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(Exact name of registrant as
specified in its charter)
Delaware
95-3518892
(State or other jurisdiction
of
(I.R.S. Employer
incorporation or
organization)
Identification Number)
350 North Orleans Street, 10-S
Chicago, Illinois
60654
(Address of Principal Executive
Office)
(Zip Code)
Registrant’s telephone number, including area code
(312) 321-2299
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title of Each
Class:
Class A Common Stock par value $.01 per share
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
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 o
Accelerated
filer o
Non-accelerated
filer o
Smaller
reporting
company þ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2008, the aggregate market value of
Class A Common Stock held by non-affiliates was
approximately $23,013,094 determined using the closing price per
share of $0.49, as reported on the Pink Sheets.
The number of outstanding shares of each class of the
registrant’s common stock as of February 28, 2009 was
as follows: 83,982,280 shares of Class A Common Stock.
This annual report on
Form 10-K
(“2008
10-K”)
of Sun-Times Media Group, Inc. and subsidiaries (collectively,
the “Company”) contains forward-looking statements
(within the meaning of Section 27A of the Securities Act of
1933, Section 21E of the Securities Exchange Act of 1934,
as amended, and the Private Securities Litigation Reform Act of
1995), that involve a number of risks and uncertainties. These
statements relate to future events or the Company’s future
financial performance with respect to its financial condition,
results of operations, business plans and strategies, operating
efficiencies, competitive positions, growth opportunities, plans
and objectives of management, capital expenditures, growth and
other matters. These statements involve known and unknown risks,
uncertainties and other factors that may cause the actual
results, levels of activity, performance or achievements of the
Company or the newspaper industry to be materially different
from those expressed or implied by any forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as “may,”“will,”“could,”“would,”“should,”“expect,”“plan,”“anticipate,”“intend,”“believe,”“estimate,”“predict,”“potential,”“seek,” or “continue”
or the negative of those terms or other comparable terminology.
These statements are only predictions and such expectations may
prove to be incorrect. Some of the things that could cause the
Company’s actual results to differ substantially from its
current expectations are:
•
the filing by the Company and its U.S. subsidiaries for
relief under Chapter 11 of the United States Bankruptcy
Code (the “Bankruptcy Code”). The Company has prepared
the financial statements, included elsewhere herein, under the
assumption it will continue to realize its assets and settle its
liabilities in the normal course of business. The outcome of the
proceedings under the Bankruptcy Code will likely result in
material changes to the Company’s operations and financial
condition. Currently, it is not possible to accurately predict
the outcome of the Chapter 11 proceedings, including the
impact on the Company’s financial condition or the ultimate
effect on the interests of the Company’s creditors and
stakeholders.
•
the resolution of certain United States and foreign tax matters;
•
changes in the preferences of readers and advertisers,
particularly in response to the growth of Internet-based media
and Internet-based classified and other advertising;
•
actions of competitors, including price changes and the
introduction of competitive service offerings;
•
changes in prevailing economic conditions, particularly as they
affect Chicago, Illinois and its metropolitan area;
•
adverse developments in pending litigation involving the Company
and its affiliates, and former directors and officers;
•
actions arising from continuing investigations by the Securities
and Exchange Commission and other government agencies in the
United States and Canada, principally of matters identified by a
special committee of independent directors formed to investigate
related party transactions and other payments made to certain
executives of the Company and Hollinger Inc. and other
affiliates in connection with the sale of certain of the
Company’s assets and other transactions;
•
the effects of recent and future outsourcing efforts;
•
the effects of changing costs or availability of raw materials,
primarily newsprint;
•
changes in laws or regulations, including changes that affect
the way business entities are taxed;
•
changes in accounting principles or in the way such principles
are applied; and
•
other matters identified in Item 1A “— Risk
Factors.”
The Company operates in a continually changing business
environment, and new risks emerge from time to time. Management
cannot predict such new risks, nor can it assess either the
impact, if any, of such risks on the Company’s businesses
or the extent to which any risk or combination of risks may
cause actual results to differ materially from those projected
in any forward-looking statements. In light of these risks,
uncertainties and assumptions, it should be kept in mind that
future events or conditions described in any forward-looking
statement made in this 2008
10-K might
not occur. All forward-looking statements speak only as of the
date of this 2008
10-K
or, in the case of any document incorporated by reference, the
date of that document, and the Company does not undertake any
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, except as required by federal securities law. All of
the forward-looking statements are qualified in their entirety
by reference to the factors discussed under the caption
“Risk Factors.”
On March 31, 2009, the Sun-Times Media Group, Inc. and its
domestic subsidiaries (collectively, the “Debtors”)
filed voluntary petitions under Chapter 11 of the United
States Bankruptcy Code (the “Bankruptcy Code”) in the
U.S. Bankruptcy Court (the “Bankruptcy Court”)
for the District of Delaware (Case
No. 09-11092
or the “Filings”). During the pendency of the
bankruptcy proceedings, the Debtors remain in possession of
their properties and assets and the management of the Sun-Times
Media Group, Inc. and subsidiaries (collectively, the
“Company”) continues to operate the businesses of the
Debtors as
debtors-in-possession.
As a
debtor-in-possession,
the Company is authorized to operate the business of the
Debtors, but may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court.
Since the Filings, the Company has continued to honor
subscriptions and provide advertising services to its customers.
In addition, the Company’s Canadian subsidiaries will
likely apply for court-supervised reorganization under the
Companies’ Creditors Arrangement Act (Canada) (the
“CCAA”). The Company’s Canadian subsidiaries have
limited activities generally related to legacy pension and
post-employment liabilities and certain litigation related
contingent liabilities. At December 31, 2008, the Canadian
subsidiaries had $29.9 million in cash and cash equivalents
which is generally unavailable to fund U.S. operations.
Subject to certain exceptions under the Bankruptcy Code, the
Debtors’ Filings automatically enjoined the continuation of
any judicial or administrative proceedings against the Debtors.
Any creditor actions to obtain possession of property from the
Debtors or to create, perfect or enforce any lien against
property of the Debtors are also enjoined. As a result,
creditors of the Debtors are precluded from collecting
pre-petition liabilities without the approval of the Bankruptcy
Court. Certain pre-petition liabilities have been paid after
obtaining the approval of the Bankruptcy Court, including
certain wages and benefits of employees.
Under the Bankruptcy Code, the Debtors have the right to assume
or reject executory contracts. An executory contract is one in
which the parties have mutual obligations to perform (e.g., real
property leases and service agreements). Unless otherwise
agreed, the assumption of a contract will require the Company to
cure all prior defaults under the related contract, including
all pre-petition liabilities. Unless otherwise agreed, the
rejection of a contract is deemed to constitute a breach of the
agreement as of the moment immediately preceding the Filing,
giving the other party to the contract a right to assert a
general unsecured claim for damages.
The Debtors have not as yet notified its known or potential
creditors of the Filing in an effort to identify pre-petition
claims against the Debtors. The Bankruptcy Court has not yet set
the bar date, which is the last date for most parties to file
proofs of claim with respect to non-governmental pre-petition
obligations. Payment terms for these amounts will be established
in connection with the Chapter 11 cases. There may be
differences between the amounts at which any such liabilities
are recorded in the financial statements and the amount claimed
by the Company’s creditors. Litigation may be required to
resolve any such disputes.
Currently, it is not possible to accurately predict the length
of time the Company will operate under Chapter 11 and the
supervision of the Bankruptcy Court, when or if the Company will
file a plan or plans of reorganization or liquidation with the
Bankruptcy Court, the outcome of the Chapter 11
proceedings, including the impact on the Company’s
financial condition, or the ultimate effect on the interests of
the Company’s creditors and stakeholders. However, under
the priority scheme established by the Bankruptcy Code and based
on the amount and nature of the Company’s assets and
liabilities, it is highly unlikely the Company’s common
stock will retain any value or that stockholders will receive
any distribution or consideration. In March 2009, the Company
retained Rothschild, Inc. (“Rothschild”) to pursue a
sale of the Company’s assets pursuant to Section 363
of the Bankruptcy Code. The proceeds from any such sale or
series of sales may differ materially from the value of the
Company’s assets as reflected in the financial statements.
Unless otherwise indicated, the discussion of the Company and
its business is presented in this annual report on
Form 10-K
(the “2008
10-K”)
under the assumption that the Company will continue to realize
its assets and settle its liabilities in the normal course of
business. The outcome of the proceedings under the Bankruptcy
Code will likely result in changes that materially affect the
Company’s operations and financial condition. Information
about the Filings is available on the Company’s website
(www.thesuntimesgroup.com).
The Company conducts business as a single operating segment,
which is concentrated in the publishing, printing and
distribution of newspapers in the greater Chicago, Illinois
metropolitan area and operates various related Internet Web
sites. The Company’s revenue for the year ended
December 31, 2008 includes the Chicago Sun-Times,
Post-Tribune, SouthtownStar and other newspapers in the
Chicago metropolitan area and associated Web sites.
Unless the context requires otherwise, all references herein to
the “Company” are to Sun-Times Media Group, Inc., its
predecessors and consolidated subsidiaries,
“Publishing” refers to Hollinger International
Publishing Inc., a wholly-owned subsidiary of the Company, and
“Hollinger Inc.” refers to the Company’s former
immediate parent and former controlling stockholder, Hollinger
Inc., and its affiliates (other than the Company). The
“Sun-Times News Group” refers to all of the
Company’s Chicago metropolitan area newspaper and related
operations.
General
Sun-Times Media Group, Inc. was incorporated in the State of
Delaware on December 28, 1990 as Hollinger International
Inc. On June 13, 2006, our stockholders approved the
amendment of the Hollinger International Inc. Restated
Certificate of Incorporation, changing the Company’s name
to Sun-Times Media Group, Inc., which became effective on
July 17, 2006. Publishing was incorporated in the State of
Delaware on December 12, 1995. The Company’s principal
executive offices are at 350 North Orleans Street, Chicago,
Illinois, 60654, telephone number
(312) 321-2299.
Business
Strategy
Evaluate Strategic Alternatives. On
February 4, 2008, the Company announced that its Board of
Directors had begun an evaluation of the Company’s
strategic alternatives to enhance shareholder value. These
alternatives included, but were not limited to, joint ventures
or strategic partnerships with third parties,
and/or the
sale of the Company or any or all of its assets. The Company
subsequently announced that it had retained Lazard
Frères & Co. LLC (“Lazard”) in
connection therewith. The Company’s engagement of Lazard
was terminated in 2009 and in March 2009, the Company retained
Rothschild, Inc. Rothschild has commenced a process for a sale
of the Company’s assets pursuant to Section 363 of the
Bankruptcy Code. There can be no assurances that this process
will result in any specific transactions, and such process is
subject to legal requirements including those imposed by the
Bankruptcy Court.
Aggressively Target Cost Reductions and Operating
Efficiencies.The Company is and has been
aggressively pursuing cost reductions in response to declining
advertising revenue. Integral to this effort is the evaluation
and implementation of appropriate outsourcing arrangements.
Newsprint and production costs have been minimized through
reductions in page sizes and balancing of editorial versus
advertising content and the Company intends to pursue
productivity enhancements in other areas of the Company,
including combining production facilities. Headcount in all
areas will continue to be adjusted in response to declining
revenue.
Increase Market Share by Leveraging the Company’s
Leading Market Position.The Company intends to
continue to leverage its position in daily readership in the
Chicago market in order to maximize its market share through
emphasizing local content to readers while emphasizing the reach
of the entire Sun-Times News Group network in both print and
Internet products to advertisers. The Company’s primary
assets are the Chicago metropolitan area newspapers, including
its flagship property, the Chicago Sun-Times. The Company
will seek to increase market share by taking advantage of the
extensive network of publications which allows the Company to
offer local advertisers geographically and demographically
targeted advertising solutions and national advertisers
an efficient vehicle to reach the entire Chicago market and by
shifting sales resources from print to Internet to further
capitalize on growth in this area and offset continuing declines
in print advertising.
Publish Relevant and Trusted High Quality
Newspapers.The Company is committed to
maintaining the high quality of its newspaper products and
editorial integrity in order to ensure continued reader loyalty.
Strong Corporate Governance Practices. The
Company is committed to the implementation and maintenance of
strong and effective corporate governance policies and practices
and to high ethical business practices.
(a) On January 2, 2009, the Company filed a
Form 15 with the Securities and Exchange Commission
(“SEC”) to voluntarily deregister its Class A
Common Stock and ending its reporting obligations under the
Securities Exchange Act of 1934 (the “Exchange Act”).
The Company’s obligation to file periodic reports with the
SEC for 2009 was immediately suspended upon the filing of the
Form 15. The registration of the Company’s
Class A Common Stock under the Exchange Act terminated
90 days after the filing of the Form 15 (April 2,2009).
(b) On January 16, 2009, Davidson Kempner Capital
Management LLC (“Davidson Kempner”) delivered to the
Company’s registered agent in Delaware consents from
holders representing a majority of the outstanding shares of the
Company to reconstitute the Company’s Board of Directors.
Upon delivery of such consents, the nominees proposed by
Davidson Kempner — Jeremy L. Halbreich, Robert A.
Schmitz, and Michael E. Katzenstein — joined
Robert B. Poile as the reconstituted Board of Directors of the
Company. Pursuant to such consents, the then-current directors
of the Company, with the exception of Robert B. Poile, were
removed. On January 30, 2009, Graham W. Savage was
re-elected to the Board of Directors. Mr. Savage previously
served as a director from July 24, 2003 to January 16,2009.
(c) On January 29, 2009, the Company received the
decision of an arbitrator in the dispute between the Company and
CanWest. The arbitrator’s decision includes an award in
favor of CanWest in the amount of approximately
Cdn.$50.7 million. The award is exclusive of interest and
costs, which are estimated to be Cdn.$18.2 million. On
March 12, 2009, the Company entered into a settlement
agreement with CanWest that resolved all claims with respect to
the arbitration award against the Company. Under the terms of
the settlement agreement, CanWest received
Cdn.$34.0 million, including approximately
Cdn.$22.0 million from an escrow account funded by the
Company, and an additional Cdn.$6.0 million paid by the
Company in March 2009. As a result of the arbitration award and
settlement, the Company has recognized a charge of
$10.5 million in the fourth quarter of 2008 which is
included in “Corporate expenses” in the Statements of
Operations. See Note 17 to the consolidated financial
statements. The escrowed funds are included on the Consolidated
Balance Sheet at December 31, 2008 under “Escrow
deposits and restricted cash.” The remainder due to CanWest
was paid by an unaffiliated third party. As a result of the
settlement, the Company and all of its affiliates and
subsidiaries have been released from any and all liability
related to the arbitration award and the underlying transactions
that led to the award. See Item 3
“— Legal Proceedings — CanWest
Arbitration.”
(d) On March 31, 2009, the Company and its domestic
subsidiaries filed voluntary petitions under the Bankruptcy
Code. See “Bankruptcy and Insolvency
Proceedings.”
Sun-Times
Media Group
The Company’s properties include newspapers and associated
Web sites and news products serving more than 200 communities in
the greater Chicago metropolitan area. For the year ended
December 31, 2008, the Company had revenue of
$323.9 million and an operating loss of
$381.3 million. The Company’s primary newspaper is the
Chicago Sun-Times, which was founded in 1948 and is one
of Chicago’s most widely read newspapers. The Chicago
Sun-Times is published in a tabloid format and has the
second highest daily readership and circulation of any newspaper
in the Chicago metropolitan area, attracting approximately
1.3 million readers daily (as reported in the 2008
Scarborough Release Study). The Company pursues a strategy which
offers a network of publications throughout Chicago and the
major suburbs in the surrounding high growth counties to allow
its advertising customers the ability to target and cover their
specific and most productive audiences. This strategy enables
the Company to offer joint selling programs to advertisers,
thereby expanding advertisers’ reach.
In addition to the Chicago Sun-Times, the Company’s
newspaper properties include: Pioneer Press
(“Pioneer”), which currently publishes 39 weekly
newspapers and one magazine in Chicago’s northern and
northwestern suburbs; the daily SouthtownStar; the daily
Post-Tribune of northwest Indiana; and publishes the
Herald News in Joliet, the Courier News in Elgin,
the Beacon News in Aurora, the Naperville Sun in
Naperville, the Lake County News-Sun in Waukegan and 13
free weekly newspapers in suburban Chicago.
Sources of Revenue.The Company’s
operating revenue is provided by the Chicago metropolitan area
newspapers and related Web sites. The following table sets forth
the sources of revenue and the percentage such sources represent
of total revenue for the Company during each year in the
three-year period ended December 31, 2008.
Based on information accumulated by a third party from data
submitted by Chicago area newspaper organizations, newspaper
print advertising declined 17% for the year ended
December 31, 2008 for the greater Chicago market versus the
comparable period in 2007. Advertising revenue for the Company
declined 16% for the year ended December 31, 2008, compared
to the same (52 week) period in 2007.
Advertising. Advertisements are carried either
within the body of the newspapers (which are referred to as
run-of-press
advertising and make up approximately 79% of the Company’s
advertising revenue), as inserts, or as Internet advertisements.
The Company’s advertising revenue is derived largely from
local and national retailers and classified advertisers.
Advertising rates and rate structures vary among the
publications and are based on, among other things, circulation,
readership, penetration and type of advertising (whether
classified, national or retail). In 2008, retail advertising
accounted for the largest share of advertising revenue (50%),
followed by classified (31%) and national (19%). The Chicago
Sun-Times offers a variety of advertising alternatives,
including geographically zoned issues, special interest pullout
sections and advertising supplements in addition to regular
sections of the newspaper targeted to different readers. The
Chicago area suburban newspapers offer similar alternatives to
the Chicago Sun-Times platform for their daily and weekly
publications. The Company operates the Reach Chicago Newspaper
Network, an advertising vehicle that can reach the combined
readership base of all the Company’s publications. The
network allows the Company to offer local advertisers
geographically and demographically targeted advertising
solutions and national advertisers an efficient vehicle to reach
the entire Chicago metropolitan market.
Circulation. Circulation revenue is derived
primarily from two sources. The first is sales of single copies
of the newspaper made through retailers and vending racks and
the second is home delivery newspaper sales to subscribers. For
the year ended December 31, 2008, approximately 58% of the
copies of the Chicago Sun-Times reported as sold and 62%
of the circulation revenue generated was attributable to
single-copy sales. Approximately 77% of 2008 circulation revenue
of the Company’s suburban newspapers was derived from home
delivery subscription sales.
Wednesday or Thursday circulation; weekly publications
(5)
Average unaudited circulation for 13 free distribution products,
as of December 31, 2008
In 2004, the Audit Committee of the Board of Directors (the
“Audit Committee”) initiated an internal review into
practices that, in the past, resulted in the overstatement of
the Chicago Sun-Times daily and Sunday circulation and
determined that inflation of daily and Sunday single-copy
circulation of the Chicago Sun-Times began modestly in
the late 1990’s and increased over time. The Audit
Committee concluded that the report of the Chicago Sun-Times
circulation published in April 2004 by ABC for the
53 week period ended March 30, 2003, overstated
single-copy circulation by approximately 50,000 copies on
weekdays and approximately 17,000 copies on Sundays. The Audit
Committee determined that inflation of single-copy circulation
continued until all inflation was discontinued in early 2004.
The inflation occurring after March 30, 2003 did not affect
public disclosures of circulation as such figures had not been
published. The Company has implemented procedures to help ensure
that circulation overstatements do not occur in the future.
As a result of the overstatement, the Chicago Sun-Times
was censured by ABC in July 2004 and was required to undergo
semi-annual audits for a two-year period thereafter. The first
of these censured audits, for the 26-week period ended
March 27, 2005, was released in December 2005. The second
censured audit for the 26-week period ended September 25,2005 was released in May 2007. The Company’s final censured
audits (26-week period ending March 26, 2006 and 26-week
period ended September 24, 2006) were released in the
first quarter of 2008.
The internal review by the Audit Committee also uncovered minor
circulation misstatements at the Daily Southtown and the
Star (which have since been merged to form the
SouthtownStar). These publications were censured by ABC
in March 2005 and were required to undergo semi-annual audits
for a two-year period thereafter. The first of these censured
audits, for the
26-week
period ended March 27, 2005, was released in April 2006;
the audit for the 26-week period ended September 25, 2005,
was released in January 2007. The third censured audit for the
26-week period ended March 26, 2006 was released in
December 2007. The Company’s final censured audit (for the
26-week period ended September 24, 2006) was released
in the first quarter of 2008.
Other Publications and Business
Enterprises.The Company continues to strengthen
its online presence. For the twelve months ended
December 31, 2008, Suntimes.com and related
Sun-Times News Group Web sites have approximately
3.4 million unique users per month (as measured by
Nielsen//NetRatings), with approximately 51 million page
impressions per month (as measured by Omniture, Inc.). In
November 2008, the Company signed
an agreement with Monster, Inc., owner of Monster.com, for
recruitment classified advertising across the Company’s
publications, which launched in January 2009. This alliance will
result in co-branded Web sites with the Company’s
publications and connect through links from the Company’s
newspaper Web sites and the searchchicago.com portal. In
February 2007, the Company launched
www.searchchicago.com/autos featuring the inventory of
more than 400 auto dealers, including more than 100,000 new and
used cars and trucks.
Sales and Marketing. The marketing promotions
department works closely with both advertising and circulation
sales and advertising teams to introduce new readers and new
advertisers to the Company’s newspapers through various
initiatives. The Company’s marketing departments use
strategic alliances at major event productions and sporting
venues, for
on-site
promotion and to generate subscription sales. The Chicago
Sun-Times has media relationships with local television and
radio outlets that have given it a presence in the market and
enabled targeted audience exposure. Similarly at suburban
newspapers, marketing professionals work closely with
circulation sales professionals to determine circulation
promotional activities, including special offers, sampling
programs, in-store kiosks, sporting event promotions, dealer
promotions and community event participation. Suburban
newspapers generally target readers by zip code and offer
marketing packages that combine the strengths of daily,
bi-weekly and weekly publications.
Distribution. During 2007, the Company entered
into a contract with Chicago Tribune Company for home delivery
and suburban single-copy delivery of the Chicago Sun-Times
and most of its suburban publications. The Company continues
to distribute single-copy editions of the Chicago Sun-Times
within the city of Chicago and continues to operate the
circulation sales and billing functions with the exception of
single copy billing in the suburbs. The agreement with the
Chicago Tribune Company is an executory contract subject to
appropriate provisions of the Bankruptcy Code as previously
discussed. See Risk Factors “— The outsourcingof significant business processes may expose the Company tosignificant financial and customer service risk.”
Printing.The Company operates three printing
facilities. The 320,000 square foot owned printing facility
on Ashland Avenue in Chicago was completed in April 2001 and
gives the Company printing presses with the quality and speed
necessary to effectively compete with the other regional
newspaper publishers. The Company also owns a
100,000 square foot printing facility in Plainfield,
Illinois, which is held for sale at December 31, 2008.
Pioneer prints the main body of most of its weekly newspapers at
its leased Northfield, Illinois production facility. In order to
provide advertisers with more color capacity, certain of
Pioneer’s newspapers’ sections are printed at the
Ashland Avenue facility. The Company generally prints multiple
publications at each of its printing facilities. In December
2008, the Company announced its intention to consolidate
printing operations and expects to close its Plainfield,
Illinois printing facility in April 2009. The Company intends to
sell the facility and anticipates that printing work performed
in Plainfield will be performed at the Company’s Ashland
Avenue production plant.
Competition. Each of the Company’s
Chicago area newspapers competes to varying degrees with radio,
broadcast and cable television, direct marketing and other
communications and advertising media, including free Internet
sites, as well as with other newspapers having local, regional
or national circulation. The Chicago metropolitan region is
served by 13 local daily newspapers of which the Company owns
eight. The Chicago Sun-Times competes in the Chicago
region with the Chicago Tribune, a large established
metropolitan daily and Sunday newspaper. In addition, the
Chicago Sun-Times and other Company newspapers face
competition from other newspapers published in adjacent or
nearby locations and circulated in the Chicago metropolitan area
market.
Employees and Labor Relations. As of
December 31, 2008, the Company had 2,322 employees,
including 153 part-time employees. Of the
2,169 full-time employees, 564 were production staff, 509
were sales and marketing personnel, 237 were circulation staff,
252 were general and administrative staff, 587 were editorial
staff and 20 were facilities staff. Approximately 928, or 43% of
the Company’s employees were represented by 18 collective
bargaining units. Direct employee costs (including salaries,
wages, severance, fringe benefits, employment-related taxes and
other direct employee costs) were approximately 52% of the
Company’s revenue in the year ended December 31, 2008.
Contracts covering approximately 10% of union employees will
expire or are being negotiated in 2009.
There have been no strikes or general work stoppages at any of
the Company’s newspapers in the past five years. The
Company believes that its relationships with its employees are
generally good.
Raw Materials. The primary raw material for
newspapers is newsprint. In 2008, approximately 63,952 metric
tons were consumed by the Sun-Times News Group. Newsprint costs
were approximately 14% of the Company’s revenue. Average
newsprint prices increased approximately 16% in 2008 from 2007.
The Company is not dependent upon any single newsprint supplier.
The Company believes that its access to Canadian, United States
and offshore newsprint producers ensures an adequate supply of
newsprint. The Company has not entered into any long-term fixed
price newsprint supply contracts. The Company believes that its
sources of supply for newsprint are adequate to meet anticipated
needs.
Reorganization Activities. In December 2007,
the Company announced that its Board of Directors adopted a plan
to reduce annual operating costs by $50 million. The plan,
implemented during 2008, included $10 million of expected
annual savings previously announced in connection with the
Company’s distribution agreement with Chicago Tribune
Company and the consolidation of two of the Company’s
suburban newspapers. The plan also included a reduction in
full-time staffing levels. In November 2008, the Company
announced a second cost reduction program of $45 million to
$55 million to be implemented during the first nine months
of 2009. Certain of these programs have been postponed due to
the Filings.
Environmental
The Company, like other newspaper companies engaged in similar
operations, is subject to a wide range of federal, state and
local environmental laws and regulations pertaining to air and
water quality, storage tanks, and the management and disposal of
wastes at the Company’s major printing facilities. These
requirements are becoming increasingly stringent. However, the
Company believes that the cost of compliance with these laws and
regulations will not have a material adverse effect on its
business or results of operations.
Seasonality
The Company’s operations are subject to seasonality.
Typically, the Company’s advertising revenue is typically
lowest during the first quarter. However, due to the decreasing
revenue trends, advertising revenue for the third quarter of
2008 was slightly lower than the first quarter of 2008.
Intellectual
Property
The Company seeks and maintains protection for its intellectual
property in all relevant jurisdictions, and has current
registrations, pending applications, renewals or reinstatements
for all of its material trademarks. No claim adverse to the
interests of the Company of a material trademark is pending or,
to the best of the Company’s knowledge, has been
threatened. The Company has not received notice, or is not
otherwise aware, of any infringement or other violation of any
of the Company’s material trademarks. Internet domain names
also form an important part of the Company’s intellectual
property portfolio. Currently, there are approximately 710
domain names registered in the name of the Company or its
subsidiaries, including numerous variations on each major name.
In the Chicago market, the Company participates in aggregation
of advertising information with other periodical companies
whereby the Company’s advertisements are presented in an
online format along with advertisements of other newspapers.
Available
Information
The Company has historically filed annual, quarterly and current
reports, proxy statements and other information with the SEC
under the Exchange Act. However, on January 2, 2009, the
Company filed a Form 15 with the SEC to voluntarily
deregister its Class A Common Stock and ending its
reporting obligations under the Exchange Act. The termination of
the registration of the Class A Common Stock was effective
April 2, 2009.
You may read and copy information previously filed with the SEC
at the Public Reference Room of the SEC, Room 1580,
100 F Street, N.E., Washington, D.C. 20549. You
may obtain information about the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically through the
“EDGAR” (Electronic Data Gathering, Analysis and
Retrieval) and which is available on the SEC’s website
(http://www.sec.gov).
The Company also maintains a website on the World Wide Web at
www.thesuntimesgroup.com. The Company makes available,
free of charge, on its website the annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports previously filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as
soon as reasonably practicable after such reports were
electronically filed with, or furnished to, the SEC. Updates to
the Company’s bankruptcy proceedings are also available on
the Company’s website. The Company’s reports filed
with, or furnished to, the SEC are also available on the
SEC’s website at www.sec.gov.
As previously reported, on May 20, 2008, the Class A
Common Stock was delisted from the New York Stock Exchange
(“NYSE”). The Class A Common Stock is currently
quoted on the Pink Sheets under the symbol SUTMQ.PK.
The Company has implemented a Code of Business Conduct and
Ethics, which applies to all employees of the Company including
each of its Chief Executive Officer (“CEO”), Chief
Financial Officer (“CFO”) and principal accounting
officer or controller or persons performing similar functions.
The text of the Code of Business Conduct and Ethics can be
accessed on the Company’s website at
www.thesuntimesgroup.com. Any changes to the Code of
Business Conduct and Ethics will be posted on the website.
Item 1A.
Risk
Factors
Certain statements contained in this report under various
sections, including but not limited to “Business
Strategy” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
are forward-looking statements that involve risks and
uncertainties. See “Forward Looking Statements.” Such
statements are subject to the following important factors, among
others, which in some cases have affected, and in the future
could affect, the Company’s actual results and could cause
the Company’s actual consolidated results to differ
materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company:
All risk factors discussed, unless otherwise noted, are
presented without regard to the Company’s filing for
bankruptcy protection.
Risks
Relating to the Company’s Business and the
Industry
The
Company and its domestic subsidiaries filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code and its
Canadian subsidiaries will likely apply for court-supervised
reorganization.
As described in Note 1 to the Company’s consolidated
financial statements and elsewhere in this 2008
10-K, the
Company and its domestic subsidiaries filed voluntary petitions
under Bankruptcy Code. Its Canadian subsidiaries will likely
apply for court-supervised reorganization. These actions reflect
the impact of the settlement of the dispute between the Company
and CanWest and the substantial acceleration in revenue declines
in 2008, both in the industry and for the Company, in
combination with the negative outlook for the economy, continued
negative operating results and cash flow for the Company and the
general negative outlook for newspaper advertising and
circulation in the near and long-term, as well as the
Company’s substantial tax liabilities, which create
substantial doubt as to the Company’s ability to continue
as a going concern.
Currently, it is not possible to accurately predict the length
of time the Company will operate under Chapter 11 and the
supervision of the Bankruptcy Court, how long the Company may be
able to continue operating, when or if the Company will file a
plan or plans of reorganization or liquidation with the
Bankruptcy Court, the outcome of the Chapter 11
proceedings, including the impact on the Company’s
financial condition or the ultimate effect on the interests of
the Company’s creditors and stakeholders. However, under
the priority scheme established by the Bankruptcy Code and based
on the amount and nature of the Company’s assets and
liabilities, it is highly unlikely the Company’s common
stock will retain any value or that stockholders will receive
any distribution or consideration.
The
Company has substantial potential tax liabilities.
The Company’s Consolidated Balance Sheet as of
December 31, 2008 includes $608.0 million of accruals
intended to cover contingent liabilities related to additional
taxes and interest it may be required to pay, largely
related to the Company’s operations in the United States.
The accruals cover contingent tax liabilities primarily related
to items that have been deducted in arriving at taxable income,
which deductions may be disallowed by taxing authorities. If
those deductions were to be disallowed, the Company would be
required to pay those accrued contingent taxes and interest and
it may be subject to penalties. The Company will continue to
record accruals for interest that it may be required to pay with
respect to its contingent tax liabilities.
Although the Company believes that it has defensible positions
with respect to significant portions of these tax liabilities,
there is a risk that the Company may be required to make payment
of the full amount or a significant portion of such tax
liabilities. There may be significant cash requirements in the
future regarding these currently unresolved U.S. tax
issues. Although the Company is attempting to resolve a
significant portion of the contingent liabilities with the
relevant taxing authorities, the timing and amounts of any
payments the Company may be required to make remain uncertain.
Although these accruals for contingent tax liabilities are
reflected in the Company’s Consolidated Balance Sheets, if
the Company were required to make payment of a significant
portion of the amount, this would result in substantial cash
payment obligations. The actual payment of such cash amount
would have a material adverse effect on the Company’s
liquidity and ability to continue operations.
In January 2008, the Company received an examination report from
the Internal Revenue Service (“IRS”) setting forth
proposed adjustments to the Company’s U.S. income tax
returns from 1996 through 2003. A significant portion of the
Company’s contingent tax liabilities relate to these tax
years. The Company has disputed certain of the proposed
adjustments. The process for resolving disputes between the
Company and the IRS is likely to entail various administrative
and judicial proceedings, the timing and duration of which
involve substantial uncertainties. As the disputes are resolved,
it is possible that the Company will record adjustments to its
financial statements that could be material to its financial
position and results of operations and it may be required to
make material cash payments. The timing and amounts of any
payments the Company may be required to make are uncertain, but
the Company does not anticipate that it will make any material
cash payments to settle any of the disputed items during 2009.
Competition
in the newspaper industry originates from many sources. The
advent of new technologies and industry practices, such as the
provision of newspaper content on free Internet sites, may
continue to result in decreased advertising and circulation
revenue.
Revenue in the newspaper industry is dependent primarily upon
advertising revenue and paid circulation. Competition for
advertising and circulation revenue comes from local and
regional newspapers, radio, broadcast and cable television,
direct mail and other communications and advertising media that
operate in the Company’s markets. The extent and nature of
such competition is, in large part, determined by the location
and demographics of the markets and the number of media
alternatives in those markets. Some of the Company’s
competitors are larger and have greater financial resources than
the Company. The Company may experience price competition from
newspapers and other media sources in the future and one of the
Company’s major competitors publishes a free publication
that targets similar demographics to those that are particularly
strong for some of the Company’s newspapers. In addition,
the use of alternative means of delivery, such as free Internet
sites, for news, advertising and other content has increased
significantly in the past few years and has resulted in what may
likely be permanent decline in advertising revenue for printed
newspaper products. Should significant numbers of customers
choose to receive content using these alternative delivery
sources rather than the Company’s newspapers, the Company
may suffer continued decreases in advertising revenue and may be
forced to decrease the prices charged for the Company’s
newspapers, make other changes in the way the Company operates
or face a long-term decline in circulation, any or all of which
are likely to harm the Company’s results of operations and
financial condition.
The
Company’s revenue is dependent upon economic conditions in
the Company’s target markets and is seasonal.
Advertising and circulation are the Company’s two primary
sources of revenue. Historically, increases in advertising
revenue have corresponded with economic recoveries while
decreases have corresponded with general economic downturns and
regional and local economic recessions. Advertising revenue is
also dependent upon the condition of specific industries that
contribute significantly to the Company’s advertising
revenue, such as the automobile, real estate and retail
industries whose recent significant downturn has negatively
impacted classified
and other advertising revenue. If general economic conditions or
economic conditions in these industries continue to deteriorate
significantly, it would have a material adverse effect on the
Company’s revenue and results of operations.
The Company’s advertising revenue also experiences
seasonality, with the first quarter typically being the lowest.
However, due to the decreasing revenue trends, advertising
revenue for the third quarter of 2008 was slightly lower than
the advertising revenue for the first quarter of 2008. In 2008,
based on information accumulated by a third party from data
submitted by Chicago area newspaper organizations, print
advertising in the greater Chicago market declined approximately
17%, while the Company’s print advertising revenue declined
approximately 16% versus the comparable 52 week period in
2007. The advertising revenue declines have accelerated in the
third and fourth quarter of 2008 and the first quarter of 2009
with a decline in the first quarter of approximately 30% versus
the first quarter of 2008. The Company’s dependency on
advertising sales, which generally have a short lead-time, means
that the Company has only a limited ability to accurately
predict future revenue and operating results. The recent
bankruptcy filing may cause further declines as customers may be
less willing to do business with a company in bankruptcy. This
may be somewhat mitigated as the Company’s largest direct
competitor has also filed for bankruptcy.
The
Company’s publications have experienced declines in
circulation in the past and may do so in the
future.
Certain of the Company’s publications have experienced
declines in circulation. Any significant declines in circulation
the Company may experience at its publications could have a
material adverse impact on the Company’s business and
results of operations, particularly as it may negatively affect
advertising revenue. The recent bankruptcy filing may cause
further declines as customers may be less willing to do business
with a company in bankruptcy. This may be somewhat mitigated as
the Company’s largest direct competitor has also filed for
bankruptcy.
The
Company has implemented cost saving strategies that have not and
may not result in profitability.
In December 2007, the Company announced that its Board of
Directors adopted a plan to reduce annual operating costs by
$50 million. The plan, implemented during 2008, included
$10 million of expected annual savings previously announced
in connection with the Company’s distribution agreement
with Chicago Tribune Company and the consolidation of two of the
Company’s suburban newspapers. In November 2008, the
Company announced a second cost reduction program of
$45 million to $55 million that was planned to be
implemented during 2009. The implementation of these strategies
requires a reduction in full-time staffing levels, re-deployment
of staff to Internet and other initiatives, reorganizing the
sales function to strengthen the pursuit of Internet revenue,
sales of assets and the outsourcing of certain functions. While
the strategy is intended to have long-term benefits for the
Company, there is no guarantee that the strategy will offset
declines in revenue or bring the Company back to profitability.
The timing and extent of actions within the strategy may also be
materially altered by the Filings.
The
Company may not be able to realize the value of certain
investments at their carrying value.
On August 21, 2007, $25.0 million of the
Company’s investments in Canadian asset-backed commercial
paper (“Canadian CP”) held through a Canadian
subsidiary matured but were not redeemed and on August 24,2007, $23.0 million of similar investments matured but were
not redeemed. As of December 31, 2007, the Company held
$48.2 million of Canadian CP, including accrued interest
through original maturity. The Canadian CP held by the Company
was issued by two special purpose entities sponsored by non-bank
entities. The Canadian CP was not redeemed at maturity due to
the combination of a collapse in demand for Canadian CP and the
refusal of the
back-up
lenders to fund the redemption on the grounds that these events
did not constitute events that would trigger a redemption
obligation. On May 9, 2008, the Company sold
$28.0 million (face amount, plus accrued interest) of its
Canadian CP investments that were issued by one of the special
purpose entities for $21.0 million and at December 31,2008, the Company held $20.2 million (face amount, plus
accrued interest) of Canadian CP with a carrying value,
following impairment charges, of $7.4 million. Due to
uncertainties in the timing as to when these investments will be
sold or otherwise liquidated, the Canadian CP is classified as a
noncurrent asset included in “Investments” on the
Consolidated Balance Sheets at December 31, 2008 and
December 31, 2007.
