Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Tribune Publishing Coa2014q310qexhibit311.htm
EX-32 - EXHIBIT 32 - Tribune Publishing Coa2014q310qexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - Tribune Publishing Coa2014q310qexhibit312.htm
EXCEL - IDEA: XBRL DOCUMENT - Tribune Publishing CoFinancial_Report.xls





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014 
 
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

Commission File No. 001-36230 
Tribune Publishing Company
(Exact name of registrant as specified in its charter) 
Delaware
 
38-3919441
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. employer
identification no.)
 
 
 
435 North Michigan Avenue
 
 
Chicago Illinois
 
60611
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (312) 222-9100
 
Former name, former address and former fiscal year, if changed since last report.
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ___  No  X
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  X   No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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:
Large accelerated filer ____
 
Accelerated filer ____
Non-accelerated filer   X   
 
Smaller reporting company ____
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes __  No  X
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding at November 5, 2014
Common Stock, $0.01 par value
 
25,438,970







 
 
TRIBUNE PUBLISHING COMPANY
 
 
 
 
FORM 10-Q
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
PART I
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 

1




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q, as well as the information contained in the notes to our consolidated and combined financial statements, include certain forward-looking statements that are based largely on our current expectations and reflect various estimates and assumptions by us. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in such forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond our control, include: competition and other economic conditions including fragmentation of the media landscape and competition from other media alternatives; changes in advertising demand, circulation levels and audience shares; our ability to develop and grow our online businesses; our reliance on revenue from printing and distributing third-party publications; changes in newsprint prices; macroeconomic trends and conditions; our reliance on third-party vendors for various services; our ability to adapt to technological changes; adverse results from litigation, governmental investigations or tax-related proceedings or audits; our ability to realize benefits or synergies from acquisitions or divestitures or to operate our businesses effectively following acquisitions or divestitures; our ability to attract and retain employees; our ability to satisfy pension and other postretirement employee benefit obligations; changes in accounting standards; the effect of labor strikes, lockouts and labor negotiations; regulatory and judicial rulings; our indebtedness and ability to comply with debt covenants applicable to our debt facilities; our adoption of fresh-start reporting which has caused our consolidated and combined financial statements for periods subsequent to December 31, 2012 to not be comparable to prior periods; our ability to satisfy future capital and liquidity requirements; and our ability to access the credit and capital markets at the times and in the amounts needed and on acceptable terms. For more information about these and other risks, see “Risk Factors” in the information statement filed as Exhibit 99.1 to the Company's registration statement on Form 10, as amended, filed with the Securities and Exchange Commission on July 21, 2014.
The words “believe,” “expect,” “anticipate,” “estimate,” “could,” “should,” “intend,” “may,” “plan,” “seek” and similar expressions generally identify forward-looking statements. However, such words are not the exclusive means for identifying forward-looking statements, and their absence does not mean that the statement is not forward looking. Whether or not any such forward-looking statements are, in fact, achieved will depend on future events, some of which are beyond our control. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

2




PART I.
Item 1.    Financial Statements
TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
 
 
Successor
 
 
Predecessor
 
 
Three months ended
 
Nine months ended
 
 
 
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
 
December 31, 2012
Operating revenue:
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
$
220,842

 
$
244,028

 
$
696,008

 
$
756,545

 
 
$

Circulation
 
107,511

 
106,227

 
323,828

 
319,859

 
 

Other
 
75,704

 
73,522

 
230,666

 
234,746

 
 

Total operating revenues
 
404,057

 
423,777

 
1,250,502

 
1,311,150

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales (exclusive of items shown below)
 
231,566

 
245,875

 
725,370

 
759,451

 
 

Selling, general and administrative
 
157,829

 
143,724

 
455,827

 
426,499

 
 

Depreciation
 
8,002

 
5,597

 
13,636

 
16,567

 
 

Amortization
 
2,143

 
1,698

 
5,370

 
4,998

 
 

Total operating expenses
 
399,540

 
396,894

 
1,200,203

 
1,207,515

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
 
4,517

 
26,883

 
50,299

 
103,635

 
 

Loss on equity investments, net
 
(201
)
 
(216
)
 
(830
)
 
(864
)
 
 

Gain on investment transaction
 

 

 
1,484

 

 
 

Interest income (expense), net
 
(3,783
)
 
(5
)
 
(3,838
)
 
7

 
 

Reorganization items, net
 
(205
)
 
