
—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 sale
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 and is included in other non-current assets at March 30, 2008.
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 to 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 sale at March 30, 2008
and 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, and expects to record a pretax
gain of $23 million 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
essentially 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 sale at March 30, 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 essentially all of its subsidiaries as qualified subchapter S
subsidiaries. Subject to certain limitations (such as the built-in
capital gains 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 has eliminated approximately $1,859
million of net deferred income tax liabilities as of Dec. 31, 2007, and has
recorded such adjustment as a reduction in the Company’s provision for income
tax expense in the first quarter of 2008. The Company will continue
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 gains 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
$277 million for the period 2004 through the first 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 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 the second quarter 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
first quarter of 2008, income tax expense applicable to continuing operations
amounted to a net benefit of $1,854 million and was comprised of the favorable
$1,859 million deferred income tax adjustment discussed above and a provision of
$5 million. The provision was primarily for interest on uncertain tax
positions. The effective tax rate on income from continuing
operations was 63.1% in the first quarter of 2007. The effective tax
rate for the 2007 first quarter 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 in the first quarter of 2007 by 23.0 percentage
points.
NOTE
4: STOCK-BASED COMPENSATION
Stock-based
compensation expense for the first quarters of 2008 and 2007 was as follows (in
thousands):
|
First
Quarter
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
Management
equity incentive
plan
|
$
|
7,994
|
|
$
|
—
|
|
Options(1)
|
|
—
|
|
|
726
|
|
Restricted
stock
units(1)
|
|
—
|
|
|
16,951
|
|
Employee
stock purchase
plan(2)
|
|
—
|
|
|
586
|
|
Total
stock-based compensation
expense
|
$
|
7,994
|
|
$
|
18,263
|
|
(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.
|
For the
first quarter of 2007, total stock-based compensation expense excluded $44,000
of credits related to discontinued operations and $119,000 of capitalized
costs.
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. The Company recorded $8.0 million of
compensation expense in the first quarter of 2008 in connection with the MEIP,
including $2.2 million of accelerated expense related to early termination
payments made pursuant to the terms of the plan. The remaining $5.8
million of expense was 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 $16 million at March 30, 2008 and Dec. 30,
2007. The estimated fair value per share of the Company’s common
stock did not change during the first quarter of 2008.
NOTE
5: EMPLOYEE STOCK OWNERSHIP PLAN
On April
1, 2007, the Company established the ESOP as a long-term employee benefit
plan. On that date, the ESOP purchased 8,928,571 shares of the
Company’s common stock. The ESOP paid for this purchase with a promissory note
of the ESOP in favor of the Company in the principal amount of $250 million, to
be repaid by the ESOP over the 30-year life of the loan through its use of
contributions from the Company to the ESOP and/or distributions paid on the
shares of the Company’s common stock held by the ESOP. Upon consummation of the
Merger, the 8,928,571 shares of the Company’s common stock held by the ESOP were
converted into 56,521,739 shares of common stock.
The ESOP
provides for the allocation of the Company’s common shares it holds on a
noncontributory basis to eligible employees of the Company. None of
the shares held by the ESOP had been committed for release or allocated to
employees at Dec. 30, 2007. Beginning in fiscal year 2008, as the
ESOP repays the loan through its use of contributions from the Company, shares
will be released and allocated to eligible employees in proportion to their
eligible compensation. The shares that are released for allocation on
an annual basis will be in the same proportion that the current year’s principal
and interest payments bear in relation to the total remaining principal and
interest payments to be paid over the life of the $250 million ESOP loan. The
Company will recognize compensation expense based on the estimated fair value of
the shares of the Company’s common stock that are allocated in each annual
period. In the first quarter of 2008, the Company recognized $10.7
million of compensation expense related to the ESOP.
The
Company’s policy is to present unallocated shares held by the ESOP at book
value, net of unearned compensation, and allocated shares, which include shares
committed to be released, at fair value in the Company’s consolidated balance
sheet. Pursuant to the terms of the ESOP, participants who receive distributions
of shares of the Company’s common stock can require the Company to repurchase
those shares within a specified time period following such
distribution. Accordingly, the shares of the Company’s common stock
held by the ESOP are classified outside of shareholders’ equity (deficit), net
of unearned compensation, in the Company’s condensed consolidated balance
sheets. The amounts at March 30, 2008 and Dec. 30, 2007 were as follows (in
thousands):
|
|
March
30, 2008
|
|
Dec.
30, 2007
|
|
Allocated
ESOP shares (at fair value)(1)
|
|
$
|
10,688
|
|
$
|
—
|
|
Unallocated
ESOP shares (at book value)
|
|
|
245,498
|
|
|
250,000
|
|
Unearned
compensation related to ESOP
|
|
|
(245,498
|
)
|
|
(250,000
|
)
|
Common
shares held by ESOP, net of unearned compensation
|
|
$
|
10,688
|
|
$
|
—
|
|
(1)
|
Represents
1,017,891 shares committed to be
released.
|
At March
30, 2008 and Dec. 30, 2007, the fair value of the unallocated shares held by the
ESOP was approximately $583 million and $593 million,
respectively. In accordance with the terms of the ESOP, the fair
value per share of the Company’s common stock is determined as of each fiscal
year end by the trustee of the ESOP. The estimated fair value per
share of the Company’s common stock did not change during the first quarter of
2008.
NOTE
6: PENSION AND OTHER POSTRETIREMENT BENEFITS
The
components of net periodic benefit cost for Company-sponsored pension and other
postretirement benefits plans for the first quarters of 2008 and 2007 were as
follows (in thousands):
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|
First
Quarter
|
|
|
First
Quarter
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
6,046
|
|
|
$
|
570
|
|
|
$
|
307
|
|
|
$
|
323
|
|
Interest
cost
|
|
21,938
|
|
|
|
21,675
|
|
|
|
1,888
|
|
|
|
1,872
|
|
Expected
return on plans’
assets
|
|
(36,727
|
)
|
|
|
(34,849
|
)
|
|
|
—
|
|
|
|
—
|
|
Recognized
actuarial
loss
|
|
6,385
|
|
|
|
12,832
|
|
|
|
44
|
|
|
|
4
|
|
Amortization
of prior service costs (credits)
|
|
360
|
|
|
|
55
|
|
|
|
(362
|
)
|
|
|
(361
|
)
|
Special
termination
benefits(1)
|
|
24,153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
periodic benefit
cost
|
$
|
22,155
|
|
|
$
|
283
|
|
|
$
|
1,877
|
|
|
$
|
1,838
|
|
(1)
|
One-time
pension benefits related to position the elimination of approximately 600
positions.
|
For the
year ending Dec. 28, 2008, the Company plans to contribute $6 million to certain
of its union and non-qualified pension plans and $13 million to its other
postretirement plans. For the first quarter ended March 30, 2008, the
Company made $2 million of contributions to its union and non-qualified pension
plans and $3 million of contributions to its other postretirement
plans.
NOTE
7: NON-OPERATING ITEMS
The first
quarters of 2008 and 2007 included several non-operating items, summarized as
follows (in thousands):
|
First
Quarter 2008
|
|
|
First
Quarter 2007
|
|
|
Pretax
Gain
(Loss)
|
|
|
After-tax
Gain
(Loss)
|
|
|
Pretax
Gain
(Loss)
|
|
|
After-tax
Gain
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on change in fair values
of PHONES and related
investment
|
$
|
69,880
|
|
|
$
|
69,055
|
|
|
$
|
(69,780
|
)
|
|
$
|
(42,566
|
)
|
Strategic
transaction
expenses
|
|
—
|
|
|
|
—
|
|
|
|
(14,473
|
)
|
|
|
(13,771
|
)
|
Other,
net
|
|
(859
|
)
|
|
|
(1,075
|
)
|
|
|
538
|
|
|
|
(842
|
)
|
Income
tax
adjustment
|
|
—
|
|
|
|
1,859,358
|
|
|
|
—
|
|
|
|
—
|
|
Total
non-operating
items
|
$
|
69,021
|
|
|
$
|
1,927,338
|
|
|
$
|
(83,715
|
)
|
|
$
|
(57,179
|
)
|
In the
first quarter of 2008, the $70 million non-cash pretax gain on change in fair
values of PHONES and related investment resulted primarily from a $115 million
decrease in the fair value of the Company’s PHONES, partially offset by a $45
million decrease in the fair value of 16 million shares of Time Warner common
stock. Effective Dec. 31, 2007, the Company has elected to account
for its PHONES utilizing the fair value option under FAS No. 159. As
a result of this election, the Company no longer measures just the changes in
fair value of the derivative component of the PHONES, but instead measures the
changes in fair value of the entire PHONES debt. See Note 10 for
further information pertaining to the Company’s adoption of FAS No.
159. The favorable income tax adjustment of $1,859 million in the
first quarter of 2008 related to the Company’s election to be treated as a
subchapter S corporation, which resulted in the elimination of essentially all
of the Company’s net deferred tax liabilities. See Note 3 for further
information pertaining to the Company’s election to be treated as a subchapter S
corporation.
In the
first quarter of 2007, the $70 million non-cash pretax loss on change in fair
values of PHONES and related investment resulted primarily from a $36 million
increase in the fair value of the derivative component of the Company’s PHONES
and a $33 million decrease in the fair value of 16 million shares of Time Warner
common stock. The strategic transaction expenses in the first quarter
of 2007 related to the Company’s strategic review and the Leveraged ESOP
Transactions.
NOTE
8: INVENTORIES
Inventories
consisted of the following (in thousands):
|
March
30, 2008
|
|
Dec.
30, 2007
|
|
|
|
|
|
|
Newsprint
|
$
|
31,722
|
|
$
|
28,664
|
Supplies
and
other
|
|
12,562
|
|
|
12,011
|
Total
inventories
|
$
|
44,284
|
|
$
|
40,675
|
Newsprint
inventories valued under the LIFO method were less than current cost by
approximately $12 million at March 30, 2008 and $10 million at Dec. 30,
2007.
NOTE
9: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
and other intangible assets consisted of the following (in
thousands):
|
|
March
30, 2008
|
|
Dec.
30, 2007
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers
(useful life of 15 to 20 years)
|
|
$
|
189,879
|
|
|
$
|
(84,210
|
)
|
|
$
|
105,669
|
|
$
|
189,879
|
|
$
|
(81,698
|
)
|
$
|
108,181
|
Network
affiliation agreements (useful life of 40 years)(1)
|
|
|
278,034
|
|
|
|
(31,293
|
)
|
|
|
246,741
|
|
|
278,034
|
|
|
(29,552
|
)
|
|
248,482
|
Other
(useful life of 3 to 40 years)
|
|
|
25,436
|
|
|
|
(12,436
|
)
|
|
|
13,000
|
|
|
25,381
|
|
|
(11,707
|
)
|
|
13,674
|
Total
|
|
$
|
493,349
|
|
|
$
|
(127,939
|
)
|
|
|
365,410
|
|
$
|
493,294
|
|
$
|
(122,957
|
)
|
|
370,337
|
Goodwill
and other intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing
|
|
|
|
|
|
|
|
|
|
|
4,138,685
|
|
|
|
|
|
|
|
|
4,138,685
|
Broadcasting
and entertainment
|
|
|
|
|
|
|
|
|
|
|
1,441,241
|
|
|
|
|
|
|
|
|
1,441,241
|
Total
goodwill
|
|
|
|
|
|
|
|
|
|
|
5,579,926
|
|
|
|
|
|
|
|
|
5,579,926
|
Newspaper
mastheads
|
|
|
|
|
|
|
|
|
|
|
1,412,937
|
|
|
|
|
|
|
|
|
1,412,937
|
FCC
licenses
|
|
|
|
|
|
|
|
|
|
|
871,946
|
|
|
|
|
|
|
|
|
871,946
|
Tradename
|
|
|
|
|
|
|
|
|
|
|
7,932
|
|
|
|
|
|
|
|
|
7,932
|
Total
|
|
|
|
|
|
|
|
|
|
|
7,872,741
|
|
|
|
|
|
|
|
|
7,872,741
|
Total
goodwill and other intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
8,238,151
|
|
|
|
|
|
|
|
$
|
8,243,078
|
(1)
|
Network
affiliation agreements, net of accumulated amortization, included $173
million related to FOX affiliations, $71 million related to CW
affiliations and $3 million related to MyNetworkTV affiliations as of
March 30, 2008.
|
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. As a result,
approximately $1,859 million of the Company’s net deferred tax liabilities were
eliminated and such adjustment was recorded as a reduction in the Company’s
provision for income tax expense in the first quarter of 2008 (see Note
3). This adjustment resulted in an increase in the carrying values of
the Company’s reporting units.
As
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
Dec. 30, 2007, the Company performs its annual impairment review of goodwill and
other intangible assets not subject to amortization in the fourth quarter of
each year in accordance with FASB Statement No. 142, “Goodwill and Other
Intangible Assets” (“FAS No. 142”). Under FAS No. 142, the impairment
review of goodwill and other intangible assets not subject to amortization must
be based on estimated fair values. The valuation of intangible assets
requires assumptions and estimates of many critical factors, including revenue
and market growth, operating cash flows, market multiples, and discount
rates. The Company has experienced continued declines in its
consolidated operating results during the first quarter of 2008, particularly in
its publishing reporting unit. Adverse changes in expected operating results
and/or unfavorable changes in other economic factors used to estimate fair
values could result in a non-cash impairment charge in the future under FAS No.
142.
NOTE
10: DEBT
Debt
consisted of the following (in thousands):
|
|
March
30, 2008
|
|
Dec. 30, 2007
|
Tranche
B Facility due 2014, interest rate of 5.54% and 7.91%,
respectively
|
|
$
|
7,593,050
|
|
$
|
7,587,163
|
Tranche
X Facility due 2008-2009, interest rate of 7.40% and 7.99%,
respectively
|
|
|
1,400,000
|
|
|
1,400,000
|
Bridge
Facility due 2008, interest rate of 7.54% and 9.43%,
respectively
|
|
|
1,600,000
|
|
|
1,600,000
|
Medium-term
notes due 2008, weighted average interest rate of 5.6% in 2008 and
2007
|
|
|
237,585
|
|
|
262,585
|
Property
financing obligation, effective interest rate of 7.7%, expiring
2009
|
|
|
30,267
|
|
|
35,676
|
4.875%
notes due 2010, net of unamortized discount of $372 and $410,
respectively
|
|
|
449,628
|
|
|
449,589
|
7.25%
debentures due 2013, net of unamortized discount of $1,708 and $1,794,
respectively
|
|
|
80,375
|
|
|
80,289
|
5.25%
notes due 2015, net of unamortized discount of $1,166 and $1,205,
respectively
|
|
|
328,835
|
|
|
328,795
|
7.5%
debentures due 2023, net of unamortized discount of $3,673 and $3,732,
respectively
|
|
|
95,075
|
|
|
95,016
|
6.61%
debentures due 2027, net of unamortized discount of $2,069 and $2,095,
respectively
|
|
|
82,891
|
|
|
82,864
|
7.25%
debentures due 2096, net of unamortized discount of $17,879 and $17,926,
respectively
|
|
|
130,120
|
|
|
130,073
|
Subordinated
promissory notes due 2018, effective interest rate of 17%,
net of unamortized discount of $165,063 and $165,000,
respectively
|
|
|
62,859
|
|
|
60,315
|
Interest
rate swaps
|
|
|
193,872
|
|
|
119,029
|
Other
notes and obligations
|
|
|
14,964
|
|
|
15,091
|
Total
debt excluding PHONES
|
|
|
12,299,521
|
|
|
12,246,485
|
2%
PHONES debt related to Time Warner stock, due 2029
|
|
|
304,640
|
|
|
597,040
|
Total
debt
|
|
$
|
12,604,161
|
|
$
|
12,843,525
|
Debt was
classified as follows in the unaudited condensed consolidated balance sheets (in
thousands):
|
|
March
30, 2008
|
|
Dec.