Efforts to restructure the Canadian CP that remained unredeemed
were undertaken by a largely Canadian investor committee. On
December 23, 2007, the investor committee announced that an
agreement in principle had been reached to restructure the
Canadian CP, whereby the Canadian CP would be exchanged for
medium term notes (“MTN’s”), backed by the assets
underlying the Canadian CP, having a maturity that will
generally match the maturity of the underlying assets. The
agreement in principle called for $11.1 million of the
MTN’s the Company would receive to be backed by a pool of
assets that are generally similar to those backing the Canadian
CP held by the Company and which were originally held by a
number of special purpose entities, while the remaining
$9.1 million of the MTN’s the Company would receive
would be backed by assets held by the specific special purpose
entity that originally issued the Canadian CP. The agreement in
principle was finalized and the investor committee filed a
proposed restructuring plan (the “Plan”) under the
CCAA with the Ontario Superior Court of Justice (the
“Court”) on March 17, 2008. Under the Plan, the
allocation of the MTN’s was modified to $9.6 million
backed by a pool of assets and $10.6 million backed by
specific assets. The Plan was approved by the holders of the
Canadian CP on April 25, 2008, and sanctioned by the Court
on June 5, 2008. On January 12, 2009, the Court
approved the Plan, which was fully implemented on
January 21, 2009.
The Canadian CP has not traded in an active market since
mid-August 2007 and there are currently no market quotations
available. On March 19, 2008, Dominion Bond Rating Service
withdrew its ratings of the Canadian CP. The Company has
employed a valuation model to estimate the fair value for the
$9.6 million of MTN’s backed by the pool of assets.
The valuation model used by the Company to estimate the fair
value for this portion of the MTN’s incorporates discounted
cash flows, the best available information regarding market
conditions and other factors that a market participant would
consider for such investments. The fair value (and carrying
value at December 31, 2008) of the $7.4 million
of Canadian CP (and replacement MTN’s backed by specific
assets) was estimated through the use of a model relying on
market data and inputs derived from securities similar to the
MTN’s. This model was also used during prior periods to
estimate the fair value of the $28.0 million of Canadian CP
that the Company sold on May 9, 2008. The Company believes
the valuation model provides a better estimate of fair value
than the thinly traded, distressed market for the MTN’s
issued to replace the Canadian CP in January 2009.
During 2007, the Company’s valuation resulted in an
impairment charge and reduction of $12.2 million to the
estimated fair value of the $48.2 million (face amount plus
accrued interest) in Canadian CP. During 2008, the
Company’s valuation resulted in an additional impairment
charge of $8.7 million on $20.2 million (face amount
plus accrued interest) of the Canadian CP. The Company recorded
a gain on sale of $1.1 million during 2008 related to the
Canadian CP sold on May 9, 2008 for $21.0 million.
Continuing uncertainties regarding the value of the assets which
underlie the MTN’s, the amount and timing of cash flows,
the actual yield of the MTN’s, whether an active market
will develop for the MTN’s and other factors could give
rise to a further change in the value of the Company’s
investment, which could materially impact the Company’s
financial condition and results of operations.
As part of the CanWest settlement, the Company transferred
certain asset-backed commercial paper, making up approximately
$5.6 million in face value (of the Company’s
$20.2 million) of Canadian CP, to a third party. The
asset-backed commercial paper that was transferred had a
carrying value of $nil at December 31, 2008. See
Item 3 “— Legal Proceedings —
CanWest Arbitration.”
The
Company’s senior management team is required to devote
significant attention to matters arising from the Filings and
the sale process.
The efforts of the current management team and the Board of
Directors to manage the Company’s business and ongoing cost
reduction plan may be hindered at times by the resource
requirements of the Filings and their need to spend significant
time and effort in connection with the process for a sale of the
Company’s assets pursuant to Section 363 of the
Bankruptcy Code conducted by Rothschild. To the extent the
management team and the Board of Directors will be required to
devote significant attention to these matters in the future,
this may have an adverse effect on operations.
The
outsourcing of significant business processes may expose the
Company to significant financial and customer service
risk.
The Company has outsourced distribution to the Chicago Tribune
Company and has entered into agreements to outsource advertising
production and other key operational processes. There can be no
assurance that the Chicago Tribune Company will emerge from
bankruptcy or that it will have sufficient resources to
adequately service the Company following bankruptcy. The Company
is pursuing additional outsourcing arrangements in a number of
areas important to its business. In the event the providers of
these services were to provide less than adequate service levels
or cease operations, the Company could experience a substantial
impact on its service levels, results of operations and
financial condition as it sought to contract with a replacement
provider (or providers) or re-establish internal capabilities to
replace one or more outsource providers.
Sun-Times
Media Group, Inc. is a holding company and relies on its
subsidiaries to meet its financial obligations.
Sun-Times Media Group, Inc. is a holding company and its assets
consist primarily of investments in subsidiaries and affiliated
companies. Sun-Times Media Group, Inc. relies on distributions
from subsidiaries to meet its financial obligations or pay
dividends on its common stock. Sun-Times Media Group,
Inc.’s ability to meet its future financial obligations is
dependent upon the availability of cash flows from its
subsidiaries through dividends and intercompany advances.
Sun-Times Media Group Inc.’s subsidiaries and affiliated
companies are under no obligation to pay dividends and, in the
case of Publishing and its principal domestic and foreign
subsidiaries, are subject to certain statutory restrictions and
may become subject to restrictions in future debt agreements
that limit their ability to pay dividends. This risk has
increased as a result of the Filings. Due to funding
requirements in Canada, cash held by the Company’s Canadian
subsidiaries ($29.9 million at December 31,2008) is not available to fund U.S. operations.
The
Company’s internal control over financial reporting is not
effective as of December 31, 2008 and weaknesses in the
Company’s internal controls and procedures could have a
material adverse effect on the Company.
The Company’s management concluded that material weaknesses
existed in the Company’s internal control over financial
reporting as of December 31, 2008. See Item 9A
“— Controls and Procedures.”
Current management has taken steps to correct internal control
deficiencies and weaknesses during and subsequent to 2008 and
believes that the Company’s internal controls and
procedures have strengthened. However, it is possible that the
Company may not be able to remediate all material weaknesses by
December 31, 2009.
The
Company may experience labor disputes, which could slow down or
halt production or distribution of the Company’s newspapers
or other publications.
Approximately 43% of the Company’s employees are
represented by labor unions. Those employees are mostly covered
by collective bargaining or similar agreements which are
regularly renewable, including agreements covering approximately
10% of union employees that are renewable in 2009. A work
stoppage or strike may occur prior to the expiration of the
current labor agreements or during negotiations of new labor
agreements or extensions of existing labor agreements. The
Filings and the Company’s request to obtain wage and other
concessions from the unions could increase this risk. Work
stoppages or other labor-related developments could slow down or
halt production or distribution of the newspapers, which would
adversely affect results of operations.
Newsprint
represents the Company’s single largest raw material
expense and changes in the price of newsprint could affect net
income.
Newsprint represents the Company’s single largest raw
material expense and is the most significant operating cost
other than employee costs. In 2008, newsprint costs represented
approximately 14% of revenue. Newsprint prices vary widely from
time to time and increased approximately 16% during 2008. If
newsprint prices increase in the future and the Company is
unable to pass these costs on to customers, such increases may
have a material adverse effect on the Company’s results of
operations. Although the Company has, in the past, implemented
measures in an attempt to offset increases in newsprint prices,
such as reducing page sizes where practical and managing waste
through technology enhancements, newsprint price increases have
in the past had a material adverse effect on the Company and may
do so in the future.
All of
the Company’s operations are concentrated in one geographic
area.
All of the Company’s revenue and business activities are
concentrated in the greater Chicago metropolitan area. As a
result, the Company’s revenue is heavily dependent on
economic and competitive factors affecting the greater Chicago
metropolitan area.
Pending
litigation could have a material adverse effect on the
Company.
The Company is currently involved, either as plaintiff or as
defendant, in several lawsuits, including purported class
actions brought by stockholders against it, certain former
executive officers and certain of its former directors,
Hollinger Inc., The Ravelston Corporation Limited
(“Ravelston”) and other affiliated entities and
several suits and counterclaims brought by Black
and/or
Hollinger Inc. In addition, Black has commenced libel actions
against certain of the Company’s current and former
directors, officers and advisors to whom the Company has
indemnification obligations. See Item 3
“— Legal Proceedings”for a more
detailed description of these proceedings. Several of these
actions remain in preliminary stages and it is not yet possible
to determine their ultimate outcome. The Company cannot provide
assurance that the legal and other costs associated with the
defense of all of these actions, the amount of time required to
be spent by management and the Board of Directors in these
matters and the ultimate outcome of these actions will not have
a material adverse effect on the Company’s business,
financial condition and results of operations. Subject to
certain exceptions under the Bankruptcy Code, the Debtors’
Filings automatically enjoined the continuation of any judicial
or administrative proceedings against the Debtors.
Item 1B.
Unresolved
Staff Comments
Not applicable.
Item 2.
Properties
The Company believes that its properties and equipment are in
generally good condition, well-maintained and adequate for
current operations. The Company closed its older, less
productive facility on South Harlem Avenue in 2006, in 2007
closed its Gary, Indiana facility and announced it will
consolidate its three printing operations by closing and
offering for sale its production facility in Plainfield,
Illinois in 2009 and intends to consolidate several other
facilities.
The Company owns a 320,000 square foot, state of the art
printing facility in Chicago, Illinois that houses the
production for the Chicago Sun-Times. In October 2004,
the Chicago Sun-Times relocated its editorial, pre-press,
marketing, sales and administrative activities to a
127,000 square foot leased facility in downtown Chicago.
The Company entered into a
15-year
lease for this office space.
The Company currently produces most of its suburban newspapers
at a 100,000 square foot owned plant, in Plainfield,
Illinois (which is held for sale at December 31,2008) and a 65,000 square foot leased building in
Northfield, Illinois.
The Plainfield facility houses pre-print, sales and
administrative functions, as well as certain editorial
functions. Owned facilities in Elgin and Naperville (both held
for sale at December 31, 2008), and Waukegan, Illinois
house editorial and sales activities for the Company’s
daily and weekly newspapers in those suburbs. The Company owns a
building in north suburban Chicago at which Pioneer conducts its
editorial, pre-press, sales and administrative activities and
leases several satellite offices for Pioneer’s editorial
and sales staff in surrounding suburbs. The Company also owns
buildings in Tinley Park, Illinois and Merrillville, Indiana
which it uses for editorial, pre-press, marketing, sales and
administrative activities (which are both held for sale at
December 31, 2008).
The Company leases 52,209 square feet of office space in
Aurora, Illinois which houses editorial and sales activities for
the daily newspaper in that suburb, as well as administrative
activities for certain of the Company’s other suburban
newspapers. This lease expires in October 2018.
The Company leases 2,097 square feet of office space and
storage space in Toronto, Ontario, Canada. This lease expires in
August 2009.
Item 3.
Legal
Proceedings
Bankruptcy
and Insolvency Filings
See Item 1 “— Business —
Bankruptcy and Insolvency Filings”for a discussion of
the Filings.
Litigation
Involving Controlling Stockholder, Senior Management and
Directors
As previously reported in the Company’s SEC filings, on
January 28, 2004, the Company, through a special committee
of independent directors (the “Special Committee”),
filed a civil complaint in the United States District Court for
the Northern District of Illinois asserting breach of fiduciary
duty and other claims against Hollinger Inc., Ravelston,
Ravelston Management, Inc. (“RMI”), and certain former
executive officers of the Company, which complaint was amended
on May 7, 2004 and again on October 29, 2004. The
action is entitled Hollinger International Inc. v.
Hollinger Inc., et al., Case
No. 04C-0698.
The second amended complaint sought to recover approximately
$542.0 million in damages, including prejudgment interest
of approximately $117.0 million, and punitive damages. The
second amended complaint asserted claims for breach of fiduciary
duty, unjust enrichment, conversion, fraud and civil conspiracy
in connection with certain transactions, including unauthorized
“non-competition” payments, excessive management fees,
sham broker fees and investments and divestitures of Company
assets.
On October 8, 2008, the Company filed a Third Amended
Complaint against Ravelston, Black, John A. Boultbee
(“Boultbee”), Daniel W. Colson (“Colson”)
and Barbara Amiel Black (“Amiel Black”). The Third
Amended Complaint updates the factual allegations and removes
defendants Richard N. Perle, Radler and Hollinger Inc., the
latter two having entered into settlement agreements with the
Company, as previously announced. The Third Amended Complaint
also narrows the asserted claims, in part to reflect these
settlements, removing previously-asserted claims totaling
approximately $105.0 million. Colson, Black, Boultbee and
Amiel Black have answered the Third Amended Complaint, while
Ravelston has not. Although, as previously reported, Black and
Ravelston had asserted counterclaims against the Company in
response to the Second Amended Complaint, their counterclaims
have not been reasserted in response to the Third Amended
Complaint.
Stockholder
Class Actions
As previously disclosed, in 2004 certain stockholders of the
Company initiated securities class action claims asserted
against the Company, a number of its former directors and
officers, certain affiliated companies, and the Company’s
auditor, KPMG LLP, in a consolidated class action in the United
States District Court for the Northern District of Illinois
entitled In re Hollinger International Inc. Securities
Litigation,
No. 04C-0834,
and in similar actions that have been initiated in Saskatchewan,
Ontario, and Quebec, Canada. Those actions assert, among other
things, that from 1999 to 2003 the defendants breached
U.S. federal, state,
and/or
Canadian law by allegedly making misleading disclosures and
omissions regarding certain “non-competition” payments
and the payment of allegedly excessive management fees. On
July 31, 2007, the Company entered into agreements to
settle these suits and litigation over its directors and
officers insurance coverage. The Company’s settlement of
the securities class action lawsuits will be funded entirely by
$30.0 million in proceeds from the Company’s insurance
policies. The settlement includes no admission of liability by
the Company or any of the settling defendants and the Company
continues to deny any such liability or damages. In addition,
the Company’s insurers have deposited $24.5 million in
insurance proceeds into an escrow account in return for a
release from any other claims for the July 1, 2002 to
July 1, 2003 policy period. If the securities class action
settlement is approved, there will then be a court proceeding to
determine how the $24.5 million in the insurance escrow
account should be distributed. The insurance settlement
agreement is conditioned upon approval of the class action
settlement. The parties are in the process of seeking these
approvals in the appropriate courts in the United States and
Canada. Due to the contingent and conditional nature of the
settlement and insurance proceeds, the Company’s financial
statements do not reflect any amounts related to the agreements
described above.
On February 1, 2008, the Company brought an action in the
Court of Chancery of the State of Delaware against Black,
Boultbee, Mark S. Kipnis (“Kipnis”) and Peter Y.
Atkinson (“Atkinson”). In the action, entitled
Sun-Times Media Group, Inc. v. Black, C.A.
No. 3518-VCS,
the Company sought a declaration that it has no obligation to
advance any of the defendants’ attorneys fees and other
expenses incurred in connection with the appeals of their
respective criminal convictions and sentences, and that it is
entitled to repayment or setoff of legal fees and expenses that
it previously advanced to each defendant in connection with the
criminal counts on which they were convicted. On July 30,2008, the Delaware Court of Chancery granted summary judgment to
the defendants and denied the Company’s motion for summary
judgment. On September 29, 2008, the Court entered an order
implementing its rulings, which stated that the Company“shall continue to advance reasonable attorneys’ fees
and other expenses to the defendants until the final disposition
of United States v. Black, et al., 05 CR 727 (N.D.
Ill.), that is, until all direct appeals in that proceeding and
any remands therefrom, together with any additional direct
appeals are resolved or the time for filing any direct appeals
shall have expired.” See “— Federal
Criminal Actions Against Ravelston and Former Company
Officials”below.
Black v.
Breeden, et al.
As previously reported, six defamation actions have been brought
by Black in the Ontario Superior Court of Justice against
Richard C. Breeden, Gordon A. Paris, Graham W. Savage, Raymond
Seitz and other former officers and directors of the Company.
The defendants named in the six defamation actions have
indemnity claims against the Company for all reasonable costs
and expenses they incur in connection with these actions,
including judgments, fines and settlement amounts. In addition,
the Company is required to advance legal and other fees that the
defendants may incur for the defense of those actions. The
matter is pending.
United
States Securities and Exchange Commission v. Conrad M.
Black, et al.
As previously reported, on November 15, 2004, the SEC filed
an action in the United States District Court for the Northern
District of Illinois against Black seeking injunctive, monetary
and other equitable relief. In the action, the SEC alleges that
Black violated federal securities laws by engaging in a
fraudulent and deceptive scheme to divert cash and assets from
the Company and to conceal his self-dealing from the
Company’s public stockholders from at least 1999 through at
least 2003. The SEC also alleges that Black was liable for the
Company’s violations of certain federal securities laws
during at least this period.
The SEC alleges that the scheme used by Black included the
misuse of so-called “non-competition” payments to
divert $85.0 million from the Company to defendants and
others; the sale of certain publications owned by the Company at
below-market prices to a privately-held company controlled by
Black and Radler; the investment of $2.5 million of the
Company’s funds in a venture capital fund with which Black
and two other former directors of the Company were affiliated;
and Black’s approval of a press release by the Company in
November 2003 in which Black allegedly misled the investing
public about his intention to devote his time to an effort to
sell Company assets for the benefit of all of the Company’s
stockholders and not to undermine that process by engaging in
transactions for the benefit of himself and Hollinger Inc. The
SEC further alleges that Black misrepresented and omitted to
state material facts regarding related party transactions to the
Company’s Audit Committee and Board of Directors and in the
Company’s SEC filings and at the Company’s stockholder
meetings.
The SEC’s complaint seeks: (i) disgorgement of
ill-gotten gains by Black and unspecified civil penalties
against each of them; (ii) an order enjoining Black from
serving as an officer or director of any issuer required to file
reports with the SEC; (iii) a voting trust upon the shares
of the Company held directly or indirectly by Black and
Hollinger Inc.; and (iv) an order enjoining Black from
further violations of the federal securities laws.
On January 16, 2008, the SEC moved for summary judgment on
certain of its claims against Black. Black filed his response to
the motion on February 20, 2008. On September 24,2008, the Court granted in part the SEC’s motion for
partial summary judgment against Black, finding him liable for
securities fraud for, among other things, statements in the
Company’s 2001
Form 10-K,
2002
Form 10-K,
and 2002 Proxy Statements. On October 22, 2008, the Court
entered an order enjoining Black from violating provisions of
the Exchange Act and from serving as an officer or director of a
public company.
On November 19, 2008, the SEC moved for monetary relief
based on the Court’s summary judgment ruling. The motion
seeks an award of approximately $30.0 million in
disgorgement, interest, and penalties, with the entire judgment
to be paid to the Company as the victim of the fraud. On
December 10, Black filed his opposition to the motion, and
on December 23 the SEC filed its reply. The motion is pending.
Receivership
and CCAA Proceedings in Canada Involving the Ravelston
Entities
As previously reported, on April 20, 2005, Ravelston and
RMI were placed in receivership by the Receivership Order and
granted protection by a separate order pursuant to the CCAA
Order. The court appointed RSM Richter Inc.
(“Richter”) to monitor all assets of Ravelston and
RMI. On May 18, 2005, the court extended the orders to
include Argus Corporation and five of its subsidiaries and
provided that nothing in the Receivership Order or the CCAA
Order should stay or prevent the Special Committee’s action
in the United States District Court for the Northern District of
Illinois, including as against Ravelston and RMI. According to
public filings of Hollinger Inc., Ravelston and certain
affiliated entities own, directly or indirectly, or exercise
control or direction over, Hollinger Inc.’s common shares
representing approximately 78.3% of the issued and outstanding
common stock of Hollinger Inc. Following the amendment of the
Company’s Shareholder Rights Plan (“SRP”) to
designate Richter as an “exempt stockholder” and
Richter took possession and control over those shares on or
around June 1, 2005. Richter stated that it took possession
and control over those shares for the purposes of carrying out
its responsibilities as court appointed officer.
On January 22, 2007, Hollinger Inc. and Domgroup Ltd.
(“Domgroup”) served a motion record in support of a
motion to be heard on a future date to be fixed by the Court for
an order confirming the validity and enforceability of Hollinger
Inc. and Domgroup’s respective security interests in
certain of the property, assets and undertakings of Ravelston.
Hollinger Inc. and Domgroup allege that they hold secured
obligations in excess of Cdn.$25.0 million owing by
Ravelston. The Company advised Hollinger Inc., Domgroup and the
court of its intent to bring a cross-motion to stay Hollinger
Inc. and Domgroup’s motion or alternatively to establish a
schedule for the resolution of the issue. On June 28, 2007,
the Court dismissed the Company’s motion to stay the
proceedings. The Company subsequently agreed with Hollinger Inc.
and Domgroup not to advance this litigation at that time given
Hollinger Inc.’s filing under the CCAA (See
— Hollinger Inc. CCAA Proceedings in the
Company’s previous filings).
On November 28, 2007, Richter, on behalf of Ravelston,
appeared for a sentencing hearing before the court in the
criminal proceedings described under — Federal
Criminal Actions Against Ravelston and Former Company
Officials. Counsel for Richter advised the court that
Richter and the United States Attorney’s Office had entered
into an agreement in respect of the amount of restitution to be
paid by Ravelston. In accordance with that agreement, the court
ordered Ravelston to pay a fine of $7.0 million and
restitution in the net amount of $6.0 million. On
March 31, 2009, the Company received a $1.6 million
distribution from Richter in final settlement of all claims by
the Company against Ravelston and RMI. The matter otherwise
remains pending.
Federal
Criminal Actions Against Ravelston and Former Company
Officials
As previously reported, through multiple indictments in 2005 and
2006, a federal grand jury in Chicago indicted Radler, the
Company’s former President and Chief Operating Officer,
Kipnis, the Company’s former Vice President, Corporate
Counsel and Secretary, Black, Boultbee and Ravelston on federal
fraud charges for allegedly diverting more than
$80.0 million from the Company through a series of
self-dealing transactions between 1999 and May 2001, including
$51.8 million from the Company’s multibillion-dollar
sale of assets to CanWest in 2000.
On September 20, 2005, Radler pleaded guilty to one count
of fraud. On July 13, 2007, a jury in federal court in
Chicago, Illinois, returned verdicts of guilty on three fraud
counts against Black, Kipnis, Boultbee and Atkinson and one
obstruction of justice count against Black. On November 5,2007, the district court overturned the guilty verdict against
Kipnis on one count. All the defendants were also held jointly
and severally liable for a $5.5 million forfeiture order,
and Black, Boultbee and Atkinson were held jointly and severally
liable for a $600,000 forfeiture order. On June 25, 2008,
the Seventh Circuit Court of Appeals affirmed the convictions.
On January 9, 2009, Black, Boultbee and Kipnis filed
petitions for certiorari review by the U.S. Supreme Court.
As previously reported, on December 19, 2003, CanWest
commenced notices of arbitration against the Company and others
with respect to disputes arising from CanWest’s purchase of
certain newspaper assets from the Company in 2000. CanWest and
the Company had competing claims relating to this transaction.
CanWest claimed the Company and certain of its direct
subsidiaries owed CanWest approximately Cdn.$84.0 million.
The Company was contesting this claim, and had asserted a claim
against CanWest in the aggregate amount of approximately
Cdn.$80.5 million.
On January 29, 2009, the Company received the
arbitrator’s decision. The arbitrator’s decision
included an award in favor of CanWest in the amount of
approximately Cdn.$50.7 million. The award is exclusive of
interest and costs, which are estimated to be
Cdn.$18.2 million. On March 12, 2009, the Company
entered into a settlement agreement with CanWest that resolved
all claims with respect to the arbitration award against the
Company. Under the terms of the settlement agreement, CanWest
received Cdn.$34.0 million, including approximately
Cdn.$22.0 million from an escrow account funded by the
Company, and an additional Cdn.$6.0 million paid by the
Company in March 2009. As a result of the arbitration award and
settlement, the Company has recognized a charge of
$10.5 million in the fourth quarter of 2008 which is
included in “Corporate expenses” in the Statements of
Operations. See Note 17 to the consolidated financial
statements. The escrowed funds are included on the Consolidated
Balance Sheet under “Escrow deposits and restricted
cash.” The remainder due to CanWest was paid by an
unaffiliated third party. As a result of the settlement, the
Company and all of its affiliates and subsidiaries have been
released from any and all liability related to the arbitration
award and the underlying transactions that led to the award.
CanWest
and The National Post Company v. Hollinger Inc., Hollinger
International Inc., the Ravelston Corporation Limited and
Ravelston Management, Inc.
As previously reported, on December 17, 2003, CanWest and
The National Post Company brought an action in the Court against
the Company and others for approximately Cdn.$25.7 million
plus interest in respect of issues arising from a letter
agreement dated August 23, 2001 to transfer the
Company’s remaining 50% interest in the National Post
to CanWest. On November 30, 2004, the Company settled
all but two of the matters in this action by paying The National
Post Company the amount of Cdn.$26.5 million. The two
remaining matters were discontinued and transferred to the
CanWest Arbitration on consent of the parties.
RMI brought a third party claim in this action against Hollinger
Canadian Publishing Holdings Co. (“HCPH Co.”) for
indemnification from HCPH Co. in the event CanWest and The
National Post Company were successful in their motion for
partial summary judgment as against RMI in the main action.
CanWest’s motion against RMI was unsuccessful and
CanWest’s claim against RMI was dismissed on consent of the
parties. RMI’s third party action against HCPH Co. remains
outstanding. The Company is seeking a discontinuance of the
third party claim and an acknowledgment and release from RMI
that HCPH Co. and the Company are not liable on a promissory
note issued in connection with the sale of NP Holdings Company.
Other
Matters
The Company becomes involved from time to time in various claims
and lawsuits incidental to the ordinary course of business,
including such matters as libel, defamation and privacy actions.
In addition, the Company is involved from time to time in
various governmental and administrative proceedings with respect
to employee terminations and other labor matters, environmental
compliance, tax and other matters.
Management believes that the outcome of any pending claims or
proceedings described under “Other Matters”will not have a material adverse effect on the Company taken
as a whole.
Submission
of Matters to a Vote of Security Holders
See Item 1 “— Business — Recent
Developments”regarding the consent solicitation by
Davidson Kempner. Davidson Kempner delivered consents from
holders of 44,356,784 shares of the Company.
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Until May 13, 2008, the Company’s Class A Common
Stock were listed on the New York Stock Exchange under the
trading symbol SVN. Subsequent to such date, the Company’s
Class A Common Stock has been quoted first on the Over the
Counter Bulletin Board and, currently, on the Pink Sheets.
At December 31, 2008 there were 104,497,022 shares of
Class A Common Stock outstanding, excluding
21,432,455 shares held by the Company, and these shares
were held by approximately 85 holders of record.
The following table sets forth for periods indicated the high
and low sales prices for shares of the Class A Common
Stock, as reported by the New York Stock Exchange Composite
Transactions Tape, during the periods in which it was listed on
the New York Stock Exchange and the high and low bid prices for
the Class A Common Stock during the period when such shares
were quoted for over the counter trading. Over the counter
market quotations reflect interdealer prices, without retail
mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
The Company has not paid a cash dividend to holders of our
Class A Common Stock since 2006 and does not anticipate
paying a cash dividend in the foreseeable future.
Recent
Sales of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
The Company’s Sun-Times News Group newspaper operations are
on a 52 week/53 week accounting cycle. This generally
results in a reporting of 52 weeks or 364 days in each
annual period. However, the year ended December 31, 2006
contains 53 weeks. This additional week added approximately
$5.0 million to advertising revenue, $1.5 million to
circulation revenue, $6.6 million to total operating
revenue, $6.1 million in total
operating expenses and $0.5 million in operating income.
The Statement of Operations Data above and the following
discussions include the impact of the 53rd week.
(2)
The year ended December 31, 2008, includes $209,269 for
impairment of all goodwill and intangible assets and $71,866 for
the impairment of property, plant and equipment. See
Note 17 to the consolidated financial statements.
(3)
The principal components of “Other income (expense),
net” are presented below:
2008
2007
2006
2005
2004
(In thousands)
Loss on extinguishment of debt
$
—
$
(60
)
$
—
$
—
$
(60,381
)
Write-down of investments
(8,700
)
(12,200
)
—
—
(365
)
Write-down and expenses related to FDR Collection
(1,500
)
—
—
(795
)
—
Gain (loss) on Participation Trust and CanWest Debentures,
including exchange gains and losses
—
—
—
—
(22,689
)
Foreign currency gains (losses), net
18,437
(16,569
)
2,943
(2,171
)
1,634
Legal settlement
—
—
—
(800
)
—
Settlements with former directors and officers
—
—
—
—
1,718
Gain (loss) on sale of investments
1,108
1,019
(76
)
2,254
1,709
Gain on sale of non-operating assets
—
—
—
—
1,090
Gain related to life insurance settlement
1,002
—
—
—
—
Equity in losses of affiliates, net of dividends received
(74
)
(184
)
(259
)
(1,752
)
(3,897
)
Other
(234
)
150
34
(575
)
(6,609
)
$
10,039
$
(27,844
)
$
2,642
$
(3,839
)
$
(87,790
)
See Note 19 to the consolidated financial statements.
(4)
The Company’s diluted earnings per share are calculated on
the following number of shares outstanding (in thousands):
2008 — 82,010, 2007 — 80,661,
2006 — 85,681, 2005 — 90,875,
2004 — 90,486.
(5)
Excludes escrow deposits and restricted cash, assets and
liabilities of operations to be disposed of and current
installments of long-term debt.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
General
The results of operations and financial condition of the
Canadian companies sold by the Company in 2005 and early 2006
(the sold Canadian businesses are referred to collectively as
the “Canadian Newspaper Operations”) are reported as
discontinued operations for all periods presented. All amounts
relate to continuing operations unless otherwise noted. The
Company has prepared the financial statements under the
assumption that the Company will continue to realize its assets
and settle its liabilities in the normal course of business. The
outcome of the Filings may result in changes that materially
affect the Company’s operations and financial condition. In
addition, under the priority schedule established by the
Bankruptcy Code and based on the amount and nature of the
Company’s assets and liabilities, it is highly unlikely the
Company’s Class A Common Stock will retain any value
or that stockholders will receive any distribution or
consideration.
The Company’s business is concentrated in the publishing,
printing and distribution of newspapers under a single operating
segment. The Company’s revenue includes the Chicago
Sun-Times, Post-Tribune, SouthtownStar, Naperville Sun and
other city and suburban newspapers in the Chicago metropolitan
area. Segments that had previously been reported separately from
the Sun-Times News Group are either included in discontinued
operations (such as the Canadian Newspaper Operations) or
included in “Corporate expenses” (such as the former
Investment and Corporate Group) for all periods presented. Any
remaining administrative or legacy expenses related to sold
operations are also included in “Corporate expenses”
for all periods presented.
The Company’s revenue is primarily derived from the sale of
advertising space within the Company’s publications.
Advertising revenue accounted for approximately 75% of the
Company’s consolidated revenue for the year ended
December 31, 2008. Advertising revenue is largely comprised
of three primary sub-groups: retail, national and classified.
Advertising revenue is subject to changes in the economy in
general, on both a national and local level, and in individual
business sectors. The Company’s advertising revenue
experiences seasonality, with the first quarter typically being
the lowest. Advertising revenue is recognized upon publication
of the advertisement.
Approximately 23% of the Company’s revenue for the year
ended December 31, 2008 was generated by circulation of the
Company’s publications. This includes sales of publications
to individuals on a single copy or subscription basis and to
sales outlets, which then re-sell the publications. The Company
recognizes circulation revenue from subscriptions on a
straight-line basis over the subscription term and single-copy
sales at the time of distribution. The Company also generates
revenue from job printing and other activities which are
recognized upon delivery.
Significant expenses for the Company are editorial, production
and distribution costs and newsprint and ink. Editorial,
production and distribution compensation expenses, which
includes benefits, were approximately 30% of the Company’s
total operating revenue and other editorial, production and
distribution costs were approximately 22% of the Company’s
total operating revenue for the year ended December 31,2008. Compensation costs are recognized as employment services
are rendered. Newsprint and ink costs represented approximately
15% of the Company’s total operating revenue for the year
ended December 31, 2008. Newsprint prices are subject to
fluctuation as newsprint is a commodity and can vary
significantly from period to period. Newsprint costs are
recognized upon consumption. Collectively, these costs directly
related to producing and distributing the product are presented
as cost of sales in the Company’s Consolidated Statement of
Operations. Corporate expenses, representing all costs incurred
for U.S. and Canadian administrative activities at the
Corporate level including audit, tax, legal and professional
fees, directors and officers insurance premiums, stock
compensation, corporate wages and benefits and other public
company costs, represented 10% of total operating revenue for
the year ended December 31, 2008.
All significant intercompany balances and transactions have been
eliminated in consolidation.
The following events may impact the Company’s consolidated
financial statements for periods subsequent to those covered by
this report.
(a) On January 2, 2009, the Company filed a
Form 15 with the SEC to voluntarily deregister its
Class A Common Stock and ending its reporting obligations
under the Exchange Act.
The Company’s obligation to file periodic reports with the
SEC for 2009 was immediately suspended upon the filing of the
Form 15. The registration of the Company’s
Class A Common Stock under the Exchange Act terminated on
April 2, 2009.
(b) On January 16, 2009, Davidson Kempner delivered to
the Company’s registered agent in Delaware consents from
holders representing a majority of the outstanding shares of the
Company to reconstitute the Board of Directors. Upon delivery of
such consents, the nominees proposed by Davidson
Kempner — Jeremy L. Halbreich, Robert A. Schmitz, and
Michael E. Katzenstein — joined Robert B. Poile as the
reconstituted Board of Directors of
the Company. Pursuant to such consents, the then-current
directors of the Company, with the exception of Robert B. Poile,
were removed. On January 30, 2009, Graham W. Savage was
re-elected to the Board of Directors. Mr. Savage previously
served as a director from July 24, 2003 to January 16,2009.
(c) On January 29, 2009, the Company received the
decision of an arbitrator in the dispute between the Company and
CanWest. The arbitrator’s decision includes an award in
favor of CanWest in the amount of approximately
Cdn.$50.7 million. The award is exclusive of interest and
costs, which are estimated to be Cdn.$18.2 million. On
March 12, 2009, the Company entered into a settlement
agreement with CanWest that resolved all claims with respect to
the arbitration award against the Company. Under the terms of
the settlement agreement, CanWest received
Cdn.$34.0 million, including approximately
Cdn.$22.0 million from an escrow account funded by the
Company, and an additional Cdn.$6.0 million paid by the
Company in March 2009. As a result of the arbitration award and
settlement, the Company has recognized a charge of
$10.5 million in the fourth quarter of 2008 which is
included in “Corporate expenses” in the Statements of
Operations. See Note 17 to the consolidated financial
statements. The escrowed funds are included on the Consolidated
Balance Sheet under “Escrow deposits and restricted
cash.” The remainder due to CanWest was paid by an
unaffiliated third party. As a result of the settlement, the
Company and all of its affiliates and subsidiaries have been
released from any and all liability related to the arbitration
award and the underlying transactions that led to the award. See
Item 3 “— Legal Proceedings —
CanWest Arbitration.”
(d) On March 31, 2009, the Company and its domestic
subsidiaries filed voluntary petitions under the Bankruptcy
Code. See “Bankruptcy and Insolvency
Proceedings.”
Significant
Transactions in 2008
Impairment
of Goodwill, Intangible and Other Long-Lived
Assets
The substantial acceleration in revenue declines in both the
industry and for the Company, in combination with the negative
outlook for the economy and the continued decline in the
Company’s market capitalization were considered by the
Company to be indicators of potential impairment of its
goodwill, intangible and other long-lived assets at
September 30, 2008. The consequent impairment test resulted
in a non-cash impairment charge of $209.3 million related
to the write-off of goodwill and intangible assets and
$71.9 million related to property, plant and equipment of
the Chicago newspaper operations in 2008. See Notes 7 and 8
to the consolidated financial statements.
Significant
Developments Related to Hollinger Inc.
On March 25, 2008, the Company agreed to the terms of a
settlement (the “Settlement”) that resolved the
various disputes and litigation between the Company and
Hollinger Inc. At the time of the Settlement, Hollinger Inc. was
the owner of all of the outstanding shares of the Company’s
Class B Common Stock, which had 10 votes per share, and
782,923 shares of Class A Common Stock, which has one
vote per share. These holdings represented 19.6% of the
outstanding equity of the Company and 70.0% of the voting power
of the Company’s outstanding common stock at the time of
the Settlement.
On May 14, 2008, the Company agreed to revised terms of the
Settlement (the “Revised Settlement”). The Revised
Settlement was approved by the Company’s full Board of
Directors and the Hollinger Inc. Board of Directors. The Company
amended its SRP to ensure that the execution and delivery of the
Company’s agreement to the Revised Settlement and the
consummation of the Revised Settlement did not cause the
preferred share purchase rights to become exercisable or
otherwise trigger the provisions of the SRP. On May 26,2008, the Revised Settlement was approved in Ontario, Canada,
under the CCAA.
The Revised Settlement included a complete release of claims
between the parties and the elimination of the voting control by
Hollinger Inc. of the Company through conversion on a
one-for-one basis of the shares of Class B Common Stock to
shares of Class A Common Stock. The Revised Settlement also
required the Company to deliver 1.499 million additional
shares of Class A Common Stock to Hollinger Inc. The terms
of the Revised Settlement were carried out at a closing on
June 18, 2008. The Company granted demand registration
rights with respect to the shares of Class A Common Stock
that resulted from the conversion of the shares of Class B
Common Stock, as well
as with respect to the additional 1.499 million shares of
Class A Common Stock issued to Hollinger Inc. pursuant to
the Revised Settlement. The Company recorded $0.8 million
in expense (including fees) related to the issuance of the
1.499 million shares of Class A Common Stock and
$1.7 million related to the write-off of a receivable from
Hollinger Inc. and its subsidiaries. In addition, the Company
has written-off a fully reserved loan of $33.7 million due
from a subsidiary of Hollinger Inc. See Note 17 to the
consolidated financial statements.
Under the Revised Settlement, all shares of Class A Common
Stock issued to Hollinger Inc. are to be voted by the indenture
trustees for certain notes issued by Hollinger Inc., as directed
by a majority in principal amount of such notes, but such
trustees together will only be able to vote shares of common
stock not exceeding 19.999% of the outstanding common stock of
the Company at any given time.