164

 
(214
)
 
(39
)
 
 
2,754,553

Income before income taxes
 
328

 
26,826

 
46,901

 
102,739

 
 
2,754,553

Income tax expense (benefit)
 
484

 
8,542

 
20,082

 
41,336

 
 
(87,773
)
Net income (loss)
 
$
(156
)
 
$
18,284

 
$
26,819

 
$
61,403

 
 
$
2,842,326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.01
)
 
$
0.72

 
$
1.05

 
$
2.42

 
 
$

Diluted
 
$
(0.01
)
 
$
0.72

 
$
1.05

 
$
2.42

 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
25,430

 
25,424

 
25,426

 
25,424

 
 
25,424

Diluted
 
25,430

 
25,424

 
25,465

 
25,424

 
 
25,424



The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
3




TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Successor
 
 
Predecessor
 
 
Three months ended
 
Nine months ended
 
 
 
 
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
 
 
December 31, 2012
Net income (loss)
 
$
(156
)
 
$
18,284

 
$
26,819

 
$
61,403

 
 
$
2,842,326

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
 
 
 
Unrecognized benefit plan gains and losses:
 
 
 
 
 
 
 
 
 
 
 
Change in unrecognized benefit plan gain arising during the period, net of taxes of ($2,226) and ($1,360), respectively
 
3,719

 

 
2,393

 

 
 

Fresh-start reporting adjustment included in net income to eliminate Predecessor's accumulated other comprehensive income, net of taxes of $6,440
 

 

 

 

 
 
(27,158
)
Other comprehensive income (loss), net of taxes
 
3,719

 

 
2,393

 

 
 
(27,158
)
Comprehensive income
 
$
3,563

 
$
18,284

 
$
29,212

 
$
61,403

 
 
$
2,815,168



The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
4



TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 
 
September 28,
2014
 
December 29, 2013
Assets
 
 
 
 
Current assets
 
 
 
 
Cash
 
$
59,647

 
$
9,694

Accounts receivable (net of allowances of $16,162 and $12,856)
 
194,185

 
251,636

Inventories
 
15,334

 
14,222

Deferred income taxes
 
32,437

 
37,371

Prepaid expenses and other
 
27,944

 
13,570

Total current assets
 
329,547

 
326,493


 
 
 
 
Property, plant and equipment
 
 
 
 
Property, plant and equipment
 
221,209

 
83,901

Accumulated depreciation
 
(60,971
)
 
(15,973
)
Property, plant and equipment, net
 
160,238

 
67,928

 
 
 
 
 
Other Assets
 
 
 
 
Goodwill
 
35,404

 
15,331

Intangible assets, net
 
72,106

 
60,482

Investments
 
2,720

 
2,799

Deferred income taxes
 
12,207

 
39,587

Restricted cash
 
27,500

 

Debt issuance costs and other long-term assets
 
11,891

 
1,746

Total other assets
 
161,828

 
119,945

 
 
 
 
 
Total assets
 
$
651,613

 
$
514,366

 
 
 
 
 

The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
5



TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 
 
September 28,
2014
 
December 29, 2013
Liabilities and Equity (Deficit)
 
 
 
 
Current Liabilities
 
 
 
 
Current portion of long-term debt
 
$
13,536

 
$

Accounts payable
 
59,377

 
36,329

Employee compensation and benefits
 
102,122

 
103,351

Deferred revenue
 
78,090

 
67,934

Other current liabilities
 
24,863

 
20,866

Total current liabilities
 
277,988

 
228,480

 
 
 
 
 
Non-Current Liabilities
 
 
 
 
Long-term debt
 
333,863

 

Deferred revenue
 
5,741

 
7,015

Postretirement medical, life and other benefits
 
40,881

 
45,373

Other obligations
 
10,071

 
8,673

Total non-current liabilities
 
390,556

 
61,061

 
 
 
 
 
Shareholders' equity (deficit)
 
 
 
 
Common stock, $.01 par value. Authorized 300,000 shares, 25,439 shares issued and outstanding at September 28, 2014
 
254

 

Additional paid-in capital
 
804

 

Accumulated deficit
 
(20,072
)
 

Accumulated other comprehensive income (loss)
 
2,083

 
(310
)
Tribune Media Company equity
 

 
225,135

Total shareholders' equity (deficit)
 
(16,931
)
 
224,825

 
 
 
 
 
Total liabilities and shareholders equity (deficit)
 