30, 2007
|
Current
Liabilities:
|
|
|
|
|
|
|
PHONES
debt related to Time Warner
stock
|
|
$
|
210,824
|
|
$
|
253,080
|
Other
debt due within one
year
|
|
|
752,138
|
|
|
750,239
|
Total
current
debt
|
|
|
962,962
|
|
|
1,003,319
|
Long-Term
Debt:
|
|
|
|
|
|
|
PHONES
debt related to Time Warner
stock
|
|
|
93,816
|
|
|
343,960
|
Other
long-term
debt
|
|
|
11,547,383
|
|
|
11,496,246
|
Total
long-term
debt
|
|
|
11,641,199
|
|
|
11,840,206
|
Total
Debt
|
|
$
|
12,604,161
|
|
$
|
12,843,525
|
New Credit Agreements
—On May
17, 2007, the Company entered into a $8.028 billion senior secured credit
agreement, as amended on June 4, 2007 (collectively, the “Credit Agreement”).
The Credit Agreement consists of the following facilities: (a) a $1.50 billion
Senior Tranche X Term Loan Facility (the “Tranche X Facility”), (b) a $5.515
billion Senior Tranche B Term Loan Facility (the “Tranche B Facility”), (c) a
$263 million Delayed Draw Senior Tranche B Term Loan Facility (the “Delayed Draw
Facility”) and (d) a $750 million Revolving Credit Facility (the “Revolving
Credit Facility”). The Credit Agreement also provided a commitment for an
additional $2.105 billion in new incremental term loans under the Tranche B
Facility (the “Incremental Facility”). Accordingly, the aggregate amount of the
facilities under the Credit Agreement equals $10.133 billion.
On June
4, 2007, proceeds from the Tranche X Facility and the Tranche B Facility were
used by the Company in connection with the consummation of the Company’s tender
offer to repurchase 126 million shares of the Company’s common stock that were
then outstanding at a price of $34.00 per share in cash and to refinance the
Company’s former five-year credit agreement and former bridge credit
agreement.
The
Revolving Credit Facility includes a letter of credit subfacility in an amount
up to $250 million and a swing line facility in an amount up to $100
million. As of March 30, 2008, the Company had $65 million of letters
of credit outstanding. Borrowings under the Revolving Credit Facility may be
used for working capital and general corporate purposes.
On Dec.
20, 2007, the Company entered into (i) a $1.6 billion senior unsecured interim
loan agreement (the “Interim Credit Agreement”) and (ii) a number of increase
joinders pursuant to which the Incremental Facility became a part of the Tranche
B Facility under the Credit Agreement (the Incremental Facility and Tranche B
Facility are hereinafter referred to collectively as the Tranche B Facility).
The Interim Credit Agreement contains a $1.6 billion twelve-month bridge
facility (the “Bridge Facility”). The total proceeds of $3.705 billion from the
Bridge Facility and the Incremental Facility were used by the Company, among
other ways, in connection with the consummation of the Merger and for general
corporate purposes.
Prior to
the consummation of the Merger, the Tranche X Facility bore interest per annum
at a variable rate equal to, at the Company’s election, the applicable base rate
plus a margin of 150 basis points or LIBOR plus a margin of 250 basis points.
Pursuant to the terms of the Credit Agreement, following the closing of the
Merger, the margins applicable to the Tranche X Facility increased to 175 basis
points and 275 basis points, respectively.
The
Tranche B Facility, Delayed Draw Facility and Revolving Credit Facility bear
interest per annum at a variable rate equal to, at the Company’s election, the
applicable base rate plus a margin of 200 basis points or LIBOR plus a margin of
300 basis points. All undrawn amounts under the Delayed Draw Facility
and the
Revolving Credit
Facility accrue commitment fees at a per annum rate of 75 basis points and 50
basis points, respectively. With respect to the Revolving Credit Facility only,
the margin applicable to base rate advances, the margin applicable to LIBOR
advances and the commitment fee applicable to undrawn amounts are subject to
decreases based on a leverage-based grid.
On June
29, 2007, the Company repaid $100 million of the $1.5 billion of borrowings
under the Tranche X Facility. The remaining principal balance of the
Tranche X Facility must be repaid in an aggregate amount of $650 million on Dec.
4, 2008, which amount may be adjusted to reflect additional prepayments or other
mandatory prepayments (described below) applied thereto, and the remaining
outstanding amount of the Tranche X Facility, if any, must be repaid on June 4,
2009.
The
Tranche B Facility is a seven-year facility which matures on June 4, 2014 and
also amortizes at a rate of 1.0% per annum (payable quarterly). The Revolving
Facility is a six-year facility and matures on June 4, 2013. In
February 2008, the Company refinanced $25 million of its medium-term notes with
borrowings under the Delayed Draw Facility. The Delayed Draw Facility
automatically becomes part of the Tranche B Facility as amounts are borrowed and
amortizes based upon the Tranche B Facility amortization schedule. The Company
intends
to use the Delayed Draw Facility to refinance approximately $238 million of its
remaining medium-term notes as they mature during 2008. Accordingly,
the Company has classified its medium-term notes as long-term at March 30, 2008
and Dec. 30, 2007.
Prior to
June 4, 2008, optional prepayments on the Tranche X Facility and the Tranche B
Facility with the proceeds of a substantially concurrent issuance of loans under
any senior secured credit facilities pursuant to the Credit Agreement must be
accompanied by a prepayment fee equal to 1.0% of the aggregate amount of such
prepayments if the interest rate spread applicable to such new loans is less
than the interest rate applicable to the Tranche X Facility or the Tranche B
Facility. Except as described in the immediately preceding sentence, borrowings
under the Credit Agreement are prepayable at any time prior to maturity without
penalty, and the unutilized portion of the commitments under the Revolving
Credit Facility or the Delayed Draw Facility may be reduced at the option of the
Company without penalty.
Upon
execution of the Interim Credit Agreement, loans under the Bridge Facility bore
interest per annum at a variable rate equal to, at the Company’s election, the
applicable base rate plus a margin of 350 basis points or LIBOR plus a margin of
450 basis points. On March 20, 2008, pursuant to the terms of the Interim Credit
Agreement, such margins increased by 50 basis points per annum and will continue
to increase by this amount each quarter, subject to specified caps, a portion of
which interest may be payable through an interest payable-in-kind
feature. Subject to certain prepayment restrictions contained in the
Credit Agreement, the Bridge Facility is prepayable at any time prior to
maturity without penalty, including in connection with the issuance of up to
$1.6 billion of high-yield notes.
If any
loans under the Bridge Facility remain outstanding on Dec. 20, 2008, the lenders
thereunder will have the option, subject to the terms of the Interim Credit
Agreement, at any time and from time to time to exchange such initial loans for
senior exchange notes that the Company will issue under a senior indenture,
and the maturity date of any initial loans that are not exchanged for
senior exchange notes will, unless a bankruptcy event of default has occurred
and is continuing on such date, automatically be extended to Dec. 20, 2015 (the
“Final Interim Credit Agreement Maturity Date”). Accordingly, the Company has
classified the borrowings under the Bridge Facility as long-term at March 30,
2008 and Dec. 30, 2007. The senior exchange notes will also mature on the Final
Interim Credit Agreement Maturity Date. Holders of the senior exchange notes
will have registration rights.
Loans
under the Tranche X Facility, Tranche B Facility and Revolving Loan Facility are
required to be repaid with the following proceeds, subject to certain exceptions
and exclusions set forth in the Credit Agreement: (a) 100% of the net cash
proceeds from the issuance or incurrence of debt for borrowed money by the
Company or any subsidiary (other than debt permitted to be incurred under the
negative covenants contained in the Credit Agreement (with certain exclusions)),
(b) certain specified percentages of excess cash flow proceeds based on a
leverage-based grid ranging from 50% to 0% and (c) 100% of the net cash proceeds
from all asset sales, certain dispositions, share issuances by the Company’s
subsidiaries and casualty events unless, in each case, the Company reinvests the
proceeds pursuant to the terms of the Credit Agreement.
Loans
under the Bridge Facility are required to be repaid with the following proceeds,
in each case after the obligations under the Credit Agreement have been repaid,
either as required by the Credit Agreement or repaid at the election of the
Company, subject to certain exceptions and exclusions set forth in the Interim
Credit Agreement: (a) 100% of the net cash proceeds from the issuance or
incurrence of certain debt for borrowed money by the Company or any subsidiary,
(b) 100% of the net cash proceeds of any equity issuance consummated by the
Company and (c) 100% of the net cash proceeds from all asset sales, certain
dispositions, share issuances by the Company’s subsidiaries and casualty events
unless, in each case, the Company reinvests the proceeds pursuant to the terms
of the Interim Credit Agreement.
Borrowings
under the Credit Agreement are guaranteed on a senior basis by certain of the
Company’s direct and indirect U.S. subsidiaries and secured by a pledge of the
equity interests of Tribune Broadcasting Holdco, LLC and Tribune Finance, LLC,
two subsidiaries of the Company. The Company’s other senior notes and
senior
debentures are secured on an equal and ratable basis with the borrowings under
the Credit Agreement as required by the terms of the indentures governing such
notes and debentures. Borrowings under the Interim Credit Agreement are
unsecured, but are guaranteed on a senior subordinated basis by certain of the
Company’s direct and indirect U.S. subsidiaries.
The
Credit Agreement and the Interim Credit Agreement contain representations and
warranties, affirmative and negative covenants, including restrictions on
capital expenditures, and events of default, in each case subject to customary
and negotiated exceptions and limitations, as applicable. If an event of default
occurs, the lenders under the Credit Agreement and the Interim Credit Agreement
will be entitled to take certain actions, including acceleration of all amounts
due under the facilities.
Further,
pursuant to the Credit Agreement, the Company is required to comply, on a
quarterly basis, with a maximum total guaranteed leverage ratio and a
minimum interest coverage ratio. For the twelve-month period ending March 30,
2008, the maximum permitted “Total Guaranteed Leverage Ratio” and the minimum
permitted “Interest Coverage Ratio” (each as defined in the Credit Agreement)
were 9.00 to 1.0 and 1.15 to 1.0, respectively. Both financial covenant
ratios are measured on a rolling four-quarter basis and become
more restrictive on an annual basis as set forth in the Credit Agreement.
At March 30, 2008, the Company was in compliance with these financial covenants.
The Company’s ability to remain in compliance with these financial covenants
will be impacted by a number of factors, including the Company’s ability to
continue to generate sufficient revenues and cash flows, changes in interest
rates, the impact of future purchase, sale, joint venture or similar
transactions involving the Company or its business units and the other risks and
uncertainties set forth in Part I, Item 1A, “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007.
On March
13, 2008, the Company filed an election to be treated as a subchapter S
corporation under the Internal Revenue Code, which election is effective as of
the beginning of the Company’s 2008 fiscal year. The Credit Agreement and the
Interim Credit Agreement contain affirmative covenants which required the
Company to make such election and that the election be effective for fiscal year
2008. The Credit Agreement and Interim Credit Agreement further provide that if
the Company fails to maintain the S corporation election for any year beginning
with 2009, the Company will be required in each such year to obtain an
investment in the Company in the form of common stock or subordinated debt in an
amount of up to $100 million. There can be no assurance that the Company will be
able to obtain such an investment and the failure to obtain such an investment
in those circumstances could result in a default under the Credit Agreement and
Interim Credit Agreement.
Under the
terms of the Credit Agreement, the Company is required to enter into hedge
arrangements to offset a percentage of its interest rate exposure under the
Credit Agreement and other debt with respect to borrowed money. On
July 2, 2007, the Company entered into an International Swap and Derivatives
Association, Inc. (“ISDA”) Master Agreement, a schedule to the 1992 ISDA Master
Agreement and, on July 3, 2007, entered into three interest rate swap
confirmations (collectively, the “Swap Documents”) with Barclays Bank, which
Swap Documents provide for (i) a two-year hedge with respect to $750 million in
notional amount, (ii) a three-year hedge with respect to $1 billion in notional
amount and (iii) a five-year hedge with respect to $750 million in notional
amount. The Swap Documents effectively converted a portion of the variable rate
borrowings under the Tranche B Facility in the Credit Agreement to a weighted
average fixed rate of 5.31% plus a margin of 300 basis points. The Company
accounts for these interest rate swaps as cash flow hedges in accordance with
FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“FAS No. 133”). Under FAS No. 133, a cash flow hedge is
deemed to be highly effective if it is expected that changes in the cash flows
of the hedged item are almost fully offset by changes in the cash flows of the
hedging instrument. While there will be some ineffectiveness in the future, the
cash flow hedges covered by the Swap Documents are deemed to be highly
effective, and therefore gains and losses resulting from changes in the fair
value of these hedges, other than changes resulting from hedge ineffectiveness,
are recorded in other comprehensive income (loss), net of taxes.
As of
March 30, 2008, the Company had outstanding borrowings of $7.6 billion
under the Tranche B Facility, $1.4 billion under the Tranche X Facility, and
$1.6 billion under the Bridge Facility. As of March 30, 2008, the
applicable interest rate was 5.54% on the Tranche B Facility, 7.40% on the
Tranche X Facility and 7.54% on the Bridge Facility.
Interest Rate Swaps
—As noted
above, the Company is party to three interest rate swaps covered under the Swap
Documents. At March 30, 2008, the fair value of these swaps had declined since
their inception date of July 3, 2007 by $160 million, which amount is included
in long-term debt. The Company determined that $1.7 million of this
change resulted from hedge ineffectiveness. The remaining $158.3
million change in fair value of these swaps is included, net of taxes, in the
accumulated other comprehensive income (loss) component of shareholders’ equity
(deficit) at March 30, 2008. The Company is also party to an additional interest
rate swap agreement related to the $100 million 7.5% debentures due in 2023
which effectively converts the fixed 7.5% rate to a variable rate based on
LIBOR.
Debt Due Within One Year
—Debt
due within one year at March 30, 2008 included $650 million of borrowings under
the Tranche X Facility, $78 million of borrowings under the Tranche B
Facility, $211 million related to PHONES, and $23 million of property
financing and other obligations. Debt due within one year at Dec. 30, 2007
included $650 million of borrowings under the Tranche X Facility,
$76 million of borrowings under the Tranche B Facility, $253 million
related to PHONES, and $24 million of property financing and other
obligations. The Company expects to fund interest and principal
payments due in 2008 through a combination of cash flows from operations,
available borrowings under the Revolving Credit Facility, and, if necessary,
dispositions of assets or operations. The Company’s ability to make
scheduled payments or prepayments on its debt and other financial obligations
will depend on future financial and operating performance and the ability to
dispose of assets on favorable terms. There can be no assurances that
the Company’s businesses will generate sufficient cash flows from operations or
that future borrowings under the Revolving Credit Facility will be available in
an amount sufficient to satisfy debt maturities or to fund other liquidity needs
or that any such asset dispositions can be completed. The Company’s
financial and operating performance is subject to prevailing economic and
industry conditions and to financial, business and other factors, some of which
are beyond the control of the Company.