Pursuant to a stipulation and agreement of settlement of
U.S. and Canadian class actions against the Company and
Hollinger Inc. and an insurance settlement agreement dated
June 27, 2007, up to $24.5 million (plus interest,
less fees and expenses) will be paid to the Company, Hollinger
Inc. and/or
other claimants under their directors’ and officers’
insurance policies (the “Insurance Settlement
Proceeds”). Payment of the Insurance Settlement Proceeds is
subject to the approval of various United States and Canadian
courts. Under the terms of the Revised Settlement, Hollinger
Inc. and the Company will cooperate to maximize the recoverable
portion of the Insurance Settlement Proceeds payable to them
collectively (as opposed to other claimants) and they have
agreed that the Company will receive 85% and Hollinger Inc. will
receive 15% of the amounts to be received collectively by
Hollinger Inc. and the Company (as opposed to amounts received
by other claimants) from such proceeds. Also, the collective
recoveries, if any, of Hollinger Inc. and the Company on account
of their claims against Hollinger Inc.’s controlling parent
company, Ravelston, which is in insolvency proceedings in
Ontario, Canada, will be divided equally between Hollinger Inc.
and the Company.
The Revised Settlement provided that the Company would be
reimbursed by Hollinger Inc. for up to $2.0 million of the
Company’s legal fees that were incurred in connection with
Hollinger Inc.’s CCAA proceedings. The Company received
payment of $2.0 million in June 2008. See Note 18 to
the consolidated financial statements.
Pursuant to the Revised Settlement, the six directors of the
Company appointed by Hollinger Inc. on August 1, 2007
resigned from the Board of Directors.
Under the terms of the Revised Settlement, certain of the
Company’s claims against Hollinger Inc. were allowed as
unsecured claims, in agreed amounts (“Allowed
Claims”). The Company’s total recovery in respect of
the Allowed Claims is capped at $15.0 million. After the
Company receives the first $7.5 million in respect of the
Allowed Claims, 50% of any further recovery received by the
Company in respect of the Allowed Claims (subject to the
$15.0 million cap) will be assigned to Hollinger Inc. Under
the terms of the Revised Settlement, the amounts so assigned are
intended to be available to fund litigation claims of Hollinger
Inc. against third parties. All of the Company’s claims
against Hollinger Inc. other than the Allowed Claims were
released as part of the general mutual release that, among other
things, discontinued any and all pending litigation between the
Company and Hollinger Inc., including all of the litigation then
pending in the United States District Court for the Northern
District of Illinois.
Other
Significant Developments in 2008
In January 2008, the Company received an examination report from
the IRS setting forth proposed adjustments to the Company’s
U.S. income tax returns from 1996 through 2003. The Company
has disputed certain of the proposed adjustments. The process
for resolving disputes between the Company and the IRS is likely
to entail various administrative and judicial proceedings, the
timing and duration of which involve substantial uncertainties.
As the disputes are resolved, it is possible that the Company
will record adjustments to its financial statements that could
be material to its financial position and results of operations
and it may be required to make material cash payments. The
timing and amounts of any payments the Company may be required
to make are uncertain, but the Company does not anticipate that
it will make any material cash payments to settle any of the
disputed items during 2009. See Note 20 to the consolidated
financial statements.
On February 19, 2008, the Company announced it entered into
an agreement with Affinity Express, Inc. to handle the majority
of the Company’s non-classified print and online
advertising production. This agreement is expected to save
approximately $3.0 million annually and resulted in a
reduction of approximately 50 full-time advertising
production and related staff positions.
As previously reported, on May 20, 2008, the Company’s
Class A Common Stock was delisted from the NYSE. The
Class A Common Stock is currently quoted on the Pink Sheets
under the symbol SUTMQ.PK.
During 2008, the Company’s valuation of Canadian CP (and
the replacement MTN’s) resulted in additional impairment
charges of $8.7 million on $20.2 million (face amount
plus accrued interest). The Company recorded a gain on sale of
$1.1 million for the year ended December 31, 2008
related to the Canadian CP sold on May 9, 2008 for
$21.0 million. See Note 6 to the consolidated
financial statements.
The Canadian CP has not traded in an active market since
mid-August 2007 and there are currently no market quotations
available. On March 19, 2008, Dominion Bond Rating Service
withdrew its ratings of the Canadian CP. The Company has
employed a valuation model to estimate the fair value for the
$9.6 million of MTN’s backed by the pool of assets.
The valuation model used by the Company to estimate the fair
value for this portion of the MTN’s incorporates discounted
cash flows, the best available information regarding market
conditions and other factors that a market participant would
consider for such investments. The fair value (and carrying
value at December 31, 2008) of the $7.4 million
of Canadian CP (and replacement MTN’s backed by specific
assets) was estimated through the use of a model relying on
market data and inputs derived from securities similar to the
MTN’s. This model was also used during prior periods to
estimate the fair value of the $28.0 million of Canadian CP
that the Company sold on May 9, 2008. The Company believes
the valuation model provides a better estimate of fair value
than the thinly traded, distressed market for the MTN’s
issued to replace the Canadian CP in January 2009.
As part of the CanWest settlement referred to below, the Company
transferred certain asset-backed commercial paper, making up
approximately $5.6 million in face value (of the
Company’s $20.2 million) of Canadian CP, to a third
party. The asset-backed commercial paper that was transferred
had a carrying value of $nil at December 31, 2008.
On January 29, 2009, the Company received the decision of
an arbitrator in the dispute between the Company and CanWest.
The arbitrator’s decision included an award in favor of
CanWest in the amount of approximately Cdn.$50.7 million.
The award is exclusive of interest and costs, which are
estimated to be Cdn.$18.2 million. On March 12, 2009,
the Company entered into a settlement agreement with CanWest
that resolved all claims with respect to the arbitration award
against the Company. Under the terms of the settlement
agreement, CanWest received Cdn.$34.0 million, including
approximately Cdn.$22.0 million from an escrow account
funded by the Company, and an additional Cdn.$6.0 million
paid by the Company in March 2009. As a result of the
arbitration award and settlement, the Company has recognized a
charge of $10.5 million in the fourth quarter of 2008 which
is included in “Corporate expenses” in the Statements
of Operations. See Note 17 to the consolidated financial
statements. The escrowed funds are included on the Consolidated
Balance Sheet under “Escrow deposits and restricted
cash.” The remainder due to CanWest was paid by an
unaffiliated third party. As a result of the settlement, the
Company and all of its affiliates and subsidiaries have been
released from any and all liability related to the arbitration
award and the underlying transactions that led to the award. The
effect of this settlement is included in “Corporate
expenses” in the Consolidated Statement of Operations at
December 31, 2008. See Item 3 ‘‘—
Legal Proceedings — CanWest Arbitration.”
The costs incurred by the Company in connection with its
investigations, disputes and legal proceedings relating to
transactions between the Company and certain former executive
officers and directors are summarized in the following table:
Costs and expenses arising from the Special Committee’s
investigation. These amounts include the fees and costs of the
Special Committee’s members, counsel, advisors and experts.
The Special Committee was dissolved in November 2008, and the
Committee’s related legal matters were turned over to the
Company’s Board of Directors and management.
(2)
Largely represents legal and other professional fees to defend
the Company in litigation that has arisen as a result of the
issues the Special Committee has investigated, including costs
to defend the counterclaims of Hollinger Inc. and Black. In
2006, these costs include a $3.5 million settlement paid to
Tweedy, Browne & Company, LLC in the second quarter in
settlement for legal fees.
(3)
Represents amounts the Company has been required to advance in
fees and costs to indemnified parties, including the indirect
former controlling stockholders and their affiliates and
associates who are defendants in the litigation brought by the
Company or resulting from criminal proceedings. See
“Black v. Hollinger International Inc.”described in the Company’s previous filings.
(4)
Represents recoveries directly resulting from the investigation
activities which includes reimbursement by Hollinger Inc. for
$2.0 million of the Company’s legal fees that were
incurred in connection with Hollinger Inc.’s CCAA
proceedings, a 2007 settlement, negotiated and approved by the
Special Committee, with Radler, (including his wholly-owned
company, North American Newspapers Ltd. f/k/a F.D. Radler Ltd.)
and the publishing companies Horizon Publishing Company
(“Horizon”) and Bradford Publishing Company
(“Bradford”). The Company received $63.4 million
in cash to settle the following: (i) claims by the Company
against Radler, Horizon and Bradford, (ii) potential
additional claims against Radler related to the Special
Committee’s findings regarding incorrectly dated stock
options and (iii) amounts due from Horizon and Bradford.
The Company recorded $47.7 million of the settlement, as a
recovery, within “Indemnification, investigation and
litigation costs, net of recoveries” and $7.2 million
in “Interest and dividend income” in the Consolidated
Statement of Operations for the year ended December 31,2007. The remaining $8.5 million represents the collection
of certain notes receivable. In 2006, recoveries include
approximately $47.5 million in a settlement with certain of
the Company’s directors and officers insurance carriers net
of approximately $2.5 million paid to Cardinal Value Equity
Partners L.P.’s counsel as attorney fees directly
attributable to this settlement. This settlement was approved by
the Delaware Court of Chancery in November 2006, and received by
the Company in January 2007. In 2005, the Company received
approximately $30.3 million in a settlement with Torys LLP
and $2.1 million in recoveries of indemnification payments
from Black. Excludes settlements with former directors and
officers, pursuant to a restitution agreement reached in
November 2003, of approximately $1.7 million and
$31.5 million for the years ended December 31, 2004
and 2003, respectively, which were included in “Other
income (expense), net” in the Consolidated Statements of
Operations. See Notes 18, 22(a) and 23(e) to the
consolidated financial statements.
(5)
Represents amounts received pursuant to the restitution
agreement described in (4) above.
(6)
The Special Committee was formed on June 17, 2003. These
amounts represent the cumulative net costs from that date.
Including the $7.2 million and $8.5 million received
from Radler in interest and payment of notes receivable,
respectively (see (4) above), and the Company’s
potential share of insurance proceeds held in escrow (see
Note 22(a) to the consolidated financial statements“Stockholder Class Actions”) of
$20.8 million, the amounts collected by the Special
Committee aggregate $199.3 million and total expenses
aggregate $215.4 million.
Based on information accumulated by a third party from data
submitted by Chicago area newspaper organizations, newspaper
print advertising declined 17% in 2008 for the greater Chicago
market versus the comparable period in 2007. Advertising revenue
for the Company declined 16% for the year ended
December 31, 2008, compared to the same period in 2007.
Critical
Accounting Policies and Estimates
The preparation of the Company’s consolidated financial
statements requires it to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its
estimates, including those related to areas that require a
significant level of judgment or are otherwise subject to an
inherent degree of uncertainty. These areas include bad debts,
investments, goodwill, intangible and other long-lived assets,
income taxes, pensions and other postretirement benefits,
contingencies and litigation. The Company bases its estimates on
historical experience, observance of trends in particular areas,
information available from outside sources and various other
assumptions that are believed to be reasonable under the
circumstances. Information from these sources form the basis for
making judgments about the carrying values of assets and
liabilities that may not be readily apparent from other sources.
Actual amounts may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies
reflect the more significant judgments and estimates used in the
preparation of the consolidated financial statements.
Accruals
for Contingent Tax Liabilities
At December 31, 2008, the Company’s Consolidated
Balance Sheet includes $608.0 million of accruals intended
to cover contingent liabilities for taxes and interest it may be
required to pay. The accruals cover contingent tax liabilities
primarily related to items that have been deducted in arriving
at taxable income, which deductions may be disallowed by taxing
authorities. If those deductions were to be disallowed, the
Company would be required to pay additional taxes and interest
since the dates such taxes would have been paid had the
deductions not been taken. The Company may also be subject to
penalties. The ultimate resolution of these tax contingencies
will be dependent upon a number of factors, including
discussions with taxing authorities and the nature, extent and
timing of any restitution or reimbursement received by the
Company.
The Company believes that the accruals that have been recorded
are adequate to cover the tax contingencies. If the ultimate
resolution of the tax contingencies is more or less favorable
than what has been assumed by management in determining the
accruals, the accruals may ultimately be excessive or inadequate
in amounts that are not presently determinable, but such amounts
may be material to the Company’s consolidated financial
position, results of operations, and cash flows.
Investments
During 2007, the Company’s valuation resulted in an
impairment charge and reduction of $12.2 million to the
estimated fair value of the $48.2 million (face amount plus
accrued interest) in Canadian CP.
On May 9, 2008, the Company sold $28.0 million (face
amount, plus accrued interest) of its Canadian CP investments
that were issued by one of the special purpose entities for
$21.0 million and at December 31, 2008, the Company
held $20.2 million (face amount, plus accrued interest) of
Canadian CP.
During 2008, the Company’s valuation resulted in an
additional impairment charge of $8.7 million on
$20.2 million (face amount plus accrued interest) of the
Canadian CP with a carrying value of $7.4 million at
December 31, 2008. The Company recorded a gain on sale of
$1.1 million for the year ended December 31, 2008
related to the Canadian CP sold on May 9, 2008 for
$21.0 million.
During 2008 and 2007, the Company used valuation models to
estimate the fair value of the Canadian CP incorporating
discounted cash flows, the best available information regarding
market conditions and other factors. This valuation resulted in
a reduction of $8.7 million and $12.2 million at
December 31, 2008 and 2007, respectively, to the estimated
fair value of the Canadian CP. Continuing uncertainties
regarding the value of the assets which underlie the Canadian CP
and replacement MTN’s, the amount and timing of cash flows,
the yield of the replacement notes, whether an active market
will develop for the replacement notes and other factors could
give rise to a further change in the value of the Company’s
investment which could materially impact the Company’s
financial condition and results of operations. The Company
believes the valuation model provides a better estimate of fair
value than the thinly traded, distressed market for the
MTN’s issued to replace the Canadian CP in January 2009.
The Company does not consider these distressed sales a valid
indicator of a more than temporary impairment of these
investments.
As part of the CanWest settlement, the Company transferred
certain asset-backed commercial paper, making up approximately
$5.6 million in face value (of the Company’s
$20.2 million) of Canadian CP, to a third party. The
asset-backed commercial paper that was transferred had a
carrying value of $nil at December 31, 2008. See
Item 3 “— Legal Proceedings —
CanWest Arbitration.”
Allowance
for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of customers to
make required payments. If the financial condition of customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances could be required.
Impairment
of Goodwill, Intangible and Other Long-Lived
Assets
The Company is required to determine, at least annually, whether
or not there has been any permanent impairment in the value of
goodwill, intangible and other long-lived assets. Certain
indicators of potential impairment that could impact the Company
include, but are not limited to, the following: (i) a
significant long-term adverse change in the business climate
that is expected to cause a substantial decline in advertising
spending, (ii) a permanent significant decline in newspaper
readership, (iii) a significant adverse long-term negative
change in the demographics of newspaper readership and
(iv) a significant technological change that results in a
substantially more cost effective method of advertising than
newspapers. The substantial acceleration in declines in revenue
in the third quarter of 2008 both in the industry and for the
Company, in combination with the negative outlook for the
economy, the negative outlook for newspaper advertising and
circulation in the near and long-term, and the continued decline
in the Company’s market capitalization were considered by
the Company to be indicators of potential impairment of its
goodwill, intangible and other long-lived assets. The consequent
impairment test resulted in a non-cash impairment charge of
$281.1 million. See Notes 7 and 8 to the consolidated
financial statements.
The computation of the fair value of the newspaper reporting
unit requires significant estimation and judgment. The
impairment of the subscriber and advertiser relationship
intangible assets resulted primarily from declines in current
cash flows and the inability of the Company to reliably project
cash flows beyond the near term due to the previously mentioned
negative outlook and industry and economic declines experienced
in 2008. The impairment of the Company’s goodwill reflects
the decline in market capitalization (fair value) allocated to
the newspaper reporting unit such that the fair value no longer
exceeds the carrying value of that unit. The impairment of the
Company’s goodwill is driven by the decline in the
Company’s market capitalization of approximately
$163.0 million, or 92%, between December 31, 2007 and
September 30, 2008, in combination with the negative
industry and economic factors mentioned above and the inability
of the Company to reliably project cash flow to substantiate or
estimate alternative measures of fair value.
The Company has significant long-lived assets primarily
property, plant and equipment recorded in its Consolidated
Balance Sheets. The Company’s valuation of these long-lived
assets was completed as of December 31, 2008 and resulted
in a fourth quarter charge of $71.9 million. See
Notes 8 and 25 to the consolidated financial statements.
The Company records a valuation allowance to reduce its deferred
tax assets to the amount which, the Company estimates, is more
likely than not to be realized. The Company’s ability to
realize its deferred tax assets is generally dependent on the
generation of taxable income during the future periods in which
the temporary differences are deductible and the net operating
losses can be offset against taxable income. The Company
increased its valuation allowance in 2007 and believes the
increase is appropriate based on its pre-tax losses in the past
several years and accounting guidelines that provide that
cumulative losses in recent years provide significant evidence
that a company should not recognize tax benefits that depend on
the generation of taxable income from future operations. The
Company has experienced pre-tax losses in 2008 and has
recognized additional valuation allowances on current year tax
benefits. If the Company were to determine that it would be able
to realize deferred tax assets in the future in excess of the
net recorded amount, the resulting adjustment to deferred tax
assets would increase net earnings in the period such a
determination was made.
Defined
Benefit Pension Plans and Postretirement Benefits
The Company sponsors several defined benefit pension and
postretirement benefit plans for domestic and foreign employees
and former employees. These defined benefit plans include
pension and postretirement benefit obligations, which are
calculated based on actuarial valuations. In determining these
obligations and related expenses, key assumptions are made
concerning expected rates of return on plan assets and discount
rates. In making these assumptions, the Company evaluates, among
other things, input from actuaries, expected long-term market
returns and current high-quality bond rates. The Company will
continue to evaluate the expected long-term rates of return on
plan assets and discount rates at least annually and make
adjustments as necessary, which could change the pension and
postretirement obligations and expenses in the future.
Unrecognized actuarial gains and losses are recognized by the
Company over a period of approximately 15 years, which
represents the weighted-average remaining service life of the
employee group. Unrecognized actuarial gains and losses arise
from several factors including experience, changes in
assumptions and from differences between expected returns and
actual returns on assets. At the end of 2008, the Company had
unrecognized net actuarial losses of $116.7 million. These
unrecognized amounts could result in an increase to pension
expense in future years depending on several factors, including
whether such losses exceed the corridor in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 87, “Employers’ Accounting for Pensions”
and SFAS No. 106 “Employers Accounting for
Postretirement Benefits Other than Pensions.”
During 2008, the Company made contributions of
$10.4 million to defined benefit pension plans. Global
capital market and interest rate fluctuations may impact future
funding requirements and reported pension expense for such plans
and additional Company contributions may be required. If the
Company is required to make significant contributions to fund
the defined benefit pension plans, the Company’s cash flow
available for other uses would be reduced. The Company is
scheduled to contribute approximately $6.8 million to these
plans in 2009.
2008
Compared with 2007
Income
(Loss) from Continuing Operations — Overview
Loss from continuing operations in 2008 amounted to
$353.5 million, or $4.31 per share, compared to income of
$270.0 million in 2007, or $3.36 per share. In 2008, the
Company recorded an income tax benefit of $13.1 million
compared to an income tax benefit of $420.9 million in
2007, a decrease of $407.8 million, which was largely due
to the 2007 settlement of tax issues with the Canada Revenue
Agency (“CRA”) that resulted in an income tax benefit
of $586.7 million with a corresponding reduction of tax
liabilities, partially offset by a charge of $193.5 million
to increase the valuation allowance against U.S. deferred
tax assets and to other factors as presented in Note 20 to
the consolidated financial statements. The loss from continuing
operations before income taxes increased to $366.6 million
in 2008 from $150.9 million in 2007, an increase of
$215.7 million. The increase was largely due to a decline
in revenue of $48.4 million, a 2008 impairment charge of
$281.1 million, an increase in sales and marketing costs of
$2.1 million, and an increase in indemnification,
investigation and litigation costs, net, of $3.8 million,
partially offset by a decrease in other operating costs of
$18.6 million, a decrease in corporate expenses of
$46.0 million, an improvement in total other income
(expense) of $25.3 million and lower cost of sales of
$24.5 million.
Operating revenue and operating loss in 2008 was
$323.9 million and $381.3 million, respectively,
compared with operating revenue of $372.3 million and an
operating loss of $140.2 million in 2007. The decrease in
operating revenue of $48.4 million compared to the prior
year largely reflects a decrease in advertising revenue of
$44.6 million and a decrease in circulation revenue of
$2.8 million. The $241.1 million increase in operating
loss in 2008 is primarily due to the $48.4 million decrease
in operating revenue, the impairment charge of
$281.1 million, an increase in indemnification,
investigation and litigation costs, net of $3.8 million and
an increase in sales and marketing costs of $2.1 million,
partially offset by a decrease in corporate expenses of
$46.0 million reflecting lower bad debt costs of
$33.7 million and a decreased loss on sale of newspaper
operations of $3.1 million, a decrease of
$18.6 million in other operating costs and lower cost of
sales of $24.5 million, reflecting lower direct wages and
benefits of $13.0 million.
Operating
Revenue
Operating revenue was $323.9 million in 2008 compared to
$372.3 million in 2007, a decrease of $48.4 million.
Advertising revenue was $242.6 million in 2008 compared
with $287.2 million in 2007, a decrease of
$44.6 million or 16%. The decrease was largely a result of
lower retail advertising revenue of $18.4 million, lower
classified advertising of $19.6 million, lower national
advertising revenue of $6.5 million and lower Internet
advertising revenue of $0.1 million. The revenue declines
accelerated in the second half of the year. The recessionary
economy had significant negative effects on employment, real
estate, auto and retailer advertising spending.
Circulation revenue was $74.8 million in 2008 compared with
$77.6 million in 2007, a decrease of $2.8 million. The
decline in circulation revenue was attributable to declines in
volume, largely in the daily single copy category.
Operating
Costs and Expenses
Total operating costs and expenses in 2008 were
$705.2 million, compared with $512.5 million in 2007,
an increase of $192.7 million. This increase is largely
reflective of the impairment charge of $281.1 million,
higher indemnification, investigation and litigation costs, net,
of $3.8 million and higher sales and marketing expenses of
$2.1 million. These increases were partially offset by
lower other operating costs of $18.6 million, lower
corporate expenses of $46.0 million reflecting lower bad
debt expense of $33.7 million and a decreased loss on sale
of newspaper operations of $3.1 million, lower cost of
sales of $24.5 million reflecting lower wages and benefits
of $13.0 million and lower depreciation and amortization of
$5.4 million, largely due to 2007 direct response
advertising cost amortization of $7.3 million, which is
expensed as incurred in 2008, partially offset by higher
depreciation in 2008 of $3.0 million.
Cost of sales, which includes newsprint and ink, as well as
distribution, editorial and production costs was
$215.8 million for 2008, compared with $240.3 million
for 2007, a decrease of $24.5 million. Wages and benefits
were $95.6 million in 2008 and $108.6 million in 2007,
a decrease of $13.0 million, largely due to a decrease in
headcount. Newsprint and ink expense was $47.5 million for
2008, compared with $50.6 million in 2007, a decrease of
$3.1 million or approximately 6%. Total newsprint
consumption in 2008 decreased approximately 19% compared with
2007 reflecting reductions in page sizes and lower circulation,
largely offset by an increase in the average cost per metric ton
of newsprint of approximately 16% in 2008. Other costs of sales
were $72.7 million and $81.1 million in 2008 and 2007,
respectively, a decrease of $8.4 million largely due to
lower distribution and circulation expenses of
$4.8 million, lower printing and production costs of
$2.1 million and lower facility costs of $1.4 million,
largely due to the full year impact of outsourcing of certain
distribution activities.
Included in selling, general and administrative costs are sales
and marketing expenses, other operating costs including
administrative support functions, such as information
technology, finance and human resources, and corporate expenses
and indemnification, investigation and litigation costs, net.
Total selling, general and administrative costs were
$462.7 million in 2008 compared to $240.1 million for
2007, an increase of $222.6 million. The increase is
largely due to the impairment charge of $281.1 million,
higher sales and marketing expense of $2.1 million and
higher indemnification, investigation and litigation costs, net,
of
$3.8 million. These costs were partially offset by lower
other operating costs of $18.6 million and lower corporate
expenses of $46.0 million.
Sales and marketing costs were $72.5 million in 2008,
compared to $70.4 million in 2007, an increase of
$2.1 million. The increase is largely due to higher
telemarketing expenses of $6.3 million which were
capitalized and amortized in 2007, increased outsourced call
center costs of $1.5 million and increased outsourced ad
production costs of $1.4 million, both of which were
staffed internally and included in compensation in 2007,
partially offset by a decrease in wages and benefits of
$4.6 million resulting from outsourcing activities and
other decreases in headcount, lower bad debt expense of
$0.9 million, lower marketing and promotion costs of
$0.5 million and lower temporary help of $0.4 million.
Other operating costs consist largely of accounting and finance,
information technology, human resources, property and facilities
and other general and administrative costs supporting the
newspaper operations. Other operating costs were
$63.7 million in 2008, compared to $82.3 million in
2007, a decrease of $18.6 million. The decrease reflects
the 2007 write-off of capitalized direct response advertising
costs of $15.2 million, 2007 costs of outsourcing certain
distribution activities of $1.8 million, a 2007 write-off
of capitalized software of $1.5 million, lower professional
fees of $1.6 million and lower compensation and benefits,
including severance, of $2.4 million. These increases were
partially offset by the write-down, disposition, or write-off of
property, plant and equipment totaling $3.9 million and
costs related to printing plant relocation of $1.2 million.
See Note 17 to the consolidated financial statements.
Impairment of goodwill, identifiable intangible and other
long-lived assets was $281.1 million in 2008. The
substantial acceleration in revenue declines in 2008, both in
the industry and for the Company, in combination with the
negative outlook for the economy and the continued decline in
the Company’s market capitalization were considered by the
Company to be indicators of potential impairment of its
goodwill, intangible and other long-lived assets. The consequent
impairment test resulted in a non-cash impairment charge of
$209.3 million related to the write-off of goodwill and
intangible assets and $71.9 million related to its
long-lived assets consisting of property, plant and equipment of
the Chicago newspaper operations for twelve months ended
December 31, 2008. See Note 8 to the consolidated
financial statements.
Corporate operating expenses in 2008 were $33.7 million
compared to $79.7 million in 2007, a decrease of
$46.0 million. This decrease is largely due to lower bad
debt expense of $33.7 million related to a loan to a
subsidiary of Hollinger Inc. in 2007, a decrease in loss on sale
of newspaper operations of $3.1 million related to a
settlement with CanWest (see Note 17 to the consolidated
financial statements), lower legal and professional fees of
$8.7 million reflecting lower internal audit and other
compliance activity and related professional service fees and
lower insurance costs, primarily directors and officers of
$2.5 million. These costs were partially offset by higher
compensation expenses of $0.3 million, costs associated
with the Company’s strategic process of $0.6 million
and costs associated with the Revised Settlement with Hollinger
Inc. of $2.5 million. See Note 23(i) to the
consolidated financial statements.
Indemnification, investigation and litigation costs, net, in
2008 were $11.6 million compared to $7.8 million in
2007, an increase of $3.8 million. In 2008 the Company
recorded a recovery of $2.0 million of legal fees in
connection with the Revised Settlement with Hollinger Inc. and
in 2007 the Company recorded $47.7 million in recoveries
resulting from a settlement with a former officer.
Indemnification costs decreased $38.4 million to
$9.4 million in 2008 from $47.8 million in 2007 as the
criminal proceedings against former officers took place from
March 2007 to July 2007, although certain appeals are
continuing. Special Committee investigation costs decreased
$2.7 million compared to 2007. See Note 18 to the
consolidated financial statements.
Depreciation and amortization expense in 2008 was
$26.7 million compared with $32.1 million in 2007, a
decrease of $5.4 million. Depreciation expense increased by
$3.0 million, as the Company recorded additional
incremental depreciation expense in 2008 related to expected
printing facility closings in Plainfield, Illinois versus the
2007 closing in Gary, Indiana, and impact of fixed asset
additions. Amortization expense includes intangible amortization
of $3.3 million and $11.7 million in 2008 and 2007,
respectively, an $8.4 million decrease, largely due to
direct response advertising costs capitalized and amortized in
2007 of $7.3 million and lower expense of $1.1 million
in 2008 reflecting the write-off of intangibles in the third
quarter of 2008. See Note 8 to the consolidated financial
statements.
Largely as a result of the items noted above, the operating loss
in 2008 was $381.3 million compared with
$140.2 million in 2007, an increased loss of
$241.1 million.
Interest
and Dividend Income
Interest and dividend income in 2008 amounted to
$4.9 million compared to $17.8 million in 2007, a
decrease of $12.9 million, largely due to $7.2 million
of interest received on the settlement with Radler in 2007 and
the effect of lower average cash balances in 2008.
Other
Income (Expense), Net
Other income (expense), net, in 2008 was income of
$10.0 million compared to an expense of $27.8 million
in 2007. The improvement of $37.8 million was largely due
to a $35.0 million decrease in foreign exchange losses, a
$3.5 million lower write-down of an investment in Canadian
CP, partially offset by a write-down of other investments of
$1.5 million. The decrease in foreign exchange losses
largely relates to the impact on U.S. denominated cash and
cash equivalents held by a subsidiary in Canada and the net
impact of certain intercompany and affiliated loans payable in
Canadian dollars all of which result from the strengthening of
the U.S. dollar during 2008, partially offset by a
$1.0 million foreign currency write-off related to the
liquidation of a foreign subsidiary. See Note 19 to the
consolidated financial statements.
Income
Taxes
Income taxes were a benefit of $13.1 million in 2008 and a
benefit of $420.9 million in 2007. The 2008 benefit
includes the reversal of contingent tax liabilities no longer
deemed necessary of $34.7 million as the result of the
Company receiving a notification from the CRA of the completion
of a 2000 tax year audit resulting in no changes to the tax
return. Provisions for additional interest on contingent
liabilities, net of related tax benefits, amounted to
$49.6 million in 2008 (excluding the reversal of interest
of $15.4 million included in the $34.7 million
contingent tax reversal previously mentioned) and
$48.0 million in 2007. The 2007 benefit largely represents
the impact of the settlement with the CRA, which resulted in an
income tax benefit of $586.7 million, partially offset by
increases in the valuation allowance for deferred tax benefits
of $193.5 million. The Company’s income tax expense
varies substantially from the U.S. Federal statutory rate
primarily due to provisions for contingent liabilities to cover
additional taxes and interest the Company may be required to pay
in various tax jurisdictions, changes in the valuation allowance
for tax assets and reductions of tax contingency accruals due to
the resolution of uncertainties. See Note 20 to the
consolidated financial statements for a complete discussion of
items affecting the Company’s income taxes.
2007
Compared with 2006
Income
(Loss) from Continuing Operations — Overview
Income from continuing operations in 2007 amounted to
$270.0 million, or income of $3.36 per share, compared to a
loss of $77.6 million in 2006, or a $0.91 loss per share.
In 2007, the Company recorded an income tax benefit of
$420.9 million, compared to income tax expense of
$57.4 million in 2006, a variation of $478.3 million,
which was largely due to the settlement of tax issues with the
CRA that resulted from an income tax benefit of
$586.7 million largely as a result of a reduction of tax
liabilities, partially offset by a charge of $193.5 million
to increase the valuation allowance against U.S. deferred
tax assets and to other factors as presented in Note 20 to
the consolidated financial statements. The loss from continuing
operations before income taxes increased from $20.2 million
in 2006 to $150.9 million in 2007, an increase of
$130.7 million. The decline was largely due to a decline in
revenue of $48.1 million, an increase in corporate expenses
of $28.0 million, an increase in other operating costs of
$16.1 million, an increase in indemnification,
investigation and litigation costs, net, of $25.2 million
and an increase in other income (expense) of $30.4 million
partially offset by lower cost of sales of $18.1 million.
Operating
Revenue and Operating Loss — Overview
Operating revenue and operating loss in 2007 was
$372.3 million and $140.2 million, respectively,
compared with operating revenue of $420.4 million and an
operating loss of $39.0 million in 2006. The decrease in
operating
revenue of $48.1 million compared to the prior year is
largely a reflection of a decrease in advertising revenue of
$37.4 million and a decrease in circulation revenue of
$7.6 million. The $101.2 million increase in operating
loss in 2007 is primarily due to the $48.1 million decrease
in operating revenue, an increase in corporate expenses of
$28.0 million largely resulting from bad debt expense of
$33.7 million, an increase of $25.2 million in
indemnification, investigation and litigation costs, net, an
increase in other operating costs of $16.1 million, which
was largely due to an impairment charge in respect of
capitalized direct response advertising costs of
$15.2 million, and an increase in sales and marketing costs
of $3.9 million. These increases were partially offset by
lower cost of sales expenses of $18.1 million, largely due
to lower newsprint and ink expense of $16.6 million.
Operating
Revenue
Operating revenue was $372.3 million in 2007 compared to
$420.4 million in 2006, a decrease of $48.1 million.
As previously noted, the effect of the 53rd week in 2006
added $6.6 million to operating revenue in 2006.
Advertising revenue was $287.2 million in 2007 compared
with $324.6 million in 2006, a decrease of
$37.4 million or 12%. The decrease was largely a result of
lower retail advertising revenue of $13.9 million, lower
classified advertising of $20.5 million and lower national
advertising revenue of $6.3 million, partially offset by
increased Internet advertising revenue of $3.3 million. The
Company’s advertising revenue declined by approximately two
percentage points higher than the overall Chicago market decline
due to a loss in market share primarily in the first half of
2007.
Circulation revenue was $77.6 million in 2007 compared with
$85.2 million in 2006, a decrease of $7.6 million. The
decline in circulation revenue was attributable to declines in
volume, primarily in the daily single copy category.
Operating
Costs and Expenses
Total operating costs and expenses in 2007 were
$512.5 million, compared with $459.3 million in 2006,
an increase of $53.2 million. This increase is largely
reflective of higher indemnification, investigation and
litigation costs, net, of $25.2 million, after giving
effect to recoveries in 2007 and 2006 of $47.7 million and
$47.5 million, respectively, higher other operating costs
of $16.1 million, largely due to an impairment charge in
respect of capitalized direct response advertising costs of
$15.2 million, higher corporate expenses of
$28.0 million largely resulting from bad debt expense in
respect of notes receivable from affiliates of
$33.7 million, and higher sales and marketing expenses of
$3.9 million. These increases were partially offset by
lower cost of sales of $18.1 million, primarily lower
newsprint and ink expense of $16.6 million and lower
depreciation and amortization expense of $1.8 million. As
previously noted, the effect of the 53rd week in 2006 added
approximately $6.1 million to total operating costs and
expenses in 2006.
Cost of sales, which includes newsprint and ink, as well as
distribution, editorial and production costs was
$240.3 million for 2007, compared with $258.4 million
for 2006, a decrease of $18.1 million. Wages and benefits
were $108.6 million in 2007 and $110.3 million in
2006, a decrease of $1.7 million. Newsprint and ink expense
was $50.6 million for 2007, compared with
$67.2 million in 2006, a decrease of $16.6 million or
approximately 25%. Total newsprint consumption in 2007 decreased
approximately 16% compared with 2006 reflecting reductions in
page sizes and lower circulation, and the average cost per
metric ton of newsprint in 2007 was approximately 10% lower than
in 2006. Other cost of sales was generally flat at
$81.1 million and $80.9 million in 2007 and 2006,
respectively.
Included in selling, general and administrative costs are sales
and marketing expenses, other operating costs including
administrative support functions, such as information
technology, finance and human resources, and corporate expenses
and indemnification, investigation and litigation costs, net.
Total selling, general and administrative costs were
$240.1 million in 2007 compared to $167.0 million for
2006, an increase of $73.1 million. The increase is largely
due to higher indemnification, investigation and litigation
costs, net, of $25.2 million, after giving effect to
recoveries of $47.7 million and $47.5 million, in 2007
and 2006, respectively, higher corporate expenses of
$28.0 million, higher other operating costs of
$16.1 million and higher sales and marketing expense of
$3.9 million.
Sales and marketing costs were $70.4 million in 2007,
compared to $66.5 million in 2006, an increase of
$3.9 million. The increase is largely due to higher bad
debt expense of $1.0 million, increased wages and benefits
of
$2.5 million resulting from increased headcount and
increased marketing and promotion expense of $1.5 million
largely due to additional market research and marketing costs
including those related to promoting a new look and slogan for
the Chicago Sun-Times in radio and promotional
billboards, partially offset by a decrease in professional fees
of $1.8 million.
Other operating costs consist largely of accounting and finance,
information technology, human resources, property and facilities
and other general and administrative costs supporting the
newspaper operations. Other operating costs were
$82.3 million in 2007, compared to $66.2 million in
2006, an increase of $16.1 million. The increase reflects a
$15.2 million impairment charge in respect of capitalized
direct response advertising costs (see Note 17 to the
consolidated financial statements), an increase in web related
support and other costs of $2.3 million, increased
telecommunications expense of $1.4 million and increased
professional fees of $1.2 million. These increases were
partially offset by lower severance cost of $4.7 million.
See Note 17 to the consolidated financial statements.
Corporate operating expenses in 2007 were $79.7 million
compared to $51.7 million in 2006, an increase of
$28.0 million. This increase is largely due to bad debt
expense of $33.7 million related to a loan to a subsidiary
of Hollinger Inc. and an adjustment of $13.6 million in
2007 to decrease the estimated net proceeds related to the sale
of publishing interests in prior years. See Note 17 to the
consolidated financial statements. These amounts are partially
offset by lower compensation expenses of $10.0 million,
lower legal and professional fees of $1.8 million
reflecting lower internal audit and other compliance activity
and professional service fees, lower insurance costs, primarily
directors and officers of $2.3 million, lower business
taxes of $1.6 million, lower general expenses of
$0.9 million and lower property and facility costs of
$0.7 million due to the closing of the New York office in
2006. The decrease in compensation reflects lower incentive
compensation costs of $0.6 million, a $7.1 million
reduction in severance expense and lower pension expense of
$1.9 million.
Indemnification, investigation and litigation costs, net, in
2007 were an expense of $7.8 million compared to a net
recovery of $17.4 million in 2006, an increase of
$25.2 million. In 2007, the Company recorded
$47.7 million in recoveries resulting from a settlement
with a former officer and in 2006 the Company recorded
$47.5 million in recoveries resulting from an insurance
settlement. Indemnification costs increased $28.9 million
to $47.8 million in 2007 from $18.9 million in 2006 as
the criminal proceedings against former officers took place from
March 2007 to July 2007. Special Committee investigation and
litigation costs decreased $3.4 million compared to 2006.