$
651,613

 
$
514,366


The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
6




TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENT OF EQUITY (DEFICIT)
(In thousands, except share data)
(Unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Paid in Capital
 
Accumulated Deficit
 
Tribune Media Company
Investment
 
AOCI
 
Total Equity
(Deficit)
Balance at December 29, 2013
 

 
$

 
$

 
$

 
$
225,135

 
$
(310
)
 
$
224,825

Transactions with Tribune Media Company, net
 

 

 

 

 
(66,180
)
 

 
(66,180
)
Dividend to Tribune Media Company
 

 

 

 

 
(275,000
)
 

 
(275,000
)
Comprehensive income
 

 

 

 
1,099

 
25,720

 
2,393

 
29,212

Contribution by Tribune Media
 

 

 

 

 
69,408

 

 
69,408

Issuance of stock in the distribution
 
25,423,617

 
254

 

 
(21,171
)
 
20,917

 

 

Issuance of stock from RSU conversions
 
2,369

 

 

 

 

 

 

Exercise of stock options
 
12,984

 

 
182

 

 

 

 
182

Share-based compensation
 

 

 
622

 

 

 

 
622

Balance at September 28, 2014
 
25,438,970

 
$
254

 
$
804

 
$
(20,072
)
 
$

 
$
2,083

 
$
(16,931
)



The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
7




TRIBUNE PUBLISHING COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
 
Successor
 
 
Predecessor
 
 
Nine Months Ended
 
 
December 30, 2012
 
 
September 28,
2014
 
September 29,
2013
 
 
Operating Activities
 
 
 
 
 
 
 
Net income
 
$
26,819

 
$
61,403

 
 
$
2,842,326

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
Depreciation
 
13,636

 
16,567

 
 

Allowance for bad debt
 
12,714

 
8,197

 
 

Amortization of intangible assets
 
5,370

 
4,998

 
 

Amortization of contract intangible liabilities
 
(112
)
 
(163
)
 
 

Loss on equity investments, net
 
830

 
864

 
 

Gain on fixed asset sales
 
(1,226
)
 
(100
)
 
 

Non-cash gain on investment transaction
 
(1,484
)
 

 
 

Non-cash reorganization items, net
 

 
(194
)
 
 
(2,756,494
)
Changes in working capital items, excluding acquisitions:
 
 
 
 
 
 
 
Accounts receivable, net
 
49,121

 
50,936

 
 

Prepaid expenses, inventories and other current assets
 
(9,356
)
 
3,358

 
 

Accounts payable, employee compensation and benefits, deferred revenue and other current liabilities
 
12,747

 
1,337

 
 
8,381

Non-current deferred revenue
 
7,352

 
(2,029
)
 
 

Deferred income taxes
 
9,459

 
17,068

 
 
(94,213
)
Postretirement medical, life and other benefits
 
(1,062
)
 
(852
)
 
 

Other, net
 
1,102

 
(695
)
 
 

Net cash provided by operating activities
 
125,910

 
160,695

 
 

 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
Capital expenditures
 
(11,370
)
 
(14,150
)
 
 

Acquisitions, net of cash acquired
 
(32,282
)
 
(271
)
 
 

Restricted cash
 
(27,500
)
 

 
 

Proceeds from sale of fixed assets
 
1,881

 
100

 
 

Investments in equity investments net of distributions
 
(2,009
)
 

 
 

Net cash used for investing activities
 
(71,280
)
 
(14,321
)
 
 

 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
Net proceeds from issuance of debt
 
346,500

 

 
 

Payment of debt issuance costs
 
(10,179
)
 

 
 

Repayments of capital lease obligations
 

 
(213
)
 
 

Related party dividends
 
(275,000
)
 
(15,738
)
 
 

Proceeds from exercise of stock options
 
182

 

 
 

Transactions with Tribune Media Company, net
 
(66,180
)
 
(134,634
)
 
 

Net cash used for financing activities
 
(4,677
)
 
(150,585
)
 
 

 
 
 
 
 
 
 
 
Net increase (decrease) in cash
 
49,953

 
(4,211
)
 
 

Cash, beginning of period
 
9,694

 
13,768

 
 
13,768

Cash, end of period
 
$
59,647

 
$
9,557

 
 
$
13,768


The accompanying notes are an integral part of these unaudited consolidated and combined financial statements.
8