If the
Company’s cash flows and capital resources are insufficient to fund debt service
obligations, the Company will likely face increased pressure to reduce or delay
capital expenditures, dispose of assets or operations, further reduce the size
of its workforce, seek additional capital or restructure or refinance its
indebtedness. These actions could have a material adverse effect on the
Company’s business, financial condition and results of operations. In addition,
the Company cannot assure the ability to take any of these actions, that these
actions would be successful and permit the Company to meet scheduled debt
service obligations or that these actions would be permitted under the terms of
the Company’s existing or future debt agreements, including the Credit Agreement
and the Interim Credit Agreement. For example, the Company may need
to refinance all or a portion of its indebtedness on or before maturity. There
can be no assurance that the Company will be able to refinance any of its
indebtedness on commercially reasonable terms or at all. In the
absence of improved operating results and access to capital resources, the
Company could face substantial liquidity problems and might be required to
dispose of material assets or operations to meet its debt service and other
obligations. The Credit Agreement and the Interim Credit Agreement restrict the
Company’s ability to dispose of assets and use the proceeds from the
disposition. The Company may not be able to consummate those
dispositions or to obtain the proceeds realized. Additionally, these
proceeds may not be adequate to meet the debt service obligations then
due.
If the
Company cannot make scheduled payments or prepayments on its debt, the Company
will be in default and, as a result, among other things, the Company’s debt
holders could declare all outstanding principal and interest to be due and
payable and the Company could be forced into bankruptcy or liquidation or
required to substantially restructure or alter business operations or debt
obligations.
Exchangeable Subordinated Debentures
due 2029 (“PHONES”)
—In 1999, the Company issued 8 million PHONES for
an aggregate principal amount of approximately $1.3 billion. The principal
amount was equal to the value of 16 million shares of Time Warner common
stock at the closing price of $78.50 per share on April 7, 1999. Quarterly
interest payments are made to the PHONES holders at an annual rate of 2% of the
initial principal. Effective Dec. 31, 2007, the Company has elected to account
for the PHONES utilizing the fair value option under FAS No.
159. Prior to the adoption of FAS No. 159, the Company recorded both
cash and non-cash interest expense on the discounted debt component of the
PHONES. Following the adoption of FAS No. 159 for the PHONES, the
Company records as interest expense only the cash interest paid on the
PHONES. See below for further information pertaining to the Company’s
adoption of FAS No. 159.
The
PHONES debenture agreement requires principal payments equal to any dividends
declared on the 16 million shares of Time Warner common stock. A payment of
$.125 per PHONES was made in the first quarter of 2008 for a Time Warner
dividend declared in the fourth quarter of 2007, and a payment of
$.125 per PHONES will be due in the second quarter of 2008 for a Time
Warner dividend declared in the first quarter of 2008. The Company
records the dividends it receives on its Time Warner common stock as dividend
income and accounts for the related payments to the PHONES holders as principal
reduction.
The
Company may redeem the PHONES at any time for the higher of the principal value
of the PHONES ($155.86 per PHONES at March 30, 2008) or the then market value of
two shares of Time Warner common stock, subject to certain adjustments. At any
time, holders of the PHONES may exchange a PHONES for an amount of cash equal to
95% (or 100% under certain circumstances) of the market value of two shares of
Time Warner common stock. At March 30, 2008, the market value per PHONES was
$38.08, and the market value of two shares of Time Warner common stock was
$27.74. The amount PHONES holders could have received if they had elected to
exchange their PHONES for cash on March 30, 2008 was $211 million, which is
included in current liabilities at March 30, 2008.
Prior to
the adoption of FAS No. 159, the Company accounted for the PHONES under the
provisions of FAS No. 133. Under FAS No. 133, the PHONES consisted of
a discounted debt component, which was presented at book value, and a derivative
component, which was presented at fair value. Changes in the fair value of the
derivative component of the PHONES were recorded in the statement of income. At
Dec. 30, 2007, the Company performed a direct valuation of the derivative
component of the PHONES utilizing the Black-Scholes option-pricing
model. As noted above, effective Dec. 31, 2007, the Company has
elected to account for the PHONES utilizing the fair value option under FAS No.
159. As a result of this election, the PHONES no longer consists of a
discounted debt component, presented at book value, and a derivative component,
presented at fair value, but instead is presented based on the fair value of the
entire PHONES debt. The Company made this election as the fair value
of the PHONES is readily determinable based on quoted market
prices. Changes in the fair value of the PHONES are recorded in the
statement of income.
The
following table summarizes the impact of the adoption of FAS No. 159 for the
PHONES on the Company’s unaudited condensed consolidated balance sheet (in
thousands):
|
Balances
prior to adoption
|
|
|
Net
gain/(loss)
upon
adoption
|
|
Balances
after adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
PHONES
debt (current and long-term portions)
|
$
|
(597,040
|
)
|
|
$
|
177,040
|
|
|
$
|
(420,000
|
)
|
Unamortized
debt issuance costs related to PHONES
|
|
|
|
|
|
|
|
|
|
|
|
included
in other non-current assets
|
|
18,384
|
|
|
|
(18,384
|
)
|
|
|
|
|
Pretax
cumulative effect of adoption
|
|
|
|
|
|
158,656
|
|
|
|
|
|
Increase
in deferred income tax liabilities
|
|
|
|
|
|
(61,876
|
)
|
|
|
|
|
Cumulative
effect of adoption (increase to
retained
earnings)
|
|
|
|
|
$
|
96,780
|
|
|
|
|
|
In
accordance with FAS No. 159, the $97 million after-tax cumulative effect of
adoption was recorded directly to retained earnings and was not included in the
Company’s unaudited condensed consolidated statement of operations for the
quarter ended March 30, 2008.
The
market value of the PHONES, which are traded on the New York Stock Exchange, was
$305 million and $420 million at March 30, 2008 and Dec. 30, 2007,
respectively. The outstanding principal balance of the PHONES was
$1,247 million and $1,248 million at March 30, 2008 and Dec. 30, 2007,
respectively.
NOTE
11: FAIR VALUE OF FINANCIAL INSTRUMENTS
As
discussed in Note 1, the Company adopted FAS No. 157 effective Dec. 31,
2007. FAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. In February 2008, the FASB issued Staff Position No.
157-2 (“FSP No. 157-2”) which defers the effective date of FAS No. 157 for all
nonfinancial assets and liabilities, except those items recognized or disclosed
at fair value on an annual or more frequently recurring basis, until one year
after the adoption of FAS No. 157. The Company is currently
evaluating the impact of FAS No. 157 on the assets and liabilities within the
scope of FSP 157-2, the provisions of which will become effective beginning in
the Company’s first quarter of 2009.
In
accordance with FAS No. 157, the Company has categorized its financial assets
and liabilities into a three-level hierarchy as outlined below.
·
|
Level One
– Financial
assets and liabilities whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market. Level
One financial assets for the Company include its investment in Time Warner
stock related to its PHONES debt and other investments in the securities
of public companies that are classified as available for
sale. Level One financial liabilities for the Company include
its PHONES debt related to Time Warner stock (see Note 10 for additional
information pertaining to the fair value of the Company’s PHONES
debt).
|
·
|
Level Two
– Financial
assets and liabilities whose values are based on quoted prices in markets
where trading occurs infrequently or whose values are based on quoted
prices of instruments with similar attributes in active
markets. Level Two financial assets and liabilities also
include assets and liabilities whose values are derived from valuation
models whose inputs are observable. Level Two financial assets
and liabilities for the Company include its interest rate swaps (see Note
10 for additional information on the Company’s interest rate
swaps).
|
·
|
Level Three
– Financial
assets and liabilities whose values are based on valuation models or
pricing techniques that utilize unobservable inputs that are significant
to the overall fair value measurement. The Company does not
currently have any Level Three financial assets or
liabilities.
|
The
following table presents the financial assets and liabilities measured at fair
value on a recurring basis on the Company’s unaudited condensed consolidated
balance sheet at March 30, 2008 (in thousands):
|
March
30, 2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
|
|
|
|
|
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
Time
Warner stock related to
PHONES
|
$
|
221,920
|
|
|
$
|
—
|
|
Other
investments in securities of public
companies
|
|
3,923
|
|
|
|
—
|
|
Interest
rate
swaps
|
|
—
|
|
|
|
38,658
|
|
Total
|
$
|
225,843
|
|
|
$
|
38,658
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
PHONES
debt related to Time Warner
stock
|
$
|
304,640
|
|
|
$
|
—
|
|
Interest
rate
swaps
|
|
—
|
|
|
|
193,872
|
|
Total
|
$
|
304,640
|
|
|
$
|
193,872
|
|
NOTE
12: COMPREHENSIVE INCOME
Comprehensive
income (loss) reflects all changes in the net assets of the Company during the
period from transactions and other events and circumstances, except those
resulting from stock issuances, stock repurchases and dividends. The
Company’s comprehensive income (loss) includes net income (loss) and other gains
and losses.
The
Company’s comprehensive income (loss) was as follows (in
thousands):
|
First
Quarter
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
income
(loss)
|
$
|
1,823,462
|
|
|
$
|
(23,295
|
)
|
Change
in unrecognized benefit cost loss, net of
taxes
|
|
(11,565
|
)
|
|
|
—
|
|
Adjustment
for previously unrecognized benefit cost (gains) and losses
included in net income, net of taxes
|
|
6,351
|
|
|
|
7,642
|
|
Unrealized
loss on marketable securities, net of taxes
|
|
(1,369
|
)
|
|
|
(611
|
)
|
Unrecognized
losses on cash flow hedging instruments:
|
|
|
|
|
|
|
|
Change
in losses on cash flow hedging instruments, net of taxes
|
|
(68,455
|
)
|
|
|
—
|
|
Adjustment
for losses on cash flow hedging instruments included in net
income, net of taxes
|
|
28
|
|
|
|
—
|
|
Unrecognized
losses on cash flow hedging instruments, net of taxes
|
|
(68,427
|
)
|
|
|
—
|
|
Change
in foreign currency translation adjustments, net of taxes
|
|
(6
|
)
|
|
|
17
|
|
Other
comprehensive income
(loss)
|
|
(75,016
|
)
|
|
|
7,048
|
|
Comprehensive
income
(loss)
|
$
|
1,748,446
|
|
|
$
|
(16,247
|
)
|
NOTE
13: OTHER MATTERS
Media Ownership Rules
—Various
aspects of the Company’s operations are subject to regulation by governmental
authorities in the United States. The Company’s television and radio
broadcasting operations are subject to Federal Communications Commission
(“FCC”)
jurisdiction
under the Communications Act of 1934, as amended. FCC rules, among other things,
govern the term, renewal and transfer of radio and television broadcasting
licenses, and limit the number of media interests in a local market that a
single entity can own. Federal law also regulates the rates charged
for political advertising and the quantity of advertising within children’s
programs.
On Nov.
30, 2007, the FCC issued an order (the “Order”) granting applications of the
Company to transfer control of the Company from the shareholders to the
ESOP. In the Order, the FCC granted the Company temporary waivers of
the newspaper/broadcast cross-ownership rule in Miami, Florida (WSFL-TV and the
South Florida
Sun-Sentinel
); Hartford, Connecticut (WTXX-TV/WTIC-TV and the
Hartford Courant
); Los
Angeles, California (KTLA-TV and the
Los Angeles Times
); and New
York, New York (WPIX-TV and
Newsday
), for a six-month
period beginning Jan. 1, 2008. The six-month waiver could be
automatically extended under two conditions: (1) if the Company appeals the
Order, the waivers are extended for the longer of two years or six months after
the conclusion of the litigation over the Order; or (2) if the FCC adopts a
revised newspaper-broadcast cross-ownership rule prior to Jan. 1, 2008, the
waivers are extended for a two-year period to allow the Company to come into
compliance with any revised rule, provided that in the event the revised rule is
the subject of a judicial stay, the waiver is extended until six months after
the expiration of any such stay.
The Order
also granted the Company a permanent waiver of the newspaper-broadcast
cross-ownership rule to permit continued common ownership of WGN-AM, WGN-TV and
the Chicago Tribune in Chicago, Illinois; a permanent “failing station” waiver
of the television duopoly rule to permit continued common ownership of WTIC-TV
and WTXX-TV in Hartford, Connecticut; and granted satellite station status to
WTTK-TV, Kokomo, Indiana to permit continued common ownership with WTTV-TV,
Bloomington, Indiana.
Various
parties have filed petitions for reconsideration of the Order with the FCC,
which the company opposed. The Company also filed an appeal of the
Order in the United States Court of Appeals for the District of Columbia Circuit
on Dec. 3, 2007, thus automatically extending the waivers for two years or until
six months after the conclusion of that appeal, whichever is
longer. The appeal has been held in abeyance pending FCC action on
the petitions
for
reconsideration. Intervenors have filed a motion to dismiss the
appeal, which the Company opposed. A decision on the motion to
dismiss has been deferred until briefing on the merits.
On Dec.
18, 2007, the FCC announced in an FCC news release the adoption of revisions to
the newspaper/broadcast cross-ownership rule. The FCC, on Feb. 4, 2008, released
the full text of the rule. The revised rule establishes a presumption
that the common ownership of a daily newspaper of general circulation and either
a television or a radio broadcast station in the top 20 Nielsen Designated
Market Areas (“DMAs”) would serve the public interest, provided that, if the
transaction involves a television station, (i) at least eight independently
owned and operating major media voices (defined to include major newspapers and
full-power commercial television stations) would remain in the DMA following the
transaction and (ii) the cross-owned television station is not among the
top-four ranked television stations in the DMA. Other proposed
newspaper/broadcast transactions would be presumed not to be in the public
interest, except in the case of a “failing” station or newspaper, or in the
event that the proposed transaction results in a new source of news in the
market. The FCC did not further relax the television-radio cross-ownership
rules, the radio local ownership rules, or the television duopoly rules. Under
the rule adopted, the Company would be entitled to a presumption in favor of
common ownership in three of the four of the Company’s cross-ownership markets
(New York, New York, Los Angeles, California, Miami, Florida) not covered by the
FCC’s grant of a permanent waiver (Chicago, Illinois). Various parties,
including the Company, have sought judicial review of the FCC’s order
adopting
the new rule.
Congress
removed national limits on the number of broadcast stations a licensee may own
in 1996. However, federal law continues to limit the number of radio and
television stations a single owner may own in a local market, and caps the
percentage of the national television audience that may be reached by a
licensee’s television stations in the aggregate at 39%.
Television
and radio broadcasting licenses are subject to renewal by the FCC, at which time
they may be subject to petitions to deny the license renewal applications. At
March 30, 2008, the Company had FCC authorization to operate 23 television
stations and one AM radio station. In order to expedite the renewal
grants, the Company entered into tolling agreements with the FCC for WPIX-TV,
New York, WDCW-TV, Washington, D.C., WGNO-TV, New Orleans, WXIN-TV,
Indianapolis, WXMI-TV, Grand Rapids, WGN-TV, Chicago, WPHL-TV, Philadelphia,
KWGN-TV, Denver, KHCW-TV, Houston, KTLA-TV, Los Angeles, KTXL-TV, Sacramento,
KSWB-TV, San Diego, KCPQ-TV, Seattle/Tacoma, WTIC-TV, and WPMT-TV Harrisburg,
Pennsylvania). The tolling agreements would allow the FCC to penalize
the Company for rule violations that occurred during the previous license term
notwithstanding the grant of renewal applications.