See Note 18 to the consolidated financial statements.
Depreciation and amortization expense in 2007 was
$32.1 million compared with $33.9 million in 2006, a
decrease of $1.8 million. The Company recorded additional
depreciation expense of $1.0 million and $2.7 million
in 2007 and 2006, respectively, related to closing the New York
office and printing facility closings in Chicago, Illinois and
Gary, Indiana. Amortization expense includes $7.3 million
and $7.5 million in 2007 and 2006, respectively, related to
capitalized direct response advertising costs. See Note 17
to the consolidated financial statements.
Largely as a result of the items noted above, operating loss in
2007 was $140.2 million compared with $39.0 million in
2006, an increased loss of $101.2 million.
Interest
and Dividend Income
Interest and dividend income in 2007 amounted to
$17.8 million compared to $16.8 million in 2006, an
increase of $1.0 million, largely due to $7.2 million
of interest received on the settlement with Radler, somewhat
offset by the interest on the loan to affiliate of
$4.4 million recorded in 2006 with no corresponding income
in 2007 and the effect of lower average cash balances in 2007.
Other
Income (Expense), Net
Other income (expense), net, in 2007 was an expense of
$27.8 million compared to income of $2.6 million in
2006. The deterioration of $30.4 million was largely due to
a $19.5 million increase in foreign exchange losses and a
$12.2 million write-down of Canadian CP that matured but
was not redeemed and which remains outstanding, partially offset
by a gain on sale of investments of $1.1 million. The
increase in foreign exchange losses largely
relates to the impact on U.S. denominated cash and cash
equivalents held by a subsidiary in Canada and the net impact of
certain intercompany and affiliated loans payable in Canadian
dollars all of which result from the weakening of the
U.S. dollar during 2007. See Note 19 to the
consolidated financial statements.
Income
Taxes
Income taxes were a benefit of $420.9 million in 2007 and
an expense of $57.4 million in 2006. The benefit largely
represents the impact of the settlement with the CRA, which
resulted in an income tax benefit of $586.7 million. The
Company’s income tax expense varies substantially from the
U.S. Federal statutory rate primarily due to provisions for
contingent liabilities to cover additional taxes and interest
the Company may be required to pay in various tax jurisdictions,
changes in the valuation allowance for tax assets and reductions
of tax contingency accruals due to the resolution of
uncertainties. See Note 20 to the consolidated financial
statements for a complete discussion of items affecting the
Company’s income taxes.
Liquidity
and Capital Resources
Cash
and Cash Equivalents
Cash and cash equivalents amounted to $79.2 million at
December 31, 2008 as compared to $142.5 million at
December 31, 2007, a decrease of $63.3 million.
Canadian subsidiaries held $29.9 million in cash at
December 31, 2008 which, due to funding requirements in
Canada, is unavailable to fund U.S. operations. Cash
and cash equivalents at December 31, 2008 and
December 31, 2007 exclude $20.2 million and
$48.2 million, respectively, of Canadian CP that was
initially purchased under the Company’s cash management
program. However, because the Canadian CP was not redeemed at
maturity in August 2007 due to the combination of a collapse in
demand for Canadian CP and the refusal of the
back-up
lenders to fund a redemption, the Company’s investments in
Canadian CP have instead been recorded as investments and
classified as non-current assets in the Consolidated Balance
Sheet at December 31, 2008. See “Investments”
below.
Investments
Investments include $7.4 million in Canadian CP
($20.2 million including accrued interest less a
$12.8 million write-down). The Canadian CP was issued by
certain special purpose entities sponsored by non-bank entities.
See “Significant Transactions in 2008.”
Corporate
Structure
Sun-Times Media Group, Inc. is a holding company and its assets
consist primarily of investments in its subsidiaries and
affiliated companies. As a result, the Company’s ability to
meet its future financial obligations is dependent upon the
availability of cash flows from its subsidiaries through
dividends, intercompany advances and other payments. Similarly,
the Company’s ability to pay any future dividends on its
common stock may be limited as a result of its dependence upon
the distribution of earnings of its subsidiaries and affiliated
companies. The Company’s subsidiaries and affiliated
companies are under no obligation to pay dividends and may be
subject to or become subject to statutory restrictions and other
restrictions that limit their ability to pay dividends or
repatriate funds to the United States.
Bankruptcy
and Insolvency Filings
On March 31, 2009, the Debtors filed voluntary petitions
under the Bankruptcy Code in the Bankruptcy Court. During the
pendency of the bankruptcy proceedings, the Debtors remain in
possession of their properties and assets and the management of
the Company continues to operate the businesses of the Debtors
as
debtors-in-possession.
As a
debtor-in-possession,
the Company is authorized to operate the business of the
Debtors, but may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court.
Since the Filings, the Company has continued to honor
subscriptions and provide advertising services to its customers.
In addition, the Company’s Canadian subsidiaries will
likely apply for court-supervised reorganization under the CCAA.
The Company’s Canadian subsidiaries have limited activities
generally related to legacy pension and post-employment
liabilities and certain litigation related contingent
liabilities. At December 31, 2008, the Canadian
subsidiaries had $29.9 million in cash and cash equivalents.
Subject to certain exceptions under the Bankruptcy Code, the
Debtors’ Filings automatically enjoined the continuation of
any judicial or administrative proceedings against the Debtors.
Any creditor actions to obtain possession of property from the
Debtors or to create, perfect or enforce any lien against
property of the Debtors are also enjoined. As a result,
creditors of the Debtors are precluded from collecting
pre-petition liabilities without the approval of the Bankruptcy
Court. Certain pre-petition liabilities have been paid after
obtaining the approval of the Bankruptcy Court, including
certain wages and benefits of employees.
Under the Bankruptcy Code, the Debtors have the right to assume
or reject executory contracts. An executory contract is one in
which the parties have mutual obligations to perform (e.g., real
property leases and service agreements). Unless otherwise
agreed, the assumption of a contract will require the Company to
cure all prior defaults under the related contract, including
all pre-petition liabilities. Unless otherwise agreed, the
rejection of a contract is deemed to constitute a breach of the
agreement as of the moment immediately preceding the Filing,
giving the other party to the contract a right to assert a
general unsecured claim for damages.
The Debtors have not as yet notified its known or potential
creditors of the Filing in an effort to identify pre-petition
claims against the Debtors. The Bankruptcy Court has not yet set
the bar date, which is the last date for most parties to file
proofs of claim with respect to non-governmental pre-petition
obligations. Payment terms for these amounts will be established
in connection with the Chapter 11 cases. There may be
differences between the amounts at which any such liabilities
are recorded in the financial statements and the amount claimed
by the Company’s creditors. Litigation may be required to
resolve any such disputes.
Currently, it is not possible to accurately predict the length
of time the Company will operate under Chapter 11 and the
supervision of the Bankruptcy Court, when or if the Company will
file a plan or plans of reorganization or liquidation with the
Bankruptcy Court, the outcome of the Chapter 11, including
the impact on the Company’s financial condition, or the
ultimate effect on the interests of the Company’s creditors
and stakeholders. However, under the priority scheme established
by the Bankruptcy Code and based on the amount and nature of the
Company’s assets and liabilities, it is highly unlikely the
Company’s common stock will retain any value or that
stockholders will receive any distribution or consideration.
Unless otherwise indicated, the discussion of the Company and
its business is presented in this 2008
10-K under
the assumption that the Company will continue to realize its
assets and settle its liabilities in the normal course of
business. The outcome of the proceedings under the Bankruptcy
Code will likely result in changes that materially affect the
Company’s operations and financial condition. The following
discussion on liquidity and capital resources does not reflect
the effects the Filings will have on the timing
and/or
extent of settling liabilities in existence at or prior to the
Filings.
Factors
That Are Expected to Affect Liquidity in the Future
Potential
Cash Outlays Related to Accruals for Income Tax Contingent
Liabilities
The Company has the following income tax liabilities recorded in
its Consolidated Balance Sheet at December 31, 2008:
(In thousands)
Income taxes payable
$
448
Deferred income tax liabilities
9,569
Other tax liabilities
607,960
$
617,977
The Company has recorded accruals to cover contingent
liabilities related to additional taxes, interest, and penalties
it may be required to pay in various tax jurisdictions. Such
accruals are included in “Other tax liabilities”
listed above.
Efforts to resolve or settle certain tax issues are ongoing and
may place substantial demands on the Company’s cash, cash
equivalents, investments and other resources to fund any such
resolution or settlement. The timing and amounts of any payments
the Company may be required to make are uncertain, but the
Company does not anticipate that it will make any material cash
payments to settle any of the disputed items during 2009. See
Note 20 to the consolidated financial statements.
Potential
Cash Outflows Related to Operations
The Company’s cash flow is expected to continue to be
cyclical, reflecting changes in economic conditions. The Company
is dependent upon the Sun-Times News Group for operating cash
flow. That cash flow in turn is dependent to a significant
extent on the Sun-Times News Group’s ability to sell
advertising in its Chicago area market. Advertising revenue for
the Sun-Times News Group declined 16% during 2008 compared to
2007. The advertising revenue declines have accelerated in the
third and fourth quarters of 2008 and the first quarter of 2009
with a decline in the first quarter of approximately 30% versus
the first quarter of 2008. Based on the Company’s
assessment of market conditions in the Chicago area and the
potential of these negative trends continuing, the Company has
considered and may continue to consider a range of options to
address the resulting significant shortfall in performance and
cash flow and has suspended its dividend payments since the
fourth quarter of 2006. As a result of continued declines in
revenue, the deteriorating economic climate and the significant,
pending tax liabilities, the Company has instituted bankruptcy
proceedings as discussed above.
Other
The Company’s independent registered public accounting firm
has issued an audit opinion which includes a statement
expressing doubt as to the Company’s ability to continue as
a going concern. See “Bankruptcy and Insolvency”and Note 1 to the consolidated financial statements.
Cash
Flows
Cash flows used in continuing operating activities were
$64.1 million in 2008, a $68.6 million decline
compared with $4.5 million provided by continuing operating
activities in 2007. The comparison of operating cash flows
between years is affected by several key factors. Net income
from continuing operations has decreased by $623.5 million
to a loss of $353.5 million in 2008, compared to net income
of $270.0 million for 2007. Income from continuing
operations in 2007 includes an income tax benefit of
$420.9 million, compared to income tax benefit of
$13.1 million in 2008. The decrease between years amounted
to $407.8 million, substantially all of which was comprised
of non-cash items previously discussed. See Note 20 to the
consolidated financial statements. Non-cash charges in 2008
included a write-off of goodwill and intangible assets of
$209.3 million and a write-down of property, plant and
equipment of $71.9 million, an expense of
$10.5 million for lower estimated proceeds received from
the sale of newspaper operations in prior years due to the
CanWest arbitration award and a $10.2 million write-down of
investments.
Cash flows provided by investing activities in 2008 were
$12.5 million compared with cash flows used in investing
activities of $48.0 million in 2007. The increase of
$60.5 million in cash provided by investing activities is
primarily the result of the 2007 purchase of $48.2 million
in Canadian CP, which was somewhat offset by the 2007 collection
of $8.5 million of notes receivable pursuant to the
settlement with Radler and $25.5 million provided in 2008
from the sale of investments and other assets (largely the sale
of Canadian CP).
Cash flows used in financing activities were $8.3 million
in 2008 and $9.3 million in 2007. The $1.0 million
decrease in cash used in financing activities is primarily
attributable to the $7.0 million used for debt repayments
and premiums upon extinguishment, escrow funding of
$5.4 million in 2007, and 2008 escrow funding of
$8.1 million (originally Cdn.$10.0 million) related to
certain defamation cases in Canada.
The Company is party to several leases for facilities and
equipment. These leases are operating leases in nature.
Capital
Expenditures
The Company has funded its recurring capital expenditures out of
cash provided by operating activities or existing cash balances.
The Company expects capital expenditures in 2009 to be lower
than 2008 expenditures.
Dividends
and Other Commitments
On December 13, 2006, the Company announced that its Board
of Directors reviewed its dividend policy and voted to suspend
the Company’s quarterly dividend of five cents ($0.05) per
share. As a result, the Company did not pay any dividend in 2007
or 2008.
Off-Balance
Sheet Arrangements
The Company does not have any material off-balance sheet
arrangements.
Commercial
Commitments and Contractual Obligations
In connection with the Company’s insurance program, letters
of credit are required to support certain projected
workers’ compensation obligations. At December 31,2008, letters of credit in the amount of $10.1 million were
outstanding which are largely collateralized by restricted cash
accounts.
Set out below is a summary of the amounts due and committed
under the Company’s contractual cash obligations at
December 31, 2008:
Due in
1 Year or
Due between
Due between
Due over
Total
Less
1 and 3 Years
3 and 5 Years
5 Years
(In thousands)
Long-term debt
$
—
$
—
$
—
$
—
$
—
Operating leases
46,514
5,221
8,003
8,134
25,156
Purchase obligations(1)
27,300
9,100
18,200
—
—
Total contractual cash obligations(2)
$
73,814
$
14,321
$
26,203
$
8,134
$
25,156
(1)
Pursuant to a ten-year distribution agreement, which is
terminable upon three years’ notice. Amounts shown
represent the base fixed fee component of the distribution
agreement for three years ($9,100 per year).
(2)
Refer to “Potential Cash Outlays Related to Accruals for
Income Tax Contingent Liabilities” for a discussion of
Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes” tax liabilities. Such amounts are excluded
from this table as the Company is unable to reliably estimate
the period of cash settlement, if any, with the taxing authority.
In addition to amounts committed under its contractual cash
obligations, the Company also assumed a number of contingent
obligations by way of guarantees and indemnities in relation to
the conduct of its business and disposition of certain of its
assets. The Company is also involved in various matters in
litigation. For more information on the Company’s
contingent obligations, see Item 3
“— Legal Proceedings”and
Note 22 to the consolidated financial statements.
Recent
Accounting Pronouncements
Effective January 1, 2008, the Company adopted
SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which defines fair value
as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value. The adoption of this statement did
not have a material impact on the Company’s results of
operations or financial condition.
The Company also adopted FASB Staff Position
No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which
defers for one year the effective date of SFAS No. 157
for non-financial assets and liabilities measured at fair value
on a nonrecurring basis. The purpose of this deferral is to
allow the FASB and constituents additional time to consider the
effect of various implementation issues that have arisen, or may
arise, for the application of SFAS No. 157.
On December 4, 2007, SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”
(“SFAS No. 160”), was issued. This Standard
changes the accounting for and reporting of noncontrolling or
minority interests (now called noncontrolling interest) in
consolidated financial statements. This Standard is effective
January 1, 2009. When implemented, prior periods will be
recast for the changes required by SFAS No. 160. The
adoption of this standard will not have a material impact on the
Company’s results of operations or financial condition.
On March 19, 2008, SFAS No. 161,
“Disclosures About Derivative Instruments and Hedging
Activities” (“SFAS No. 161”), was
issued. This Standard enhances the disclosure requirements for
derivative instruments and hedging activities. This Standard is
effective January 1, 2009. Since SFAS No. 161
requires only additional disclosures concerning derivatives and
hedging activities, adoption of SFAS No. 161 will not
affect the Company’s financial condition, results of
operations or cash flows.
On May 5, 2008, SFAS No. 162, “The Hierarchy
of Generally Accepted Accounting Principles,” was issued.
This Standard identifies the sources of accounting principles
and the framework for selecting the principles to be used in the
preparation of financial statements that are presented in
conformity with generally accepted accounting principles in the
U.S. The adoption of this standard will not have a material
impact on the Company’s results of operations or financial
condition.
Item 7A.
Quantitative
and Qualitative Disclosure About Market Risk
Not applicable.
Item 8.
Financial
Statements and Supplementary Data
The information required by this item appears beginning at
page 65 of this 2008
10-K.
(a) Evaluation
of Disclosure Controls and Procedures
Pursuant to
Rule 13a-15(e)
under the Exchange Act, the Company’s management evaluated
the effectiveness of the design and operation of the
Company’s disclosure controls and procedures with the
participation of its CEO and its CFO. Based on that evaluation,
for the reasons and in respect of the matters noted below in the
ensuing management’s report on internal control over
financial reporting, management concluded that the disclosure
controls and procedures were ineffective as of December 31,2008 in providing reasonable assurance that material information
requiring disclosure was brought to management’s attention
on a timely basis and that the Company’s financial
reporting was reliable.
Procedures were undertaken in order that management could
conclude that reasonable assurance exists regarding the
reliability of financial reporting and the preparation of the
consolidated financial statements contained in this filing.
Accordingly, management believes that the consolidated financial
statements included in this 2008
10-K fairly
present, in all material respects, the Company’s financial
position, results of operations and cash flows for the periods
presented.
Disclosure controls and procedures under
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act are those controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by the company in the reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
issuer’s management, including its principal executive and
principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure.
(b) Management’s
Report on Internal Control over Financial
Reporting
Internal control over financial reporting is the process
designed by, or under the supervision of, the CEO and CFO, and
effected by the Company’s Board of Directors, management
and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those
policies and procedures that:
1. Pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
2. Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
3. Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the financial statements.
A material weakness is defined within the Public Company
Accounting Oversight Board’s Auditing Standard No. 5
as a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or
detected on a timely basis.
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. As of December 31, 2008,
management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting using
the criteria in Internal Control — Integrated
Framework, established by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
Based on this assessment, management has concluded that internal
control over financial reporting was ineffective as of
December 31, 2008, as a result of the following material
weaknesses:
Advertising Revenue Recognition:The Company
identified a number of deficiencies related to the recognition
of advertising revenue and has concluded that the deficiencies,
in aggregate, represent a material weakness in internal controls
relating to the recognition of advertising revenue.
Specifically, the following deficiencies existed as of
December 31, 2008:
•
The controls related to the review and monitoring of advertising
rates were not operating effectively.
•
The review and approval controls related to advertising billing
and related reconciliation process were not operating
effectively.
•
Within the computer system used to process advertising revenue
transactions, controls over access to the program and data were
ineffectively designed and roles were not adequately defined and
assigned to enforce an effective segregation of duties.
Income Taxes:The Company lacked controls over
accounting for uncertain tax positions and foreign deferred
income taxes as there was an absence of appropriate
documentation or institutional knowledge of numerous complex
historical transactions, principally those that occurred prior
to 2004, that was required for these controls to be operating
effectively.
These material weaknesses resulted in a reasonable possibility
that a material misstatement of the Company’s annual or
interim financial statements would not be prevented or detected
on a timely basis.
Changes
in Internal Control over Financial Reporting and Other
Remediation
No changes were made to the Company’s internal control over
financial reporting during the three months ended
December 31, 2008 that have materially affected or are
reasonably likely to materially affect the Company’s
internal control over financial reporting.
Directors
and Executive Officers and Corporate Governance
The names, ages and position held of each of the directors and
executive officers of the Company are set forth below. All
directors are elected on an annual basis.
Chairman of the Board and Interim Chief Executive Officer
Michael E. Katzenstein, 49
Director
Thomas L. Kram, 50
Chief Financial Officer
James D. McDonough, 50
Chief Administrative Officer, General Counsel and Secretary
Robert B. Poile, 49
Vice Chairman of the Board
Graham W. Savage, 60
Director
Robert A. Schmitz, 68
Director
Blair Richard Surkamer, 56
President and Chief Operating Officer
Barbara Swanson, 51
Senior Vice President, Advertising and Marketing
The name, principal occupation, business experience and tenure
as executive officer of the Company is set forth below. Unless
otherwise indicated, all principal occupations have been held
for more than five years.
Jeremy L. Halbreich, Chairman of the Board and Interim
Chief Executive Officer. Mr. Halbreich was elected as a
director in January 2009 and was appointed the Company’s
Interim Chief Executive Officer in February 2009. Since
September 2008, Mr. Halbreich has been Chairman of the
Board, President and Chief Executive Officer of Amercomm LLC, a
media management and investment holding company founded by
Mr. Halbreich. From October 1998 to August 2008,
Mr. Halbreich was founder, Chairman of the Board, President
and Chief Executive Officer of American Consolidated Media LLC,
a national owner and operator of approximately 100 community
newspapers. Prior thereto, Mr. Halbreich was the President
and General Manager of The Dallas Morning News, where he spent
24 years working in marketing and general management
positions.
Michael E. Katzenstein, Director. Mr. Katzenstein
was elected as a director in January 2009. Since January 1,2009, Mr. Katzenstein has been a Senior Managing Director
at FTI Consulting Inc., a global consulting firm. Prior to that,
since 2001, Mr. Katzenstein had been a founding partner of
CXO, L.L.C., a turnaround management and advisory firm, which
was acquired by FTI Consulting in December 2008.
Mr. Katzenstein currently serves as Chairman of the Board
of RCN Corporation, a United States public reporting company.
Thomas L. Kram, Chief Financial Officer. Mr. Kram
joined the Company in July 2004 as Corporate Controller and
added the position of Chief Accounting Officer in January 2006.
He was elected Chief Financial Officer in March 2009.
Mr. Kram was formerly Vice President, Controller of Budget
Group, Inc. from July 1997 through December 2003.
James D. McDonough, Chief Administrative Officer, General
Counsel and Secretary. Mr. McDonough joined the company in
January 2005 as Assistant General Counsel and Chief Counsel of
the company’s Chicago Group,
which includes the Chicago Sun-Times. He became the Vice
President, General Counsel and Secretary of the Company on
December 29, 2006 and Chief Administrative Officer in
January 2009. Before joining the Company Mr. McDonough was
a partner in the law firm of Gardner Carton & Douglas
LLP in Chicago, where he acted as outside counsel to the Audit
Committee of the Company.
Robert B. Poile, Director. Mr. Poile was elected as
a director in June 2008. Mr. Poile is currently a Portfolio
Strategist at Polar Securities, Inc. and has been President of
Trident Advisors Inc., a private investment company co-founded
by Mr. Poile, from June 1998 to present. From October 2004
to April 2007, Mr. Poile was President and Chief Executive
Officer of ClubLink Corporation, an owner, operator and
developer of golf courses. Mr. Poile currently serves as a
Trustee of Cinram International Income Fund, a Canadian public
reporting company.
Graham W. Savage, Director. Mr. Savage was elected
as a director in 2003. Mr. Savage served for 21 years,
seven years as the Chief Financial Officer, at Rogers
Communications Inc., a major Toronto-based media and
communications company. Mr. Savage currently serves as
Chairman of Callisto Capital LP, a merchant banking firm based
in Toronto. Mr. Savage currently serves as a director and
chairman of the audit committee of Canadian Tire Corporation,
Limited, a Canadian public reporting company, and as a director
and chairman of the audit committee of Cott Corporation, a
United States public reporting company.
Robert A. Schmitz, Director. Mr. Schmitz was elected
as a director in January 2009. Since 1999, Mr. Schmitz has
been a managing director at Quest Turnaround Advisors, LLC, a
restructuring firm. In his capacity as a managing director of
Quest, since 2008, he has served as Chief Restructuring Officer
of World Space Inc., a global satellite radio company, and from
2004 to 2008, Mr. Schmitz served as Chief Operating Officer
of PTV Inc., a holding company for a number of businesses in a
variety of industries.
Blair Richard Surkamer, President and Chief Operating
Officer. Mr. Surkamer has served as President of the
Company since February 2009 and, from October 2007 to February
2009, as Chief Operating Officer of the Sun-Times News Group.
Mr. Surkamer joined the Company in January 2007 as Vice
President of Operations. Prior to joining the Sun-Times News
Group, from 2003 to 2007, Mr. Surkamer was President and
Chief Operating Officer of Rollex Corp., a manufacturer and
distributor of building products based in Elk Grove Village,
Illinois, and from 2002 to 2003, Mr. Surkamer was President
of Graymills Corporation, a manufacturer of print, packaging and
industrial fluid power products based in Chicago.
Mr. Surkamer worked for Chicago Tribune Company from 1986
to 1997 in a variety of capacities, including as Director of
Manufacturing and Distribution, Director of Metro Circulation
and Production Director.
Barbara Swanson, Senior Vice President, Advertising and
Marketing. Ms. Swanson joined the Company in March 2008 as
Group Vice President, Advertising and Marketing and, in March
2009, became Senior Vice President, Advertising and Marketing.
From October 2006 to March 2008, Ms. Swanson was Vice
President, Sales-Midwest of A.R. Systems, Inc., a receivables
management firm. Prior to that, from 1979 to 2006,
Ms. Swanson worked for Chicago Tribune Company in a variety
of capacities, most recently as Vice President, Classified
Advertising.
Audit
Committee
The Company’s Audit Committee currently consists of
Messrs. Katzenstein, Schmitz and Savage (Chairman). The
Board of Directors has previously determined that
Mr. Savage, who became a member of the Audit Committee in
November 2003, is an audit committee financial expert with the
relevant accounting or related financial management expertise as
described in Mr. Savage’s biography above.
Code of
Ethics
The Company has implemented a Code of Business Conduct and
Ethics, which applies to all employees of the Company, including
each of its Chief Executive Officer, Chief Financial Officer and
principal accounting officer or controller or persons performing
similar functions. The text of the Code of Business Conduct and
Ethics can be accessed on the Company’s website at
www.thesuntimesgroup.com. Any changes to the Code of Business
Conduct and Ethics will be posted on the Company’s website.
Under the federal securities laws, the directors and executive
officers and any persons holding more than 10% of any equity
security of the Company are required to report their initial
ownership of any equity security and any subsequent changes in
that ownership to the SEC. Specific due dates for these reports
have been established by the SEC and the Company is required to
disclose in this report any failure to file such reports by
those dates during 2008. To the Company’s knowledge, except
as set forth in the following sentence, based upon a review of
the copies of the reports furnished to the Company and written
representations that no other reports were required, these
filing requirements were satisfied during the 2008 fiscal year.
Form 3s and 4s were not timely filed as follows:
(i) William G. Barker, III, the former Senior Vice
President and Chief Financial Officer of the Company, failed to
timely file five reports regarding the vesting of certain grants
of Deferred Stock Units (“DSUs”) and restricted stock;
(ii) Peter J. Dey, a former director of the Company, failed
to timely file two reports regarding the grant of DSUs;
(iii) Cyrus F. Freidheim, Jr., the former President
and Chief Executive Officer of the Company, failed to timely
file six reports regarding the vesting of certain grants of DSUs
and restricted stock; (iv) Thomas L. Kram, the Chief
Financial Officer of the Company, failed to timely file three
reports regarding the vesting of certain grants of DSUs;
(v) Rohit Kumar, the Vice President of Technology of the
Company, failed to timely file two reports regarding the vesting
of certain grants of DSUs; (vi) Frederic R. Lebolt,
President of Fox Valley Publishing, failed to timely file one
report regarding the vesting of a grant of DSUs;
(vii) David C. Martin, the Senior Vice President, Business
development of the Company, failed to timely file two reports
regarding the vesting of certain grants of DSUs;
(viii) James D. McDonough, the Chief Administrative
Officer, General Counsel and Secretary of the Company, failed to
timely file seven reports regarding the vesting of certain
grants of DSUs and restricted stock; (ix) Robert B. Poile,
a director of the Company, failed to timely file a Form 3
and one report regarding the grant of DSUs; and (x) Blair
Richard Surkamer, the President and Chief Operating Officer of
the Company, failed to timely file six reports regarding the
vesting of certain grants of DSUs and restricted stock.
Item 11.
Executive
Compensation
COMPENSATION
OF EXECUTIVE OFFICERS AND DIRECTORS
Summary
Compensation Table for Named Executive Officers
The following table sets forth compensation information for the
fiscal year ended December 31, 2008 for (i) the person
who served during 2008 as the Company’s principal executive
officer, and (ii) the two other most highly compensated
executive officers of the Company (collectively, the “named
executive officers”).
Non-Equity
Incentive
Stock
Option
Plan
All other
Salary
Bonus
Awards
Awards
Compensation
Compensation
Total
Name and Principal Position
Year
($)(1)
($)
($)(2)
($)
($)
($)
($)
Cyrus F. Freidheim, Jr.(3),
2008
$
380,800
—
$
994,783
(4)
—
—
$
12,356
(5)
$
1,387,939
Former President and
2007
$
680,000
—
$
608,879
(4)
—
—
$
12,079
$
1,300,958
Chief Executive Officer
2006
$
163,561
$
87,561
$
121,189
(4)
—
—
—
$
372,311
Blair Richard Surkamer(6),
2008
$
284,625
$
94,875
$
104,017
—
—
$
14,266
(7)
$
497,783
President and Chief Operating Officer
2007
$
252,962
$
319,062
(8)
$
5,131
—
—
—
$
577,155
James D. McDonough(9),
2008
$
250,000
$
84,562
$
141,039
—
—
$
7,155
(10)
$
482,756
Chief Administrative
2007
$
275,000
—
$
76,482
—
—
$
9,844
$
361,326
Officer, General Counsel and Secretary
2006
$
225,000
$
25,000
$
27,694
—
—
$
13,090
$
290,784
(1)
In 2008, each of the named executive officers received a grant
of restricted Class A common stock in lieu of a portion of
his cash salary as follows: (i) Mr. Freidheim received
a grant of 262,465 shares of restricted stock in lieu of
44% of his 2008 base salary of $680,000;
(ii) Mr. Surkamer received a grant of
31,625 shares of restricted stock in lieu of 10% of his
2008 base salary of $316,250; and (iii) Mr. McDonough
received a grant of 27,500 shares of restricted stock in
lieu of 10% of his 2008 base salary of $275,000. The grants
vested 25%
on each of February 15, May 15, August 15 and
November 15, 2008 and are reflected under “Stock
Awards” and not under “Salary.”
(2)
The amounts in this column (other than $66,255 in 2006, $602,010
in 2007 and $695,583 in 2008 for Mr. Freidheim (as to which
see Note (4) to this table below)) reflect the dollar
amount recognized for financial statement reporting purposes for
the applicable fiscal year in accordance with Statement of
Financial Accounting Standards No. 123R “Share-Based
Payment”(“SFAS No. 123R”) with
respect to (i) awards of DSUs granted in 2007, and
(ii) awards of restricted stock granted in 2008 as
described in Note (1) to this table above. Assumptions used
in the calculation of these amounts are included in Note 15
to the Company’s audited financial statements for the
fiscal year ended December 31, 2008 included in this Annual
Report on
Form 10-K.
(3)
Mr. Freidheim became President and Chief Executive Officer
on November 14, 2006. Prior to that date,
Mr. Freidheim received compensation as a director of the
Company. Amount shown under “Salary” for 2006 includes
$76,000 of cash director fees paid to Mr. Freidheim in 2006
and amount shown under “Stock Awards” for 2006
includes $54,934 in respect of DSUs granted to
Mr. Freidheim as a director in 2006.
Mr. Freidheim’s employment with the Company terminated
effective February 28, 2009.
(4)
Reflects the dollar amount recognized for financial statement
reporting purposes for the applicable fiscal year in accordance
with SFAS No. 123R with respect to (i) awards to
Mr. Freidheim in December 2007 of 150,000 shares of
restricted Class A common stock and 386,364 DSUs; and
(ii) awards to Mr. Freidheim in November 2006 of 7,277
DSUs (including dividend equivalent DSUs) granted to him as a
director, 100,000 shares of restricted Class A common
stock and a stock opportunity award with respect to up to
400,000 shares of Class A common stock. See
“— Employment Agreements — Terms of
Freidheim Arrangement” for a detailed description of the
2006 awards. Under SFAS No. 123R, the grant date fair value
of the awards of restricted Class A common stock are
expensed ratably over the applicable vesting periods. The grant
date fair value of the 200,000-share portion of the stock
opportunity award that vests based upon the attainment of
specified price levels for the Company’s Class A
common stock was estimated for financial statement reporting
purposes using a Monte Carlo simulation model and the estimated
fair value is being expensed over the median expected vesting
periods produced by the Monte Carlo simulation. With respect to
the EBITDA Award portion of the stock opportunity award, under
SFAS No. 123R, no expense was recognized for financial
statement reporting purposes for the fiscal year ended
December 31, 2006 because the relevant performance targets
and objectives had not been established as of December 31,2006, no expense was recognized for financial statement
reporting purposes for the fiscal year ended December 31,2007 because the Company determined that it was more likely than
not that the threshold target for the EBITDA Award would not be
met, and no expense was recognized for financial statement
reporting purposes for the fiscal year ended December 31,2008 because the threshold target for the EBITDA Award was not
met.
(5)
Includes contributions made by the Company under the
Company’s 401(k) plan ($3,063) and perquisites that
aggregate less than $10,000.
Includes contributions made by the Company under the
Company’s 401(k) plan ($3,063) and perquisites consisting
of an automobile allowance and reimbursement of club membership
dues and parking fees, none of which individually exceeds
$25,000.
(8)
Consists of a sign-on bonus ($130,000) and a guaranteed bonus
($189,062).
(9)
Mr. McDonough became Chief Administrative Officer of the
Company on February 11, 2009.
(10)
Includes contributions made by the Company under the
Company’s 401(k) plan ($3,063) and perquisites that
aggregate less than $10,000.
Employment
Agreements
The Company has entered into compensation or employment
arrangements or agreements with Messrs. Surkamer and
McDonough. The Company has also entered into a Key Employee
Severance Program Participation
Agreement with Mr. Surkamer. The Company has sought to
reject these agreements in its Chapter 11 proceedings. The
Company also had an employment arrangement with
Mr. Freidheim. For a discussion of amounts paid or that
could be payable to the named executive officers upon
termination of employment or a change of control of the Company,
see “Potential Payments Upon Termination or Change of
Control.”
Terms
of Freidheim Arrangement
On November 14, 2006, the Board of Directors appointed
Mr. Freidheim as its President and Chief Executive Officer.
In connection with Mr. Freidheim’s appointment, the
Company agreed to a compensation arrangement (the
“Freidheim Arrangement”) for Mr. Freidheim. The
compensation arrangement with Mr. Freidheim provides for:
(a) an annual base salary of $680,000; (b) an annual
bonus for 2007 (with a target bonus of 100% of base salary and a
maximum bonus of 200% of base salary), based on performance
against EBITDA-based targets, payable 50% in cash and 50% in
shares of the Company’s Class A common stock, with the
number of shares to be determined based on the closing price of
a share of the Company’s Class A common stock on
November 14, 2006 ($5.53); (c) a pro-rata bonus for
2006 of $87,561; (d) a grant of 100,000 shares of
restricted stock that vest 50% on November 15, 2007 and 50%
on November 15, 2008, subject to continued employment as
Chief Executive Officer on the applicable date; and (e) a
grant of a “stock opportunity award” pursuant to which
Mr. Freidheim will be eligible to earn
(i) 50,000 shares of the Company’s Class A
common stock when the average daily closing price of a share of
the Company’s Class A common stock over any
consecutive four-month period exceeds $7.00, and an additional
50,000 shares of the Company’s Class A common
stock when the average daily closing price of a share of the
Company’s Class A common stock over any consecutive
four-month period exceeds $8.00, $9.00 and $10.00, respectively
(so that a maximum of 200,000 shares of the Company’s
Class A common stock may be earned under this portion of
the stock opportunity award) and (ii) 50,000 shares
(at threshold), 100,000 shares (at target) or
200,000 shares (at maximum) (the “EBITDA Award”)
based on performance against two-year EBITDA-based targets and
other long-term corporate objectives for Mr. Freidheim
including, but not limited to, the Company’s financial
strength, organization and management and strategy going forward
(so that a maximum of 400,000 shares of the Company’s
Class A common stock in the aggregate may be earned under
both portions of the stock opportunity award), subject in each
case to continued employment as Chief Executive Officer on the
applicable date, and provided further that any shares earned
under the stock opportunity award may not be sold, transferred
or otherwise disposed of by Mr. Freidheim so long as he
remains Chief Executive Officer of the Company (except to pay
taxes incurred in connection with earning such shares). No
shares were earned under the EBITDA Award because the cumulative
EBITDA targets for 2007 and 2008 were not met.
Mr. Freidheim’s employment with the Company terminated
effective February 28, 2009.
Terms
of Surkamer Arrangement
Mr. Surkamer commenced employment with the Company as Vice
President of Operations on February 12, 2007 and became
Chief Operating Officer-Sun-Times News Group on October 1,2007 and President and Chief Operating Officer of the Company on
February 11, 2009. In connection with
Mr. Surkamer’s appointment, the Company agreed to a
compensation arrangement (the “Surkamer Arrangement”)
for Mr. Surkamer. The Surkamer Arrangement provides for:
(a) an annual base salary of $275,000 (which was increased
to $316,250 effective October 8, 2007 and $385,000
effective February 11, 2009); (b) a sign-on bonus of
$130,000; (c) a guaranteed bonus for 2007 of 75% of
Mr. Surkamer’s annual base salary; and
(d) eligibility to receive an award under the
Company’s 2006 Long-Term Incentive Plan (the
“LTIP”) in an amount of up to 75% of
Mr. Surkamer’s annual base salary (prorated based upon
Mr. Surkamer’s start date). In addition,
Mr. Surkamer is eligible for participation in the
Company’s other incentive programs, benefit plans and
programs and perquisites for which other senior executives of
the Company generally are eligible.
Terms
of McDonough Agreement
Effective December 29, 2006, the Company entered into an
Employment Agreement with Mr. McDonough (the
“McDonough Agreement”) providing for
Mr. McDonough’s employment as Vice President, General
Counsel and Secretary of the Company. On February 11, 2009,
Mr. McDonough also became Chief Administrative Officer of
the Company. Mr. McDonough reports to the President and
Chief Executive Officer of the Company. The
McDonough Agreement is for the period to December 31, 2007,
and the term of employment is renewable for successive periods
of one year upon expiration of the previous term, unless the
Board of Directors or Mr. McDonough gives written notice of
non-renewal at least 30 days prior to the end of each such
period. The Company may also elect to terminate the McDonough
Agreement at the end of its then current term without
terminating Mr. McDonough’s employment with the
Company. The McDonough Agreement was renewed for the period to
December 31, 2008 and has again been renewed for the period
to December 31, 2009.
Under the McDonough Agreement, Mr. McDonough is paid an
annual salary of $275,000 (which was increased to $350,000
effective February 11, 2009) and will be eligible for
an annual bonus targeted at 50% his annual base salary. In
addition, Mr. McDonough is eligible to receive an annual
award under the LTIP in an amount to be determined by the
Compensation Committee. Mr. McDonough is eligible for
participation in the Company’s other incentive programs,
benefit plans and programs and perquisites for which other
senior executives of the Company were, at the time, eligible,
including executive life and long-term disability insurance, the
premiums for which are paid for by the Company.