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1: DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business—Tribune Publishing Company and its subsidiaries (collectively, the “Company” or “Tribune Publishing”) is a diversified media and marketing solutions company that delivers innovative experiences for audiences and advertisers across all platforms. The Company's diverse portfolio of iconic news and information brands includes 10 award-winning daily titles, more than 60 digital properties and more than 150 verticals in key markets. Tribune Publishing also offers an array of customized marketing solutions, and operates a number of niche products, including Hoy and El Sentinel, making Tribune Publishing the country's largest Spanish-language publisher. The daily newspapers published by Tribune Publishing are the Los Angeles Times; the Chicago Tribune; the Sun Sentinel; the Orlando Sentinel; The Baltimore Sun; The Capital; the Carroll County Times; the Hartford Courant; The Morning Call, serving Pennsylvania’s Lehigh Valley; and the Daily Press, serving the Virginia Peninsula. Tribune Publishing’s operations also include Blue Lynx Media, LLC (“BLM”) which operates a shared service center for the benefit of the Company; a 50% equity interest in CIPS Marketing Group, Inc. (“CIPS”); and a 33% equity interest in Homefinder.com, LLC (“Homefinder”). In May 2014, Tribune Publishing acquired the outstanding 50% interest in McClatchy/Tribune Information Services (“MCT”). See Note 5 for additional information on the MCT acquisition. In August 2014, the Company purchased a 20% equity interest in Contend, LLC (“Contend”), a content creation company. See Note 8 for additional information on the investment in Contend.
Separation from Tribune Media Company—On July 10, 2013, Tribune Media Company, formerly Tribune Company, (“TCO”) announced its plan to spin-off its principal publishing operations into an independent company, Tribune Publishing. On August 4, 2014 (the “Distribution Date”), TCO completed the spin-off of its principal publishing operations into Tribune Publishing, by distributing 98.5% of the common stock of Tribune Publishing to holders of TCO common stock and warrants. In the distribution, each holder of TCO's Class A common stock, Class B common stock and warrants received 0.25 of a share of Tribune Publishing's common stock for each share of TCO common stock or TCO warrant held as of July 28, 2014 (the “Record Date”). Based on the number of shares of TCO common stock and TCO warrants outstanding as of the Record Date and the distribution ratio, 25,042,263 shares of Tribune Publishing common stock were distributed to the TCO stockholders and holders of TCO warrants and TCO retained 381,354 shares of Tribune Publishing common stock, representing 1.5% of the outstanding common stock of Tribune Publishing. On August 5, 2014, Tribune Publishing became a separate publicly-traded company with its own board of directors and senior management team. Shares of Tribune Publishing common stock are listed on the New York Stock Exchange under the symbol “TPUB”. In connection with the separation and distribution, Tribune Publishing paid a $275.0 million cash dividend to TCO from a portion of the proceeds of a senior secured credit facility entered into by Tribune Publishing. See Note 10 for additional information on the senior secured credit facility.
Associated with the separation and distribution, TCO contributed technology assets with a net book value of $91.2 million. The contributed assets were not included in the historical consolidated and combined financial statements as a final decision had not been made to contribute the assets by TCO. Depreciation on the assets to be transferred to the Company was previously charged to Tribune Publishing through allocations from TCO's corporate functions. See Note 4 for additional information on the allocated depreciation.

9


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


At the Distribution Date, the technology assets and liabilities contributed to Tribune Publishing are as follows (in thousands):
Accounts receivable
$
169

Prepaid expenses and other
4,756

Deferred income taxes, current
(47
)
Property plant and equipment
122,549

Accumulated depreciation
(31,387
)
Deferred income taxes
(21,449
)
Total assets
74,591

 
 