The
television industry is in the final stages of the transition to digital
television (“DTV”). By law, the transition to DTV is to occur by Feb. 17, 2009.
The FCC has issued an order with the final, post-transition DTV channel
assignments for every full power television station in the U.S. It also recently
completed a proceeding that established the operating rules for DTV stations
just before and after the transition in February 2009. Conversion to digital
transmission requires all television broadcasters, including those owned by the
Company, to invest in digital equipment and facilities. At March 30, 2008, all
of the Company’s television stations were operating DTV stations in compliance
with the FCC’s rules.
The FCC
still has not resolved a number of issues relating to the operation of DTV
stations, including the possible imposition of additional “public interest”
obligations attached to broadcasters’ use of digital spectrum.
From time
to time, the FCC revises existing regulations and policies in ways that could
affect the Company’s broadcasting operations. In addition, Congress from time to
time considers and adopts substantive amendments to the governing communications
legislation. The Company cannot predict what regulations or legislation may be
proposed or finally enacted or what effect, if any, such regulations or
legislation could have on the Company’s broadcasting operations.
Variable Interest Entities
—The
Company holds significant variable interests, as defined by FASB Interpretation
No. 46R, “Consolidation of Variable Interest Entities,” in Classified Ventures,
LLC, ShopLocal, LLC and Topix, LLC, but the Company has determined that it is
not the primary beneficiary of these entities. The Company’s maximum
loss exposure related to these entities is limited to its equity investments in
Classified Ventures, LLC, ShopLocal, LLC, and Topix, LLC, which were $46
million, $33 million and $23 million, respectively, at March 30,
2008.
Acquisition
of TMCT Real Properties
—On Sept. 22, 2006, the Company amended the terms
of its lease agreement with TMCT, LLC, an investment trust in which the Company
formerly held an interest following the Company’s acquisition of The Times
Mirror Company in 2000 and from which the Company leased eight real properties
(see Note 8 to the consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007 for further
information on the Company’s interest in TMCT, LLC). Under the terms
of the amended lease, the Company was granted an accelerated option to acquire
the eight properties during the month of January 2008 for
$175 million. The Company exercised this option on Jan. 29, 2008 and the
acquisition was completed on April 28, 2008. In connection with this
acquisition, the related property financing obligation of $30 million at March
30, 2008 was extinguished (see Note 10). No gain or loss will be
recorded as a result of the acquisition.
New Accounting Standards
—In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51” (“FAS No.
160”), which provides accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that an ownership interest in a subsidiary should be reported as a
separate component of equity in the consolidated financial statements, requires
consolidated net income to include the amounts attributable to both the parent
and the noncontrolling interest and provides for expanded disclosures in the
consolidated financial statements. FAS No. 160 is effective for financial
statements issued for fiscal years beginning after Dec. 15, 2008 and interim
periods beginning within these fiscal years. The Company is currently evaluating
the impact of adopting FAS No. 160 on its consolidated financial
statements.
In
December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business
Combinations” (“FAS No. 141R”), which addresses, among other items, the
recognition and accounting for identifiable assets acquired and liabilities
assumed in business combinations. FAS No. 141R also establishes
expanded disclosure requirements for business combinations. FAS No.
141R is effective for financial statements issued for fiscal years beginning
after Dec. 15, 2008 and interim periods beginning within these fiscal
years. The Company is currently evaluating the impact of adopting FAS
No. 141R on its consolidated financial statements.
In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (FAS
No. 161), which requires enhanced disclosures for derivative and hedging
activities. FAS No. 161 is effective for financial statements issued
for fiscal years beginning after Dec. 15, 2008 and interim periods beginning
within these fiscal years. Early adoption is permitted. The Company
is currently evaluating the impact of adopting FAS No. 161 on its consolidated
financial statements.
NOTE
14: SEGMENT INFORMATION
Financial
data for each of the Company’s business segments, from continuing operations,
was as follows (in thousands):
|
First
Quarter
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
Publishing
|
$
|
822,966
|
|
|
$
|
926,371
|
|
Broadcasting and
entertainment
|
|
291,682
|
|
|
|
283,008
|
|
Total
operating
revenues
|
$
|
1,114,648
|
|
|
$
|
1,209,379
|
|
|
|
|
|
|
|
|
|
Operating
profit
(1):
|
|
|
|
|
|
|
|
Publishing
|
$
|
36,654
|
|
|
$
|
140,176
|
|
Broadcasting and
entertainment
|
|
135,195
|
|
|
|
61,382
|
|
Corporate
expenses
|
|
(28,497
|
)
|
|
|
(19,641
|
)
|
Total
operating
profit
|
$
|
143,352
|
|
|
$
|
181,917
|
|
|
March
30, 2008
|
|
|
Dec.
30, 2007
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Publishing
|
$
|
8,057,468
|
|
|
$
|
8,121,133
|
|
Broadcasting and
entertainment
|
|
4,029,688
|
|
|
|
3,993,933
|
|
Corporate
|
|
876,794
|
|
|
|
1,000,873
|
|
Assets
held for
sale
|
|
10,432
|
|
|
|
33,780
|
|
Total
assets
|
$
|
12,974,382
|
|
|
$
|
13,149,719
|
|
(1)
|
Operating
profit for each segment excludes interest and dividend income, interest
expense, equity income and losses, non-operating items and income
taxes.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS.
|
The
following discussion compares the results of operations of Tribune Company and
its subsidiaries (the “Company”) for the first quarter of 2008 to the first
quarter of 2007. This commentary should be read in conjunction with
the Company’s unaudited condensed consolidated financial statements, which are
also presented in this Form 10-Q. Certain prior year amounts have
been reclassified to conform with the 2008 presentation.
FORWARD-LOOKING
STATEMENTS
The
discussion contained in this Item 2 (including, in particular, the
discussion under “Liquidity and Capital Resources”), the information contained
in the preceding notes to the unaudited condensed consolidated financial
statements and the information contained in Part I, Item 3, “Quantitative and
Qualitative Disclosures about Market Risk,” contain certain comments and
forward-looking statements that are based largely on the Company’s current
expectations. Forward-looking statements are subject to certain
risks, trends and uncertainties that could cause actual results and achievements
to differ materially from those expressed in the forward-looking statements
including, but not limited to, the items discussed in Part I, Item 1A,
“Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year
ended Dec. 30, 2007. Such risks, trends and uncertainties, which in
some instances are beyond the Company’s control, include: our ability to
generate sufficient cash to service the significant debt levels and other
financial obligations that resulted from the Leveraged ESOP Transactions (as
defined below in “Significant Events”); our ability to comply with or obtain
modifications or waivers of the financial covenants contained in our senior
credit facilities, and the potential impact to our operations and liquidity as a
result of the restrictive covenants in such senior credit facilities; our
dependency on dividends and distributions from our subsidiaries to make payments
on our indebtedness; increased interest rate risk due to our higher level of
variable rate indebtedness; the ability to maintain our subchapter S corporation
status; changes in advertising demand, circulation levels and audience shares;
regulatory and judicial rulings; availability and cost of broadcast rights;
competition and other economic conditions; changes in newsprint prices; changes
in the Company’s credit ratings and interest rates; changes in accounting
standards; adverse results from litigation, governmental investigations or
tax-related proceedings or audits; the effect of labor strikes, lock-outs and
negotiations; the effect of acquisitions, investments and divestitures; the
effect of derivative transactions; the Company’s reliance on third-party vendors
for various services; and events beyond the Company’s control that may result in
unexpected adverse operating results.
The words “believe,” “expect,”
“anticipate,” “estimate,” “could,” “should,” “intend” and similar expressions
generally identify forward-looking statements. Readers are cautioned
not to place undue reliance on such forward-looking statements, which are being
made as of the date of this filing. The Company undertakes no
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
SIGNIFICANT
EVENTS
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 essentially all of its subsidiaries as qualified subchapter S
subsidiaries. Subject to certain limitations (such as the built-in
capital gains tax applicable for ten years to gains accrued prior to the
election), the Company is no longer subject to federal income
tax. Instead, the Company’s income will be required to be reported by
its shareholders. The Company’s Employee Stock Ownership Plan, the
Company’s sole shareholder (see Note 5 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof), will not be taxed
on the share of income that is passed through to it because the Employee Stock
Ownership Plan is a qualified employee benefit plan. Although most
states in which the Company operates recognize the S corporation status, some
impose income
taxes
at a reduced rate.
As a
result of the election and in accordance with Financial Accounting Standards
Board (“FASB”) Statement No. 109, “Accounting for Income Taxes”, the Company has
eliminated approximately $1,859 million of net deferred income tax liabilities
as of Dec. 31, 2007, and has recorded such adjustment as a reduction in the
Company’s provision for income tax expense in the first quarter of
2008. The Company will continue 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 gains tax.
Leveraged ESOP Transactions
—On
April 1, 2007, the Company’s board of directors (the “Board”), based on the
recommendation of a special committee of the Board comprised entirely of
independent directors, approved a series of transactions (collectively, the
“Leveraged ESOP Transactions”) with a newly formed Tribune Employee Stock
Ownership Plan (the “ESOP”), EGI-TRB, L.L.C., a Delaware limited liability
company (the “Zell Entity”) 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 accounted for
these transactions as a leveraged recapitalization and, accordingly, has
maintained a historical cost presentation in its consolidated financial
statements.
The
Leveraged ESOP Transactions consisted of a series of transactions that included
the following:
●
|
On
April 1, 2007, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with GreatBanc Trust Company, not in its
individual or corporate capacity, but solely as trustee of the Tribune
Employee Stock Ownership Trust, a separate trust which forms a part of the
ESOP, Tesop Corporation, a Delaware corporation wholly owned by the ESOP
(“Merger Sub”), and the Zell Entity (solely for the limited purposes
specified therein) providing for Merger Sub to be merged with and into the
Company, and following such merger, the Company to continue as the
surviving corporation wholly owned by the ESOP (the
“Merger”).
|
●
|
On
April 1, 2007, the ESOP purchased 8,928,571 shares of the Company’s common
stock from the Company at a price of $28.00 per share. The ESOP paid for
this purchase with a promissory note of the ESOP in favor of the Company
in the principal amount of $250 million, to be repaid by the ESOP over the
30-year life of the loan through its use of annual contributions from the
Company to the ESOP and/or distributions paid on the shares of the
Company’s common stock held by the ESOP. Upon consummation of the Merger,
the 8,928,571 shares of the Company’s common stock held by the ESOP were
converted into 56,521,739 shares of common stock and represent the only
outstanding shares of capital stock of the Company after the
Merger.
|
●
|
On
April 23, 2007, pursuant to a purchase agreement dated April 1, 2007 (the
“Zell Entity Purchase Agreement”), the Zell Entity made an initial
investment of $250 million in the Company in exchange for (1) 1,470,588
shares of the Company’s common stock at a price of $34.00 per share and
(2) an unsecured subordinated exchangeable promissory note of the Company
in the principal amount of $200 million. The shares were
converted at the effective time of the Merger into the right to receive
$34.00 per share in cash, and the unsecured subordinated exchangeable
promissory note, including approximately $6 million of interest accrued
thereon, was repaid by the Company immediately prior to the
Merger. Pursuant to the Zell Entity Purchase Agreement, on May
9, 2007, Mr. Zell was appointed as a member of the
Board.
|
●
|
On
April 25, 2007, the Company commenced a tender offer to repurchase up to
126 million shares of the Company’s common stock that were then
outstanding at a price of $34.00 per share in cash (the “Share
Repurchase”). The tender offer expired on May 24, 2007 and 126 million
shares of the
|
|
Company’s
common stock were repurchased and subsequently retired on June 4, 2007
utilizing proceeds from the Credit Agreement (as defined in the “New
Credit Agreements” section below).
|
·
|
The
Company granted registration rights to Chandler Trust No. 1 and Chandler
Trust No. 2 (together, the “Chandler Trusts”), which were significant
shareholders of the Company prior to the Company’s entry into the
Leveraged ESOP Transactions. On April 25, 2007, the Company filed a shelf
registration statement in connection with the registration rights granted
to the Chandler Trusts.
|
·
|
On
June 4, 2007, the Chandler Trusts entered into an underwriting agreement
with Goldman, Sachs & Co. (“Goldman Sachs”) and the Company, pursuant
to which the Chandler Trusts sold an aggregate of 20,351,954 shares of the
Company’s common stock, which represented the remainder of the shares of
the Company’s common stock owned by them following the Share Repurchase,
through a block trade underwritten by Goldman Sachs. The shares were
offered pursuant to the shelf registration statement filed by the Company
on April 25, 2007.
|
·
|
On
Dec. 20, 2007, the Company completed its merger with Merger Sub, with the
Company surviving the Merger. Pursuant to the terms of the Merger
Agreement, each share of common stock of the Company, par value $0.01 per
share, issued and outstanding immediately prior to the Merger, other than
shares held by the Company, the ESOP or Merger Sub immediately prior to
the Merger (in each case, other than shares held on behalf of third
parties) and shares held by shareholders who validly exercised appraisal
rights, was cancelled and automatically converted into the right to
receive $34.00, without interest and less any applicable withholding
taxes, and the Company became wholly owned by the
ESOP.
|
·
|
Following
the consummation of the Merger, the Zell Entity purchased from the
Company, for an aggregate of $315 million, a $225 million subordinated
promissory note and a 15-year warrant. For accounting purposes,
the subordinated promissory note and 15-year warrant were recorded at fair
value based on the relative fair value method. The warrant entitles the
Zell Entity
to purchase
43,478,261 shares of the Company’s common stock (subject to adjustment),
which represents approximately 40% of the economic equity interest in the
Company following the Merger (on a fully-diluted basis, including after
giving effect to share equivalents granted under a new management equity
incentive plan which is described in Note 4 to the Company’s unaudited
condensed consolidated financial statements in Part I, Item 1, hereof).
The warrant has an initial aggregate exercise price of $500 million,
increasing by $10 million per year for the first 10 years of the warrant,
for a maximum aggregate exercise price of $600 million (subject to
adjustment). Thereafter, the Zell Entity assigned minority interests in
the subordinated promissory note and the warrant to certain permitted
assignees.
|
·
|
On
Dec. 20, 2007, the Company notified the New York Stock Exchange (the
“NYSE”) that the Merger was consummated and requested that the Company’s
common stock (and associated Series A junior participating preferred stock
purchase rights) be suspended from the NYSE, effective as of the close of
the market on Dec. 20, 2007. Subsequently, the NYSE filed with
the Securities and Exchange Commission an application on Form 25 reporting
that the shares of the Company’s common stock and associated Series A
junior participating preferred stock purchase rights are no longer listed
on the NYSE.
|
The
Company currently intends to dispose of an interest in the Chicago Cubs and the
Company’s 25% equity interest in Comcast SportsNet Chicago. The Company
currently expects that proceeds from such dispositions will be used to pay down
Company debt. The disposition of an interest in the Cubs is subject to the
approval of Major League Baseball.
New Credit Agreements
—On May
17, 2007, the Company entered into a $8.028 billion senior secured credit
agreement, as amended on June 4, 2007 (collectively, the “Credit Agreement”).