Outstanding
Equity Awards at Fiscal 2008 Year-End
Option Awards
Stock Awards
Equity
Equity
Incentive
Incentive
Plan
Equity
Plan
Awards:
Incentive
Awards:
Market or
Plan
Number of
Payout
Awards:
Unearned
Value of
Number of
Number of
Number of
Number of
Market Value
Shares,
Unearned
Securities
Securities
Securities
Shares or
of Shares
Units or
Shares,
Underlying
Underlying
Underlying
Units of
or Units of
Other
Units or
Unexercised
Unexercised
Unexercised
Option
Stock That
Stock
Rights That
Other Rights
Options
Options
Unearned
Exercise
Option
Have Not
That Have
Have Not
That Have
(#)
(#)
Options
Price
Expiration
Vested
Not Vested
Vested
Not Vested
Name
Exercisable
Unexercisable
(#)
($/Sh)
Date
(#)
($)(1)
(#)(2)
($)(1)
Cyrus F. Freidheim, Jr.(3)
—
—
—
—
—
257,576
(4)
$
12,879
100,000
(5)
$
5,000
Blair Richard Surkamer
—
—
—
—
—
75,345
(6)
$
3,767
23,174
$
1,159
James D. McDonough
—
—
—
—
—
62,382
(7)
$
3,119
15,449
$
772
(1)
Amounts are calculated based upon the per share closing price of
the Class A common stock on December 31, 2008 of $0.05.
(2)
The amounts in this column (other than those for
Mr. Freidheim (as to which see Note (5) to this table
below)) consist of performance-vesting DSUs awarded pursuant to
the Company’s LTIP and 1999 Stock Incentive Plan on
December 21, 2007. Performance vesting DSUs vest at either
threshold, target or maximum levels based on Sun-Times News
Group cumulative EBITDA for 2007 and 2008 and individual
two-year goals for each participant such that if the EBITDA
target and individual goals are met, one-half of the DSU will
vest in the first quarter of 2009 and the other half will vest
in the first quarter of 2010. Amounts shown are based on full
vesting of the DSU awards as all DSUs vested automatically upon
the occurrence of the January 16, 2009 change in control.
Consists of the unvested portion of a grant of 386,364 DSUs that
vest
331/3%
on each of December 18, 2008, 2009 and 2010, in each case
subject to continued employment on such date. All DSUs vested
automatically upon the occurrence of the January 16, 2009
change in control.
(5)
Consists of a grant in November 2006 of a “stock
opportunity award.” See “— Employment
Agreements — Terms of Freidheim Arrangement” for
a description of this award. Amounts shown are based on
achieving threshold performance under both portions of the stock
opportunity award.
(6)
Consists of the unvested portion of (i) a grant of 89,844
DSUs that vest
331/3%
on each of December 18, 2008, 2009 and 2010; and
(ii) a grant of 23,174 DSUs that vest
331/3%
on each of February 13, 2008, 2009 and 2010, in each case
subject to continued employment on such date. All DSUs vested
automatically upon the occurrence of the January 16, 2009
change in control.
Consists of the unvested portion of (i) a grant of 78,125
DSUs that vest
331/3%
on each of December 18, 2008, 2009 and 2010; and
(ii) a grant of 15,449 DSUs that vest
331/3%
on each of February 13, 2008, 2009 and 2010, in each case
subject to continued employment on such date. All DSUs vested
automatically upon the occurrence of the January 16, 2009
change in control.
Potential
Payments Upon Termination or Change of Control
Named
Executive Officers Who Are Still Employed With the
Company
Mr. Surkamer
On December 23, 2008 (the “Surkamer Effective
Date”), the Company entered into a Key Employee Severance
Program Participation Agreement with Mr. Surkamer (the
“Surkamer Severance Agreement”), which supersedes all
prior severance agreements between the Company and
Mr. Surkamer. The Surkamer Severance Agreement provides
that in the event Mr. Surkamer’s employment is
terminated by the Company other than for cause or as a result of
death or permanent disability prior to a change in control,
Mr. Surkamer will receive the following: (i) a lump
sum payment for any accrued, unused vacation time, reduced by
all applicable tax withholding requirements; (ii) a lump
sum payment equal to Mr. Surkamer’s then current
target bonus; (iii) continuation of
Mr. Surkamer’s base salary in effect on the date of
termination, payable in the same manner that
Mr. Surkamer’s payroll is currently handled, less all
appropriate withholding amounts and deductions, for the one-year
period immediately following Mr. Surkamer’s
termination; and (iv) continuation of all then-current
welfare benefit programs in which Mr. Surkamer participates
on the date of his termination of employment, subject only to
Mr. Surkamer’s continued premium contributions at the
same level as on the date of termination, for the one-year
period immediately following Mr. Surkamer’s
termination.
In the event of a change in control, and the subsequent
termination of Mr. Surkamer’s services by the Company
other than for cause or as a result of death or permanent
disability or by Mr. Surkamer for good reason,
Mr. Surkamer will receive the following: (i) a lump
sum payment for any accrued, unused vacation time, reduced by
all applicable tax withholding requirements; (ii) a lump
sum payment equal to Mr. Surkamer’s then current
target bonus multiplied by 2; (iii) continuation of
Mr. Surkamer’s base salary in effect on the date of
termination, payable in the same manner that
Mr. Surkamer’s payroll is currently handled, less all
appropriate withholding amounts and deductions, for the two-year
period immediately following Mr. Surkamer’s
termination; and (iv) continuation of all then-current
welfare benefit programs in which Mr. Surkamer participates
on the date of his termination of employment, subject only to
Mr. Surkamer’s continued premium contributions at the
same level as on the date of termination, for the one-year
period immediately following Mr. Surkamer’s
termination. In the event of a change in control that is a Stock
Acquisition Change in Control or a Disposition Change in
Control, and the subsequent termination of
Mr. Surkamer’s services by Mr. Surkamer for good
reason, Mr. Surkamer will not be entitled to the severance
benefits described above if, in connection with such change in
control, he is offered a position substantially similar to his
then current position or he is employed by the purchaser in such
change in control within one year following such change in
control. Under the terms of the Surkamer Severance Agreement and
of the equity-based awards he has been granted by the Company,
all unexpired equity-based awards then held by Mr. Surkamer
will vest upon a change in control. The term of the Surkamer
Severance Agreement runs from the Surkamer Effective Date until
the second (2nd) anniversary of the Surkamer Effective Date and
shall automatically renew for successive one (1) year
intervals thereafter unless the Company shall have given at
least one hundred eighty (180) days advance written notice
to Mr. Surkamer of the cessation of such automatic renewal.
Mr. Surkamer has agreed that during his employment with the
Company, and for a period of one year after the effective date
of his termination from the Company for whatever reason, he will
be subject to non-solicitation provisions as set forth in the
Surkamer Severance Agreement.
For purposes of the Surkamer Severance Agreement, a “change
in control” of the Company is deemed to have occurred upon:
(a) the acquisition of securities of the Company
representing more than fifty percent (50%) of the combined
voting power of the Company’s then outstanding securities
(a “Stock Acquisition Change in Control”); or
(b) the entry into a plan or agreement for a
reorganization, merger or consolidation, or sale or other
disposition of all or substantially all of the assets of the
Company (a “Disposition Change in Control”); or
(c) the members of the Board of Directors as of the
Surkamer Effective Date and any new directors whose election by
the Board or
nomination by the Board for election was approved by a vote of a
least two-thirds of the directors then still in office who
either were in office on the Surkamer Effective Date or whose
election or nomination for election was previously so approved
ceasing for any reason to constitute at least a majority of the
Board. Under the terms of the Surkamer Severance Agreement,
“cause” means (i) Mr. Surkamer engaging in
intentional and willful misconduct, including a breach of his
duty of loyalty to the Company, to the detriment of the Company,
or (ii) Mr. Surkamer being convicted of, or entering a
plea of nolo contendere to, a crime involving fraud,
dishonesty or violence. Under the terms of the Surkamer
Severance Agreement, “good reason” means the
occurrence of a change in control followed by Mr. Surkamer
experiencing (i) a material reduction in base salary,
title, authority or responsibilities, (ii) required
relocation more than 50 road miles from the office where
Mr. Surkamer currently works, or (iii) the failure of
the Company to obtain an explicit undertaking from any successor
to honor the terms of the Surkamer Severance Agreement. The
reconstitution of the Company’s Board of Directors on
January 16, 2009 constituted a change in control under the
Surkamer Severance Agreement.
On February 12, 2008, the Company granted a Cash Incentive
Award under the LTIP to Mr. Surkamer with a target amount
of $118,594. Under the LTIP, upon a change in control (which the
reconstitution of the Company’s Board of Directors on
January 16, 2009 constituted) the award vested at target
and will be paid upon the earliest of:
(i) February 12, 2011, (ii) death,
(iii) permanent disability, (iv) retirement
(termination after
age 591/2
and with at least 5 years of service), (v) involuntary
termination without cause (as defined in the Surkamer Severance
Agreement), (vi) voluntary termination for Good Reason (as
defined in the Surkamer Severance Agreement), or (vii) the
closing of a business combination. Upon the change in control,
Mr. Surkamer’s then-vested 98,519 DSU’s (valued
at $4,926 using the per share closing price of $0.05)
automatically vested.
The Company has sought to reject the Surkamer Severance
Agreement and the Cash Incentive Award in its Chapter 11
proceedings.
Mr. McDonough
The McDonough Agreement may be terminated: (a) by
Mr. McDonough at the end of the term; (b) upon
Mr. McDonough’s death or disability; (c) by the
Company for cause; or (d) by Mr. McDonough for any
reason upon 30 days’ notice, in which case
Mr. McDonough will be entitled to receive his salary and
health and welfare benefits through his final date of active
employment, plus any accrued but unused vacation pay and any
benefits required by law or any other plan or program in which
he is a participant. Under the terms of the McDonough Agreement,
“cause” means that Mr. McDonough has
(i) been convicted of (or has pleaded guilty or no contest
to) a felony, or (ii) engaged in conduct that constitutes
willful gross neglect or willful gross misconduct with respect
to his employment duties; provided, no act or omission on
Mr. McDonough’s part shall be considered
“willful” if conducted in good faith and with a
reasonable belief that his conduct was in the best interests of
the Company and further provided the Company may not terminate
Mr. McDonough’s employment under clause (ii)
unless Mr. McDonough is given at least thirty days to cure
any such conduct (if capable of cure), and has received a
certified copy of a resolution of the Board of Directors
terminating his employment for cause and stating specifically
the conduct that the Board believes satisfies the definition of
cause.
The McDonough Agreement may also be terminated by the Company
for any other reason upon 30 days’ notice or by the
Company at the end of the term, in which case, except if such
termination occurs within the
24-month
period following a change of control of the Company,
Mr. McDonough will be entitled to receive a single lump sum
payment equal to (a) one times the sum of
Mr. McDonough’s final base salary and target bonus,
(b) a pro-rata target bonus for the year in which
termination of employment occurs, and (c) an amount equal
to any bonus for Mr. McDonough earned and unpaid as of
Mr. McDonough’s termination of employment.
Mr. McDonough will also be entitled to receive health and
welfare benefits for a period ending one year from the date of
Mr. McDonough’s termination of employment (the
“Continuation Period”). Notwithstanding the above, if
the Company elects to terminate the McDonough Agreement at the
end of its then current term but not terminate
Mr. McDonough’s employment, and if the Company has
comparable severance policies in effect as of the date on which
the McDonough Agreement is terminated, then Mr. McDonough
will not be entitled to receive the payments and benefits
described in this paragraph. Upon termination of
Mr. McDonough’s services as described in this
paragraph, (i) all unvested cash awards will become fully
vested and payable (as applicable), (ii) all unvested
equity-based
awards which, in accordance with applicable vesting schedules,
would have vested during the Continuation Period will become
fully vested and payable and (iii) all other unvested
equity-based awards will be forfeited.
In the event of a change of control of the Company and the
subsequent termination of Mr. McDonough’s employment
by the Company without cause, by the Company at the end of the
then current term without comparable severance policies then in
effect or by Mr. McDonough for good reason, within
24 months after the change of control, Mr. McDonough
will be entitled to his base salary and health and welfare
benefits through his final date of active employment and any
accrued but unused vacation pay. Mr. McDonough will also be
entitled to receive: (a) a lump sum amount equal to his
final annual base salary, multiplied by two, plus two times his
target bonus, (b) a target bonus for the year of
termination prorated for service through the date of
termination, (c) the continuation of health and welfare
benefits for a period ending two years from the date of
termination, and (d) any bonus that was earned with respect
to a prior calendar year but not paid as of the date of
termination. In addition, upon a change of control, all unvested
awards and grants become immediately fully vested and payable
(if applicable). All severance payments will be made to
Mr. McDonough in a single lump sum payment on a date that
is not later than ten business days following the date of
termination of his services. The McDonough Agreement provides
that if payments to Mr. McDonough would result in the
imposition of an excise tax under Section 4999 of the Code,
then the payments will be reduced so that no excise tax will be
imposed, but only if the effect of such reduction would be to
place Mr. McDonough in a better after-tax economic position
than he would have been in had no such reduction been effected.
For purposes of the McDonough Agreement, a “change of
control” of the Company is deemed to have occurred upon:
•
the acquisition of securities of the Company representing more
than fifty percent (50%) of the combined voting power of the
Company’s then outstanding securities; or
•
the members of the Board of Directors as of December 29,2006 (the “Effective Date”) and any new directors
whose election by the Board or nomination by the Board for
election was approved by a vote of a least two-thirds of the
directors then still in office who either were in office on the
Effective Date or whose election or nomination for election was
previously so approved ceasing for any reason to constitute at
least a majority of the Board;
•
the adoption, enactment or effectiveness of any action that
materially limits or diminishes the power or authority of the
Company’s board of directors or any committee thereof, if
such action has not been approved by a vote of a least
two-thirds of the directors then still in office who either were
in office on the Effective Date or whose election or nomination
for election was previously so approved ceasing for any reason
to constitute at least a majority of the Board; or
•
the consummation of, or the execution of a definitive agreement
the consummation of which would result in, a reorganization,
merger or consolidation, or sale or other disposition of all or
substantially all of the assets of the Company to an
unaffiliated buyer; or
•
the shareholder approval of a complete liquidation or
dissolution of the Company.
The reconstitution of the Company’s Board of Directors on
January 16, 2009 constituted a change in control under the
McDonough Agreement. Under the terms of the McDonough Agreement,
“good reason” exists if a change of control has
occurred and, at any time during the twenty-four months
thereafter, any of the following has also occurred:
(i) Mr. McDonough’s title, authority, or
principal duties are materially reduced, materially diminished
or eliminated; (ii) Mr. McDonough’s base salary
is reduced or his benefits are diminished (except in connection
with reduction of base salaries or benefits, as the case may be,
on substantially a Company-wide basis, so long as
Mr. McDonough’s reduction is not less favorable on a
percentage basis than the reductions applicable to other members
of senior management of the Company); or
(iii) Mr. McDonough’s principal place of
employment is relocated to a location that results in an
increase in his one-way commute of more than thirty-five road
miles from the prior commuting distance.
Mr. McDonough has agreed that during his employment with
the Company, and for a period of one year after the effective
date of his termination from the Company for whatever reason, he
will be subject to non-competition and non-solicitation
provisions as set forth in the McDonough Agreement.
On February 12, 2008, the Company granted a Cash Incentive
Award under the LTIP to Mr. McDonough with a target amount
of $103,125. Under the LTIP, upon a change in control (which the
reconstitution of the Company’s Board of Directors on
January 16, 2009 constituted) the award vested at target
and will be paid upon the earliest of:
(i) February 12, 2011, (ii) death,
(iii) permanent disability, (iv) retirement
(termination after
age 591/2
and with at least 5 years of service), (v) involuntary
termination without cause (as defined in the McDonough
Agreement), (vi) voluntary termination for Good Reason (as
defined in the McDonough Agreement), or (vii) the closing
of a business combination. Upon the change in control,
Mr. McDonough’s then-vested 77,831 DSU’s (valued
at $3,892 using the per share closing price of the Class A
common stock at December 31, 2008 of $0.05) automatically
vested.
The Company has sought to reject the McDonough Agreement and the
Cash Incentive Award in its Chapter 11 proceedings.
Named
Executive Officers Who Are No Longer Employed With the
Company
Mr. Freidheim
Pursuant to the Freidheim Arrangement, after December 31,2007, either the Company or Mr. Freidheim could terminate
the employment relationship with 60 days’ notice. If
Mr. Freidheim’s employment was terminated by the
Company (other than for cause or due to death or disability),
Mr. Freidheim would be entitled to receive continuation of
his base salary, target annual bonus and employee benefits
through the date falling six months following the date of
termination of employment. In addition, if
Mr. Freidheim’s employment was terminated by the
Company (other than for cause or due to death or disability),
then (i) his shares of restricted stock that would have
vested during the
12-month
period following termination would be treated as vested as of
the date of termination; and (ii) Mr. Freidheim would
have 12 months from the date of termination of employment
to earn the shares of the Company’s Class A common
stock under his stock opportunity award, and after such
12-month
period such award would be cancelled and expire. In the event of
a change of control of the Company as defined in the LTIP, and
the subsequent termination of Mr. Freidheim’s
employment by the Company without cause or by Mr. Freidheim
for good reason, within 24 months after the change of
control, Mr. Freidheim would be entitled to his base salary
and health and welfare benefits through his final date of active
employment and any accrued but unused vacation pay.
Mr. Freidheim would also be entitled to receive: (a) a
lump sum amount equal to 50% of his final annual base salary,
plus 50% of the higher of his target bonus or the highest annual
bonus actually received during the two most recent years,
(b) a target bonus for the year of termination prorated for
service through the date of termination, and (c) the
continuation of health and welfare benefits for a period ending
six months from the end of the current term of his agreement. In
addition, upon a change of control, all unvested awards and
grants become immediately fully vested and payable (if
applicable). All severance payments would be made to
Mr. Freidheim in a single lump sum payment on a date that
is not later than ten business days following the date of
termination of his services. For purposes of the Freidheim
Arrangement, a “change of control” of the Company was
deemed to have occurred upon:
•
the acquisition of securities of the Company representing more
than fifty percent (50%) of the combined voting power of the
Company’s then outstanding securities; or
•
the members of the Board of Directors as of the date on which
Mr. Freidheim’s employment began (the “Effective
Date”) and any new directors whose election by the Board or
nomination by the Board for election was approved by a vote of a
least two-thirds of the directors then still in office who
either were in office on the Effective Date or whose election or
nomination for election was previously so approved ceasing for
any reason to constitute at least a majority of the Board; or
•
the adoption, enactment or effectiveness of any action that
materially limits or diminishes the power or authority of the
Company’s board of directors or any committee thereof, if
such action has not been approved by a vote of at least
two-thirds of the directors then still in office who either were
in office on the Effective Date or whose election or nomination
for election was previously so approved ceasing for any reason
to constitute at least a majority of the Board; or
•
the consummation of, or the execution of a definitive agreement
the consummation of which would result in, a reorganization,
merger or consolidation, or sale or other disposition of all or
substantially all of the assets of the Company to an
unaffiliated buyer; or
•
the consummation of a complete liquidation or dissolution of the
Company.
For purposes of the Freidheim Arrangement, “good
reason” was deemed to have occurred if
Mr. Freidheim’s title, authority, or principal duties
are reduced, diminished or eliminated, his base salary is
reduced, his benefits were diminished, his principal place of
employment was relocated more than thirty-five (35) road
miles from its then-current location, or his target bonus
opportunity was reduced.
On October 24, 2008, the Company and Mr. Freidheim
entered into an amendment to the Freidheim Arrangement, which
primarily served to restore Mr. Freidheim’s severance
benefit, which had expired on December 31, 2007. In
addition, the amendment provided that in the event of a
reorganization, recapitalization or other transaction which
constitutes a
“Rule 13e-3
Transaction” under
Rule 13e-3
of the Securities Exchange Act of 1934 and does not otherwise
constitute a change of control, Mr. Freidheim’s
unvested long-term incentive awards would nevertheless
immediately vest and become immediately payable. The amendment
also provided for gross up protection in the event
Mr. Freidheim becomes subject to the 20% excise tax imposed
under Section 4999 of the Internal Revenue Code. In
addition, the amendment provided that Mr. Freidheim would
be subject to non-compete and non-solicitation provisions for
six months following his termination date and that if the
Company reduced Mr. Freidheim’s annual base salary or
his target bonus opportunity without his prior written consent,
he could voluntarily terminate his employment with the Company
and such termination would be deemed an involuntary termination
by the Company without cause, entitling Mr. Freidheim to
the benefits discussed above.
On February 12, 2008, the Company granted a Cash Incentive
Award under the LTIP to Mr. Freidheim with a target amount
of $510,000. Under the LTIP and the Freidheim Arrangement as
amended, upon a change in control (which the reconstitution of
the Company’s Board of Directors on January 16, 2009
constituted) the award vested at target and became immediately
payable and was paid to Mr. Freidheim. Upon the change in
control, Mr. Freidheim’s then-unvested 257,576 DSUs
(valued at $12,879 using the per share closing price of the
Class A common stock on December 31, 2008 of $0.05)
also automatically vested. Effective February 28, 2009,
Mr. Freidheim terminated his employment with the Company
and, because the termination was voluntary received only
payments for accrued vacation.
Directors’
Compensation
Under the terms of the Company’s compensation arrangements
with directors that were effective in 2008, each non-management
director received an annual director retainer of $50,000 per
annum and a fee of $3,000 for each board meeting attended.
Committee chairs and committee members received retainers and
meeting attendance fees which vary among committees. The chair
of the Audit Committee received a $20,000 annual retainer, while
Audit Committee members received a $10,000 annual retainer and
all Audit Committee members received a fee of $3,000 per meeting
attended. The chair of the Compensation Committee received an
annual retainer of $5,000, and all Compensation Committee
members received a fee of $3,000 per meeting attended. The chair
of the Nominating & Governance Committee received an
annual retainer of $5,000, and all Nominating &
Governance Committee members received a fee of $3,000 per
meeting attended. The chair of the Special Committee received a
meeting attendance fee of $7,500, and all Special Committee
members received a fee of $5,000 per meeting attended. All
members of the Strategic Alternatives Committee, which was
established by the Board of Directors in February 2008, received
a fee of $3,000 per meeting attended. Directors are reimbursed
for reasonable expenses incurred in attending meetings of the
Board of Directors.
The annual director’s retainer for 2008 was paid quarterly
in the form of DSUs granted under the Company’s 1999 Stock
Incentive Plan. The DSUs were issued in quarterly installments
as of the last business day of each fiscal quarter, with the
number of DSUs being issued with respect to annual director
retainer payments as of each such date being determined by
dividing the amount of the annual director retainer payable by
the fair market value of a share of our Class A common
stock on the last trading day of such fiscal quarter. Each DSU
represents an unfunded, unsecured right to receive a share of
Class A common stock after the date the non-management
director ceases to be a member of the Board of Directors. DSUs
attract additional dividend equivalent DSUs if the Company
declares a cash or stock dividend on its outstanding
Class A common stock. Each non-management director also
received a grant of an additional 1,000 DSUs under the 1999
Stock Incentive Plan each fiscal quarter. Because of the decline
in the Company’s stock price and the resulting dilution
caused by the issuance of DSUs to non-management directors,
effective June 30, 2008, the Board of Directors approved
changes to the Company’s compensation arrangements with
non-management directors to provide that (i) all of the
annual director’s retainer be paid in cash, and
(ii) the
quarterly DSU issuance was eliminated and each non-management
director would instead be paid a cash amount each calendar
quarter equal to the value of 1,000 shares of Class A
common stock (valued based upon the per share closing price of
the Class A common stock on the last trading day of the
calendar quarter).
The Board of Directors also maintained a stock ownership
requirement for non-management Board members. Each
non-management director is required to own shares of
Class A common stock with an aggregate fair market value
equal to at least five times the amount of the annual director
retainer. Non-management directors will have five years to
satisfy this requirement and all DSUs granted to a
non-management director will count towards the satisfaction of
this requirement. The stock ownership requirement was suspended
effective June 30, 2008.
The Board determined that, in addition to not applying to
management directors, the arrangements described above would
also not apply to William Aziz and G. Wesley Voorheis, who
became members of the Company’s Board of Directors on
August 1, 2007 and who are employees of the Company’s
controlling stockholder.
On August 7, 2006, the Compensation Committee approved a
new compensation arrangement for Raymond G.H. Seitz under which
he would be paid an annual retainer of $300,000 for serving as
the Non-Executive Chairman of the Board, with 50% of such
retainer paid in cash and 50% paid in DSUs. Such retainer is in
lieu of all other retainers and meeting attendance fees, except
that Mr. Seitz will continue to be paid meeting fees for
attending meetings of the Special Committee. Effective
June 30, 2008, the Board of Directors modified the
arrangement to provide that 100% of the annual retainer would be
paid in cash.
On January 16, 2009, the Company’s Board of Directors
was reconstituted. On March 2, 2009, the Board of Directors
modified the Company’s compensation policy for directors,
effective January 16, 2009, so that each member of the
Board of Directors be compensated for his or her service on the
Board in the amount of $200,000 per annum, payable at such times
as shall be determined from time to time by the Chairman of the
Board, and that any director who devotes at least four
(4) hours in any day to matters benefiting the Company be
entitled to compensation therefor in the amount of $3,000,
subject to the receipt by the Company of reasonable
documentation with respect thereto. These compensation
arrangements do not apply to Mr. Halbreich, Chairman of the
Board and Interim Chief Executive Officer of the Company.
Mr. Halbreich’s compensation arrangement with the
Company provides that he be paid $6,000 per day for days he
works full-time as Interim Chief Executive Officer of the
Company.
The table below summarizes the compensation paid by the Company
to non-management directors in respect of services in 2008.
Fees Earned or Paid
in Cash
Stock Awards
Total
Name
($)
($)(1)
($)
Current Directors(2)
Robert B. Poile(3)
$
57,220
$
1,427
$
58,647
Graham W. Savage(4)
$
185,220
$
26,210
$
211,430
Former Directors
William Aziz(5)
—
—
—
Brent D. Baird(5)
$
26,000
$
24,497
$
50,497
Albrecht W.A. Bellstedt(5)
$
24,000
$
24,497
$
48,497
Herbert A. Denton(4)
$
112,220
$
26,210
$
138,430
Peter Dey(4)
$
87,720
$
26,210
$
113,930
Cyrus F. Freidheim, Jr.(4)
—
—
—
Edward Hannah(5)(6)
$
15,000
$
38,970
$
53,970
Gordon A. Paris(4)
$
173,720
$
26,210
$
199,930
Raymond G.H. Seitz(4)
$
316,500
$
75,000
$
391,500
G. Wesley Voorheis(5)
—
—
—
(1)
The amounts reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal year ended
December 31, 2008 in accordance with
SFAS No. 123R with respect to DSUs, which are issuable
in the form of shares upon the termination of a director’s
service as a member of the Board. These amounts also reflect the
grant date fair value of the DSUs granted to directors in 2008
(computed in accordance with SFAS No. 123R).
Assumptions used in the calculation of these amounts are
included in Note 15 to the Company’s audited financial
statements for the fiscal year ended December 31, 2008
included in this Annual Report on Form
10-K.
(2)
Excludes Messrs. Halbreich, Katzenstein and Schmitz who
were elected to the Company’s Board of Directors on
January 16, 2009.
On January 16, 2009, Messrs. Denton, Dey, Freidheim, Paris
Savage and Seitz were removed from the Company’s Board of
Directors. On January 30, 2009, Mr. Savage was
re-elected to the Board of Directors.
(5)
Effective June 18, 2008, Messrs. Aziz, Baird,
Bellstedt, Hannah and Voorheis resigned from the Company’s
Board of Directors.
(6)
Includes expense recognized for financial statement reporting
purposes for the fiscal year ended December 31, 2008 with
respect to 5,953 DSUs issued to Mr. Hannah on
March 31, 2008 in respect of his service on the Board of
Directors from August 1, 2007 through December 31,2007. Because these DSUs were not issued until March 31,2008, no expense was recognized for financial statement
reporting purposes for the fiscal year ended December 31,2007 with respect to such DSUs.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of February 28, 2009,
unless otherwise indicated, certain information regarding those
persons or entities known to hold more than 5% of the
outstanding shares of Class A Common Stock, and ownership
of Class A Common Stock by the named executive officers,
the directors, nominees for election and all directors and
executive officers as a group. The beneficial ownership
information of each of these persons or entities is based upon,
where applicable, filings with the SEC as noted in the footnotes
to the table.
Class and Total Number of Shares
Percent
Name and Address
Beneficially Owned(1)
of Class
Hollinger Inc. and affiliates(2)
17,271,923
Class A Common
20.6
%
100 King Street West, Suite 3700
Toronto, Ontario
M5X 1C9 Canada
Polar Securities Inc.(3)
9,038,163
10.8
%
372 Bay Street,
21st
Floor
Toronto, Ontario
M5H 2W9 Canada
As reported in Schedule 13D filed with the SEC on
December 18, 2008.
(5)
As reported in Schedule 13D filed with the SEC on
January 22, 2009.
(6)
Includes 2,914 shares issuable pursuant to DSUs.
Mr. Freidheim served as an executive officer of the Company
during 2008 but his employment with the Company was terminated
prior to the date hereof. Accordingly, because this line item
reflects the beneficial ownership of our current directors and
executive officers, the beneficial ownership of
Mr. Freidheim is not included herein.
Equity
Compensation Plan Information
Number of Securities
Number of Securities
Weighted-Average
Remaining Available for
to be Issued Upon
Exercise Price of
Future Issuance Under
Exercise of Outstanding
Outstanding Options,
Equity Compensation Plans
Options, Warrants and
Warrants and
(Excluding Securities
Plan Category
Rights(a)
Rights(b)
Reflected in Column (a))(c)
Equity compensation plans approved by security holders
297,683
$
7.90
1,784,313
Equity compensation plans not approved by security holders
—
—
—
Total
297,683
$
7.90
1,784,313
Item 13.
Certain
Relationships and Related Transactions
Related
Party Transactions
The Company has recorded $9.4 million of expenses on behalf
of current and former executive officers and directors of the
Company during the year ended December 31, 2008. The
majority of these expenses relate to payments of fees for legal
counsel representing former executive officers and directors of
the Company in their dealings with the Special Committee, while
conducting its investigations or with respect to criminal
proceedings and litigation. Payments of such fees were made
pursuant to indemnification provisions of the Company’s
Certificate of Incorporation and the Company’s by-laws.
On March 25, 2008, the Company announced that it had agreed
to the terms of a settlement (the “Settlement”) that
resolved the various disputes and litigation between the Company
and Hollinger Inc. At the time of the Settlement, Hollinger Inc.
was the owner of all of the outstanding shares of the
Company’s Class B Common Stock, which had ten votes
per share, and 782,923 shares of Class A Common Stock,
which has one vote per share. These holdings represented 19.6%
of the outstanding equity of the Company and 70.0% of the voting
power of the Company’s outstanding common stock at the time
of the Settlement.
On March 24 and 25, 2008, respectively, the Special Committee
and the Company’s full Board of Directors approved the
Settlement. The Settlement was also approved by the Hollinger
Inc. Board of Directors.
On May 14, 2008, the Company announced it had agreed to the
Revised Settlement. The Revised Settlement was approved by the
Company’s full Board of Directors and the Hollinger Inc.
Board of Directors. The Company amended its SRP to ensure that
the execution and delivery of the Company’s agreement to
the Revised Settlement and the consummation of the Revised
Settlement did not cause the Rights to become exercisable or
otherwise trigger the provisions of the SRP. On May 26,2008, the Revised Settlement was approved in Ontario, Canada,
under the CCAA.
The Revised Settlement included a complete release of claims
between the parties and the elimination of the voting control by
Hollinger Inc. of the Company through conversion on a
one-for-one
basis of the shares of Class B Common Stock to shares of
Class A Common Stock. The Revised Settlement also required
the Company to deliver 1.499 million additional shares of
Class A Common Stock to Hollinger Inc. The terms of the
Revised Settlement were carried out at a closing on
June 18, 2008. The Company granted demand registration
rights with respect to the shares of Class A Common Stock
that resulted from the conversion of the shares of Class B
Common Stock, as well as with respect to the additional
1.499 million shares of Class A Common Stock issued to
Hollinger Inc. pursuant to the Revised Settlement. The Company
recorded $0.8 million in expense (including fees) related
to the issuance of the 1.499 million shares of Class A
Common Stock and $1.7 million related to the write-off of a
receivable from Hollinger Inc. and its subsidiaries. In
addition, to the previously mentioned write-off of the fully
reserved loan of $33.7 million due from a subsidiary of
Hollinger Inc.
Under the Revised Settlement, all shares of Class A Common
Stock issued to Hollinger Inc. will be voted by the indenture
trustees for certain notes issued by Hollinger Inc., but such
trustees together will only be able to vote shares of common
stock not exceeding 19.999% of the outstanding common stock of
the Company at any given time.
Pursuant to a stipulation and agreement of settlement of
U.S. and Canadian class actions against the Company and
Hollinger Inc. and an insurance settlement agreement dated
June 27, 2007, up to $24.5 million (plus interest,
less fees and expenses) will be paid to the Company, Hollinger
Inc. and/or
other claimants under their directors’ and officers’
insurance policies (the “Insurance Settlement
Proceeds”). Payment of the Insurance Settlement Proceeds is
subject to the approval of various United States and Canadian
courts. Under the terms of the Revised Settlement, Hollinger
Inc. and the Company will cooperate to maximize the recoverable
portion of the Insurance Settlement Proceeds payable to them
collectively (as opposed to other claimants) and they have
agreed that the Company will receive 85% and Hollinger Inc. will
receive 15% of the amounts to be received collectively by
Hollinger Inc. and the Company (as opposed to amounts received
by other claimants) from such proceeds. Also, the collective
recoveries, if any, of Hollinger Inc. and the Company on account
of their claims against Hollinger Inc.’s controlling parent
company, Ravelston, which is in insolvency proceedings in
Ontario, Canada, will be divided equally between Hollinger Inc.
and the Company.
The Revised Settlement provided that the Company would be
reimbursed by Hollinger Inc. for up to $2.0 million of the
Company’s legal fees that were incurred in connection with
Hollinger Inc.’s CCAA proceedings. The Company received
payment of $2.0 million in June 2008.
Pursuant to the Revised Settlement, on June 23, 2008, the
Company announced that the six directors of the Company
appointed by Hollinger Inc. on July 31, 2007 resigned from
the Board of Directors. Thereafter, Peter J. Dey and Robert B.
Poile were elected as directors. The two events had the effect
of reducing the size of the Board of Directors from eleven to
seven.
Under the terms of the Revised Settlement, certain of the
Company’s claims against Hollinger Inc. were allowed as
unsecured claims, in agreed amounts (“Allowed
Claims”). The Company’s total recovery in respect of
the Allowed Claims is capped at $15.0 million. After the
Company receives the first $7.5 million in respect of the
Allowed Claims, 50% of any further recovery received by the
Company in respect of the Allowed Claims (subject to the
$15.0 million cap) will be assigned to Hollinger Inc. Under
the terms of the Revised Settlement, the amounts so assigned are
intended to be available to fund litigation claims of Hollinger
Inc. against third parties. All of the Company’s claims
against Hollinger Inc. other than the Allowed Claims were
released as part of the general mutual release that, among other
things, discontinued any and all pending litigation between the
Company and Hollinger Inc., including all of the litigation
pending in the United States District Court for the Northern
District of Illinois.
Director
Independence
The Board of Directors has made no determination as to the
independence of each director.
Company paid FTI Consulting $1,006,000 for litigation support,
and advisory services related to cash management planning and
forecasting and bankruptcy preparation. $888,000 of this amount
has been paid since Mr. Katzenstein was elected to the
Company’s Board of Directors. In addition,
Mr. Katzenstein’s compensation and expenses as a
member of the Company’s Board of Directors since his
election on January 16, 2009 totaling $54,769, have, at
Mr. Katzenstein’s request, been paid by the Company to
FTI Consulting.
Item 14.
Principal
Accountant Fees and Services
The Audit Committee has responsibility for appointing, setting
fees and overseeing the work of the independent registered
public accounting firm. In recognition of this responsibility,
the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the
independent registered public accounting firm, subject to de
minimis exceptions for non-audit services that are approved by
the Audit Committee prior to the completion of the audit.
The Audit Committee engaged the firm KPMG LLP as the
Company’s independent registered public accounting firm for
fiscal year 2008.
On an ongoing basis, management defines and communicates
specific projects for which the advance approval of the Audit
Committee is requested. The Audit Committee reviews these
requests and advises management if it approves the engagement of
KPMG LLP. The categories of service that the Audit Committee
pre-approves are as follows:
Audit Services. Audit services include work
performed in connection with the audit of the consolidated
financial statements, as well as work that is normally provided
by the independent registered public accounting firm in
connection with statutory and regulatory filings or engagements.
Audit Related Services. These services are for
assurance and related services that are traditionally performed
by the independent registered public accounting firm and that
are reasonably related to the work performed in connection with
the audit including due diligence related to mergers and
acquisitions, employee benefit plan audits and audits of
subsidiaries and affiliates.
Tax Services. These services are related to
tax compliance, tax advice and tax planning. These services may
be provided in relation to Company strategies as a whole or be
transaction specific.
Other Services. These services include all
other permissible non-audit services provided by the independent
registered public accounting firm and are pre-approved on an
engagement-by-engagement
basis.
The Audit Committee has delegated pre-approval authority to the
chairman of the Audit Committee. The chairman must report any
pre-approval decisions to the Audit Committee at its next
scheduled meeting for approval by the Audit Committee as a
whole. The following table presents fees for professional audit
services rendered by KPMG LLP for the audit of the
Company’s consolidated financial statements for 2008 and
2007, and fees billed for other services rendered during 2008
and 2007 by KPMG LLP.
2008
2007
(In thousands)
Audit fees(1)
$
3,200
$
5,500
Audit-related fees(2)
5
—
Total audit and audit related fees
3,205
5,500
Tax fees(3)
345
587
All other fees
—
—
Total fees
$
3,550
$
6,087
(1)
Audit fees for 2008 and 2007 include fees for the annual audit
and quarterly reviews.
(2)
Audit-related fees for 2008 include fees for assistance with SEC
comment letters.