Current portion of long-term debt
411

Accounts payable
3,243

Employee compensation and benefits
5,061

Other current liabilities
(3,943
)
Long-term debt
411

Change in parent investement
69,408

Total liabilities and shareholders' equity
$
74,591

In connection with the separation and distribution, Tribune Publishing entered into a transition services agreement (the “TSA”) and certain other agreements with TCO that govern the relationships between Tribune Publishing and TCO following the separation and distribution. Under the TSA, the providing company is generally allowed to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the services, plus, in some cases, the allocated direct costs of providing the services, generally without profit. Pursuant to the TSA, TCO provides Tribune Publishing with certain specified services on a transitional basis, including support in areas such as human resources, risk management, treasury, technology, legal, real estate, procurement, and advertising and marketing in a single market. Tribune Publishing provides TCO with certain specified services on a transitional basis, including such areas as human resources, technology, legal, procurement, accounting, digital advertising operations, and advertising, marketing, event management and fleet maintenance in a single market. See Note 4 for information related to amounts charged under the TSA.
Basis of Presentation—The accompanying unaudited consolidated and combined financial statements and notes of Tribune Publishing have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated and combined financial statements and accompanying notes. In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of Tribune Publishing as of September 28, 2014, the results of operations for the three months and nine months ended September 28, 2014 and September 29, 2013, the cash flows for the nine months ended September 28, 2014 and September 29, 2013 and the results of operations and cash flows for December 30, 2012 of the Predecessor (as defined below). Actual results could differ from these estimates. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The December 29, 2013 consolidated and combined balance sheet date was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP and should be read in conjunction with Tribune Publishing’s audited consolidated and combined financial statements and related notes for the year ended December 29, 2013, included in the Company's registration statement on Form 10, as amended, filed with the SEC on July 21, 2014. Certain prior period amounts have been reclassified to conform to current year classifications.
The Company revised the presentation of capital expenditures in its consolidated and combined statements of cash flow to adjust for capital expenditures that were unpaid in accounts payable for the nine months ended September 29, 2013. The effect of correcting the presentation of capital expenditures for the nine months ended September 29, 2013 resulted in a $2.9 million increase in cash provided by operating activities and a corresponding $2.9 million increase in cash used for investing activities. The impact of this adjustment was evaluated by management and considered not material to the consolidated and combined financial statements for the nine months ended September 29, 2013 and as of September 29, 2013

10


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Prior to the Distribution Date, separate financial statements were not prepared for Tribune Publishing. The accompanying consolidated and combined financial statements were derived from the historical accounting records of TCO and present Tribune Publishing’s consolidated and combined financial position, results of operations and cash flows as of and for the periods presented as if Tribune Publishing was a separate entity through the Distribution Date. Management believes that assumptions and methodologies underlying the allocation of general corporate expenses are reasonable. However, such expenses prior to the Distribution Date may not be indicative of the actual level of expense that would have been incurred had Tribune Publishing operated as a separate stand-alone entity, and, accordingly, may not necessarily reflect Tribune Publishing’s consolidated financial position, results of operations and cash flows had Tribune Publishing operated as a stand-alone entity during the periods presented. See Note 4 for further information on costs allocated from TCO. Subsequent to the Distribution Date, Tribune Publishing's financial statements are presented on a consolidated basis as the Company became a separate consolidated entity.
All intercompany accounts within Tribune Publishing have been eliminated in consolidation. For periods prior to the Distribution Date, all significant intercompany transactions between Tribune Publishing and TCO have been included within the consolidated and combined financial statements and are considered to be effectively settled through equity contributions or distributions or through cash payments at the time the transactions were recorded. The accumulated net effect of intercompany transactions between Tribune Publishing and TCO are included in the parent company investment component of Tribune Publishing equity. These intercompany transactions are further described in Note 4. The total net effect of these intercompany transactions prior to the Distribution Date are reflected in the consolidated and combined statements of cash flows as financing activities.
Prior to the Distribution Date, the costs of TCO services that are specifically identifiable to Tribune Publishing are included in these consolidated and combined financial statements. The costs of TCO services that are incurred by TCO but are not specifically identifiable to Tribune Publishing have been allocated to Tribune Publishing and included in the pre-spin consolidated and combined financial statements on a basis that management considered to be a reasonable reflection of the utilization of services provided or the benefit received by Tribune Publishing during the periods presented. While management considers these allocations to have been made on a reasonable basis, the allocations do not necessarily reflect the expenses that would have been incurred had Tribune Publishing operated as a stand-alone entity. All such costs and expenses are assumed to be settled with TCO through the parent company investment component of equity (deficit) in the period in which the costs were incurred. Current income taxes are also assumed to be settled with TCO through the parent company investment component of Tribune Publishing equity in the period the related income taxes were recorded.
As part of TCO emergence from bankruptcy, TCO consummated an internal restructuring, pursuant to and in accordance with the terms of the Plan (as defined and described in Note 2). These restructuring transactions included, among other things, establishing a number of real estate holding companies. On December 21, 2012, the majority of the land and buildings owned by Tribune Publishing were transferred to TCO’s newly established real estate holding companies.
In 2013, Tribune Publishing entered into related party lease agreements with the real estate holding companies to lease back certain land and buildings that were transferred. Although the properties subject to related party leases were legally transferred to the holding companies, Tribune Publishing determined that pursuant to the terms of the leases, it maintained forms of continuing involvement with the properties, which pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“ASC”) Topic 840, “Leases,” precluded Tribune Publishing from derecognizing those properties from its consolidated and combined financial statements. As a result, Tribune Publishing continued to account for and depreciate the carrying values of the transferred properties subject to related party leases which are presented within net property, plant and equipment in its consolidated and combined balance sheet. Rent payments under the related party leases were accounted for as dividends to TCO. See Note 4 for further information.
On December 1, 2013, Tribune Publishing modified the specific provisions within the related party leases to address the prohibited forms of continuing involvement. This resulted in Tribune Publishing derecognizing those properties by recording a $337.6 million reduction to net property, plant and equipment and a corresponding reduction to the net parent company investment component of equity in its consolidated and combined balance sheet. The related party leases subsequent to the lease modification on December 1, 2013 have been accounted for as operating leases. See Note 4 for further information.