The Credit Agreement consists of the following facilities: (a) a $1.50 billion
Senior Tranche X Term Loan Facility (the “Tranche X Facility”), (b) a $5.515
billion Senior Tranche B Term Loan Facility (the “Tranche B Facility”), (c) a
$263 million Delayed Draw Senior Tranche B Term Loan Facility (the “Delayed Draw
Facility”) and (d) a $750 million Revolving Credit Facility (the “Revolving
Credit Facility”). The Credit Agreement also provided a commitment for an
additional $2.105 billion in new incremental term loans under the Tranche B
Facility (the “Incremental Facility”). Accordingly, the aggregate amount of the
facilities under the Credit Agreement equals $10.133 billion.
On June
4, 2007, proceeds from the Tranche X Facility and the Tranche B Facility were
used by the Company in connection with the consummation of the Share Repurchase
and to refinance the Company’s former five-year credit agreement and former
bridge credit agreement.
The
Revolving Credit Facility includes a letter of credit subfacility in an amount
up to $250 million and a swing line facility in an amount up to $100
million. As of March 30, 2008, the Company had $65 million of letters
of credit outstanding. Borrowings under the Revolving Credit Facility may be
used for working capital and general corporate purposes.
On Dec.
20, 2007, the Company entered into (i) a $1.6 billion senior unsecured interim
loan agreement (the “Interim Credit Agreement”) and (ii) a number of increase
joinders pursuant to which the Incremental Facility became a part of the Tranche
B Facility under the Credit Agreement (the Incremental Facility and Tranche B
Facility are hereinafter referred to collectively as the Tranche B Facility).
The Interim Credit Agreement contains a $1.6 billion twelve-month bridge
facility (the “Bridge Facility”). The total proceeds of $3.705 billion from the
Bridge Facility and the Incremental Facility were used by the Company, among
other ways, in connection with the consummation of the Merger and for general
corporate purposes.
Prior to
the consummation of the Merger, the Tranche X Facility bore interest per annum
at a variable rate equal to, at the Company’s election, the applicable base rate
plus a margin of 150 basis points or LIBOR plus a margin of 250 basis points.
Pursuant to the terms of the Credit Agreement, following the closing of the
Merger, the margins applicable to the Tranche X Facility increased to 175 basis
points and 275 basis points, respectively.
The
Tranche B Facility, Delayed Draw Facility and Revolving Credit Facility bear
interest per annum at a variable rate equal to, at the Company’s election, the
applicable base rate plus a margin of 200 basis points or LIBOR plus a margin of
300 basis points. All undrawn amounts under the Delayed Draw Facility
and the
Revolving Credit
Facility accrue commitment fees at a per annum rate of 75 basis points and 50
basis points, respectively. With respect to the Revolving Credit Facility only,
the margin applicable to base rate advances, the margin applicable to LIBOR
advances and the commitment fee applicable to undrawn amounts are subject to
decreases based on a leverage-based grid.
On June
29, 2007, the Company repaid $100 million of the $1.5 billion of borrowings
under the Tranche X Facility. The remaining principal balance of the
Tranche X Facility must be repaid in an aggregate amount of $650 million on Dec.
4, 2008, which amount may be adjusted to reflect additional prepayments or other
mandatory prepayments (described below) applied thereto, and the remaining
outstanding amount of the Tranche X Facility, if any, must be repaid on June 4,
2009.
The
Tranche B Facility is a seven-year facility which matures on June 4, 2014 and
also amortizes at a rate of 1.0% per annum (payable quarterly). The Revolving
Facility is a six-year facility and matures on June 4, 2013. In
February 2008, the Company refinanced $25 million of its medium-term notes with
borrowings under the Delayed Draw Facility. The Delayed Draw Facility
automatically becomes part of the Tranche B Facility as amounts are borrowed and
amortizes based upon the Tranche B Facility amortization schedule. The Company
intends to use the Delayed Draw Facility to refinance approximately $238 million
of its remaining medium-
term
notes as they mature during 2008. Accordingly, the Company has
classified its medium-term notes as long-term at March 30, 2008 and Dec. 30,
2007.
Prior to
June 4, 2008, optional prepayments on the Tranche X Facility and the Tranche B
Facility with the proceeds of a substantially concurrent issuance of loans under
any senior secured credit facilities pursuant to the Credit Agreement must be
accompanied by a prepayment fee equal to 1.0% of the aggregate amount of such
prepayments if the interest rate spread applicable to such new loans is less
than the interest rate applicable to the Tranche X Facility or the Tranche B
Facility. Except as described in the immediately preceding sentence, borrowings
under the Credit Agreement are prepayable at any time prior to maturity without
penalty, and the unutilized portion of the commitments under the Revolving
Credit Facility or the Delayed Draw Facility may be reduced at the option of the
Company without penalty.
Upon
execution of the Interim Credit Agreement, loans under the Bridge Facility bore
interest per annum at a variable rate equal to, at the Company’s election, the
applicable base rate plus a margin of 350 basis points or LIBOR plus a margin of
450 basis points. On March 20, 2008, pursuant to the terms of the Interim Credit
Agreement, such margins increased by 50 basis points per annum and will continue
to increase by this amount each quarter, subject to specified caps, a portion of
which interest may be payable through an interest payable-in-kind
feature. Subject to certain prepayment restrictions contained in the
Credit Agreement, the Bridge Facility is prepayable at any time prior to
maturity without penalty, including in connection with the issuance of up to
$1.6 billion of high-yield notes.
If any
loans under the Bridge Facility remain outstanding on Dec. 20, 2008, the lenders
thereunder will have the option, subject to the terms of the Interim Credit
Agreement, at any time and from time to time to exchange such initial loans for
senior exchange notes that the Company will issue under a senior indenture,
and the maturity date of any initial loans that are not exchanged for
senior exchange notes will, unless a bankruptcy event of default has occurred
and is continuing on such date, automatically be extended to Dec. 20, 2015 (the
“Final Interim Credit Agreement Maturity Date”). Accordingly, the Company has
classified the borrowings under the Bridge Facility as long-term at March 30,
2008 and Dec. 30, 2007. The senior exchange notes will also mature on the Final
Interim Credit Agreement Maturity Date. Holders of the senior exchange notes
will have registration rights.
Loans
under the Tranche X Facility, Tranche B Facility and Revolving Loan Facility are
required to be repaid with the following proceeds, subject to certain exceptions
and exclusions set forth in the Credit Agreement: (a) 100% of the net cash
proceeds from the issuance or incurrence of debt for borrowed money by the
Company or any subsidiary (other than debt permitted to be incurred under the
negative covenants contained in the Credit Agreement (with certain exclusions)),
(b) certain specified percentages of excess cash flow proceeds based on a
leverage-based grid ranging from 50% to 0% and (c) 100% of the net cash proceeds
from all asset sales, certain dispositions, share issuances by the Company’s
subsidiaries and casualty events unless, in each case, the Company reinvests the
proceeds pursuant to the terms of the Credit Agreement.
Loans
under the Bridge Facility are required to be repaid with the following proceeds,
in each case after the obligations under the Credit Agreement have been repaid,
either as required by the Credit Agreement or repaid at the election of the
Company, subject to certain exceptions and exclusions set forth in the Interim
Credit Agreement: (a) 100% of the net cash proceeds from the issuance or
incurrence of certain debt for borrowed money by the Company or any subsidiary,
(b) 100% of the net cash proceeds of any equity issuance consummated by the
Company and (c) 100% of the net cash proceeds from all asset sales, certain
dispositions, share issuances by the Company’s subsidiaries and casualty events
unless, in each case, the Company reinvests the proceeds pursuant to the terms
of the Interim Credit Agreement.
Borrowings
under the Credit Agreement are guaranteed on a senior basis by certain of the
Company’s direct and indirect U.S. subsidiaries and secured by a pledge of the
equity interests of Tribune Broadcasting Holdco, LLC and Tribune Finance, LLC,
two subsidiaries of the Company. The Company’s other senior notes and
senior debentures are secured on an equal and ratable basis with the borrowings
under the Credit Agreement as
required
by the terms of the indentures governing such notes and debentures. Borrowings
under the Interim Credit Agreement are unsecured, but are guaranteed on a senior
subordinated basis by certain of the Company's direct and indirect U.S.
subsidiaries.
The
Credit Agreement and the Interim Credit Agreement contain representations and
warranties, affirmative and negative covenants, including restrictions on
capital expenditures, and events of default, in each case subject to customary
and negotiated exceptions and limitations, as applicable. If an event of default
occurs, the lenders under the Credit Agreement and the Interim Credit Agreement
will be entitled to take certain actions, including acceleration of all amounts
due under the facilities.
Further,
pursuant to the Credit Agreement, the Company is required to comply, on a
quarterly basis, with a maximum total guaranteed leverage ratio and a
minimum interest coverage ratio. For the twelve-month period ending March 30,
2008, the maximum permitted “Total Guaranteed Leverage Ratio” and the minimum
permitted “Interest Coverage Ratio” (each as defined in the Credit Agreement)
were 9.00 to 1.0 and 1.15 to 1.0, respectively. Both financial covenant
ratios are measured on a rolling four-quarter basis and become
more restrictive on an annual basis as set forth in the Credit Agreement.
At March 30, 2008, the Company was in compliance with these financial covenants.
The Company’s ability to remain in compliance with these financial covenants
will be impacted by a number of factors, including the Company’s ability to
continue to generate sufficient revenues and cash flows, changes in interest
rates, the impact of future purchase, sale, joint venture or similar
transactions involving the Company or its business units and the other risks and
uncertainties set forth in Part I, Item 1A, “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended Dec. 30, 2007.
The
Company filed an election to be treated as a subchapter S corporation under the
Internal Revenue Code on March 13, 2008, which election is effective as of the
beginning of the Company’s 2008 fiscal year. The Credit Agreement and the
Interim Credit Agreement contain affirmative covenants which required the
Company to make such election and that the election be effective for fiscal year
2008. The Credit Agreement and Interim Credit Agreement further provide that if
the Company fails to maintain the S corporation election for any year beginning
with 2009, the Company will be required in each such year to obtain an
investment in the Company in the form of common stock or subordinated debt in an
amount of up to $100 million. There can be no assurance that the Company will be
able to obtain such an investment and the failure to obtain such an investment
in those circumstances could result in a default under the Credit Agreement and
Interim Credit Agreement.
Under the
terms of the Credit Agreement, the Company is required to enter into hedge
arrangements to offset a percentage of its interest rate exposure under the
Credit Agreement and other debt with respect to borrowed money. On
July 2, 2007, the Company entered into an International Swap and Derivatives
Association, Inc. (“ISDA”) Master Agreement, a schedule to the 1992 ISDA Master
Agreement and, on July 3, 2007, entered into three interest rate swap
confirmations (collectively, the “Swap Documents”) with Barclays Bank, which
Swap Documents provide for (i) a two-year hedge with respect to $750 million in
notional amount, (ii) a three-year hedge with respect to $1 billion in notional
amount and (iii) a five-year hedge with respect to $750 million in notional
amount. The Swap Documents effectively converted a portion of the variable rate
borrowings under the Tranche B Facility in the Credit Agreement to a weighted
average fixed rate of 5.31% plus a margin of 300 basis points. The Company
accounts for these interest rate swaps as cash flow hedges in accordance with
FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“FAS No. 133”). Under FAS No. 133, a cash flow hedge is
deemed to be highly effective if it is expected that changes in the cash flows
of the hedged item are almost fully offset by changes in the cash flows of the
hedging instrument. While there will be some ineffectiveness in the future, the
cash flow hedges covered by the Swap Documents are deemed to be highly
effective, and therefore gains and losses resulting from changes in the fair
value of these hedges, other than changes resulting from hedge ineffectiveness,
are recorded in other comprehensive income (loss), net of taxes.
As of
March 30, 2008, the Company had outstanding borrowings of $7.6 billion
under the Tranche B Facility,
$1.4
billion under the Tranche X Facility, and $1.6 billion under the Bridge
Facility. As of March 30, 2008, the applicable interest rate was
5.54% on the Tranche B Facility, 7.40% on the Tranche X Facility and 7.54% on
the Bridge Facility.
Publishing Discontinued
Operations
—The Company announced an agreement to sell the New York
edition of
Hoy
, the
Company’s Spanish-language daily newspaper (“
Hoy
, New York”) on Feb. 12,
2007, and completed the sale on May 15, 2007. In March 2007, the
Company announced its intentions to sell its Southern Connecticut
Newspapers—
The Advocate
(Stamford) and
Greenwich
Time
(collectively “SCNI”). The sale of SCNI closed on Nov. 1,
2007, and excluded the SCNI real estate in Stamford and Greenwich, Connecticut,
which was sold in a separate transaction that closed on April 22,
2008. In the first quarter of 2007, the Company recorded a pretax
loss of $19 million ($33 million after taxes) to write down the net assets of
SCNI to estimated fair value, less costs to sell. In the 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 one of its subsidiaries, EZ Buy
& EZ Sell Recycler Corporation (“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 the sales,
and the Company will not have any significant continuing involvement in their
operations. Accordingly, the results of operations in 2007 for each
of these businesses are reported as discontinued operations in the unaudited
condensed consolidated statements of operations.
Critical Accounting
Policies
—As of March 30, 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 quarter ended March 30,
2008. See Note 10 to the Company’s unaudited condensed consolidated
financial statements in Part I, Item 1, hereof for additional information
regarding the Company’s adoption of FAS No. 159. The adoption of FAS
No. 157 had no impact on the Company’s consolidated financial
statements. See Note 11 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof for additional
disclosures related to the fair value of financial instruments included in the
Company’s unaudited condensed consolidated balance sheet at March 30,
2008.
As
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
Dec. 30, 2007, the Company performs its annual impairment review of goodwill and
other intangible assets not subject to amortization in the fourth quarter of
each year in accordance with FASB Statement No. 142, “Goodwill and Other
Intangible Assets” (“FAS No. 142”). Under FAS No. 142, the impairment
review of goodwill and other intangible assets not subject to amortization must
be based on estimated fair values. The valuation of intangible assets
requires assumptions and estimates of many critical factors, including revenue
and market growth, operating cash flows, market multiples, and discount
rates. The Company has experienced continued declines in its
consolidated operating results during the first quarter of 2008, particularly in
its publishing reporting unit. Adverse changes in expected operating results
and/or unfavorable changes in other economic factors used to estimate fair
values could result in a non-cash impairment charge in the future under FAS No.
142.