(3)
Tax fees consist of fees for assistance with tax compliance
matters, assistance with federal, state and international tax
planning matters and assistance with examinations by taxing
authorities.
Amendment No. 2 to the Rights Agreement between Sun-Times Media
Group, Inc. (f/k/a Hollinger International Inc.) and Mellon
Investor Services LLC as Rights Agent, dated July 23, 2007.
Amendment No. 3 to Rights Agreement between Sun-Times Media
Group, Inc. (f/k/a Hollinger International Inc.) and Mellon
Investor Services LLC as Rights Agent, dated March 25, 2008.
Amendment No. 4 to Rights Agreement between Sun-Times Media
Group, Inc. (f/k/a Hollinger International Inc.) and Mellon
Investor Services LLC as the Rights Agent, dated May 14, 2008.
Registration Rights Agreement among Sun-Times Media Group, Inc.
(f/k/a Hollinger International Inc.) and the stockholders named
therein, dated June 17, 2008.
Facilitation Agreement by and between Hollinger International
Inc., Hollinger Canadian Newspapers, Limited Partnership,
3815668 Canada Inc., Hollinger Canadian Publishing Holdings Co.,
HCN Publications Company and CanWest Global Communications Corp.
dated as of October 7, 2004.
Agreement, dated as of May 12, 2005, by and between Hollinger
International Inc. and RSM Richter Inc., in its capacity as
court appointed receiver and monitor of Ravelston Corporation
Limited and Ravelston Management, Inc.
American Publishing Company 1994 Stock Option Plan.
Incorporated by reference to Exhibit 10.10 to the
Registration Statement on
Form S-1
(No. 33-74980).
10
.14
Agreement of Compromise and Release among Cardinal Value Equity
Partners, L.P., Hollinger International Inc., Dwayne O. Andreas,
Richard R. Burt, Raymond G. Chambers, Henry A. Kissinger,
Marie-Josee Kravis, Shmuel Meitar, Robert S. Strauss, A. Alfred
Taubman, James R. Thompson, Lord Weidenfeld of Chelsea, Leslie
H. Wexner, Gordon A. Paris, Graham W. Savage and Raymond G.H.
Seitz dated May 4, 2005.
Master Services Agreement, among the Sun-Times Company,
individually and on behalf of Chicago Sun-Times LLC, Fox Valley
Publications LLC, Midwest Suburban Publishing, Inc., Pioneer
Newspapers Inc. and The Post-Tribune Company LLC, and Affinity
Express, Inc., dated February 14, 2008.
Multi-Party Settlement Term Sheet between Sun-Times Media Group,
Inc., Hollinger Inc., Sugra Limited, 4322525 Canada Inc. ,
Davidson Kempner Capital Management LLC and its affiliates,
dated May 14, 2008.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities on the dates
indicated.
Signature
Title
Date
/s/ JEREMY
L. HALBREICH
Jeremy
L. Halbreich
Chairman of the Board, Interim Chief Executive Officer
(Principal Executive Officer)
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Sun-Times Media Group, Inc.:
We have audited the accompanying consolidated balance sheets of
Sun-Times Media Group, Inc. and subsidiaries (the Company) as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income (loss),
stockholders’ equity (deficit), and cash flows for each of
the years in the three-year period ended December 31, 2008.
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Sun-Times Media Group, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 16 to the accompanying consolidated
financial statements, effective December 31, 2006, the
Company adopted Statement of Financial Accounting Standards No.
158, Employers’ Accounting for Defined Benefit Pensions
and Other Postretirement Plans-an amendment of FASB Statements
No. 87, 88, 106, and 132(R).
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Notes 1 and 24 to the consolidated
financial statements, on March 31, 2009, the Company
voluntarily filed petitions for relief under Chapter 11 of
the United States Bankruptcy Code. This matter raises
substantial doubt about the Company’s ability to continue
as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Accounts receivable, net of allowance for doubtful accounts of
$10,635 in 2008 and $12,276 in 2007
58,824
73,031
Inventories
7,504
7,937
Escrow deposits and restricted cash
37,936
35,641
Recoverable income taxes
—
16,509
Other current assets
20,055
7,034
Total current assets
203,554
282,685
Investments
7,807
42,249
Property, plant and equipment, net of accumulated depreciation
63,095
163,355
Intangible assets, net of accumulated amortization
—
88,235
Goodwill
—
124,301
Prepaid pension asset
33,323
89,512
Other assets
1,960
1,249
Total assets
$
309,739
$
791,586
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt
$
—
$
35
Accounts payable and accrued expenses
93,115
112,621
Amounts due to related parties
9,181
8,852
Income taxes payable and other tax liabilities
448
1,027
Deferred revenue
9,611
10,060
Total current liabilities
112,355
132,595
Long-term debt, less current installments
—
3
Deferred income tax liabilities
9,569
58,343
Other tax liabilities
607,960
597,206
Other liabilities
78,574
78,448
Total liabilities
808,458
866,595
Stockholders’ equity (deficit):
Class A common stock, $0.01 par value. Authorized
250,000,000 shares; 104,497,022 and 83,064,567 shares
issued and outstanding, respectively, at December 2008 and
88,008,022 and 65,308,636 shares issued and outstanding,
respectively, at December 31, 2007
1,045
880
Class B common stock, $0.01 par value. Authorized
50,000,000 shares; nil and 14,990,000 shares issued
and outstanding, respectively, at December 31, 2008 and 2007
Foreign currency translation adjustments, net of related tax
provision of $1 (2007 — net of related tax provision
of $106; 2006 — net of related tax provision of $4)
(23,369
)
(2,698
)
(1,948
)
Reclassification adjustment for realized foreign exchange
(gains) losses upon the substantial reduction of net investment
in foreign operations
—
—
(11,571
)
(23,369
)
(2,698
)
(13,519
)
Unrealized gains (losses) on marketable securities arising
during the year, net of a related tax benefit of $nil
(2007 — net of related tax provision of $2;
2006 — net of related tax provision of $4)
(507
)
75
16
Reclassification adjustment for realized gains reclassified out
of accumulated other comprehensive income (loss), net of related
taxes of $nil (2007 — net of related tax provision of
$nil; 2006 — net of related tax provision of $661)
—
—
870
(507
)
75
886
Pension adjustment, net of related tax benefit of $10,713
(2007 — net of related tax provision of $8,166;
2006 — net of related tax provision of $3,117)
(49,083
)
13,694
4,675
(72,959
)
11,071
(7,958
)
Comprehensive income (loss)
$
(426,458
)
$
282,701
$
(64,631
)
See accompanying notes to these consolidated financial
statements.
The impact of the negative ruling by an arbitrator in the
dispute between the Sun-Times Media Group, Inc. and subsidiaries
(the “Company”) and CanWest Global Communications
Corp. (“CanWest”) (see Note 17 and 22(a)), and
the substantial acceleration in revenue declines in 2008, both
in the industry and for the Company, in combination with
continued negative operating results and cash flow for the
Company, the negative outlook for the economy, and the general
negative outlook for newspaper advertising and circulation in
the near and long-term, as well as the Company’s
substantial tax liabilities, create substantial doubt as to the
Company’s ability to continue as a going concern.
Therefore, on March 31, 2009, the Sun-Times Media Group,
Inc. and its domestic subsidiaries (collectively, the
“Debtors”) filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code (the
“Bankruptcy Code”) in the U.S. Bankruptcy Court
(the “Bankruptcy Court”) for the District of Delaware
(Case
No. 09-11092
or the “Filings”). During the pendency of the
bankruptcy proceedings, the Debtors remain in possession of
their properties and assets and the management of the Company
continues to operate the businesses of the Debtors as
debtors-in-possession.
As a
debtor-in-possession,
the Company is authorized to operate the business of the
Debtors, but may not engage in transactions outside the ordinary
course of business without approval of the Bankruptcy Court.
Since the Filings, the Company has continued to honor
subscriptions and provide advertising services to its customers.
In addition, the Company’s Canadian subsidiaries will
likely apply for court-supervised reorganization under the
Companies’ Creditors Arrangement Act (Canada) (the
“CCAA”). The Company’s Canadian subsidiaries have
limited activities generally related to legacy pension and
post-employment liabilities and certain litigation related
contingent liabilities. At December 31, 2008, the Canadian
subsidiaries had $29.9 million in cash and cash equivalents
which is generally unavailable to fund U.S. operations.
Subject to certain exceptions under the Bankruptcy Code, the
Debtors’ Filings automatically enjoined the continuation of
any judicial or administrative proceedings against the Debtors.
Any creditor actions to obtain possession of property from the
Debtors or to create, perfect or enforce any lien against
property of the Debtors are also enjoined. As a result,
creditors of the Debtors are precluded from collecting
pre-petition liabilities without the approval of the Bankruptcy
Court. Certain pre-petition liabilities have been paid after
obtaining the approval of the Bankruptcy Court, including
certain wages and benefits of employees.
Under the Bankruptcy Code, the Debtors have the right to assume
or reject executory contracts. An executory contract is one in
which the parties have mutual obligations to perform (e.g., real
property leases and service agreements). Unless otherwise
agreed, the assumption of a contract will require the Company to
cure all prior defaults under the related contract, including
all pre-petition liabilities. Unless otherwise agreed, the
rejection of a contract is deemed to constitute a breach of the
agreement as of the moment immediately preceding the Filing,
giving the other party to the contract a right to assert a
general unsecured claim for damages.
The Debtors have not as yet notified its known or potential
creditors of the Filing in an effort to identify pre-petition
claims against the Debtors. The Bankruptcy Court has not yet set
the bar date, which is the last date for most parties to file
proofs of claim with respect to non-governmental pre-petition
obligations. Payment terms for these amounts will be established
in connection with the Chapter 11 cases. There may be
differences between the amounts at which any such liabilities
are recorded in the financial statements and the amount claimed
by the Company’s creditors. Litigation may be required to
resolve any such disputes.
Currently, it is not possible to accurately predict the length
of time the Company will operate under Chapter 11 and the
supervision of the Bankruptcy Court, when or if the Company will
file a plan or plans of reorganization or liquidation with the
Bankruptcy Court, the outcome of the Chapter 11 including
the impact on the Company’s financial condition, or the
ultimate effect on the interests of the Company’s creditors
and stakeholders. However, under the priority schedule
established by the Bankruptcy Code and based on the amount and
nature of the Company’s assets and liabilities, it is
highly unlikely the Company’s common stock will retain any
value or that stockholders will receive any distribution or
consideration.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Unless otherwise indicated, the discussion of the Company and
its business is presented in the consolidated financial
statements and related notes to the consolidated financial
statements under the assumption that the Company will continue
to realize its assets and settle its liabilities in the normal
course of business. The outcome of the proceedings under the
Bankruptcy Code will likely result in changes that materially
affect the Company’s operations and financial condition.
(2)
Significant
Accounting Policies
(a) Description
of Business
The Company operates principally as a publisher, printer and
distributor of newspapers and other publications through
subsidiaries and affiliates in the greater Chicago, Illinois,
metropolitan area. The Company’s operating subsidiaries and
affiliates in Canada were sold in 2005 and early 2006 (the sold
Canadian businesses are referred to collectively as the
“Canadian Newspaper Operations”). See Note 3. In
addition, the Company has developed Internet Web sites related
to its publications. The Company’s raw materials,
principally newsprint and ink, are not dependent on a single or
limited number of suppliers. Customers primarily consist of
purchasers of the Company’s publications and advertisers in
those publications and Internet Web sites.
(b) Principles
of Presentation and Consolidation
Prior to May 2008, the Company was a subsidiary of Hollinger
Inc., a Canadian corporation. At December 31, 2007,
Hollinger Inc. owned approximately 19.6% of the combined equity
and approximately 70.0% of the combined voting power of the
outstanding common stock of the Company. See Note 23(g) and
23(i) for a description of events resulting in the exchange of
stock and related relinquishment of voting control by Hollinger
Inc.
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries and other
controlled entities. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company’s newspaper operations are on a
52 week/53 week accounting cycle. This generally
results in the reporting of 52 weeks in each annual period.
However, the year ended December 31, 2006 contains
53 weeks.
(c) Use
of Estimates
The preparation of consolidated financial statements in
accordance with U.S. generally accepted accounting
principles requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its
estimates including those related to matters that require a
significant level of judgment or are otherwise subject to an
inherent degree of uncertainty. These matters include bad debts,
investments, other long-lived assets, goodwill and intangibles,
income taxes, pensions and other postretirement benefits,
contingencies and litigation. The Company bases its estimates on
historical experience, observance of trends, information
available from outside sources and various other assumptions
that are believed to be reasonable under the circumstances.
Information from these sources form the basis for making
judgments about the carrying values of assets and liabilities
that may not be readily apparent from other sources. Actual
results may differ from these estimates under different
assumptions or conditions.
(d) Cash
Equivalents
Cash equivalents consist of certain highly liquid investments
with original maturities of three months or less.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(e) Accounts
Receivable, Net of Allowance for Doubtful Accounts
Accounts receivable are stated net of the related allowance for
doubtful accounts. The following table reflects the activity in
the allowance for doubtful accounts for the years ended December
31:
2008
2007
2006
(In thousands)
Balance at beginning of year
$
12,276
$
10,267
$
11,756
Provision
2,617
4,448
3,820
Write-offs
(4,352
)
(3,113
)
(6,419
)
Recoveries and other
94
674
1,110
Balance at end of year
$
10,635
$
12,276
$
10,267
(f) Inventories
Inventories consist principally of newsprint that is valued at
the lower of cost or market. Cost is determined using the
first-in,
first-out (FIFO) method.
(g) Long-Lived
Assets
Property, plant and equipment are recorded at cost. Routine
maintenance and repairs are expensed as incurred. Depreciation
is calculated under the straight-line method over the estimated
useful lives of the assets, principally 25 to
40 years for buildings and improvements, 3 to 10 years
for machinery and equipment and 20 years for printing press
equipment. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful
life of the asset or the lease term. Property, plant and
equipment categorized as construction in progress is not
depreciated until the items are in use.
The Company assesses the recoverability of the carrying value of
all long-lived assets including property, plant and equipment
whenever events or changes in business circumstances indicate
the carrying value of the assets, or related group of assets,
may not be fully recoverable. The assessment of recoverability
is based on management’s estimate of undiscounted future
operating cash flows of its long-lived assets including
estimated sales proceeds at fair value when appropriate. If the
assessment indicates that the undiscounted operating cash flows
do not exceed the carrying value of the long-lived assets, then
the difference between the carrying value of the long-lived
assets and the fair value of such assets is recorded as an
impairment charge in the Consolidated Statements of Operations.
Recognition of an impairment charge established a new cost basis.
Primary indicators of impairment include significant permanent
declines in circulation and readership; the loss of specific
sources of advertising revenue, whether or not to other forms of
media; and an expectation that a long-lived asset may be
disposed of before the end of its useful life. Impairment is
generally assessed at the reporting unit level (being the lowest
level at which identifiable cash flows are largely independent
of the cash flows of other assets). The substantial acceleration
in revenue declines in 2008, both in the industry and for the
Company, in combination with the negative outlook for the
economy, the general negative outlook for newspaper advertising
and circulation in the near and long-term, and the continued
decline in the Company’s market capitalization, were
considered by the Company to be indicators of potential
impairment of its goodwill, intangible and long-lived assets.
The impairment test resulted in a non-cash impairment charge of
$71.9 million related to property, plant and equipment. See
Note 7.
(h) Derivative
Financial Instruments
The Company is a limited user of derivative financial
instruments to manage risks generally associated with interest
rate and foreign currency exchange rate market volatility. The
Company does not hold or issue derivative financial instruments
for trading purposes. All derivative instruments are recorded on
the Consolidated Balance
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Sheets at fair value. Derivatives that are not classified as
hedges are adjusted to fair value through earnings. Changes in
the fair value of derivatives that are designated and qualify as
effective hedges are recorded either in “Accumulated other
comprehensive income (loss)” or through earnings, as
appropriate. The ineffective portion of derivatives that are
classified as hedges is immediately recognized in net earnings
(loss). See Note 13(b) for a discussion of the
Company’s use of derivative instruments.
(i) Investments
Investments largely consist of commercial paper and equity
securities and at times may include other debt securities.
Marketable securities which are classified as available-for-sale
are recorded at fair value. Unrealized holding gains and losses,
net of the related tax effects, on available-for-sale securities
are excluded from earnings and are reported as a separate
component of “Accumulated other comprehensive income
(loss)” until realized. Realized gains and losses from the
sale of available-for-sale securities are determined on specific
investments and recognized in the Consolidated Statements of
Operations under the caption of “Other income (expense),
net.” Other corporate debt and equity securities are
recorded at cost less declines in market value that are other
than temporary (other than those investments accounted for under
the equity method as discussed below).
A decline in the market value of any security below cost that is
deemed to be other than temporary, results in a reduction in the
carrying amount to fair value. Any such impairment is charged to
earnings and a new cost basis for the security is established.
Dividend and interest income is recognized when earned.
Investments in the common stock of entities, for which the
Company has significant influence over the investee’s
operating and financial policies, but less than a controlling
voting interest, are accounted for under the equity method.
Significant influence is generally presumed to exist when the
Company owns between 20% and 50% of the investee’s voting
stock.
Under the equity method, the Company’s investment in an
investee is included in the Consolidated Balance Sheets (under
the caption “Investments”) and the Company’s
share of the investee’s earnings or loss is included in the
Consolidated Statements of Operations under the caption
“Other income (expense), net.”
(j) Goodwill
and Other Intangible Assets
Goodwill represents the excess of acquisition costs over the
estimated fair value of net assets acquired in business
combinations.
Intangible assets with finite useful lives include subscriber
and advertiser relationships, which are amortized on a
straight-line basis over 30 years.
The Company follows the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”
(“SFAS No. 142”). The standard requires that
goodwill and intangible assets with indefinite useful lives are
not amortized, but instead are tested for impairment at least
annually. The standard also specifies criteria that intangible
assets must meet in order to be recognized and reported apart
from goodwill. In addition, SFAS No. 142 requires that
intangible assets with finite useful lives are amortized over
their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
The Company is required to test goodwill for impairment on an
annual basis. The Company would also evaluate goodwill for
impairment between annual tests and intangible assets if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
amount. Certain indicators of potential impairment that could
impact the Company include, but are not limited to, the
following: (i) a significant long-term adverse change in
the business climate that is expected to cause a substantial
decline in advertising revenue, (ii) a permanent
significant decline in newspaper readership, (iii) a
significant adverse long-
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
term negative change in the demographics of newspaper readership
and (iv) a significant technological change that results in
a substantially more cost effective method of advertising than
newspapers. The substantial acceleration in revenue declines in
2008, both in the industry and for the Company, in combination
with the negative outlook for the economy, the general negative
outlook for newspaper advertising and circulation in the near
and long-term, and the continued decline in the Company’s
market capitalization, were considered by the Company to be
indicators of potential impairment of its goodwill and
intangible assets. The impairment test resulted in a non-cash
impairment charge of $209.3 million related to the
write-off of goodwill and intangible assets of the newspaper
reporting unit. See Note 8.
(k) Pension
Plans and Other Postretirement Benefits
General
The Company provides defined benefit pension, defined
contribution pension, postretirement and postemployment health
care and life insurance benefits to eligible employees or former
employees under a variety of plans. See Note 16.
Pension costs for defined contribution plans are recognized as
the obligation for contribution arises and at expected or actual
contribution rates for discretionary plans.
In general, benefits under the defined benefit plans (the
“Plans”) are based on years of service and the
employee’s compensation during the last few years of
employment.
Health care benefits are available to eligible employees meeting
certain age and service requirements upon termination of
employment. Postretirement and postemployment benefits are
accrued in accordance with SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other than Pensions” (“SFAS No. 106”),
and SFAS No. 112, “Employers’ Accounting for
Postemployment Benefits”
(“SFAS No. 112”).
The annual pension expense is based on a number of actuarial
assumptions, including expected long-term return on assets and
discount rate. The Company’s methodology in selecting these
actuarial assumptions is discussed below.
Long-Term
Rate of Return on Assets
In determining the expected long-term rate of return on assets,
the Company evaluates input from various sources which may
include its investment consultants, actuaries and investment
management firms including their review of asset class return
expectations, as well as long-term historical asset class
returns. Returns projected by such consultants are generally
based on broad equity and bond indices.
The Company regularly reviews its actual asset allocation and
periodically rebalances its investments to its targeted
allocation when considered appropriate.
The Company’s determination of net pension expense is based
on market-related valuation of assets, which reduces
year-to-year volatility. This market-related valuation of assets
recognizes investment gains or losses over a three-year period
from when they occur. Investment gains or losses for this
purpose reflect the difference between the expected return
calculated using the market-related value of assets and
recognized gains or losses over a three-year period. The future
value of assets will be affected as previously deferred gains or
losses are recorded.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Discount
Rate
The discount rate for determining future pension obligations is
determined by the Company using various input including the
indices of AA-rated corporate bonds that reflect the weighted
average period of expected benefit payments.
The Company will continue to evaluate its actuarial assumptions,
generally on an annual basis, including the expected long-term
rate of return on assets and discount rate, and will adjust them
as appropriate. Actual pension expense will depend on future
investment performance, changes in future discount rates, the
level of contributions by the Company and various other factors
related to the populations participating in the pension plans.
(l) Income
Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
are also recognized for the tax effects attributable to the
carryforward of net operating losses. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the Consolidated Statement of Operations in the
period that includes the enactment date. The Company considers
future taxable income and ongoing tax strategies in assessing
the need for a valuation allowance in relation to deferred tax
assets. The Company records a valuation allowance to reduce
deferred tax assets to a level where they are more likely than
not to be realized based upon the above mentioned considerations.
During the course of examinations by various taxing authorities,
adjustments or proposed adjustments may be asserted. The Company
evaluates such items on a case by case basis and adjusts the
accrual for contingent tax liabilities as deemed necessary.
(m) Revenue
Recognition
The Company’s principal sources of revenue are comprised of
advertising, circulation and job printing. As a general
principle, revenue is recognized when the following criteria are
met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred and services have been rendered,
(iii) the price to the buyer is fixed or determinable and,
(iv) collectibility is reasonably assured or is probable.
Advertising revenue, being amounts charged for space purchased
in the Company’s newspapers, Internet Web sites or for
inserts distributed with the newspapers, is recognized upon
publication. Circulation revenue from subscribers, billed to
customers at the beginning of a subscription period, is
recognized on a straight-line basis over the term of the related
subscription. Deferred revenue represents subscription receipts
that have not been earned. Circulation revenue from single copy
sales is recognized at the time of distribution. Circulation
revenue is recorded net of an allowance for returned copies.
Fees and commissions paid to distributors are recorded as a
component of costs of sales. Job printing revenue, being charges
for printing services provided to third parties, is recognized
upon delivery.
(n) Foreign
Currency Translation
Foreign operations of the Company have been translated into
U.S. dollars in accordance with the principles prescribed
in SFAS No. 52, “Foreign Currency
Translation.” All assets and liabilities are translated at
period end exchange rates, stockholders’ equity is
translated at historical rates, and revenue and expense are
translated at the average rate of exchange prevailing throughout
the period. Translation adjustments are included in the
“Accumulated Other Comprehensive Income (Loss)”
component of stockholders’ equity. Translation adjustments
are not included in earnings unless they are actually realized
through a sale or upon complete or substantially complete
liquidation of the Company’s net investment in the foreign
operation. Gains and losses arising from the Company’s
foreign currency transactions are reflected in the Consolidated
Statements of Operations.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(o) Earnings
(Loss) per Share
Earnings (loss) per share is computed in accordance with
SFAS No. 128, “Earnings per Share.” See
Note 21 for a reconciliation of the numerator and
denominator for the calculation of basic and diluted earnings
(loss) per share.
(p) Stock-based
Compensation
Effective January 1, 2006, the Company adopted
SFAS No. 123R “Share-Based Payment”
(“SFAS No. 123R”), requiring that
stock-based compensation payments, including grants of employee
stock options, be recognized in the consolidated financial
statements over the service period (generally the vesting
period) based on their fair value. The Company elected to use
the modified prospective transition method. Therefore, prior
results were not restated. Under the modified prospective
method, stock-based compensation is recognized for new awards,
the modification, repurchase or cancellation of awards and the
remaining portion of service under previously granted, unvested
awards outstanding as of adoption. The Company treats all
stock-based awards as individual awards for recognition and
valuation purposes and recognizes compensation cost on a
straight-line basis over the requisite service period. See
Note 15.
As a result of the adoption of SFAS No. 123R, the
Company recognized pre-tax stock-based option compensation of
$0.5 million expense, or $0.01 per basic and diluted share
for the year ended December 31, 2006 for the unvested
portion of previously issued stock options that were outstanding
at January 1, 2006, adjusted for the impact of estimated
forfeitures.
A summary of information with respect to stock-based
compensation was as follows:
Total stock-based compensation expense included in income (loss)
from continuing operations
$
2,179
$
2,432
$
2,580
(3)
Dispositions
and Discontinued Operations
In November 2003, the Board of Directors retained Lazard
Frères & Co. LLC and Lazard & Co.,
Limited as financial advisor to explore alternative strategic
transactions on the Company’s behalf, including a possible
sale of the Company as a whole, the sale of one or more of its
individual businesses, or other transactions.
On February 6, 2006, the Company completed the sale of
substantially all of its remaining Canadian operating assets,
consisting of, among other things, approximately 87% of the
outstanding equity units of Hollinger Canadian Newspapers,
Limited Partnership and all of the shares of Hollinger Canadian
Newspapers GP Inc., Eco Log Environmental Risk Information
Services Ltd. and KCN Capital News Company, for an aggregate
sale price of $106.0 million, of which approximately
$17.5 million was placed in escrow ($18.1 million
including interest and currency translation adjustments as of
December 31, 2008). A majority of the escrow may be held up
to seven years, and will be released to either the Company,
Glacier Ventures International Corp. (“Glacier”) (the
purchaser) or CanWest upon a final award, judgment or settlement
being made in respect of certain pending arbitration proceedings
involving the Company, its related entities and CanWest. See
Note 22(a) for an update on the CanWest arbitration. In
addition, the Company received $4.3 million in the second
quarter of 2006, and received an additional $2.8 million in
July 2006, related to working capital and other adjustments. The
Company recognized a gain on sale of approximately
$20.3 million, net of taxes of $34.9 million, which is
included in “Gain from disposal of business segment”
in the Consolidated Statements of Operations for the year ended
December 31, 2006.
On August 31, 2007, the final transfer of pension assets
from the Hollinger Canadian Publishing Holdings Co. (“HCPH
Co.”) Pension Trust Account to the Glacier Pension
Trust Account was completed. The transfer of the pension
assets triggered certain additional contingent consideration
based on the excess funding status of the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pension plans. As a result, the Company recognized a gain of
$1.6 million, net of taxes of $1.1 million, which is
included in “Income from discontinued operations” in
the Consolidated Statements of Operations for the year ended
December 31, 2007.
In 2006, the Company recorded an additional gain of
$0.5 million, net of taxes of $0.3 million, on the
2004 sale of substantially all of its U.K. operations largely
related to additional tax losses surrendered to the purchaser.
In 2006, the Company received approximately $10.2 million
from the sale of Hollinger Digital LLC and certain other
investments. The Company also may receive up to an additional
$0.9 million in the future if certain conditions are
satisfied. The Hollinger Digital LLC transaction resulted in a
pre-tax loss of $0.1 million for the year ended
December 31, 2006, which is included in “Other income
(expense)” in the Consolidated Statements of Operations.
The following table presents information about the operating
results of the Canadian Newspaper Operations for the period from
January 1 through February 6, 2006:
Assets of the Canadian Newspaper Operations included
$57.3 million of goodwill as of December 31, 2005. For
the period from January 1, 2006 through February 6,2006, income (loss) before taxes for the Canadian Newspaper
Operations was income of $0.2 million.
(4)
Reorganization
Activities
In December 2007, the Board of Directors adopted a plan to
reduce annual operating costs by $50 million. The plan,
which was implemented during the first half of 2008, included
savings previously announced in connection with the
Company’s distribution agreement with Chicago Tribune
Company and the consolidation of two of the Company’s
suburban newspapers. The plan also included a reduction in
full-time staffing levels. Certain of the costs directly
associated with the reorganization include involuntary
termination benefits amounting to approximately
$6.4 million (including costs related to the suburban
newspapers) for the year ended December 31, 2007, are
included in “Other operating costs” in the
Consolidated Statement of Operations. In 2008, $2.7 million
of severance expense related to the reorganization was incurred
and is included in “Other operating costs.” An
additional $0.5 million in severance not related directly
to the reorganization was incurred in 2007, of which
$0.7 million and a reduction of costs of $0.2 million,
respectively, are included in “Other operating costs”
and “Corporate expenses,” respectively, in the
Consolidated Statements of Operations. These estimated costs
have been recognized in
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accordance with SFAS No. 88 (as amended)
“Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits” related to incremental voluntary
termination severance benefits and SFAS No. 112 for
the involuntary, or base, portion of termination benefits under
the Company’s established termination plan and practices.
The involuntary termination benefits consisting of certain
involuntary terminations of full-time employees and the
continuation of certain benefit coverage under the
Company’s termination plan and practices were largely paid
by December 31, 2008.
In addition, the Company recorded severance costs of
$4.7 million in 2008 not directly related to the
reorganization described above which is included in “Other
operating costs.” See Note 17.
(5)
Other
Current Assets
At December 31, 2008, the balance of $20.1 million in
“Other current assets” on the Consolidated Balance
Sheet consisted primarily of assets held for sale (largely
underutilized real estate) of $15.4 million,
$1.2 million of prepaid insurance costs, and other items
including prepaid software maintenance, non-trade receivables,
postage and rent.
At December 31, 2007, the balance of $7.0 million in
“Other current assets” on the Consolidated Balance
Sheet consisted primarily of assets held for sale of
$1.7 million, $2.2 million of prepaid insurance costs
and deposits of $1.1 million.
(6)
Investments
and Fair Value
Effective January 1, 2008, the Company adopted
SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which defines fair value
as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. SFAS No. 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs
when measuring fair value. The adoption of this statement did
not have a material impact on the Company’s results of
operations or financial condition.
The Company also adopted Financial Accounting Standards Board
(“FASB”) Staff Position
No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which
defers for one year the effective date of SFAS No. 157
for non-financial assets and liabilities measured at fair value
on a nonrecurring basis, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The purpose of this
deferral is to allow the FASB and constituents additional time
to consider the effect of various implementation issues that
have arisen, or may arise, for the application of
SFAS No. 157. The assets and liabilities included in
the Consolidated Balance Sheet for which the adoption of
SFAS No. 157 has been deferred are largely comprised
of long-lived assets.
SFAS No. 157 describes three levels of inputs used to
measure and categorize fair value. The following is a brief
description of those three levels:
Level 1 — Unadjusted quoted prices in
active markets for identical assets or liabilities.
Level 2 — Observable inputs other than
Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
Level 3 — Unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
These inputs may reflect management’s own assumptions about
the assumptions a market participant would use in valuing the
asset or liability.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
When available, the Company uses quoted market prices to
determine fair value and classify such items in Level 1.
When necessary, Level 2 valuations are performed based on
quoted market prices for similar instruments in active markets
and/or
model-derived valuations with inputs that are observable in
active markets. Level 3 valuations are undertaken in the
absence of reliable Level 1 or Level 2 information.
The following table presents certain information for the
Company’s non-pension financial assets and liabilities that
are measured at fair value on a recurring basis at
December 31, 2008 (in thousands):
Total
Level 1
Level 2
Level 3
Assets:
Investment in Canadian commercial paper, net
$
7,400
$
—
$
—
$
7,400
Investment in other securities
407
168
—
239
Liabilities:
—
—
—
—
Investments in Canadian commercial paper and investments in
other securities are included in “Investments” on the
Company’s Consolidated Balance Sheets.
The following table reflects the activity for the major classes
of the Company’s assets and liabilities measured at fair
value using level 3 inputs (in thousands):
Realized gains and losses on securities are recorded as
“Other income (expense), net” in the Consolidated
Statements of Operations.
(b)
Declines in values determined to be other than temporary on
available-for-sale securities are recorded in “Other income
(expense), net” in the Consolidated Statements of
Operations.
The following table reflects unrealized holding gains (losses)
on the Company’s available-for-sale securities (in
thousands):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On August 21, 2007, $25.0 million of the
Company’s investments in Canadian asset-backed commercial
paper (“Canadian CP”) held through a Canadian
subsidiary matured but were not redeemed and on August 24,2007, $23.0 million of similar investments matured but were
not redeemed. As of December 31, 2007, the Company held
$48.2 million of Canadian CP, including accrued interest
through original maturity. The Canadian CP held by the Company
was issued by two special purpose entities sponsored by non-bank
entities. The Canadian CP was not redeemed at maturity due to
the combination of a collapse in demand for Canadian CP and the
refusal of the
back-up
lenders to fund the redemption on the grounds that these events
did not constitute events that would trigger a redemption
obligation. On May 9, 2008, the Company sold
$28.0 million (face amount, plus accrued interest) of its
Canadian CP investments that were issued by one of the special
purpose entities for $21.0 million and at December 31,2008, the Company held $20.2 million (face amount, plus
accrued interest) of Canadian CP with a carrying value,
following impairment charges, of $7.4 million. Due to
uncertainties in the timing as to when these investments will be
sold or otherwise liquidated, the Canadian CP is classified as a
noncurrent asset included in “Investments” on the
Consolidated Balance Sheets at December 31, 2008 and
December 31, 2007.
Efforts to restructure the Canadian CP that remained unredeemed
were undertaken by a largely Canadian investor committee. On
December 23, 2007, the investor committee announced that an
agreement in principle had been reached to restructure the
Canadian CP, whereby the Canadian CP would be exchanged for
medium term notes (“MTN’s”), backed by the assets
underlying the Canadian CP, having a maturity that will
generally match the maturity of the underlying assets. The
agreement in principle called for $11.1 million of the
MTN’s the Company would receive to be backed by a pool of
assets that are generally similar to those backing the Canadian
CP held by the Company and which were originally held by a
number of special purpose entities, while the remaining
$9.1 million of the MTN’s the Company would receive
would be backed by assets held by the specific special purpose
entity that originally issued the Canadian CP. The agreement in
principle was finalized and the investor committee filed a
proposed restructuring plan (the “Plan”) under the
CCAA with the Ontario Superior Court of Justice (the
“Court”) on March 17, 2008. Under the Plan, the
allocation of the MTN’s was modified to $9.6 million
(later modified to $9.8 million) backed by a pool of assets
and $10.6 million (later modified to $10.4 million)
backed by specific assets. The Plan was approved by the holders
of the Canadian CP on April 25, 2008, and sanctioned by the
Court on June 5, 2008. On January 12, 2009, the Court
approved the Plan, which was fully implemented on
January 21, 2009. In December 2008, the Company recognized
$1.0 million of interest due through December 31, 2008
and received cash of $0.8 million, representing interest
through August 2008 in January 2009.
The Canadian CP has not traded in an active market since
mid-August 2007 and there are currently no market quotations
available. On March 19, 2008, Dominion Bond Rating Service
withdrew its ratings of the Canadian CP. The Company has
employed a valuation model to estimate the fair value for the
$9.8 million of MTN’s backed by the pool of assets.
The valuation model used by the Company to estimate the fair
value for this portion of the MTN’s incorporates discounted
cash flows, the best available information regarding market
conditions and other factors that a market participant would
consider for such investments. The fair value (and carrying
value at December 31, 2008) of the $7.4 million
of Canadian CP (and replacement MTN’s backed by specific
assets) was estimated through the use of a model relying on
market data and inputs derived from securities similar to the
MTN’s. This model was also used during prior periods to
estimate the fair value of the $28.0 million of Canadian CP
that the Company sold on May 9, 2008. The Company believes
the valuation model provides a better estimate of fair value
than the thinly traded, distressed market for the MTN’s
issued to replace the Canadian CP in January 2009.
During 2007, the Company’s valuation resulted in an
impairment charge and reduction of $12.2 million to the
estimated fair value of the $48.2 million (face amount plus
accrued interest) in Canadian CP. During 2008, the
Company’s valuation resulted in an additional impairment
charge of $8.7 million on $20.2 million (face amount
plus accrued interest) of the Canadian CP. The Company recorded
a gain on sale of $1.1 million during 2008 related to the
Canadian CP sold on May 9, 2008 for $21.0 million.
Continuing uncertainties regarding the value of the assets which
underlie the MTN’s, the amount and timing of cash flows,
the actual yield of the MTN’s, whether an active market
will develop for the MTN’s and other factors could give
rise to a further change in the value of the Company’s
investment, which could materially impact the Company’s
financial condition and results of operations.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As part of the CanWest settlement, the Company transferred
certain asset-backed commercial paper, making up approximately
$5.6 million in face value (of the Company’s
$20.2 million) of Canadian CP, to a third party. The
asset-backed commercial paper that was transferred had a
carrying value of $nil at December 31, 2008. See
Note 17.
During 2008, the Company recognized a loss amounting to
$2.2 million relating to largely fully depreciated items of
property, plant and equipment that were no longer in use due to
completed and pending location closures and consolidations and
certain assets sold or otherwise disposed of in prior years.
These fixed assets were largely comprised of machinery and
equipment, including printing equipment and computer hardware
and software. The Consolidated Balance Sheet classification
“Property, plant and equipment, net” was reduced by
approximately $47.9 million and accumulated depreciation
was reduced by $45.7 million related to this write-down.
The Company has $15.4 million of assets held for sale (net
of a $1.9 million write-down), largely related to
underutilized facilities at December 31, 2008, which are
included in “Other current assets” on the Consolidated
Balance Sheet.
Depreciation of property, plant and equipment totaled
$23.4 million, $20.4 million and $22.0 million in
2008, 2007 and 2006, respectively.
The Company also evaluates long-lived assets, consisting of
property, plant and equipment, for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. The substantial acceleration in revenue
declines in 2008, both in the industry and for the Company, in
combination with the negative outlook for the economy, the
general negative outlook for newspaper advertising and
circulation in the near and long-term, and the continued decline
in the Company’s market capitalization, were considered by
the Company to be indicators of potential impairment of its
goodwill, intangible and long-lived assets. The impairment test
resulted in a non-cash impairment charge of $71.9 million
related to the write-down of its property, plant and equipment
summarized in the table below:
The impairment charge is included in “Impairment of
goodwill, intangible and long-lived assets” in the
Consolidated Statements of Operations.