11


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The remainder of the transferred properties are no longer utilized in the operations of Tribune Publishing; therefore, Tribune Publishing did not enter into related party leases for those properties. Tribune Publishing entered into management agreements with the real estate holding companies pursuant to which it will manage those properties for an initial term of one year, cancelable by the real estate holding companies with a 30-day notice.
Tribune Publishing assesses its operating segments in accordance with ASC Topic 280, “Segment Reporting.” Tribune Publishing is managed by its chief operating decision maker, as defined by ASC Topic 280, as one business. Accordingly, the financial statements of Tribune Publishing are presented to reflect one reportable segment.
New Accounting Standards—In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) concerning revenue recognition. The new standard supersedes a majority of existing revenue recognition guidance under U.S. GAAP, and requires a company to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to use more judgment and make more estimates while recognizing revenue, which could result in additional disclosures to the financial statements. ASU 2014-09 allows for either a “full retrospective” adoption or a “modified retrospective” adoption. The Company is currently evaluating which adoption method it will elect. The standard is effective for the Company in the first quarter 2017. Early adoption is not permitted. The Company is currently evaluating the revenue recognition impact this guidance will have once implemented.
NOTE 2: PROCEEDINGS UNDER CHAPTER 11
Chapter 11 Reorganization—On December 8, 2008 (the “Petition Date”), TCO, and 110 of its direct and indirect wholly-owned subsidiaries (each a “Debtor” and, collectively, the “Debtors”), filed voluntary petitions for relief (collectively, the “Chapter 11 Petitions”) under Chapter 11 (“Chapter 11”) of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors’ Chapter 11 proceedings continue to be jointly administered under the caption “In re: Tribune Company, et al.,” Case No. 08-13141. Certain of the legal entities included in the consolidated and combined financial statements of Tribune Publishing were Debtors or, as a result of the restructuring transactions described below, are successor legal entities to legal entities that were Debtors (collectively, the “Tribune Publishing Debtors”). As further described below, a joint plan of reorganization for the Debtors, including the Tribune Publishing Debtors became effective and the Debtors emerged from Chapter 11 on December 31, 2012 (the “Effective Date”). Tribune Publishing and its business operations as conducted on or after December 31, 2012 are herein referred to as Reorganized Tribune Publishing or “Successor.” Tribune Publishing and its business operations as conducted on or prior to December 30, 2012 are herein referred to as “Predecessor.” TCO and its business operations as conducted on or after December 31, 2012 are herein referred to as “Reorganized Tribune Media.”