NON-OPERATING
ITEMS
The first
quarters of 2008 and 2007 included several non-operating items, summarized as
follows:
|
First
Quarter 2008
|
|
|
First
Quarter 2007
|
|
(in
millions)
|
Pretax
Gain
(Loss)
|
|
|
After-tax
Gain
(Loss)
|
|
|
Pretax
Gain
(Loss)
|
|
|
After-tax
Gain
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on change in fair values
of PHONES and related
investment
|
$
|
69.9
|
|
|
$
|
69.1
|
|
|
$
|
(69.8
|
)
|
|
$
|
(42.6
|
)
|
Strategic
transaction
expenses
|
|
—
|
|
|
|
—
|
|
|
|
(14.4
|
)
|
|
|
(13.8
|
)
|
Other,
net
|
|
(.9
|
)
|
|
|
(1.1
|
)
|
|
|
.5
|
|
|
|
(.8
|
)
|
Income
tax
adjustment
|
|
—
|
|
|
|
1,859.3
|
|
|
|
—
|
|
|
|
—
|
|
Total
non-operating
items
|
$
|
69.0
|
|
|
$
|
1,927.3
|
|
|
$
|
(83.7
|
)
|
|
$
|
(57.2
|
)
|
In the
first quarter of 2008, the $70 million non-cash pretax gain on change in fair
values of PHONES and related investment resulted primarily from a $115 million
decrease in the fair value of the Company’s PHONES, partially offset by a $45
million decrease in the fair value of 16 million shares of Time Warner common
stock. Effective Dec. 31, 2007, the Company has elected to account
for its PHONES utilizing the fair value option under FAS No. 159. As
a result of this election, the Company no longer measures just the changes in
fair value of the derivative component of the PHONES, but instead measures the
changes in fair value of the entire PHONES debt. See Note 10 to the
Company’s unaudited condensed consolidated financial statements in Part I, Item
1, hereof for further information pertaining to the Company’s adoption of FAS
No. 159. The favorable income tax adjustment of $1,859 million in the
first quarter of 2008 related to the Company’s election to be treated as a
subchapter S corporation, which resulted in the elimination of essentially all
of the Company’s net deferred tax liabilities. See Note 3 to the
Company’s unaudited condensed consolidated financial statements in Part I, Item
1, hereof for further information pertaining to the Company’s election to be
treated as a subchapter S corporation.
In the
first quarter of 2007, the $70 million non-cash pretax loss on change in fair
values of PHONES and related investment resulted primarily from a $36 million
increase in the fair value of the derivative component of the Company’s PHONES
and a $33 million decrease in the fair value of 16 million shares of Time Warner
common stock. The strategic transaction expenses in the first quarter
of 2007 related to a special strategic review and the Leveraged ESOP
Transactions.
RESULTS
OF OPERATIONS
The
Company’s results of operations, when examined on a quarterly basis, reflect the
seasonality of the Company’s revenues. Second and fourth quarter
advertising revenues are typically higher than first and third quarter
revenues. Results for the second quarter usually reflect spring
advertising, while the fourth quarter includes advertising related to the
holiday season. Results for the 2008 and 2007 first quarters reflect
these seasonal patterns. Unless otherwise stated, the Company’s
discussion of its results of operations relates to continuing operations, and
therefore excludes
Hoy
,
New York, SCNI, and Recycler. See the discussion under “Discontinued
Operations” contained in this Item 2 for further information on the results from
discontinued operations.
CONSOLIDATED
The
Company’s consolidated operating results for the first quarters of 2008 and 2007
are shown in the table below:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
1,115
|
|
$
|
1,209
|
|
-
|
8%
|
Operating
profit(1)
|
$
|
143
|
|
$
|
182
|
|
-
|
21%
|
Net
income on equity
investments
|
$
|
17
|
|
$
|
13
|
|
+
|
32%
|
Net
income:
|
|
|
|
|
|
|
|
|
Income
from continuing
operations(2)
|
$
|
1,824
|
|
$
|
11
|
|
|
*
|
Loss
from discontinued operations, net of tax
|
|
(1
|
)
|
|
(34
|
)
|
|
*
|
Net
income
(loss)
|
$
|
1,823
|
|
$
|
(23
|
)
|
|
*
|
(1)
|
Operating
profit excludes interest and dividend income, interest expense, equity
income and losses, non-operating items and income
taxes.
|
(2)
|
Due
to the Company’s election to be treated as a subchapter S corporation
beginning in 2008, essentially all of its net deferred tax liabilities
have been eliminated as of Dec. 31, 2007. This resulted in a
$1,859 million reduction in income tax expense in the first quarter of
2008.
|
* Not
meaningful
Operating Revenues and
Profit
—Consolidated operating revenues and operating profit by business
segment for the first quarters of 2008 and 2007 were as follows:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
Publishing
|
$
|
823
|
|
$
|
926
|
|
-
|
11%
|
Broadcasting and
entertainment
|
|
292
|
|
|
283
|
|
+
|
3%
|
Total
operating
revenues
|
$
|
1,115
|
|
$
|
1,209
|
|
-
|
8%
|
|
|
|
|
|
|
|
|
|
Operating
profit(1)
|
|
|
|
|
|
|
|
|
Publishing
|
$
|
37
|
|
$
|
140
|
|
-
|
74%
|
Broadcasting and
entertainment(2)
|
|
135
|
|
|
61
|
|
+
|
120%
|
Corporate
expenses
|
|
(28
|
)
|
|
(20
|
)
|
-
|
45%
|
Total
operating
profit
|
$
|
143
|
|
$
|
182
|
|
-
|
21%
|
(1)
|
Operating
profit for each segment excludes interest and dividend income, interest
expense, equity income and losses, non-operating items and income
taxes.
|
(2)
|
Includes
a gain of $83 million on the sale of the real estate and related assets of
the Company’s studio production lot located in Hollywood,
California.
|
Consolidated
operating revenues for the 2008 first quarter fell 8% to $1.12 billion from
$1.21 billion in 2007 due to a decline in publishing revenues, partially offset
by an increase in broadcasting and entertainment revenues.
Consolidated
operating profit decreased 21%, or $39 million, in the 2008 first
quarter. Publishing operating profit decreased 74%, or $103 million,
in the first quarter of 2008. Publishing operating profit in the 2008
first quarter included severance and related charges of $13 million and special
termination benefits of $24 million for staff
reductions. Broadcasting and entertainment operating profit was up
120%, or $74 million, in the 2008 first quarter primarily due to a gain of $83
million on the sale of the real estate and related assets of its studio
production lot located in Hollywood, California, partially offset by a severance
charge of $9 million.
Operating
Expenses
—Consolidated operating expenses for the first quarters were as
follows:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Cost
of sales (exclusive of items shown
below)
|
$
|
599
|
|
$
|
614
|
|
-
|
2%
|
Selling,
general and
administrative
|
|
315
|
|
|
356
|
|
-
|
12%
|
Depreciation
and
amortization
|
|
57
|
|
|
57
|
|
|
—
|
Total
operating
expenses
|
$
|
971
|
|
$
|
1,027
|
|
-
|
5%
|
Cost of
sales decreased 2%, or $15 million, in the first quarter of
2008. Compensation expense decreased 3%, or $6 million, in the first
quarter of 2008 primarily due to the impact of position eliminations during
2007. Newsprint and ink expense decreased 18%, or $20 million, as a
result of a 14% drop in newsprint consumption and a 4% decline in average
newsprint costs. Programming expense increased 7%, or $6 million, due
to higher broadcast rights amortization.
Selling,
general and administrative (“SG&A”) expenses were down 12%, or $41 million,
in the first quarter of 2008. SG&A expenses in the first quarter
of 2008 included severance and related charges of $39 million and special
termination benefits of $24 million, partially offset by compensation savings
from staff reductions. The special termination benefits will be
provided through enhanced pension benefits payable by the Company’s pension
plan. The severance and related charges included approximately $32
million of costs related to the Company’s transitional compensation
plan. SG&A expenses in the first quarter of 2008 also included
the gain of $83 million on the sale of the studio production lot and $8 million
of stock-based compensation expense related to the Company’s new management
equity incentive plan. SG&A expenses in the first quarter of 2007
included $18 million of stock-based compensation expense.
PUBLISHING
Operating Revenues and
Profit
—The following table presents publishing operating revenues,
operating expenses and operating profit for the first quarters of 2008 and
2007. References in this discussion to individual daily newspapers
include their related businesses.
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
823
|
|
$
|
926
|
|
-
|
11%
|
Operating
expenses
|
|
786
|
|
|
786
|
|
|
—
|
Operating
profit(1)
|
$
|
37
|
|
$
|
140
|
|
-
|
74%
|
(1)
|
Operating
profit excludes interest and dividend income, interest expense, equity
income and losses, non-operating items and income
taxes.
|
Publishing
operating revenues decreased 11%, or $103 million, in the 2008 first
quarter. The largest declines were at Los Angeles, Chicago, Newsday,
South Florida and Orlando.
Operating
profit for the 2008 first quarter decreased 74%, or $103 million, mainly due to
the lower revenues. Operating expenses were flat in the 2008 first
quarter as workforce reduction costs and an increase in circulation distribution
expense were offset by decreases in newsprint and ink, outside services,
promotion expenses and compensation savings from staff reductions.
Publishing
operating revenues, by classification, for the first quarters of 2008 and 2007
were as follows:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
Advertising
|
|
|
|
|
|
|
|
|
Retail
|
$
|
269
|
|
$
|
292
|
|
-
|
8%
|
National
|
|
161
|
|
|
178
|
|
-
|
10%
|
Classified
|
|
186
|
|
|
256
|
|
-
|
27%
|
Total
advertising
|
|
616
|
|
|
726
|
|
-
|
15%
|
Circulation
|
|
130
|
|
|
135
|
|
-
|
3%
|
Other
|
|
77
|
|
|
65
|
|
+
|
17%
|
Total
revenues
|
$
|
823
|
|
$
|
926
|
|
-
|
11%
|
Total
advertising revenues were down 15%, or $110 million, in the 2008 first
quarter. Retail advertising revenues were down 8%, or $23 million,
primarily due to declines in the hardware/home improvement stores,
furniture/home furnishings, specialty merchandise, department stores, and other
retail categories, partially offset by an increase in the food and drug stores
category. Preprint revenues decreased 8%, or $12 million, in the
first quarter primarily due to decreases at Los Angeles, South Florida, Chicago,
and Hartford. National advertising revenues decreased 10%, or $17
million, in the first quarter primarily due to decreases in the telecom/wireless
and auto categories, partially offset by increases in the healthcare and media
categories. Classified advertising revenues decreased 27%, or $70
million, in the first quarter of 2008. The decline was primarily due
to a 41% decrease in real estate, a 33% decline in help wanted and an 8%
reduction in auto advertising. Interactive revenues, which are
included in the above advertising categories, were flat as increases in retail
and national were offset by a decrease in classified advertising due to declines
in the classified help wanted and real estate categories, partially offset by an
increase in the classified auto category.
Publishing
advertising volume for the first quarters was as follows:
|
First
Quarter
|
Inches
(in thousands)
|
2008
|
|
2007
|
|
Change
|
Full
run
|
|
|
|
|
|
|
|
|
Retail
|
|
1,156
|
|
|
1,213
|
|
-
|
5%
|
National
|
|
686
|
|
|
701
|
|
-
|
2%
|
Classified
|
|
1,706
|
|
|
2,065
|
|
-
|
17%
|
Total
full
run
|
|
3,548
|
|
|
3,979
|
|
-
|
11%
|
Part
run
|
|
3,725
|
|
|
4,715
|
|
-
|
21%
|
Total
inches
|
|
7,273
|
|
|
8,694
|
|
-
|
16%
|
|
|
|
|
|
|
|
|
|
Preprint
pieces (in
millions)
|
|
3,140
|
|
|
3,435
|
|
-
|
9%
|
Full run
advertising inches decreased 11% in the 2008 first quarter. Full run
retail advertising inches decreased 5% in the first quarter due to declines at
Chicago, Orlando and Los Angeles. Full run national advertising
inches were down 2% in the first quarter, as increases at Newport News and Los
Angeles were more than offset by decreases at Chicago, South Florida, Newsday
and Hartford. Full run classified advertising inches declined 17% in
the first quarter due to decreases at Orlando, South Florida, Chicago, Newsday
and Baltimore. Part run advertising inches decreased 21% in the first
quarter primarily due to decreases at Los Angeles, Chicago, South Florida and
Orlando. Preprint advertising pieces decreased 9% in the first
quarter mainly due to decreases at Los Angeles, Chicago, South Florida and
Baltimore.
Circulation
revenues were down 3% due to a decline in total net paid circulation copies for
both daily and Sunday, partially offset by selective price
increases. The largest revenue declines were at Los Angeles, Chicago
and Newsday. Circulation revenues increased at South Florida and
Orlando. Total net paid circulation averaged 2.7 million copies daily
(Mon-Fri) in the first quarter, down 6% from the prior year, and 3.9 million
copies Sunday, representing a decline of 5% from the prior
year. Individually paid circulation
(home
delivery plus single copy) in the first quarter of 2008 was down 6% for both
daily and Sunday.
Other
revenues are derived from advertising placement services; the syndication of
columns, features, information and comics to newspapers; commercial printing
operations; delivery of other publications; direct mail operations; cable
television news programming; distribution of entertainment listings; and other
publishing-related activities. Other revenues increased 17%, or $12
million, in the first quarter primarily due to increased delivery revenue for
third-party publications.
Operating Expenses
—Publishing
operating expenses for the first quarters were as follows:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Compensation
|
$
|
348
|
|
$
|
328
|
|
+
|
6%
|
Newsprint
and
ink
|
|
94
|
|
|
114
|
|
-
|
18%
|
Circulation
distribution
|
|
124
|
|
|
119
|
|
+
|
5%
|
Outside
services
|
|
72
|
|
|
75
|
|
-
|
4%
|
Promotion
|
|
20
|
|
|
22
|
|
-
|
6%
|
Depreciation
and
amortization
|
|
44
|
|
|
44
|
|
|
—
|
Other
|
|
84
|
|
|
84
|
|
|
—
|
Total
operating
expenses
|
$
|
786
|
|
$
|
786
|
|
|
—
|
Publishing
operating expenses were flat in the 2008 first quarter. Compensation
expense increased 6%, or $20 million, in the first quarter of 2008 primarily due
to $14 million of severance and related charges and $24 million of special
termination benefits, partially offset by the impact of a 5% (860 full-time
equivalent positions) reduction in staffing and a decrease of $3 million in
stock-based compensation. Newsprint and ink expense decreased 18%, or
$20 million, as a result of a 14% drop in consumption and a 4% decline in
average newsprint costs. Circulation distribution expense increased
5%, or $5 million, in the first quarter due to delivery of additional
products. Outside services expense was down 4%, or $3 million,
largely due to a decrease in outside printing. Promotion expense
decreased 6%, or $2 million, due to the Company’s efforts to reduce costs in
2008.
BROADCASTING
AND ENTERTAINMENT
Operating Revenues and
Profit
—The following table presents broadcasting and entertainment
operating revenues, operating expenses and operating profit for the first
quarters of 2008 and 2007. Entertainment includes Tribune
Entertainment and the Chicago Cubs.
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
Television
|
$
|
278
|
|
$
|
264
|
|
+
|
5%
|
Radio/entertainment
|
|
14
|
|
|
19
|
|
-
|
28%
|
Total
operating
revenues
|
$
|
292
|
|
$
|
283
|
|
+
|
3%
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Television
|
$
|
215
|
|
$
|
198
|
|
+
|
9%
|
Radio/entertainment(2)
|
|
(59
|
)
|
|
24
|
|
|
*
|
Total
operating
expenses
|
$
|
156
|
|
$
|
222
|
|
-
|
29%
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)(1)
|
|
|
|
|
|
|
|
|
Television
|
$
|
63
|
|
$
|
67
|
|
-
|
6%
|
Radio/entertainment(2)
|
|
72
|
|
|
(6
|
)
|
|
*
|
Total
operating
profit
|
$
|
135
|
|
$
|
61
|
|
+
|
120%
|
(1)
|
Operating
profit excludes interest and dividend income, interest expense, equity
income and losses, non-operating items and income
taxes.
|
(2)
|
Includes
the gain of $83 million on the sale of the studio production
lot.
|
* Not
meaningful
Broadcasting
and entertainment operating revenues increased 3%, or $9 million, in the 2008
first quarter. Television revenues were up 5%, or $14 million, in the
first quarter of 2008 primarily due to higher national advertising
revenues. Radio/entertainment revenues were down 28%, or $5 million,
primarily due to lower revenues at Tribune Entertainment.