The computation of the fair value of the Company’s
property, plant and equipment was completed as of
December 31, 2008. Due to the Company’s inability to
reliably forecast operating cash flows, the Company
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
estimated the fair value of its property, plant and equipment
based on a fair value in exchange basis which generally equates
to expected proceeds from an orderly sale. In determining the
fair value of its property, plant and equipment, the Company
considered how the economic obsolescence occurring in the
newspaper and printing industry may affect the fair value of
these long-lived assets.
(8)
Goodwill
and Intangible Assets
Goodwill represents the excess of acquisition costs over the
estimated fair value of net assets acquired in business
combinations. Goodwill is tested for impairment by comparing the
carrying value of the newspaper reporting unit to the
Company’s fair value based on market capitalization.
Intangible assets with finite useful lives include subscriber
and advertiser relationships, which are amortized on a
straight-line basis over 30 years. When an indicator of
potential impairment is identified, the Company tests its
subscriber and advertiser relationship intangibles for
recoverability by comparing the carrying amount of the asset to
the undiscounted future net cash flows expected to be generated.
The changes in the carrying amount of goodwill for the years
ended December 31, 2008 and 2007 are as follows:
The Company follows the provisions of SFAS No. 142.
The standard requires that goodwill and intangible assets with
indefinite useful lives are not amortized, but instead are
tested for impairment at least annually. The standard also
specifies criteria that intangible assets must meet in order to
be recognized and reported apart from goodwill. In addition,
SFAS No. 142 requires that intangible assets with
finite useful lives are amortized over their respective
estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”
The Company also evaluates goodwill for impairment between
annual tests and intangible assets if an event occurs or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. The
substantial acceleration in revenue declines in 2008, both in
the industry and for the Company, in combination with the
negative outlook for the economy, the general negative outlook
for newspaper advertising and circulation in the near and
long-term, and the continued decline in the Company’s
market capitalization, were considered by the Company to be
indicators of potential impairment of its goodwill and
intangible assets. The impairment test resulted in a non-cash
impairment charge of $209.3 million related to the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
write-off of goodwill and intangible assets of the newspaper
reporting unit and which are summarized in the table below:
Gross
Accumulated
Impairment
Net
Amount
Amortization
Charge
Amount
(In millions)
Goodwill
$
149.6
$
(25.3
)
$
(124.3
)
$
—
Subscriber and advertiser relationships
135.9
(50.9
)
(85.0
)
—
Total
$
285.5
$
(76.2
)
$
(209.3
)
$
—
The impairment charges are included in “Impairment of
goodwill, intangible and other long-lived assets” in the
Consolidated Statements of Operations.
The computation of the fair value of the newspaper reporting
unit requires significant estimation and judgment. The
impairment of the subscriber and advertiser relationship
intangible assets resulted primarily from declines in current
cash flows and the inability of the Company to reliably project
cash flows beyond the near term due to the previously mentioned
negative outlook and industry and economic declines experienced
in the three months ended September 30, 2008. The
impairment of the Company’s goodwill reflects the decline
in market capitalization (fair value) allocated to the newspaper
reporting unit such that the fair value no longer exceeds the
carrying value of that unit. The impairment of the
Company’s goodwill was driven by the decline in the
Company’s market capitalization of approximately
$163.0 million, or 92%, between December 31, 2007 and
September 30, 2008, in combination with the negative
industry and economic factors mentioned above and the inability
of the Company to reliably project cash flow to substantiate or
estimate alternative measures of fair value.
Amortization of intangible assets for the years ended
December 31, 2008, 2007 and 2006 was $3.3 million,
$4.4 million and $4.4 million, respectively.
On October 1, 2007, the Company repurchased the remaining
$6.0 million of the Company’s 9% Senior Notes due
2010 (the “9% Senior Notes”) at 101% of face
value plus accrued and unpaid interest. The total amount paid
was $6.2 million. The Company was required to offer to
repurchase the remaining $6.0 million of the Company’s
9% Senior Notes due to the actions taken by Hollinger Inc.
as described in Note 23.
Interest paid in 2008, 2007 and 2006 was $nil, $0.5 million
and $0.7 million, respectively.
(12)
Leases
The Company leases various facilities and equipment under
non-cancelable operating lease arrangements. Rental expense
under all operating leases was approximately $4.8 million,
$5.6 million and $5.9 million in 2008, 2007 and 2006,
respectively.
The Company has entered into various types of financial
instruments in the normal course of business.
For certain of these instruments, fair value estimates are made
at a specific point in time, based on assumptions concerning the
amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk and
the country of origin. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and, therefore, may not represent actual values of the financial
instruments that could be realized in the future.
The carrying values of all financial instruments at
December 31, 2008 and 2007 approximate their estimated fair
values.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(b) Derivative
Financial Instruments
The Company may enter into various swap, option and forward
contracts from time to time when management believes conditions
warrant. Such contracts are limited to those that relate to the
Company’s actual exposure to commodity prices, interest
rates and foreign currency risks. If, in management’s view,
the conditions that made such arrangements worthwhile no longer
exist, the contracts may be closed. The Company currently has no
derivative financial instruments in place.
(14)
Stockholders’
Equity
Preferred
Stock
The Company is authorized to issue 20,000,000 shares of
preferred stock in one or more series and to designate the
rights, preferences, limitations and restrictions of and upon
shares of each series, including voting, redemption and
conversion rights.
Class A
and Class B Common Stock
Class A Common Stock and Class B Common Stock have
identical rights with respect to cash dividends and in any sale
or liquidation, but different voting rights. Each share of
Class A Common Stock is entitled to one vote per share and
each share of Class B Common Stock is entitled to ten votes
per share on all matters, where the two classes vote together as
a single class, including the election of directors.
Class B Common Stock is convertible at any time into
Class A Common Stock on a share-for-share basis and is
transferable under certain conditions.
On May 14, 2008, the Company announced it had agreed to
revised terms of the Settlement (the “Revised
Settlement”) with Hollinger Inc. The Revised Settlement
included a complete release of claims between the parties and
the elimination of the voting control by Hollinger Inc. of the
Company through conversion on a one-for-one basis of the shares
of Class B Common Stock to shares of Class A Common
Stock. The Revised Settlement also required the Company to
deliver 1.499 million additional shares of Class A
Common Stock to Hollinger Inc. The terms of the Revised
Settlement were carried out at a closing on June 18, 2008.
The Company granted demand registration rights with respect to
the shares of Class A Common Stock that resulted from the
conversion of the shares of Class B Common Stock, as well
as with respect to the additional 1.499 million shares of
Class A Common Stock issued to Hollinger Inc. pursuant to
the Revised Settlement. See Note 23(i).
Shareholder
Rights Plan (“SRP”)
On February 27, 2004, the Company paid a dividend of one
preferred share purchase right (a “Right”) for each
share of Class A Common Stock and Class B Common Stock
held of record at the close of business on February 5,2004. Each Right, if and when exercisable, entitles its holder
to purchase from the Company one one-thousandth of a share of a
new series of preferred stock at an exercise price of $50.00.
Unless earlier redeemed, exercised or exchanged, the Rights will
expire on January 25, 2014.
The SRP provides that the Rights will separate from the
Class A Common Stock and Class B Common Stock and
become exercisable only if a person or group beneficially
acquires, directly or indirectly, 20% or more of the outstanding
stockholder voting power of the Company without the approval of
the Company’s directors, or if a person or group announces
a tender offer which if consummated would result in such person
or group beneficially owning 20% or more of such voting power.
The Company may redeem the Rights at $0.001 per Right or amend
the terms of the plan at any time prior to the separation of the
Rights from the Class A Common Stock and Class B
Common Stock.
Under most circumstances involving an acquisition by a person or
group of 20% or more of the stockholder voting power of the
Company, each Right will entitle its holder (other than such
person or group), in lieu of purchasing preferred stock, to
purchase shares of Class A Common Stock of the Company at a
50% discount to the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
current per share market price. In addition, in the event of
certain business combinations following such an acquisition,
each Right will entitle its holder to purchase the common stock
of an acquirer of the Company at a 50% discount from the market
value of the acquirer’s stock.
Conrad M. Black (“Black”) and each of his controlled
affiliates and Hollinger Inc., are considered “exempt
stockholders” under the terms of the plan. This means that
so long as Black and his controlled affiliates do not
collectively, directly or indirectly, increase the number of
shares of Class A and Class B Common Stock above the
level owned by them when the plan was adopted, their ownership
will not cause the Rights to separate from the Common Stock.
This exclusion would not apply to any person or group to whom
Black or one of his affiliates transfers ownership, whether
directly or indirectly, of any of the Company’s shares.
Consequently, the Rights may become exercisable if Black
transfers sufficient voting power to an unaffiliated third party
through a sale of interests in the Company, Hollinger Inc.,
Ravelston Corporation Limited (“Ravelston”) or another
affiliate. As a result of the filing on April 22, 2005 by
Ravelston and Ravelston Management, Inc. (“RMI”),
seeking court protection under Canadian insolvency laws, and the
appointment of a court-appointed receiver for Ravelston and RMI,
on May 10, 2005, the Board’s Corporate Review
Committee amended the SRP to include RSM Richter Inc.
(“Richter”), which was appointed by the Court as the
receiver of Ravelston’s assets as an “exempt
stockholder” for purposes of the SRP. The SRP was also
subsequently amended in connection with the Revised Settlement.
Common
Stock Repurchases and Issuance of Treasury Stock
On March 15, 2006, the Company announced that its Board of
Directors authorized the repurchase of an aggregate value of
$50.0 million of its common stock to begin following the
filing of the 2005
Form 10-K.
The Company completed the repurchase of common stock on
May 5, 2006, aggregating approximately 6.2 million
shares for approximately $50.0 million, including related
transaction fees.
On May 17, 2006, the Company announced that its Board of
Directors authorized the repurchase of common stock utilizing
approximately $8.2 million of proceeds from the sale of
Hollinger Digital LLC (see Note 3) and
$9.6 million of proceeds from stock options exercised in
2006. In addition, on June 13, 2006, the Company announced
that its Board of Directors had authorized an additional
$50.0 million for the repurchase of common stock. Through
December 31, 2006, the Company repurchased approximately
6.0 million shares for approximately $45.7 million,
including related transaction fees, out of the
$67.8 million authorized subsequent to the program
announced on March 15, 2006. The Company has not purchased
any treasury shares in 2007 or 2008 and has no active program in
place to acquire shares for treasury.
The Company issued approximately 1.5 million shares of its
treasury stock in respect of options exercised or shares issued
in respect of deferred stock units (“DSU’s”)
vesting through December 31, 2006. Proceeds received from
the exercise of options were then used to repurchase treasury
stock as discussed above. During 2007, the Company issued
approximately 0.3 million shares of treasury stock in
respect of DSU’s vesting through December 31, 2007 and
issued approximately 0.1 million shares in January 2008 in
respect of DSU’s vesting through December 31, 2007.
During 2008, the Company issued approximately 1.3 million
shares of treasury stock in respect of DSU’s vesting in
2008.
Dividends
and Dividends Payable
The Company is a holding company and its assets consist
primarily of investments in its wholly-owned direct and indirect
subsidiaries. As a result, the Company’s ability to meet
its future financial obligations and its ability to pay
dividends is dependent on the availability of cash flows from
its subsidiaries through dividends, intercompany advances and
other payments.
On December 13, 2006, the Company announced that its Board
of Directors voted to suspend the Company’s quarterly
dividend of five cents ($0.05) per share and no dividends have
been declared or paid since that time.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(15)
Stock-Based
Compensation
Stock
Options
In 1999, the Company adopted the Hollinger International Inc.
1999 Stock Incentive Plan (“1999 Stock Plan”) which
provides for awards of up to 8,500,000 shares of
Class A Common Stock. The 1999 Stock Plan authorizes the
grant of incentive stock options and nonqualified stock options.
The exercise price for stock options must be at least equal to
100% of the fair market value of the Class A Common Stock
on the date of grant of such option. The maximum term of the
options granted under the 1999 Stock Plan is 10 years and
the options vest ratably, over two or four years.
The Company has not granted any new stock options since 2003.
On May 1, 2004, the Company suspended option exercises
under its stock option plans until such time that the
Company’s Securities and Exchange Commission
(“SEC”) registration statement with respect to these
shares would again become effective (the “Suspension
Period”). The suspension did not affect the vesting
schedule with respect to previously granted options. In
addition, the terms of the option plans generally provide that
participants have 30 days following the date of termination
of employment with the Company to exercise options that are
exercisable on the date of termination. Participants in the
stock incentive plans whose employment had been terminated were
provided with 30 days following the lifting of the
Suspension Period to exercise options that were vested at the
termination of their employment. The extension of the exercise
period constituted a modification of the awards, but did not
affect, or extend, the contractual life of the options.
As a result of the Company’s inability to issue common
stock upon the exercise of stock options during the Suspension
Period, the exercise period with respect to those stock options
which would have been forfeited during the Suspension Period had
been extended to a date that is 30 days following the
Suspension Period. These extensions constitute amendments to the
life of the stock options, for those employees expected to
benefit from the extension, as contemplated by FIN 44.
Under FIN 44, the Company is required to recognize
compensation expense for the modification of the option grants.
The additional compensation charge for the affected options,
calculated as the difference between the intrinsic value on the
award date and the intrinsic value on the modification date,
amounted to $0.5 million for 2005.
On April 27, 2006, the Company filed with the SEC a
Form S-8
registering shares to be issued under the 1999 Stock Plan and
the registration statements for the Company’s stock
incentive plans were effective as of that date. The Company
notified option grantees that the Suspension Period would end on
May 1, 2006 related to vested options under the
Company’s stock incentive plans.
In connection with the deregistration of the Company’s
Class A Common Stock, on March 6, 2009, the Company
filed a post-effective amendment to each of its previously filed
Forms S-8
to terminate the registration of any unissued shares thereunder.
The fair value of stock options was estimated using the
Black-Scholes option-pricing model and compensation expense is
recognized on a straight-line basis over the remaining vesting
period of such awards. As the Company has not granted any new
stock options after 2003, the expense recognized for 2006
largely represents the service expense related to previously
granted, unvested awards. The remaining cost related to the
unvested options was recognized in January 2007. The Company had
no unrecognized cost related to non-vested options at
December 31, 2008.
SFAS No. 123R requires the recognition of stock-based
compensation for the number of awards that are ultimately
expected to vest. Upon the adoption of SFAS No. 123R,
the Company recognized an immaterial one-time gain based on
SFAS No. 123R’s requirement to apply an estimated
forfeiture rate to unvested awards. As a result, stock
compensation expense was reduced for estimated forfeitures
expected prior to vesting. Estimated forfeitures are based on
historical forfeiture rates and approximated 8%. Estimated
forfeitures will be reassessed in subsequent periods and the
estimate may change based on new facts and circumstances. Prior
to January 1, 2006, actual forfeitures were included in pro
forma stock compensation disclosures as they occurred.
Prior to the adoption of SFAS No. 123R, the Company
accounted for stock options and DSU’s granted to employees
and directors using the intrinsic value-based method of
accounting.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred
Stock Units
Pursuant to the 1999 Stock Plan, the Company issues DSU’s,
each of which are convertible into one share of Class A
Common Stock. The value of the DSU’s on the date of
issuance is recognized as employee compensation expense over the
vesting period or through the grantee’s eligible retirement
date, if shorter. The DSU’s are reflected in the basic
earnings per share computation upon vesting. As of
December 31, 2008, 2,777,335 DSU’s are fully vested,
in respect of which 498,918 shares of stock have not been
delivered and the Company has approximately $1.0 million of
unrecognized compensation cost related to non-vested DSU’s.
Due to the reconstruction of the Board of Directors in January
2009, all 819,252 unvested DSU’s vested and the Company
will record $1.0 million in compensation expense.
On December 16, 2004, from the proceeds of the sale of the
Company’s U.K. operations, the Board of Directors declared
a special dividend of $2.50 per share on the Company’s
Class A and Class B Common Stock paid on
January 18, 2005 to holders of record of such shares on
January 3, 2005, in an aggregate amount of approximately
$226.7 million. On January 27, 2005, the Board of
Directors declared a second special dividend of $3.00 per share
on the Company’s Class A and Class B Common Stock
paid on March 1, 2005 to holders of record of such shares
on February 14, 2005, in an aggregate amount of
approximately $272.0 million. Following the special
dividends paid in 2005, pursuant to the underlying stock option
plans, the outstanding grants under the Company’s stock
incentive plans, including DSU’s, have been adjusted to
take into account this return of cash to existing stockholders
and its effect on the per share price of the Company’s
Class A Common Stock. As a result, DSU’s increased
from 262,488 to 355,543 units and the number of shares
potentially issuable pursuant to outstanding options increased
from approximately 3.2 million shares before the adjustment
to approximately 4.6 million shares after the adjustment.
The Company recognized $2.2 million, $2.4 million and
$2.3 million in stock-based compensation in 2008, 2007 and
2006, respectively, related to DSU’s. On August 1,2007, the Company announced it received notice from Hollinger
Inc., the Company’s former controlling stockholder, that
certain corporate actions with respect to the Company had been
taken by written consent. These actions included increasing the
size of the Board of Directors with vacancies being filled by
stockholders having a majority interest. As a result of the
change in control, approximately 165,000 outstanding DSU’s
that were not yet vested became vested, which resulted in stock
compensation expense of $1.0 million in 2007.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(16)
Employee
Benefit Plans
Defined
Contribution Plans
The Company sponsors three domestic defined contribution plans,
all of which have provisions for Company contributions. For the
years ended December 31, 2008, 2007 and 2006, the Company
contributed $1.3 million, $2.2 million and
$2.6 million, respectively.
Defined
Benefit Plans
During 2006, the FASB issued SFAS No. 158 that
required implementation in fiscal years ending after
December 15, 2006. SFAS No. 158 amended
SFAS Nos. 87, 88, 106 and 132R but retained most of the
measurement and disclosure requirements and did not change the
amounts recognized in the income statement as net periodic
benefit cost. The Company adopted the SFAS No. 158
requirements for the December 31, 2006 financial statements
and disclosures.
SFAS No. 158 required the Company to 1) recognize
the funded status of Pension and Other Postretirement Plans in
its Consolidated Balance Sheets, measured as the difference
between the plan assets at fair value and the projected benefit
obligation, 2) classify, as a current liability, the amount
by which the benefits included in the benefit obligation payable
in the next twelve months exceeds the fair value of plan assets
3) recognize as a component of “Other comprehensive
income (loss),” net of tax, the unrecognized actuarial
gains and losses, prior service costs and transition obligations
that arise during the period but are not recognized as
components of net periodic benefit cost, 4) measure the
plan assets as of the date of the Company’s fiscal year end
and 5) disclose additional information as to the effect on
net periodic benefit cost for the next fiscal year that arise
from delayed recognition of gains and losses, prior service
costs and transition obligations.
As a result of adopting SFAS No. 158 as of
December 31, 2006, the Company recorded a reduction in
stockholders’ equity via a charge to the “Pension
adjustment” component of accumulated other comprehensive
income (loss) of $29.3 million, net of deferred income
taxes of $17.0 million, to recognize the unfunded portion
of its defined benefit pension plans and other postretirement
benefit plans liabilities.
The Company has seven domestic and six Canadian single-employer
defined benefit pension plans and four domestic and two Canadian
supplemental retirement arrangements. The Company’s
contributions to these plans for the years ended
December 31, 2008, 2007 and 2006 were approximately
$10.4 million, $7.2 million and $3.3 million,
respectively, and it expects to contribute approximately
$6.8 million to these plans in 2009.
The benefits under subsidiary companies’ single-employer
pension plans are based primarily on years of service and
compensation levels. The Company funds the annual provision
deductible for income tax purposes. The plans’ assets
consist principally of marketable equity securities and
corporate and government debt securities. The pension
plans’ obligations and assets are measured as of December
31 for all years presented.
Accumulated other comprehensive loss, before taxes in 2008
included net actuarial losses of $74.8 million, foreign
currency translation gains of $14.4 million, settlement and
curtailment losses recognized of $0.2 million and
amortization of net actuarial losses, prior service costs and
net transition obligation of $1.1 million,
$0.1 million and $0.1 million, respectively.
The estimated net actuarial losses, prior service costs and net
transition obligation for the defined benefit pension plans that
will be amortized from Accumulated other comprehensive loss into
net periodic benefit costs over the next fiscal year are
$6.3 million, $0.1 million and $0.1 million,
respectively.
Information for pension plans with an accumulated benefit
obligation in excess of plan assets as of December 31:
Weighted-average assumptions used to determine plan benefit
obligations at December 31:
Pension Benefits
2008
2007
Discount rate
6.90
%
5.67
%
Rate of compensation increase
2.39
%
2.53
%
Weighted-average assumptions used to determine plan net periodic
benefit cost for the years ended December 31:
Pension Benefits
2008
2007
2006
Discount rate
6.90
%
5.67
%
5.18
%
Expected long-term return on plan assets
4.55
%
6.53
%
7.22
%
Rate of compensation increase
2.39
%
2.53
%
2.47
%
The discount rate is based on yield curves derived from AA
corporate bond yields with terms similar to the projected
benefit payment duration of the benefit plans. The Company used
a building block approach to determine its current assumption of
the long-term expected rate of return on pension plan assets.
Based on historical market studies, the Company’s long-term
expected returns range from 3.75% to 8.00%. The Company’s
current target asset allocation varies by pension plan. The
weighted average target allocation is approximately 25% in
equity securities and 75% in debt and other securities.
The Plans’ pension investment objectives have been designed
to provide a long-term investment return greater than the
actuarial assumption and maximize investment return commensurate
with appropriate levels of risk.
The Plans’ strategies are predicated on the Plans’
investment objectives noted above. Risk is intended to be
minimized through the use of diverse asset classes, which will
stabilize the portfolio and thereby reduce the level of
volatility for each level of expected return.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Investment funds are selected on the basis of:
•
Historically competitive investment returns and risks;
•
Stability and financial soundness of companies offering funds;
•
Desirability of offering funds run by different
managers; and
•
Manager’s investment philosophy and style.
The Plans’ fund managers review the investment funds
quarterly for consistency of style and competitive investment
performance.
Postretirement
and Postemployment Benefits
The Company sponsors three foreign postretirement plans that
provide postretirement benefits to certain former employees.
These and other benefits are accrued in accordance with
SFAS No. 106 and SFAS No. 112. The Company
has no domestic postretirement benefit plan. The postretirement
obligations and assets are measured as of December 31 for all
years presented.
During 2006, the Company has adopted the requirements of
SFAS No. 158. SFAS No. 158 amends
SFAS No. 106 but retains most of the measurement and
disclosure requirements and does not change the amounts
recognized in the income statement as net periodic benefit cost.
SFAS No. 158 does not amend SFAS No. 112.
The components of net periodic postretirement benefit cost for
the years ended December 31, 2008, 2007 and 2006 are as
follows:
2008
2007
2006
(In thousands)
Service cost
$
10
$
10
$
27
Interest cost
1,108
1,103
1,357
Settlement gain
(3,225
)
—
—
Amortization of gains
(287
)
(1,782
)
(788
)
Net periodic postretirement benefit cost (credit)
$
(2,394
)
$
(669
)
$
596
The table below sets forth the reconciliation of the accumulated
postretirement benefit obligation:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As a result of the Company adopting the requirements of
SFAS No. 158 in 2006, unrecognized gains and losses
are recognized as a component of other comprehensive income, net
of tax. The unrecognized gains and losses were previously
included as a component of the postretirement liability. In
addition, the amount of benefits included in the postretirement
benefit obligation that are payable in the next twelve months
are classified as a current liability. The Company previously
included these obligations in other liabilities.
Unrecognized net gain, included in accumulated other
comprehensive income, net of tax
$
11,080
$
11,515
Unrecognized net gain, before taxes in accumulated other
comprehensive income in 2008 included net actuarial gains of
$2.8 million, foreign currency translation losses of
$2.5 million, settlement gain recognized of
$0.1 million and amortization of net actuarial gains of
$0.6 million.
The estimated net actuarial gain for the postretirement benefits
plans that will be amortized from Accumulated other
comprehensive income (loss) into net periodic benefit cost over
the next fiscal year is $0.7 million.
The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.30% and
5.50% as of December 31, 2008 and 2007, respectively. The
weighted average discount rate used in determining the
postretirement net periodic benefit cost was 5.50% and 5.00% for
2008 and 2007, respectively. The discount rate is based on yield
curves derived from AA corporate bond yields with terms similar
to the projected benefit payment duration of the benefit plans.
The weighted average discount rate used in determining the
accumulated postemployment benefit obligation and postemployment
net periodic benefit cost was 2.10% and 5.25% for 2008 and 2007,
respectively. The discount rate is based on AAA Government of
Canada bond yields with maturities matching the duration of the
benefit plans’ obligation. Generally, benefits under the
plans are paid for by the Company’s contributions to the
plan and the Company expects the contributions in 2009 to
approximate those in 2008.
2008
2007
Healthcare cost trend assumed next year
8.0
%
7.4
%
Rate to which the cost trend is assumed to decline (the ultimate
trend rate)
4.5
%
5.0
%
Year that rate reaches ultimate trend rate
2028
2012
Assumed health care cost trend rates have a significant effect
on the amounts reported for heath care plans. If the health care
cost trend rate was increased 1%, the accumulated postretirement
benefit obligation as of December 31, 2008 would have
increased $1.0 million (2007 — $1.3 million)
and the effect of this change on the aggregate of service and
interest cost for 2008 would have been an increase of
$0.1 million (2007 — $0.1 million). If the
health care cost trend rate was decreased 1%, the accumulated
postretirement benefit obligation as of December 31, 2008
would have decreased by $0.9 million (2007 —
$1.2 million) and the effect of this change on the
aggregate of service and interest cost for 2008 would have been
a decrease of $0.1 million (2007 —
$0.1 million).
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pension
and Other Benefit Payments
The following table presents the expected future benefit
payments to be paid by the pension and postretirement plans
during the ensuing five years and five years thereafter:
Pension
Postretirement
Year
Benefits
Benefits
(In thousands)
2009
$
26,212
$
2,000
2010
$
25,535
$
2,062
2011
$
25,088
$
2,122
2012
$
24,730
$
2,178
2013
$
24,292
$
2,225
2014-2018
$
114,657
$
11,562
(17)
Other
Operating Costs and Corporate Expenses
Items Included
in “Other Operating Costs”
Included in “Other operating costs” are the following
amounts that the Company believes may make meaningful comparison
of results between periods difficult based on their nature,
magnitude and infrequency.
Write-off of capitalized direct response advertising costs(a)
—
15,191
—
Write-off of capitalized software(b)
—
1,487
882
Costs related to outsourcing of certain newspaper distribution
activities, including severance
(163
)
1,770
—
Loss on disposal or write-down of assets, net (see Note 7)
3,943
—
—
Costs related to printing plant relocation
1,235
—
—
Restitution and settlement costs — circulation matters
(584
)
—
—
(a) Write-off
of Capitalized Direct Response Advertising Costs
The Company follows the accounting methodology set forth in
Statement of Position
93-7
“Reporting on Advertising Costs”
(“SOP 93-7”).
Changes in the Company’s business practices and the
Company’s expectations as to the effect of economic trends
and consumer demand for the Company’s products, as
indicated by declines in circulation and related advertising
revenue, indicate that the benefit period of these direct
response advertising costs can best be described as
indeterminate and such costs are expensed as incurred.
The Company therefore determined that its direct response
advertising costs were impaired as the subscription life can not
be assumed to exceed the initial subscription period (reflective
of an indeterminate subscription life in the current
environment). As a result, the Company can no longer conclude
that direct response advertising costs result in probable future
economic benefits as contemplated in
SOP 93-7
and the impaired capitalized costs were written off in 2007.
(b) Write-off
of Capitalized Software
Relates to software development projects that were halted and
cancelled.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Items Included
in “Corporate Expenses”
Included in “Corporate expenses” are the following
amounts that the Company believes may make meaningful comparison
of results between periods difficult based on their nature,
magnitude and infrequency.
Bad debt expense related to loan to subsidiary of Hollinger
Inc.(a)
$
—
$
33,685
$
—
Loss on sale of newspaper operations(b)
10,538
13,603
—
Settlement of claims with Hollinger Inc.(c)
2,490
—
—
Severance expense
—
(176
)
6,954
Unclaimed property costs
(456
)
—
2,000
(a) Bad
Debt Expense Related to Loan to Subsidiary of Hollinger Inc.
Represents bad debt expense related to a loan to a subsidiary of
Hollinger Inc. discussed in detail in Note 23(b). The
Company’s collateral for the loan is subordinated to
certain obligations of Hollinger Inc. which initiated a
court-supervised restructuring under the CCAA and a companion
proceeding in the U.S. pursuant to Chapter 15 of the
U.S. Bankruptcy Code.
(b) Loss
on Sale of Newspaper Operations
At December 31, 2007, the Company had a reserve established
under “Accounts payable and accrued expenses” on its
Consolidated Balance Sheet in respect of an arbitration arising
from a dispute with CanWest in the amount of
Cdn.$15.0 million (USD$15.2 million). The Company had
also previously established an escrow account containing
approximately Cdn.$21.6 million (USD$21.8 million)
available to pay any final arbitration award. The escrowed funds
are included on the Consolidated Balance Sheet at
December 31, 2007 under “Escrow deposits and
restricted cash.”
On January 29, 2009, the Company received the decision of
an arbitrator in the dispute between the Company and CanWest.
The arbitrator’s decision includes an award in favor of
CanWest in the amount of approximately Cdn.$50.7 million.
The award was exclusive of interest and costs, which are
estimated to aggregate Cdn.$18.2 million. On March 12,2009, the Company entered into a settlement agreement with
CanWest that resolved all claims with respect to the arbitration
award against the Company. Under the terms of the settlement
agreement, CanWest received Cdn.$34.0 million, including
approximately Cdn.$22.0 million from an escrow account
funded by the Company, and an additional Cdn.$6.0 million
paid by the Company in March 2009. The remainder due to CanWest
was paid by an unaffiliated third party. As a result of the
settlement, the Company and all of its affiliates and
subsidiaries have been released fully from any and all liability
related to the arbitration award and the underlying transactions
that led to the award. In addition to the items recorded at
December 31, 2007, in 2008 the Company recorded
Cdn.$13.0 million ($USD 10.5 million) related to this
settlement, which is included under “Accounts payable and
accrued expenses.” See Note 22(a).
(c) Settlement
of Claims with Hollinger Inc.
Represents effect of settlement and complete release of claims
between the Company and Hollinger Inc., including approximately
$1.7 million for write-off of amounts due from Hollinger
Inc. and related parties and approximately $0.8 million
related to additional common stock issued (including legal
fees). See Note 23(i).
(18)
Indemnification,
Investigation and Litigation Costs, Net of Recoveries
The Company is involved in a series of disputes, investigations
and legal proceedings relating to transactions between the
Company and certain former executive officers and certain former
directors of the Company and their affiliates. The potential
impact of these disputes, investigations and legal proceedings
on the Company’s financial
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
condition and results of operations cannot currently be
estimated. See Note 22(a). These costs primarily consist of
legal and other professional fees as summarized in the following
table. Such costs are accrued as services are rendered.
On March 18, 2007, the Company announced settlements,
negotiated and approved by a special committee of independent
directors (the “Special Committee”), with former
President and Chief Operating Officer, F. David Radler
(“Radler”), (including his wholly-owned company, North
American Newspapers Ltd. f/k/a F.D. Radler Ltd.) and the
publishing companies Horizon Publishing Company
(“Horizon”) and Bradford Publishing Company
(“Bradford”). The Company received $63.4 million
in cash to settle the following: (i) claims by the Company
against Radler, Horizon and Bradford, (ii) potential
additional claims against Radler related to the Special
Committee’s findings regarding incorrectly dated stock
options and (iii) amounts due from Horizon and Bradford.
The Company has recorded $47.7 million of the settlement,
as a recovery, within “Indemnification, investigation and
litigation costs, net of recoveries” and $7.2 million
in “Interest and dividend income” in the Consolidated
Statement of Operations for the year ended December 31,2007. The remaining $8.5 million represents the collection
of certain notes receivable.
Costs and expenses arising from the Special Committee
investigation. These amounts include the fees and costs of the
Special Committee’s members, counsel, advisors and experts.
The Special Committee was dissolved in November 2008, and the
Special Committee’s related legal matters were turned over
to the Company’s Board of Directors and management.
(2)
Largely represents legal and other professional fees to defend
the Company in litigation that has arisen as a result of the
issues the Special Committee has investigated, including costs
to defend the counterclaims of Hollinger Inc. and Black in
Hollinger International Inc. v. Conrad M. Black,
Hollinger Inc., and 504468 N.B. Inc. described in the
Company’s previous filings.
(3)
Represents amounts the Company has been required to advance in
fees and costs to indemnified parties, including former officers
and directors and their affiliates and associates who are
defendants in the litigation brought by the Company or in the
criminal proceedings. See “Black v. Hollinger
International Inc.”described in the Company’s
previous filings.
(4)
Represents recoveries including $2.0 million related to the
settlement with Hollinger Inc. for legal fees incurred in
connection with Hollinger Inc.’s CCAA proceedings,
$47.7 million related to a settlement with Radler described
above, $47.5 million in a settlement with certain of the
Company’s directors and officers insurance carriers in
2006, $30.3 million in a settlement with Torys LLP in 2005
and $2.1 million in recoveries of indemnification payments
from Black in 2005. Excludes settlements with former directors
and officers, pursuant to a restitution agreement reached in
November 2003, of $1.7 million and $31.5 million
recognized in 2004 and 2003, respectively, which were recorded
in “Other income (expense), net,” and interest related
to various recoveries and settlements of $15.8 million
which was recorded in “Interest and dividend income.”
Total recoveries, including interest, aggregate
$176.6 million. In addition, the Radler settlement resulted
in the collection of $8.5 million of notes receivable.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(5)
Represents amounts received pursuant to the restitution
agreement described in (4) above.
(6)
The Special Committee was formed on June 17, 2003. These
amounts represent the cumulative net costs from that date.
(7)
Including the $7.2 million and $8.5 million received
from Radler in interest and payment of notes receivable,
respectively (see (4) above), and the Company’s
potential share of insurance proceeds held in escrow (see
Note 22(a) “Stockholder Class Actions”) of
$20.8 million, the amounts collected by the Special
Committee aggregate $199.3 million and total expenses
aggregate $215.4 million.
In 2007, the Company retired $6.0 million of its
9% Senior Notes and recognized a premium for early
redemption. See Note 11.
(b)
The Company has made several acquisitions of papers and other
memorabilia of President Franklin Delano Roosevelt (the
“FDR Collection”). The Company has recorded an
impairment for the remaining carrying value of the FDR
Collection of $1.5 million during 2008 and has fully
reserved the initial purchase price. The U.S. National Archives
has asserted an ownership claim to a portion of the collection
known as the Grace Tully Collection.
(c)
In 2008 and 2007, the Company recorded $8.7 million and
$12.2 million of impairment charges, respectively, related
to the valuation of its Canadian CP. See Note 6.
U.S. and foreign components of loss from continuing
operations before income taxes are presented below:
2008
2007
2006
(In thousands)
U.S.
$
(382,240
)
$
(121,511
)
$
(29,351
)
Foreign
15,612
(29,346
)
9,152
$
(366,628
)
$
(150,857
)
$
(20,199
)
Total income taxes paid during the years ended December 31,2008, 2007 and 2006 amounted to $3.4 million,
$33.3 million and $23.3 million, respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense (benefit) allocated to loss from continuing
operations differed from the amounts computed by applying the
U.S. federal income tax rate of 35% for 2008, 2007 and 2006
as a result of the following:
2008
2007
2006
(In thousands)
Income tax benefit at federal statutory rate
$
(128,320
)
$
(52,800
)
$
(7,070
)
Impact of taxation at different foreign rates
2,209
4,191
(1,725
)
U.S. state and local income tax benefit, net of federal tax
impact
(18,724
)
(8,298
)
(1,462
)
Tax impacts of the disposition and liquidation of Canadian
operations, including book and tax basis differences, foreign
exchange differences and related items(a)
—
—
(10,551
)
Provision for tax contingencies
—
—
29,042
Reduction of tax contingency accruals due to the resolution of
uncertainties(b)(e)
(34,650
)
(578,530
)
(39,297
)
Reversal of U.S. deferred tax benefits related to disposition
and liquidation of Canadian operations(c)
—
157,344
—
Interest on tax contingency accruals
49,601
47,967
81,523
Items non-deductible or non-includible for income tax purposes
397
4,228
831
Income tax expense (benefit) on intercompany and other
transactions involving
non-U.S.
operations(b)
17,582
(28,797
)
2,241
Increase in valuation allowance, net(d)
99,810
35,374
5,366
Other, net
(1,034
)
(1,567
)
(1,467
)
Income tax expense (benefit) allocated to loss from continuing
operations
$
(13,129
)
$
(420,888
)
$
57,431
(a)
During 2008, the Company recognized the effects of the CanWest
arbitration decision. The pre-tax charge of $10.5 million
represents an adjustment related to the gain/loss on sale of
newspaper operations. The related tax year had previously been
closed with the Canada Revenue Agency (“CRA”) and the
Company will receive no tax benefit for the loss. See Note 17.
(b)
During 2007, the Company reached an agreement with the CRA
settling certain tax issues largely related to the disposition
of certain Canadian operations in 2000. As a result of the
settlement, the Company reduced its tax contingency accruals by
$571.8 million and recorded a U.S. tax benefit of
$14.9 million related to the deduction arising from the
settlement.
(c)
The Company had recorded deferred tax assets for the U.S. tax
benefits that were related to the 2000 disposition and
liquidation of Canadian operations. Upon the settlement of the
Canadian tax issues with the CRA, the Company reversed the U.S.
deferred tax asset of $157.3 million and the corresponding
valuation allowance.
(d)
The net increase in the valuation allowance in 2007 includes the
effects of the following significant transactions. The Company
recorded $193.5 million of increases in the valuation
allowance to conform with its accounting policy that requires
deferred tax assets be reduced to a level where they are more
likely than not to be realized. The Company recorded a reduction
of the valuation allowance in the amount of $157.3 million
as described in (c) above.
(e)
In September 2008, the Company received a favorable ruling from
the CRA that it completed an audit of the Company’s 2000
tax year, which resulted in no changes to the tax return. As a
result, the Company has recorded a tax benefit, including
interest through the quarter ended June 30, 2008, of
$34.7 million reflecting the reversal of certain contingent
tax liabilities no longer deemed necessary.