Operating
profit for broadcasting and entertainment was up 120%, or $74 million, in the
2008 first quarter. Television operating profit decreased 6%, or $4
million, primarily due to higher operating
expenses. Radio/entertainment operating profit increased $78 million,
primarily due to a gain of $83 million on the sale of the studio production lot,
partially offset by the decline in revenues.
Operating
Expenses
—Broadcasting and entertainment operating expenses for the first
quarters of 2008 and 2007 were as follows:
|
First
Quarter
|
(in
millions)
|
2008
|
|
2007
|
|
Change
|
|
|
|
|
|
|
|
|
|
Compensation
|
$
|
83
|
|
$
|
74
|
|
+
|
13%
|
Programming
|
|
89
|
|
|
83
|
|
+
|
7%
|
Depreciation
and
amortization
|
|
13
|
|
|
13
|
|
|
—
|
Other
|
|
54
|
|
|
52
|
|
+
|
4%
|
Gain
on sale of
assets(1)
|
|
(83
|
)
|
|
—
|
|
|
*
|
Total
operating
expenses
|
$
|
156
|
|
$
|
222
|
|
-
|
29%
|
(1)
|
Gain
on sale of assets represents the gain on sale of the studio production
lot.
|
* Not
meaningful
Broadcasting
and entertainment operating expenses decreased 29%, or $66 million, in the 2008
first quarter. Compensation expense increased 13%, or $9 million, in
the first quarter of 2008 primarily due to a $9 million severance
charge. Programming expense increased 7%, or $6 million, due to
higher broadcast rights amortization. Other cash expenses were up
4%.
CORPORATE
EXPENSES
Corporate
expenses for the 2008 first quarter increased $9 million, or 45%, from the first
quarter of 2007 primarily due to severance and related charges of $16 million
and approximately $1 million of special termination benefits, partially offset
by a decrease of $6 million in stock-based compensation expense.
EQUITY
RESULTS
Net
income on equity investments increased $4 million to $17 million in the 2008
first quarter. The increase was due primarily to an improvement at TV
Food Network.
INTEREST
AND DIVIDEND INCOME, INTEREST EXPENSE, AND INCOME TAXES
Interest
and dividend income for the 2008 first quarter increased $1 million to $4
million due to higher average cash balances and an increase in Time Warner
dividend income. Interest expense for the 2008 first quarter
increased to $263 million from $83 million due to higher debt
levels. Debt was $12.6 billion at the end of the 2008 first quarter,
compared with $5.0 billion at the end of the first quarter of
2007. The increase was primarily due to higher debt levels in
connection with the consummation of the Leveraged ESOP
Transactions.
In the
first quarter of 2008, income tax expense applicable to continuing operations
amounted to a net benefit of $1,854 million and was comprised of the favorable
$1,859 million deferred income tax adjustment that resulted from the Company’s S
corporation election and a provision of $5 million. The provision was
primarily for interest on uncertain tax positions. The effective tax
rate on income from continuing operations was 63.1% in the first quarter of
2007. The effective tax rate for the 2007 first quarter was affected
by certain non-operating items that were not deductible for tax
purposes. See Note 7 to the Company’s unaudited condensed
consolidated financial statements in Part I, Item 1, hereof for a summary of
non-operating items. In the aggregate, non-operating items increased
the effective tax rate in the first quarter of 2007 by 23.0 percentage
points.
DISCONTINUED
OPERATIONS
The
Company announced an agreement to sell
Hoy
, New York on Feb. 12,
2007 and completed the sale on May 15, 2007. In March 2007, the
Company announced its intentions to sell SCNI. The sale of SCNI
closed on Nov. 1, 2007, and excluded the SCNI real estate in Stamford and
Greenwich, Connecticut, which was sold in a separate transaction that closed on
April 22, 2008. In the first quarter of 2007, the Company recorded a
pretax loss of $19 million ($33 million after taxes) to write down the net
assets of SCNI to estimated fair value, less costs to sell. In the
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 the sales,
and the Company will not have any significant continuing involvement in their
operations. Accordingly, the results of operations in 2007 for each
of these businesses are reported as discontinued operations in the unaudited
condensed consolidated statements of operations.
Summarized Financial
Information
—Selected financial information related to discontinued
operations is summarized as follows:
|
First
Quarter
|
|
(in
thousands)
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$
|
—
|
|
|
$
|
15,657
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
$
|
(63
|
)
|
|
$
|
(2,460
|
)
|
Loss
on sales of discontinued
operations
|
|
(516
|
)
|
|
|
(19,442
|
)
|
Loss
from discontinued operations before income taxes
|
|
(579
|
)
|
|
|
(21,902
|
)
|
Income
taxes(1)
|
|
31
|
|
|
|
(12,743
|
)
|
Loss
from discontinued operations, net of
tax
|
$
|
(548
|
)
|
|
$
|
(34,645
|
)
|
|
|
|
|
|
|
|
|
(1)
|
Income
taxes for the first quarter of 2007 included tax expense of $14 million
related to the $19 million pretax loss on sale of SCNI. The
pretax loss included $54 million of allocated newspaper group goodwill,
most of which is not deductible for income tax
purposes.
|
LIQUIDITY
AND CAPITAL RESOURCES
Cash flow
generated from operating activities is the Company’s primary source of
liquidity. Net cash provided by operating activities was $51 million
in the first quarter of 2008, down 62% from $135 million in the first quarter of
2007, primarily due to lower operating profit and higher interest
expense.
Net cash
used for investing activities totaled $13 million in the first quarter of 2008
compared to $16 million in the first quarter of 2007. The Company’s
capital expenditures and investments totaled $23 million and $2 million,
respectively, in the first quarter of 2008. The Company received $131
million in proceeds from the sales of certain investments and real estate in the
first quarter of 2008. The proceeds included $122 million from the
sale of the studio production lot, of which $119 million was placed into an
escrow fund immediately following the closing of the sale.
On April
22, 2008, the Company sold the SCNI real estate in Stamford and Greenwich,
Connecticut for net proceeds of $29 million, which were placed into an escrow
fund. On April 28, 2008, the Company acquired the real estate
formerly leased from TMCT, LLC for $175 million (see Note 13 to the Company’s
unaudited condensed consolidated financial statements in Part I, Item 1,
hereof). The proceeds from the sales of the studio production lot and
the SCNI real estate, along with available cash, were used to fund the
purchase. The purchase was structured as a like-kind exchange, which
allowed the Company to defer income taxes on essentially all of the gains from
these dispositions.
Net cash
used for financing activities was $25 million in the first quarter of
2008. The Company refinanced $25 million of its medium term notes
with borrowings under its Delayed Draw Facility. In addition, the
Company made $19 million of scheduled Tranche B Facility amortization payments
and reduced its property financing obligation by $5 million.
The
Company expects to fund capital expenditures, interest and principal payments
due in 2008 and other operating requirements through a combination of cash flows
from operations, available borrowings under the Revolving Credit Facility, and,
if necessary, disposals of assets or operations. The Company’s
ability to satisfy financial covenants in its credit agreements and to make
scheduled payments or prepayments on its debt and other financial obligations
will depend on future financial and operating performance and the ability to
dispose of assets on favorable terms. There can be no assurances that
the Company’s businesses will generate sufficient cash flows from operations or
that any such asset dispositions can be completed. In addition, there
can be no assurances that future borrowings under the Revolving Credit Facility
will be available in an amount sufficient to satisfy debt maturities or to fund
other liquidity needs. The Company’s financial and operating
performance, and the market environment for divestiture transactions, are
subject to prevailing economic and industry conditions and to financial,
business and other factors, some of which are beyond the control of the
Company.
If the
Company’s cash flows and capital resources are insufficient to fund debt service
obligations, the Company will likely face increased pressure to reduce or delay
capital expenditures, dispose of assets or operations, further reduce the size
of its workforce, seek additional capital or restructure or refinance its
indebtedness. These actions could have a material adverse effect on the
Company’s business, financial condition and results of operations. In addition,
the Company cannot assure the ability to take any of these actions, that these
actions would be successful and permit the Company to meet scheduled debt
service obligations or that these actions would be permitted under the terms of
the Company’s existing or future debt agreements, including the Credit Agreement
and the Interim Credit Agreement. For example, the Company may need
to refinance all or a portion of its indebtedness on or before maturity. There
can be no assurance that the Company will be able to refinance any of its
indebtedness on commercially reasonable terms or at all. In the
absence of improved operating results and access to capital resources, the
Company could face substantial liquidity problems and might be required to
dispose of material assets or operations to meet its debt service and other
obligations. As described in the “New Credit Agreements” section
contained in this Item 2, the
Credit
Agreement and the Interim Credit Agreement require that proceeds from the
disposition of assets be used to repay borrowings under such agreements, subject
to certain exceptions. The Company may not be able to consummate
those dispositions or to obtain the proceeds realized. Additionally,
these proceeds may not be adequate to meet the debt service obligations then
due.
If the
Company cannot maintain compliance with the financial covenants in its credit
agreements or make scheduled payments or prepayments on its debt, the Company
will be in default and, as a result, among other things, the Company’s debt
holders could declare all outstanding principal and interest to be due and
payable and the Company could be forced into bankruptcy or liquidation or
required to substantially restructure or alter business operations or debt
obligations. See Part I, Item 1A, “Risk Factors” in the Company’s Annual Report
on Form 10-K for the fiscal year ended Dec. 30, 2007 for further discussion of
the risks associated with the Company’s ability to service all of its existing
indebtedness. In addition, see the “Significant Events” section
herein for additional information regarding the Leveraged ESOP Transactions and
a summary of the Company’s obligations under the Credit Agreement and for
definitions of capitalized terms used in this discussion.
As of
April 21, 2008, the Company’s corporate credit ratings were as follows: “B-”
with stable outlook by Standard & Poor’s Rating Services, “B3” on review for
a possible downgrade by Moody’s Investor Service and “B-” with negative outlook
by Fitch Ratings.
The
Company has for several years maintained active debt shelf registration
statements for its medium-term note program and other financing
needs. A shelf registration statement was declared effective in July
2006. The shelf registration statement does not have a designated
amount, but the Company’s Board of Directors has authorized the issuance and
sale of up to $3 billion of debt securities. Proceeds from any future
debt issuances under the new shelf registration statement would be used for
general corporate purposes, including repayment of short-term and long-term
borrowings, capital expenditures, working capital and financing of acquisitions,
in each case, subject to the terms of the Credit Agreement and the Interim
Credit Agreement.
Although
management believes its estimates and judgments are reasonable, the resolutions
of the Company’s tax issues are unpredictable and could result in tax
liabilities that are significantly higher or lower than that which has been
provided by the Company.
Off-Balance Sheet
Arrangements
—Off-balance sheet arrangements, as defined by the Securities
and Exchange Commission, include the following four categories: obligations
under certain guarantees or contracts; retained or contingent interests in
assets transferred to an unconsolidated entity or similar arrangements;
obligations under certain derivative arrangements; and obligations under
material variable interests. The Company has not entered into any
material arrangements that would fall under any of these four categories, which
would be reasonably likely to have a current or future material effect on the
Company’s financial condition, revenues or expenses, results of operations,
liquidity or capital expenditures.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
The
following represents an update of the Company’s market-sensitive financial
information. This information contains forward-looking statements and
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the fiscal year ended Dec. 30, 2007.
INTEREST
RATE RISK
All of
the Company’s borrowings are denominated in U.S. dollars. The Company manages
interest rate risk by issuing a combination of both fixed and variable rate
debt. In addition, the Company enters into hedge arrangements as
required under the terms of the Credit Agreement as defined and described in the
“Significant Events” section contained in Part I, Item 2, hereof.
Information
pertaining to the Company’s debt at March 30, 2008 is shown in the table below
(in thousands):
Maturities
|
|
|
Fixed Rate
Debt
|
|
Weighted Avg
Interest Rate
|
|
|
Variable Rate
Debt
|
|
Weighted Avg
Interest Rate
|
|
|
Total
Debt
|
|
2008(1)
|
|
$
|
234,843
|
|
|
2.6
|
%
|
|
$
|
707,933
|
|
|
7.2
|
%
|
|
$
|
942,776
|
|
2009(2)
|
|
|
9,534
|
|
|
8.0
|
%
|
|
|
857,399
|
|
|
7.2
|
%
|
|
|
866,933
|
|
2010(3)
|
|
|
451,772
|
|
|
4.9
|
%
|
|
|
141,179
|
|
|
5.5
|
%
|
|
|
592,951
|
|
2011
|
|
|
2,130
|
|
|
9.2
|
%
|
|
|
78,830
|
|
|
5.5
|
%
|
|
|
80,960
|
|
2012(4)
|
|
|
2,113
|
|
|
9.5
|
%
|
|
|
148,055
|
|
|
5.5
|
%
|
|
|
150,168
|
|
Thereafter(5)
|
|
|
1,150,573
|
|
|
4.1
|
%
|
|
|
8,819,800
|
|
|
5.9
|
%
|
|
|
9,970,373
|
|
Total
at March 30, 2008
|
|
$
|
1,850,965
|
|
|
|
|
|
$
|
10,753,196
|
|
|
|
|
|
$
|
12,604,161
|
|
Fair
Value at March 30, 2008(6)
|
|
$
|
1,186,440
|
|
|
|
|
|
$
|
8,093,487
|
|
|
|
|
|
$
|
9,279,927
|
|
(1)
|
Fixed
rate debt includes $211 million related to the Company’s 2% PHONES which
represents the cash exchange value of the PHONES at March 30,
2008. Also included is $23 million of property financing
obligation (see Note 10 to the Company’s unaudited condensed
consolidated financial
statements in
Part I, Item 1,
hereof
). Variable
rate debt includes $650 million related to the portion of the Tranche X
facility due on
Dec. 4, 2008 and $58 million related to the Tranche
B facility, which is payable in quarterly increments of approximately $19
million until maturity in 2014 when the remaining principal balance is due
in full (see Note 10 to the Company’s unaudited condensed consolidated
financial statements in
Part I, Item 1,
hereof
).
|
(2)
|
Variable
rate debt includes $750 million related to the portion of the Tranche X
facility due on June 4, 2009 and $29 million related to an interest rate
swap agreement through 2009 on $750 million of the variable rate
borrowings under the Tranche B facility effectively converting the
variable rate to a fixed rate of 5.25% plus a margin of 300 basis
points.
|
(3)
|
Variable
rate debt includes $62 million related to an interest rate swap agreement
through 2010 on $1 billion of the variable rate borrowings under the
Tranche B facility effectively converting the variable rate to a fixed
rate of 5.29% plus a margin of 300 basis
points.
|
(4)
|
Variable
rate debt includes $69 million related to an interest rate swap agreement
through 2012 on $750 million of the variable rate borrowings effectively
converting the variable rate to a fixed rate of 5.39% plus a margin of 300
basis points.
|
(5)
|
Fixed
rate debt includes the remaining $94 million of book value related to
the Company’s 2% PHONES, due 2029. The Company may redeem the
PHONES at any time for the greater of the principal value of the PHONES
($155.86 per PHONES at March 30, 2008) or the then market value of two
shares of Time Warner common stock, subject to certain adjustments.