Accounts receivable, principally due to allowance for doubtful
accounts
$
1,454
$
2,087
Bad debt allowance on loan to subsidiary of Hollinger Inc.
—
13,474
Accrued expenses
5,124
20,502
Pension assets
1,349
—
Postretirement obligations
9,484
15,365
Intangible assets(a)
30,514
—
Investments
21,211
20,796
Net operating loss carryforwards
90,976
38,508
Claims for restitution
43,964
43,964
U.S. tax benefit related to disposition and liquidation of
Canadian operations
—
10,849
Accrued interest and state income tax effects related to income
tax contingent liabilities included in “Other tax
liabilities”
109,535
93,000
Property, plant and equipment, principally due to differences in
depreciation and deferred gain on exchange of assets(b)
14,170
—
Capital loss carryovers
7,355
6,745
Other
14,388
20,898
Deferred tax assets
349,524
286,188
Less valuation allowance
(339,087
)
(237,624
)
Net deferred tax assets
$
10,437
$
48,564
Deferred tax liabilities attributable to:
Property, plant and equipment, goodwill and intangible assets,
principally due to differences in depreciation, amortization and
deferred gain on exchange of assets(a)(b)
$
—
$
59,649
Pension assets
—
23,502
Deferred gain on disposition of Canadian Newspaper Operations
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(a)
The Company recognized an impairment charge for the entirety of
its goodwill and intangible assets in 2008. See Note 8. The
charge resulted in the reversal of $49.4 million in
deferred tax liabilities and the establishment of
$30.5 million in deferred tax assets for which a valuation
allowance, in the same amount, has been established.
(b)
The Company recognized an impairment charge of
$71.9 million for property, plant and equipment in 2008.
See Note 8. The charge resulted in the reversal of
$14.5 million in deferred tax liabilities and the
establishment of $14.2 million in deferred tax assets for
which a valuation allowance, in the same amount, has been
established.
At December 31, 2008, the Company had approximately
$10.7 million of Canadian net operating loss carryforwards,
which will expire in varying amounts from December 31, 2009
through December 31, 2027. A further $41.7 million of
excess capital losses are available in Canada for carryforward.
There is no expiration for the capital loss carryforward.
The valuation allowance relates to tax benefits of future
deductible temporary differences and net operating and capital
loss carryforwards. Management believes that it is more likely
than not that the tax benefits will not be fully realized, due
to the inability to depend on the generation of taxable income
from future operations to realize such benefits.
The Company adopted the provisions of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) on January 1, 2007.
The adoption of FIN 48 did not have a material impact on
the Company’s financial position or results of operations.
As part of its adoption, the Company performed an item by item
evaluation and considered the state of its ongoing audits by,
and discussions with, various taxing authorities. Although the
Company has made significant progress in resolving or settling
certain tax issues, the remaining items under the caption
“Other tax liabilities” in the accompanying
Consolidated Balance Sheet at December 31, 2008 have not
sufficiently advanced to the degree or with the level of
finality that would cause the Company to adjust its accruals for
income tax liabilities under the “more likely than
not” criteria pursuant to FIN 48.
FIN 48 addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, the
Company must recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate resolution.
A reconciliation of the Company’s beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
Substantially all of the unrecognized tax benefits at
December 31, 2008 would affect the Company’s effective
tax rate if recognized. The Company recognizes interest and
penalties related to uncertain tax positions in income tax
expense. As of January 1, 2008 and December 31, 2008,
the Company had accruals of approximately $228.9 million
and $261.5 million, respectively, in interest and penalties
related to uncertain tax positions.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company files income tax returns with federal, state and
foreign jurisdictions. The Company is under examination by the
Internal Revenue Service (“IRS”) for federal tax years
2004 to 2006. The Company’s 2002 through 2007 New York
State tax returns are currently scheduled to be examined in May
of 2009. The Company’s Indiana tax returns are currently
being audited for years 2004 through 2007.
In January 2008, the Company received an examination report from
the IRS setting forth proposed adjustments to the Company’s
U.S. income tax returns from 1996 through 2003. The Company
has disputed certain of the proposed adjustments. The process
for resolving disputes between the Company and the IRS is likely
to entail various administrative and judicial proceedings, the
timing and duration of which involve substantial uncertainties.
As the disputes are resolved, it is possible that the Company
will record adjustments to its financial statements that could
be material to its financial position and results of operations
and it may be required to make material cash payments. The
timing and amounts of any payments the Company may be required
to make are uncertain, but the Company does not anticipate that
it will make any material cash payments to settle any of the
disputed items during 2009.
(21)
Earnings
(Loss) per Share
The following tables reconcile the numerator and denominator for
the calculation of basic and diluted income (loss) per share
from continuing operations:
The effect of stock options has been excluded from the
calculations for 2008 because they are anti-dilutive as a result
of the loss from continuing operations. The number of
potentially dilutive securities, comprised of shares issuable in
respect of DSU’s and stock options, at December 31,2008 was 1,116,935.
The effect of stock options has been excluded from the
calculations for 2006 because they are anti-dilutive as a result
of the loss from continuing operations. The number of
potentially dilutive securities, comprised of shares issuable in
respect of DSU’s and stock options, at December 31,2006 was 913,795.
(22)
Commitments
and Contingencies
(a)
Litigation
Litigation
Involving Controlling Stockholder, Senior Management and
Directors
As previously reported in the Company’s SEC filings, on
January 28, 2004, the Company, through the Special
Committee, filed a civil complaint in the United States District
Court for the Northern District of Illinois asserting breach of
fiduciary duty and other claims against Hollinger Inc.,
Ravelston, RMI, and certain former executive officers of the
Company, which complaint was amended on May 7, 2004 and
again on October 29, 2004. The action is entitled
Hollinger International Inc. v. Hollinger Inc., et
al., Case
No. 04C-0698.
The second amended complaint sought to recover approximately
$542.0 million in damages, including prejudgment interest
of approximately $117.0 million, and punitive damages. The
second amended complaint asserted claims for breach of fiduciary
duty, unjust enrichment, conversion, fraud and civil conspiracy
in connection with transactions described in the Report,
including, among other Transactions, unauthorized
“non-competition” payments, excessive management fees,
sham broker fees and investments and divestitures of Company
assets.
On October 8, 2008, the Company filed a Third Amended
Complaint against Ravelston, Black, John A. Boultbee
(“Boultbee”), Daniel W. Colson (“Colson”)
and Barbara Amiel Black (“Amiel Black”). The Third
Amended Complaint updates the factual allegations and removes
defendants Richard N. Perle, Radler and Hollinger Inc., the
latter two having entered into settlement agreements with the
Company, as previously discussed. See Note 18. The Third
Amended Complaint also narrows the asserted claims, in part to
reflect these settlements, removing previously-asserted claims
totaling approximately $105.0 million. Colson, Black,
Boultbee and Amiel Black have answered the Third Amended
Complaint, while Ravelston has not. Although, as previously
reported, Black and Ravelston had asserted counterclaims against
the Company in response to the Second Amended Complaint, their
counterclaims have not been reasserted in response to the Third
Amended Complaint.
Stockholder
Class Actions
As previously disclosed, in 2004 certain stockholders of the
Company initiated securities class action claims asserted
against the Company, a number of its former directors and
officers, certain affiliated companies, and the Company’s
auditor, KPMG LLP, in a consolidated class action in the United
States District Court for the Northern District of Illinois
entitled In re Hollinger International Inc. Securities
Litigation,
No. 04C-0834,
and in similar actions that have been initiated in Saskatchewan,
Ontario, and Quebec, Canada. Those actions assert, among other
things, that from 1999 to 2003 the defendants breached
U.S. federal, state,
and/or
Canadian law by allegedly making misleading disclosures and
omissions regarding certain “non-competition” payments
and the payment of allegedly excessive management fees. On
July 31, 2007, the Company entered into agreements to
settle these suits and
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
litigation over its directors and officers insurance coverage.
The Company’s settlement of the securities class action
lawsuits will be funded entirely by $30.0 million in
proceeds from the Company’s insurance policies. The
settlement includes no admission of liability by the Company or
any of the settling defendants and the Company continues to deny
any such liability or damages. In addition, the Company’s
insurers have deposited $24.5 million in insurance proceeds
into an escrow account in return for a release from any other
claims for the July 1, 2002 to July 1, 2003 policy
period. If the securities class action settlement is approved,
there will then be a court proceeding to determine how the
$24.5 million in the insurance escrow account should be
distributed. The insurance settlement agreement is conditioned
upon approval of the class action settlement. The parties are in
the process of seeking these approvals in the appropriate courts
in the United States and Canada. Due to the contingent and
conditional nature of the settlement and insurance proceeds, the
Company’s financial statements do not reflect any amounts
related to the agreements described above.
Sun-Times
Media Group, Inc. v. Black
On February 1, 2008, the Company brought an action in the
Court of Chancery of the State of Delaware against Black,
Boultbee, Mark S. Kipnis and Peter Y. Atkinson
(“Atkinson”). In the action, entitled Sun-Times Media
Group, Inc. v. Black, C.A.
No. 3518-VCS,
the Company sought a declaration that it has no obligation to
advance any of the defendants’ attorneys fees and other
expenses incurred in connection with the appeals of their
respective criminal convictions and sentences, and that it is
entitled to repayment or setoff of legal fees and expenses that
it previously advanced to each defendant in connection with the
criminal counts on which they were convicted. On July 30,2008, the Delaware Court of Chancery granted summary judgment to
the defendants and denied the Company’s motion for summary
judgment. On September 29, 2008, the Court entered an order
implementing its rulings, which stated that the Company“shall continue to advance reasonable attorneys’ fees
and other expenses to the defendants until the final disposition
of United States v. Black, et al., 05 CR 727 (N.D.
Ill.), that is, until all direct appeals in that proceeding and
any remands therefrom, together with any additional direct
appeals are resolved or the time for filing any direct appeals
shall have expired.”
Black v.
Breeden, et al.
As previously reported, six defamation actions have been brought
by Black in the Ontario Superior Court of Justice against
Richard C. Breeden, Gordon A. Paris, Graham W. Savage, Raymond
Seitz and other former officers and directors of the Company.
The defendants named in the six defamation actions have
indemnity claims against the Company for all reasonable costs
and expenses they incur in connection with these actions,
including judgments, fines and settlement amounts. In addition,
the Company is required to advance legal and other fees that the
defendants may incur for the defense of those actions. The
matter is pending.
United
States Securities and Exchange Commission v. Conrad M.
Black, et al.
As previously reported, on November 15, 2004, the SEC filed
an action in the United States District Court for the Northern
District of Illinois against Black seeking injunctive, monetary
and other equitable relief. In the action, the SEC alleges that
Black violated federal securities laws by engaging in a
fraudulent and deceptive scheme to divert cash and assets from
the Company and to conceal his self-dealing from the
Company’s public stockholders from at least 1999 through at
least 2003. The SEC also alleges that Black was liable for the
Company’s violations of certain federal securities laws
during at least this period.
The SEC alleges that the scheme used by Black included the
misuse of so-called “non-competition” payments to
divert $85.0 million from the Company to defendants and
others; the sale of certain publications owned by the Company at
below-market prices to a privately-held company controlled by
Black and Radler; the investment of $2.5 million of the
Company’s funds in a venture capital fund with which Black
and two other former directors of the Company were affiliated;
and Black’s approval of a press release by the Company in
November 2003 in which Black allegedly misled the investing
public about his intention to devote his time to an effort to
sell Company assets
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
for the benefit of all of the Company’s stockholders and
not to undermine that process by engaging in transactions for
the benefit of himself and Hollinger Inc. The SEC further
alleges that Black misrepresented and omitted to state material
facts regarding related party transactions to the Company’s
Audit Committee of the Board of Directors and Board of Directors
and in the Company’s SEC filings and at the Company’s
stockholder meetings.
The SEC’s complaint seeks: (i) disgorgement of
ill-gotten gains by Black and unspecified civil penalties
against each of them; (ii) an order enjoining Black from
serving as an officer or director of any issuer required to file
reports with the SEC; (iii) a voting trust upon the shares
of the Company held directly or indirectly by Black and
Hollinger Inc.; and (iv) an order enjoining Black from
further violations of the federal securities laws.
On January 16, 2008, the SEC moved for summary judgment on
certain of its claims against Black. Black filed his response to
the motion on February 20, 2008. On September 24,2008, the Court granted in part the SEC’s motion for
partial summary judgment against Black, finding him liable for
securities fraud for, among other things, statements in the
Company’s 2001
Form 10-K,
2002
Form 10-K,
and 2002 Proxy Statement. On October 22, 2008, the Court
entered an order enjoining Black from violating provisions of
the Securities Exchange Act of 1934 and from serving as an
officer or director of a public company.
On November 19, 2008, the SEC moved for monetary relief
based on the Court’s summary judgment ruling. The motion
seeks an award of approximately $30.0 million in
disgorgement, interest, and penalties, with the entire judgment
to be paid to the Company as the victim of the fraud. On
December 10, 2008, Black filed his opposition to the
motion, and on December 23, 2008, the SEC filed its reply.
The motion is pending.
CanWest
Arbitration
As previously reported, on December 19, 2003, CanWest
commenced notices of arbitration against the Company and others
with respect to disputes arising from CanWest’s purchase of
certain newspaper assets from the Company in 2000. CanWest and
the Company had competing claims relating to this transaction.
CanWest claimed the Company and certain of its direct
subsidiaries owed CanWest approximately Cdn.$84.0 million.
The Company was contesting this claim, and had asserted a claim
against CanWest in the aggregate amount of approximately
Cdn.$80.5 million.
On January 29, 2009, the Company received the
arbitrator’s decision. The arbitrator’s decision
included an award in favor of CanWest in the amount of
approximately Cdn.$50.7 million. The award is exclusive of
interest and costs, which are estimated to aggregate
Cdn.$18.2 million. On March 12, 2009, the Company
entered into a settlement agreement with CanWest that resolved
all claims with respect to the arbitration award against the
Company. Under the terms of the settlement agreement, CanWest
received Cdn.$34.0 million, including approximately
Cdn.$22.0 million from an escrow account funded by the
Company, and an additional Cdn.$6.0 million paid by the
Company in March 2009. The escrowed funds are included on the
Consolidated Balance Sheet under “Escrow deposits and
restricted cash.” The remainder due to CanWest was paid by
an unaffiliated third party. As a result of the settlement, the
Company and all of its affiliates and subsidiaries have been
released from any and all liability related to the arbitration
award and the underlying transactions that led to the award.
CanWest
and The National Post Company v. Hollinger Inc., Hollinger
International Inc., the Ravelston Corporation Limited and
Ravelston Management, Inc.
As previously reported, on December 17, 2003, CanWest and
The National Post Company brought an action in the Court against
the Company and others for approximately Cdn.$25.7 million
plus interest in respect of issues arising from a letter
agreement dated August 23, 2001 to transfer the
Company’s remaining 50% interest in the National Post
to CanWest. On November 30, 2004, the Company settled
all but two of the matters in this action by paying The National
Post Company the amount of Cdn.$26.5 million. The two
remaining matters were discontinued and transferred to the
CanWest Arbitration on consent of the parties.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
RMI brought a third party claim in this action against HCPH Co.
for indemnification from HCPH Co. in the event CanWest and The
National Post Company were successful in their motion for
partial summary judgment as against RMI in the main action.
CanWest’s motion against RMI was unsuccessful and
CanWest’s claim against RMI was dismissed on consent of the
parties. RMI’s third party action against HCPH Co. remains
outstanding. The Company is seeking a discontinuance of the
third party claim and an acknowledgment and release from RMI
that HCPH Co. and the Company are not liable on a promissory
note issued in connection with the sale of NP Holdings Company.
Other
Matters
The Company becomes involved from time to time in various claims
and lawsuits incidental to the ordinary course of business,
including such matters as libel, defamation and privacy actions.
In addition, the Company is involved from time to time in
various governmental and administrative proceedings with respect
to employee terminations and other labor matters, environmental
compliance, tax and other matters.
Management believes that the outcome of any pending claims or
proceedings described under “Other Matters”will not have a material adverse effect on the Company taken
as a whole.
(b) Guarantees
or Indemnifications
(i) Dispositions
In connection with certain dispositions of assets
and/or
businesses, the Company has provided customary representations
and warranties whose terms range in duration and may not be
explicitly defined. The Company has also retained certain
liabilities for events occurring prior to sale, relating to tax,
environmental, litigation and other matters. Generally, the
Company has indemnified the purchasers in the event that a third
party asserts a claim against the purchaser that relates to a
liability retained by the Company. These types of
indemnification guarantees typically extend for a number of
years.
The Company is unable to estimate the maximum potential
liability for these indemnifications as the underlying
agreements do not always specify a maximum amount and the
amounts are dependent upon the outcome of future events, the
nature and likelihood of which cannot be determined at this time.
Historically, the Company has not made any significant
indemnification payments under such agreements and does not
expect to in the future; accordingly no amount has been accrued
in the accompanying consolidated financial statements with
respect to these indemnification guarantees. The Company
continues to monitor the conditions that are subject to
guarantees and indemnifications to identify whether it is
probable that a loss has occurred, and would recognize any such
losses under any guarantees or indemnifications if and when
those losses become probable and estimable. See section (c)
following.
(ii) Letters
of Credit
In connection with the Company’s insurance program, letters
of credit are required to support certain projected
workers’ compensation obligations. At December 31,2008, letters of credit in the amount of $10.1 million
($12.2 million at December 31, 2007) were
outstanding and the Company maintained compensating deposits
with the issuer of $10.3 million ($12.1 million at
December 31, 2007).
(iii) Other
The Company licenses some of the content it publishes for use by
third parties. In doing so, the Company warrants that it is
entitled to license that content and indemnifies the licensee
against claims against improper use. The number or potential
magnitude of such claims cannot be reasonably estimated.
Historically, claims of this nature have not been significant.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(c) Canadian
Ownership Matters
The Company has indemnified the buyer of the Canadian Newspaper
Operations against any losses related to the following or
similar Canadian ownership issues as discussed below.
Under the Canadian Income Tax Act (“ITA”), there are
limits on the deductibility by advertisers of the cost of
advertising in newspapers that are not considered Canadian-owned
under the ITA. The status of certain of the newspapers within
the Canadian Newspaper Operations as Canadian-owned was affected
by Black’s renunciation of his Canadian citizenship in June
2001. Although the Company believes that it had a structure in
place that meets the ITA Canadian ownership rules for at least a
portion of the period since June 2001, that structure may be
challenged by the Canadian income tax authorities. Should any
challenge be successful, advertisers in Canada might seek
compensation for any advertising costs disallowed as a
deduction. The amount of exposure, if any, cannot presently be
determined. Additionally, one or more of the entities within the
Canadian Newspaper Operations has received funding under a
Canadian governmental program that is intended to benefit
entities that are Canadian owned or controlled. It is possible
that the Canadian government could seek the return of these
funds as a result of Black’s renunciation of his Canadian
citizenship. The total amount received under such grants from
January 1, 2001 through January 31, 2006 was
approximately Cdn.$4.0 million.
On October 27, 2005, a claim (which was subsequently
amended) was filed in the Court of Queens Bench of Alberta by
the operator of a weekly magazine in Edmonton, Alberta, Canada
against the Company, certain of its subsidiaries and affiliates,
the Attorney General of Canada (as liable for the Minister of
National Revenue for Canada), and others, one of whom has been
indemnified by the Company as described in the first paragraph
above. The plaintiff alleges that one title within the Canadian
Newspaper Operations made certain misrepresentations to
customers regarding the title’s ownership, resulting in
damage to the plaintiff. This action is in a preliminary stage,
and it is not yet possible to determine its ultimate outcome.
(d) Commitments
The Company is party to a distribution agreement through
August 31, 2017, which is terminable by either party upon
three years notice. Base annual minimum fees payable by the
Company pursuant to the agreement amount to $9.1 million.
(23)
Related-party
Transactions
The following is a description of certain relationships and
related-party transactions for the three years ended
December 31, 2008. Most of the findings of the Special
Committee set forth in the Report are the subject of ongoing
litigation and are being disputed by the former executive
officers and certain of the former directors of the Company who
are the subject of the Report.
(a) The Company was party to management services
agreements with Ravelston, pursuant to which Ravelston provided
advisory, consultative, procurement and administrative services
to the Company. These services agreements were assigned on
July 5, 2002 to RMI. The Company and its subsidiaries have
not recorded fees allegedly payable to Ravelston and RMI, after
2004 pursuant to these agreements. Moffat Management Inc.
(“Moffat”) and
Black-Amiel
Management Inc.
(“Black-Amiel”)
had separate services agreements with the Company. A
restructuring agreement with Hollinger Inc., Black, Radler,
Boultbee and Atkinson, among other things provided for the
termination of these agreements in accordance with their terms,
effective June 1, 2004, and the negotiation of the
management fee payable thereunder for the period from
January 1, 2004 until June 1, 2004. In November 2003,
in accordance with the terms of the restructuring agreement
mentioned above, the Company notified RMI, Moffat and
Black-Amiel
of the termination of the services agreements effective
June 1, 2004 and subsequently proposed, and recorded a
charge for, a reduced aggregate management fee of $100,000 per
month for the period from January 1, 2004 through
June 1, 2004. RMI did not accept the Company’s offer
and demanded a management fee of approximately $2.0 million
per month, which the Company did not accept. RMI seeks damages
from the Company
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
for alleged breaches of the services agreements in legal actions
pending before the courts. See “— Hollinger
International Inc. v. Ravelston, RMI and Hollinger
Inc.”in the Company’s previous filings.
Amounts due to related parties amounted to $9.2 million and
$8.9 million at December 31, 2008 and 2007,
respectively, largely representing amounts payable in respect of
management fees which are no longer being accrued (since June
2004).
(b) On July 11, 2000, the Company loaned
$36.8 million to a subsidiary of Hollinger Inc. to fund the
cash purchase by Hollinger Inc. of HCPH Special Shares. The loan
was originally payable on demand but on March 10, 2003, the
due date for repayment was extended to no earlier than
March 1, 2011. Effective January 1, 2002, the interest
rate was changed from 13.0% per annum to LIBOR plus 3.0% per
annum, without review by or approval of the Company’s
independent directors. As of December 31, 2002, the
balance, including accrued interest at the new unapproved rate,
was $45.8 million. On March 10, 2003, the Company
repurchased for cancellation, from a wholly owned subsidiary of
Hollinger Inc., 2,000,000 shares of the Company’s
Class A Common Stock at $8.25 per share for a total of
$16.5 million. The Company also redeemed, from the same
subsidiary of Hollinger Inc., pursuant to a redemption request,
all of the 93,206 outstanding shares of Series E Redeemable
Convertible Preferred Stock of the Company at the fixed
redemption price of Cdn.$146.63 per share or approximately
$9.3 million. Payments for the March 10, 2003
repurchase and redemption were applied against this debt due
from the Hollinger Inc. subsidiary resulting in a calculation of
net outstanding debt due to the Company of approximately
$20.4 million as of March 10, 2003, the date of the
repayment. The debt, since the date of the partial repayment,
bears interest at 14.25%. Following the receipt of an
independent fairness opinion and a review of all aspects of the
transaction relating to the changes in the debt arrangements
with Hollinger Inc., including the subordination of this
remaining debt, by a committee of the Board of Directors of the
Company, composed entirely of independent directors, the
committee approved the new debt arrangements.
The Company previously reported that the committee of
independent directors referred to above had agreed to a partial
offset to the $20.4 million debt against amounts owed by
the Company to RMI, a subsidiary of Ravelston, and further
stated that the offset was effected April 30, 2003.
Although the former management of the Company maintained that it
believed final approval had been given to the offset by the
committee of independent directors, according to the Report, the
committee had not given such approval. The committee of
independent directors later agreed to approve the requested
partial offset on certain terms and conditions, but these terms
and conditions were not acceptable to Hollinger Inc. and
Ravelston, and the offset was not completed.
The Company’s collateral for the loan is subordinated to
certain obligations of Hollinger Inc., which initiated a
Court-supervised restructuring under the CCAA and a companion
proceeding in the U.S. pursuant to Chapter 15 of the
U.S. Bankruptcy Code in August 2007. The Company recorded a
bad debt expense of $33.7 million related to this loan
which is included in “Corporate expenses” in the
Consolidated Statement of Operations for the year ended
December 31, 2007. See Note 17. Pursuant to a
settlement with Hollinger Inc. in May 2008, the Company
wrote-off the fully reserved promissory note of approximately
$33.7 million. See Note 23(i).
(c) The Company has recorded $9.4 million,
$47.8 million and $18.9 million of expenses on behalf
of current and former executive officers and directors of the
Company during the years ended December 31, 2008, 2007 and
2006, respectively. The majority of these expenses relate to
payments of fees for legal counsel representing former executive
officers and directors of the Company in their dealings with the
Special Committee, while conducting its investigations or with
respect to criminal proceedings and litigation as described in
Note 22(a). Payments of such fees were made pursuant to
indemnification provisions of the Company’s Certificate of
Incorporation and the Company’s by-laws. See Note 18.
(d) Bradford, a company controlled by Black and
Radler, granted a non-interest bearing note receivable to the
Company in connection with a “non-competition”
agreement entered into on the sale of certain operations to
Bradford during 2000. This note was non-interest bearing, and
accordingly, the Company established the amount receivable at
the net present value at the time of the agreement. The
remaining balance represented that net present
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
value less any payments received. The note receivable was
unsecured and due over the period to 2010. This loan,
aggregating $3.4 million, was fully repaid in 2007 as part
of a settlement with Radler, Horizon and Bradford announced by
the Company on March 18, 2007. See Note 18.
(e) Horizon granted a loan receivable to the Company
in connection with the sale of certain operations to Horizon
during 1999. The loan receivable was unsecured and was scheduled
to mature in 2007. This loan was fully repaid in 2007 as part of
a settlement with Radler, Horizon and Bradford announced by the
Company on March 18, 2007. See Note 18.
(f) On March 18, 2007, the Company announced
settlements, negotiated and approved by the Special Committee,
with former President and Chief Operating Officer, Radler,
(including his wholly-owned company, North American Newspapers
Ltd. f/k/a F.D. Radler Ltd.) and the publishing companies
Horizon and Bradford, including certain notes receivable. See
Note 18.
(g) On August 1, 2007the Company announced
that it received notice from Hollinger Inc., the Company’s
former controlling stockholder, that certain corporate actions
with respect to the Company had been taken by written consent
adopted by Hollinger Inc. and its affiliate, 4322525 Canada
Inc., which collectively hold a majority in voting interest in
the Company. These corporate actions included (i) amending
the Company’s By-Laws to increase the size of the
Company’s Board of Directors from eight members to eleven
members and to provide that vacancies occurring in the Board of
Directors may be filled by stockholders having a majority in
voting interest; (ii) removing John F. Bard, John M.
O’Brien and Raymond S. Troubh as directors of the Company;
and (iii) electing William E. Aziz, Brent D. Baird,
Albrecht Bellstedt, Peter Dey, Edward C. Hannah and G. Wesley
Voorheis as directors of the Company.
(h) On November 28, 2007, the receiver for
Ravelston and on behalf of Ravelston, appeared for a sentencing
hearing before a U.S. court in certain criminal
proceedings. Counsel for Richter advised the court that Richter
and the United States Attorneys’ Office had entered into an
agreement in respect of the amount of restitution to be paid by
Ravelston. In accordance with that agreement, the court ordered
Ravelston to pay a fine of $7.0 million and restitution in
the net amount of $6.0 million to the Company.
(i) On March 25, 2008, the Company announced
that it had agreed to the terms of a settlement (the
“Settlement”) that resolved the various disputes and
litigation between the Company and Hollinger Inc. At the time of
the Settlement, Hollinger Inc. was the owner of all of the
outstanding shares of the Company’s Class B Common
Stock, which had ten votes per share, and 782,923 shares of
Class A Common Stock, which has one vote per share. These
holdings represented 19.6% of the outstanding equity of the
Company and 70.0% of the voting power of the Company’s
outstanding common stock at the time of the Settlement.
On March 24 and 25, 2008, respectively, the Special Committee
and the Company’s full Board of Directors approved the
Settlement. The Settlement was also approved by the Hollinger
Inc. Board of Directors.
On May 14, 2008, the Company announced it had agreed to the
Revised Settlement. The Revised Settlement was approved by the
Company’s full Board of Directors and the Hollinger Inc.
Board of Directors. The Company amended its SRP to ensure that
the execution and delivery of the Company’s agreement to
the Revised Settlement and the consummation of the Revised
Settlement did not cause the Rights to become exercisable or
otherwise trigger the provisions of the SRP. On May 26,2008, the Revised Settlement was approved in Ontario, Canada,
under the CCAA.
The Revised Settlement included a complete release of claims
between the parties and the elimination of the voting control by
Hollinger Inc. of the Company through conversion on a
one-for-one basis of the shares of Class B Common Stock to
shares of Class A Common Stock. The Revised Settlement also
required the Company to deliver 1.499 million additional
shares of Class A Common Stock to Hollinger Inc. The terms
of the Revised Settlement were carried out at a closing on
June 18, 2008. The Company granted demand registration
rights with respect to the shares of Class A Common Stock
that resulted from the conversion of the shares of Class B
Common Stock, as well
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
as with respect to the additional 1.499 million shares of
Class A Common Stock issued to Hollinger Inc. pursuant to
the Revised Settlement. The Company recorded $0.8 million
in expense (including fees) related to the issuance of the
1.499 million shares of Class A Common Stock and
$1.7 million related to the write-off of a receivable from
Hollinger Inc. and its subsidiaries in addition to the
previously mentioned write-off of the fully reserved loan of
$33.7 million due from a subsidiary of Hollinger Inc.
Under the Revised Settlement, all shares of Class A Common
Stock issued to Hollinger Inc. will be voted by the indenture
trustees for certain notes issued by Hollinger Inc., but such
trustees together will only be able to vote shares of common
stock not exceeding 19.999% of the outstanding common stock of
the Company at any given time.
Pursuant to a stipulation and agreement of settlement of
U.S. and Canadian class actions against the Company and
Hollinger Inc. and an insurance settlement agreement dated
June 27, 2007, up to $24.5 million (plus interest,
less fees and expenses) will be paid to the Company, Hollinger
Inc. and/or
other claimants under their directors’ and officers’
insurance policies (the “Insurance Settlement
Proceeds”). Payment of the Insurance Settlement Proceeds is
subject to the approval of various United States and Canadian
courts. Under the terms of the Revised Settlement, Hollinger
Inc. and the Company will cooperate to maximize the recoverable
portion of the Insurance Settlement Proceeds payable to them
collectively (as opposed to other claimants) and they have
agreed that the Company will receive 85% and Hollinger Inc. will
receive 15% of the amounts to be received collectively by
Hollinger Inc. and the Company (as opposed to amounts received
by other claimants) from such proceeds. Also, the collective
recoveries, if any, of Hollinger Inc. and the Company on account
of their claims against Hollinger Inc.’s controlling parent
company, Ravelston, which is in insolvency proceedings in
Ontario, Canada, will be divided equally between Hollinger Inc.
and the Company.
The Revised Settlement provided that the Company would be
reimbursed by Hollinger Inc. for up to $2.0 million of the
Company’s legal fees that were incurred in connection with
Hollinger Inc.’s CCAA proceedings. The Company received
payment of $2.0 million in June 2008. See Note 18.
Pursuant to the Revised Settlement, on June 23, 2008, the
Company announced that the six directors of the Company
appointed by Hollinger Inc. on July 31, 2007 resigned from
the Board of Directors. Thereafter, Peter J. Dey and Robert B.
Poile were elected as directors. The two events had the effect
of reducing the size of the Board of Directors from eleven to
seven.
Under the terms of the Revised Settlement, certain of the
Company’s claims against Hollinger Inc. were allowed as
unsecured claims, in agreed amounts (“Allowed
Claims”). The Company’s total recovery in respect of
the Allowed Claims is capped at $15.0 million. After the
Company receives the first $7.5 million in respect of the
Allowed Claims, 50% of any further recovery received by the
Company in respect of the Allowed Claims (subject to the
$15.0 million cap) will be assigned to Hollinger Inc. Under
the terms of the Revised Settlement, the amounts so assigned are
intended to be available to fund litigation claims of Hollinger
Inc. against third parties. All of the Company’s claims
against Hollinger Inc. other than the Allowed Claims were
released as part of the general mutual release that, among other
things, discontinued any and all pending litigation between the
Company and Hollinger Inc., including all of the litigation
pending in the United States District Court for the Northern
District of Illinois.
(24)
Liquidity
Considerations
Bankruptcy
and Insolvency Filings
The outcome of the proceedings under the Bankruptcy Code may
result in material changes to the Company’s operations and
financial condition. The following discussion on liquidity and
capital resources does not reflect the affects the Filings will
have on the timing
and/or
extent of settling liabilities in existence at or prior to the
Filings. See Note 1.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
and Cash Equivalents
Cash and cash equivalents amounted to $79.2 million at
December 31, 2008 as compared to $142.5 million at
December 31, 2007, a decrease of $63.3 million.
Canadian subsidiaries held $29.9 million in cash at
December 31, 2008 which, due to funding requirements in
Canada, is unavailable to fund U.S. operations. Cash
and cash equivalents at December 31, 2008 and
December 31, 2007 exclude $20.2 million and
$48.2 million, respectively of Canadian CP that was
initially purchased under the Company’s cash management
program. However, because the Canadian CP was not redeemed at
maturity in August 2007 due to the combination of a collapse in
demand for Canadian CP and the refusal of the
back-up
lenders to fund the redemption due to their assertion that these
events did not constitute events that would trigger a redemption
obligation, the Company’s investments in Canadian CP have
instead been recorded as investments and classified as
non-current assets in the Consolidated Balance Sheet at
December 31, 2008. See “Investments” below.
Investments
Investments include $7.4 million in Canadian CP
($20.2 million including accrued interest less a
$12.8 million write-down). The Canadian CP was issued by
certain special purpose entities sponsored by non-bank entities.
See “Significant Transactions in 2008.”
Corporate
Structure
Sun-Times Media Group, Inc. is a holding company and its assets
consist primarily of investments in its subsidiaries and
affiliated companies. As a result, the Company’s ability to
meet its future financial obligations is dependent upon the
availability of cash flows from its subsidiaries through
dividends, intercompany advances and other payments. Similarly,
the Company’s ability to pay any future dividends on its
common stock may be limited as a result of its dependence upon
the distribution of earnings of its subsidiaries and affiliated
companies. The Company’s subsidiaries and affiliated
companies are under no obligation to pay dividends and may be
subject to or become subject to statutory restrictions and
restrictions in debt agreements that limit their ability to pay
dividends or repatriate funds to the United States.
Factors
That Are Expected to Affect Liquidity in the Future
Potential
Cash Outlays Related to Accruals for Income Tax Contingent
Liabilities
The Company has the following income tax liabilities recorded in
its Consolidated Balance Sheet at December 31, 2008:
(In thousands)
Income taxes payable
$
448
Deferred income tax liabilities
9,569
Other tax liabilities
607,960
$
617,977
The Company has recorded accruals to cover contingent
liabilities related to additional taxes, interest, and penalties
it may be required to pay in various tax jurisdictions. Such
accruals are included in “Other tax liabilities”
listed above.
Significant cash outflows are expected to occur in the future
regarding the income tax contingent liabilities. Efforts to
resolve or settle certain tax issues are ongoing and may place
substantial demands on the Company’s cash, cash
equivalents, investments and other resources to fund any such
resolution or settlement. The timing and amounts of any payments
the Company may be required to make are uncertain, but the
Company does not anticipate that it will make any material cash
payments to settle any of the disputed items during 2009. See
Note 20.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Potential
Cash Outflows Related to Operations
The Company’s cash flow is expected to continue to be
cyclical, reflecting changes in economic conditions. The Company
is dependent upon the Sun-Times News Group for operating cash
flow. That cash flow in turn is dependent to a significant
extent on the Sun-Times News Group’s ability to sell
advertising in its Chicago area market. Advertising revenue for
the Sun-Times News Group declined 16% during 2008 compared to
2007. Based on the Company’s assessment of market
conditions in the Chicago area and the potential of these
negative trends continuing, the Company has considered and may
continue to consider a range of options to address the resulting
significant shortfall in performance and cash flow and has
suspended its dividend payments since the fourth quarter of
2006. As a result of continued declines in revenue, the
deteriorating economic climate and the significant, pending tax
liabilities, the Company has instituted the bankruptcy
proceedings as discussed above.
(25)
Quarterly
Financial Data (Unaudited)
Quarterly financial data for the years ended December 31,2008 and 2007 are as follows:
2008
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter(1)
(In thousands, except per share data)
Total operating revenue
$
81,004
$
82,971
$
78,826
$
81,049
Operating loss
$
(25,768
)
$
(24,013
)
$
(227,775
)
$
(103,745
)
Net loss
$
(35,843
)
$
(37,751
)
$
(168,751
)
$
(111,154
)
Net loss per basic share(a)
$
(0.44
)
$
(0.46
)
$
(2.04
)
$
(1.34
)
Net loss per diluted share
$
(0.44
)
$
(0.46
)
$
(2.04
)
$
(1.34
)
(1)
The Company completed the valuation of its property, plant and
equipment pursuant to an impairment test undertaken in the third
quarter. As a result of the valuation, the Company recognized an
impairment charge of $71.9 million (before and after tax)
of $0.87 per share.
2007
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
(In thousands, except per share data)
Total operating revenue
$
91,717
$
94,744
$
92,539
$
93,258
Operating income (loss)
$
5,679
$
(80,639
)
$
(23,227
)
$
(42,034
)
Income (loss) from continuing operations
$
(4,823
)
$
527,980
$
(193,991
)
$
(59,135
)
Net income (loss)
$
(4,823
)
$
527,980
$
(192,392
)
$
(59,135
)
Earnings (loss) from continuing operations per basic share
$
(0.06
)
$
6.57
$
(2.41
)
$
(0.73
)
Earnings (loss) from continuing operations per diluted share
$
(0.06
)
$
6.56
$
(2.41
)
$
(0.73
)
Net earnings (loss) per basic share(a)
$
(0.06
)
$
6.57
$
(2.39
)
$
(0.73
)
Net earnings (loss) per diluted share
$
(0.06
)
$
6.56
$
(2.39
)
$
(0.73
)
(a)
Earnings (loss) per share is computed independently for each of
the quarters presented. Therefore, the sum of the quarterly
earnings (loss) per share does not necessarily equal the total
for the year.
115
Dates Referenced Herein and Documents Incorporated by Reference