Quarterly interest payments are made to the PHONES holders at an annual
rate of 2% of the initial principal. Fixed rate debt also includes
$34 million related to the interest rate swap agreement on the
$100 million 7.5% debentures due in 2023 effectively converting the
fixed 7.5% rate to a variable rate based on LIBOR. Fixed rate
debt also includes $238 million related to the Company’s medium-term notes
that the Company intends to refinance using the Delayed Draw Facility as
they mature during 2008. Accordingly, the Company has
classified its medium-term notes as long-term at March 30,
2008. Variable rate debt includes the $1.6 billion Bridge
Facility, which has been classified as long-term because the borrowings
under the Bridge Facility will be converted into long-term senior exchange
notes or similar instruments prior to the Bridge Facility’s initial
maturity date of Dec.
|
|
20,
2008 (see Note 10 to the Company’s unaudited consolidated financial
statements in
Part I, Item 1,
hereof
). Variable rate debt also includes $7.2 billion
related to the amount due in 2014 on the Tranche B facility after all
quarterly payments have been made (see Note 10 to the Company’s unaudited
consolidated financial statements in
Part I, Item 1,
hereof
).
|
(6)
|
Fair
value of the Company’s variable rate borrowings, senior notes and
debentures was estimated based on quoted market prices for similar issues
or on current rates available to the Company for debt of the same
remaining maturities and similar terms. The carrying value of
all other components of the Company’s debt approximates fair
value.
|
Variable Interest Rate Debt
—As
described in the “Significant Events” section contained in Part I, Item 2,
hereof, on June 4, 2007 and Dec. 20, 2007, the Company entered into borrowings
under the Credit Agreement and the Interim Credit Agreement. In general,
borrowings under the Credit Agreement bear interest at a variable rate based on
LIBOR plus a spread ranging from 2.75% to 3.00%. Upon execution of
the Interim Credit Agreement, loans under the Bridge Facility bore interest
based on LIBOR plus 4.50%.
On March 20,
2008, pursuant to the terms of the Interim Credit Agreement, such margins
increased by 50 basis points per annum and will continue to increase by this
amount each quarter, subject to specified caps
. As of March
30, 2008, the Company had $10.657 billion of variable rate borrowings
outstanding under these credit facilities. At this borrowing level,
and before consideration of the Company’s existing interest rate swap
agreements, a hypothetical one percent increase in the underlying interest rates
for the Company’s variable rate borrowings under these agreements would result
in an additional $107 million of annual pretax interest expense. The Company is
currently a party to four interest rate swap agreements. One of the
swap agreements relates to the $100 million fixed 7.5% rate debentures due in
2023 and effectively converts the fixed 7.5% rate to a variable rate based on
LIBOR. The other three swap agreements were initiated on July 3,
2007, and effectively converted $2.5 billion of the variable rate borrowings to
a weighted-average fixed rate of 5.31% plus a margin of 300 basis
points.
EQUITY
PRICE RISK
Available-For-Sale
Securities
—The Company has common stock investments in publicly traded
companies that are subject to market price volatility. Except for 16
million shares of Time Warner common stock (see discussion below), these
investments are classified as available-for-sale securities and are recorded on
the balance sheet at fair value with unrealized gains or losses, net of related
tax effects, reported in the accumulated other comprehensive income (loss)
component of shareholders’ equity (deficit).
The
following analysis presents the hypothetical change at March 30, 2008 in the
fair value of the Company’s common stock investments in publicly traded
companies that are classified as available-for-sale, assuming hypothetical stock
price fluctuations of plus or minus 10%, 20% and 30% in each stock’s
price. As of March 30, 2008, the Company’s common stock investments
in publicly traded companies consisted primarily of 237,790 shares of Time
Warner common stock unrelated to PHONES (see discussion below in “Derivatives
and Related Trading Securities”) and 3.4 million shares of AdStar,
Inc.
|
Valuation
of Investments
Assuming
Indicated Decrease
in
Stock’s Price
|
|
March
30, 2008
Fair
Value
|
|
Valuation
of Investments
Assuming
Indicated Increase
in
Stock’s Price
|
(in
thousands)
|
-30%
|
|
-20%
|
|
-10%
|
|
|
+10%
|
|
+20%
|
|
+30%
|
Common
stock investments in
public
companies
|
$2,746
|
|
$3,139
|
|
$3,531
|
|
$3,923
(1)
|
|
$4,316
|
|
$4,708
|
|
$5,100
|
(1)
|
Excludes
16 million shares of Time Warner common stock. See discussion
below in “Derivatives and Related Trading
Securities.”
|
During
the last 12 quarters preceding March 30, 2008, market price movements caused the
fair value of the Company’s common stock investments in publicly traded
companies to change by 10% or more in five of the quarters, by 20% or more in
five of the quarters and by 30% or more in four of the quarters.
Derivatives and Related Trading
Securities
—The Company issued 8 million PHONES in April 1999 indexed to
the value of its investment in 16 million shares of Time Warner common
stock. Since the second quarter of 1999, this investment in Time
Warner has been classified as a trading security, and changes in its fair value,
net of the changes in the fair value of the PHONES, have been recorded in the
statement of operations.
At
maturity, the PHONES will be redeemed at the greater of the then market value of
two shares of Time Warner common stock or the principal value of the PHONES
($155.86 per PHONES at March 30, 2008). At March 30, 2008, the PHONES
carrying value was approximately $305 million. Since the issuance of
the PHONES in April 1999, changes in the fair value of the PHONES have partially
offset changes in the fair value of the related Time Warner
shares. There have been and may continue to be periods with
significant non-cash increases or decreases to the Company’s net income
pertaining to the PHONES and the related Time Warner shares.
The
following analysis presents the hypothetical change in the fair value of the
Company’s 16 million shares of Time Warner common stock related to the PHONES,
assuming hypothetical stock price fluctuations of plus or minus 10%, 20% and 30%
in the stock’s price.
|
Valuation
of Investment
Assuming
Indicated Decrease
in
Stock’s Price
|
|
March
30, 2008
Fair
Value
|
|
Valuation
of Investment
Assuming
Indicated Increase
in
Stock’s Price
|
(in
thousands)
|
-30%
|
|
-20%
|
|
-10%
|
|
|
+10%
|
|
+20%
|
|
+30%
|
Time
Warner common
stock
|
$155,344
|
|
$177,536
|
|
$199,728
|
|
$221,920
|
|
$244,112
|
|
$266,304
|
|
$288,496
|
During
the last 12 quarters preceding March 30, 2008, market price movements have
caused the fair value of the Company’s 16 million shares of Time Warner common
stock to change by 10% or more in three of the quarters, by 20% or more in one
of the quarters and by 30% or more in none of the quarters.
ITEM
4. CONTROLS AND PROCEDURES.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of the Company’s management, including
its principal executive officer and principal financial officer, the Company
conducted an evaluation of its disclosure controls and procedures, as such term
is defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 30,
2008. Based upon that evaluation, the principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective.
Changes
in Internal Control Over Financial Reporting
There has
been no change in the Company’s internal control over financial reporting that
occurred during the Company’s fiscal quarter ended March 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
The
Company and its subsidiaries are defendants from time to time in actions for
matters arising out of their business operations. In addition, the
Company and its subsidiaries are involved from time to time as parties in
various regulatory, environmental and other proceedings with governmental
authorities and administrative agencies.
Newsday
and
Hoy
, New York Circulation
Misstatements
—In February 2004, a purported class action lawsuit was
filed in New York Federal Court by certain advertisers of
Newsday
and
Hoy
, New York, alleging that
they were overcharged for advertising as a result of inflated circulation
numbers at these two publications. The purported class action also alleges that
entities that paid a
Newsday
subsidiary to deliver advertising flyers were overcharged. The
Company is vigorously defending this suit. In July 2004, another
lawsuit was filed in New York Federal Court by certain advertisers of
Newsday
alleging damages
resulting from inflated
Newsday
circulation numbers
as well as federal and state antitrust violations. On Feb. 11, 2008,
this suit was settled with all remaining plaintiffs.
In
addition to the advertiser lawsuits, several class action and shareholder
derivative suits were filed against the Company and certain of its current and
former directors and officers as a result of the circulation misstatements at
Newsday
and
Hoy
, New
York. These suits alleged breaches of fiduciary duties and other
managerial and director failings under Delaware law, the federal securities laws
and the Employee Retirement Income Security Act (“ERISA”). The
consolidated shareholder derivative suit filed in Illinois state court in
Chicago was dismissed with prejudice on March 10, 2006. The appeal of
this dismissal to the Illinois State Court of Appeals was voluntarily dismissed
by the plaintiff following the closing of the Company’s going private
transaction. The consolidated securities class action lawsuit and the
consolidated ERISA class action lawsuit filed in Federal District Court in
Chicago were both dismissed with prejudice on Sept. 29, 2006. The
dismissals were appealed to the United States Court of Appeals for the Seventh
Circuit. On April 2, 2008, the Seventh Circuit issued an opinion
affirming the dismissal of both the securities class action lawsuit and the
ERISA class action lawsuit. Plaintiffs in the securities class action
lawsuit have filed a petition for a rehearing en banc by the Seventh Circuit,
which is currently pending. The Company continues to believe these
suits are without merit and will continue to vigorously defend
them.
PHONES Indenture
—The Company
received a letter dated April 9, 2007, (1) stating that it was written on behalf
of two hedge funds purporting to hold approximately 37% of the Company’s
8,000,000 PHONES Exchangeable Subordinated Debentures due 2029 (the “PHONES”),
(2) purporting to give a “notice of default” that the Company has violated the
“maintenance of properties” covenant in the indenture under which the PHONES
were issued (the “PHONES Indenture”) and (3) informing the Company that failure
to remedy such purported violation within 60 days of notice will result in an
“event of default” under the PHONES Indenture (which could, if properly
declared, result in an acceleration of principal and interest payable with
respect to the PHONES). On April 27, 2007, the Company received a
letter from the law firm purporting to represent the two hedge funds stating
that the law firm also purported to represent a third hedge fund, which,
together with the first two hedge funds, purported to hold 55% of the Company’s
PHONES and reiterating the claims set forth in the April 9, 2007
letter.
The
particular covenant in question, Section 10.05 of the PHONES Indenture, requires
the Company to “cause all properties used or useful in the conduct of its
business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order (normal wear and tear excepted) and supplied
with all necessary equipment… all as in the judgment of the Company may be
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times….” Section 10.05 of the
PHONES Indenture expressly provides that the covenant does not “prevent the
Company from discontinuing the operation and maintenance of any such properties,
or disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Company or of the Subsidiary concerned, desirable in
the
conduct
of its business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders [of the PHONES].” The letters suggest
that the Company’s recent sales of three television stations, announced
intention to dispose of an interest in the Chicago Cubs baseball team and recent
and proposed issuances of debt and return of capital to stockholders violated or
will violate this maintenance of properties covenant.
On May 2,
2007, the Company sent a letter to the law firm purporting to represent the
hedge funds rejecting their purported “notice of default” as defective and
invalid because the Company was not in default of Section 10.05, the entities
the law firm purported to represent were not “Holders” as defined in the PHONES
Indenture, and because the law firm had provided no evidence that it was an
agent duly appointed in writing as contemplated by Section 1.04 of the PHONES
Indenture. The law firm sent a letter to the Company on May 8, 2007
responding to the Company’s May 2, 2007 letter, reiterating its claim that the
Company was in default of Section 10.05 and stating that it had properly noticed
a default pursuant to Section 5.01(4) of the Indenture. The Company further
responded by letter dated May 18, 2007 reaffirming its rejection of the
purported “notice of default” and reiterating its position that the Company was
not in default of Section 10.05 and that the entities the law firm purported to
represent were not entitled to provide a notice of default under Section 5.01(4)
of the PHONES Indenture.
On July
23, 2007, the Company received a letter from the law firm purporting to
represent the hedge funds, purported to hold 70% of the Company’s PHONES,
stating that the Company has breached Section 10.05 of the PHONES Indenture,
such breach was continuing on the date of such letter, which was more than 60
days after the purported “notice of default” had been given, and that pursuant
to Section 5.01(4) of the Indenture, an “event of default” under the PHONES
Indenture had occurred and was continuing. The July 23, 2007 letter
further stated that the hedge funds were declaring the outstanding principal of
$157 per share of all of the outstanding PHONES, together with all accrued but
unpaid interest thereon to be due and payable immediately, and were demanding
immediate payment of all such amounts. On July 27, 2007, the Company
sent a letter to the trustee under the PHONES Indenture and the law firm
purporting to represent the three hedge funds rejecting the allegations made in
such law firm’s July 23, 2007 letter and reiterating the Company’s position that
the Company is not in default of Section 10.05 and that such hedge funds are not
entitled under the PHONES Indenture to provide the purported notice of
default.
On Aug.
10, 2007, the law firm purporting to represent the three hedge fund holders sent
a letter to the trustee under the PHONES Indenture stating that the PHONES
holders intended to institute proceedings to confirm the alleged covenant
default and acceleration notice. On Sept. 17, 2007, the Company
received copies of default notices from Cede & Co., the record holder of the
PHONES, on behalf of the three hedge fund holders. These purported notices of
default indicate that they were issued at the request of each of the hedge funds
by Cede & Co., the holder of record for the notes beneficially owned by each
of the hedge funds. The letter stated that Tribune was required to
remedy the purported default within 60 days of the date of the letter and that
failure to do so would constitute an “Event of Default” under the PHONES
Indenture. On Dec. 26, 2007, the Company received copies of notices
of acceleration from Cede & Co., purportedly on behalf of the three hedge
fund holders. These purported notices of acceleration indicate that
they were issued at the request of each of the hedge funds by Cede & Co.,
the holder of record for the notes beneficially owned by each of the hedge
funds. To date, the trustee under the PHONES Indenture has not
initiated any action on behalf of the PHONES holders. On January 9,
2008, the Company sent a letter to the trustee under the PHONES Indenture and
the law firm purporting to represent the three hedge funds rejecting the
purported notices of acceleration for the reasons previously set forth in the
Company’s July 27, 2007 letter.
The
Company continues to believe that the hedge funds’ claims are without merit and
that the Company remains in full compliance with Section 10.05 of the PHONES
Indenture. The Company will enforce and defend vigorously its rights
under the PHONES Indenture.
In
addition, the information contained in Note 3 and Note 13 to the unaudited
condensed consolidated financial statements in Part I, Item 1, hereof is
incorporated herein by reference.
ITEM
1A. RISK FACTORS.
There
have been no material changes to the Company’s risk factors as disclosed in Item
1A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the fiscal
year ended Dec. 30. 2007.
ITEM
6. EXHIBITS.
(a)
Exhibits.
31.1 Rule
13a-14 Certification of Chief Executive Officer
31.2 Rule
13a-14 Certification of Chief Financial Officer
32.1 Section
1350 Certification of Chief Executive Officer
32.2 Section
1350 Certification of Chief Financial Officer
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
TRIBUNE COMPANY
(Registrant)
|
|
|
|
|
|
Date:
May 8, 2008
|
By:
|
/s/ Brian
Litman
|
|
|
|
Brian
Litman
|
|
|
|
Vice
President and Controller
(on
behalf of the registrant
and
as Chief Accounting Officer)
|
|
|
|
|
|
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