12


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


From the Petition Date and until the Effective Date, the Debtors operated their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable orders of the Bankruptcy Court.
Plan of Reorganization—In order for a debtor to emerge from Chapter 11, a Chapter 11 plan of reorganization that satisfies the requirements of the Bankruptcy Code and provides for emergence from bankruptcy must be proposed and confirmed by a bankruptcy court. On April 12, 2012, the Debtors, the official committee of unsecured creditors (the “Creditors’ Committee”), Oaktree Capital Management, L.P. (“Oaktree”), a creditor under certain TCO prepetition debt facilities, Angelo, Gordon & Co. L.P. (“AG”), a creditor under certain TCO prepetition debt facilities, and JPMorgan Chase Bank, N.A. (“JPMorgan”), an administrative agent and a creditor under certain TCO prepetition debt facilities (collectively, the “Plan Proponents”) filed the Fourth Amended Joint Plan of Reorganization for Tribune Company and Its Subsidiaries (as subsequently amended and modified, the “Plan”) with the Bankruptcy Court.
On July 23, 2012, the Bankruptcy Court issued an order (the “Confirmation Order”) confirming the Plan. The Plan constitutes a separate plan of reorganization for each of the Debtors and sets forth the terms and conditions of the Debtors’ reorganization.
Notices of appeal of the Confirmation Order were filed in August 2012 by certain TCO creditors. The confirmation appeals have been transmitted to the United States District Court for the District of Delaware (“Delaware District Court”) and have been consolidated, together with two previously-filed appeals of the Bankruptcy Court’s orders relating to certain provisions in the Plan.
The appellants seek, among other relief, to overturn the Confirmation Order and certain prior orders of the Bankruptcy Court, including the settlement of certain claims and causes of action related to the Leveraged ESOP Transactions contained in the Plan. There is currently no stay of the Confirmation Order in place pending resolution of the confirmation-related appeals and those appeals remain pending before the Delaware District Court. In January 2013, Reorganized Tribune Media filed a motion to dismiss the appeals as equitably moot, based on the substantial consummation of the Plan. Briefings on those additional motions to dismiss were completed on or about July 3, 2014.
During the fourth quarter of 2012 and prior to the Effective Date, TCO and its subsidiaries consummated an internal restructuring, pursuant to and in accordance with the terms of the Plan. These restructuring transactions included, among other things, (i) converting certain of TCO’s subsidiaries into limited liability companies or merging certain of TCO’s subsidiaries into newly-formed limited liability companies, (ii) consolidating and reallocating certain operations, entities, assets and liabilities within the organizational structure of TCO and (iii) establishing a number of real estate holding companies. Among other things, the restructuring transactions resulted in Tribune Publishing Company, LLC, now a wholly-owned subsidiary of the Company (“TPC”), being converted into a limited liability company (prior to the conversion, TPC was a corporation named Tribune Publishing Company) as well as becoming the holding company for the principal direct and indirect subsidiaries that own and operate the business of Tribune Publishing as described in Note 1.
On the Effective Date, all of the conditions precedent to the effectiveness of the Plan were satisfied or waived, the Debtors emerged from Chapter 11, and the settlements, agreements and transactions contemplated by the Plan to be effected on the Effective Date were implemented, including, among other things, the appointment of a new board of directors of TCO and the initiation of distributions to creditors. As a result, Reorganized Tribune Media converted from a subchapter S corporation to a C corporation under the Internal Revenue Code (“IRC”). This conversion also affected TCO subsidiaries that were treated as qualified subchapter S subsidiaries, including certain legal entities included in the accompanying consolidated and combined financial statements of Tribune Publishing.
Since the Effective Date, Reorganized Tribune Media has substantially consummated the various transactions contemplated under the Plan, including those provisions relating to Tribune Publishing. In particular, Reorganized Tribune Media made all distributions of cash, including cash distributions made on behalf of Tribune Publishing, new common stock and new warrants that were required to be made under the terms of the Plan to creditors holding allowed claims. The prepetition claims of Tribune Publishing’s general unsecured creditors that became or become allowed subsequent to the Effective Date have been or will be paid on the next quarterly distribution date after such allowance.
Resolution of Outstanding Prepetition Claims—Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect prepetition

13


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


indebtedness or to exercise control over the property of the debtor’s estate. Absent an order of the Bankruptcy Court, substantially all prepetition liabilities are subject to settlement under a plan of reorganization approved by the Bankruptcy Court. Shortly after commencing their Chapter 11 proceedings, the Debtors began notifying all known current or potential creditors of the Chapter 11 filings.
On the Effective Date, substantially all of the Debtors’ prepetition liabilities at December 30, 2012 were settled or otherwise satisfied under the Plan. However, certain other claims have been or will be settled or otherwise satisfied subsequent to the Effective Date. Although the allowed amount of certain unresolved claims has not been determined, Tribune Publishing’s liabilities subject to compromise associated with these unresolved claims were discharged upon emergence from Chapter 11 in exchange for the treatment outlined in the Plan.
Reorganization Items, Net—Reorganization items, net, generally includes provisions and adjustments to reflect the carrying value of certain prepetition liabilities at their estimated allowable claim amounts and, pursuant to ASC Topic 852, “Reorganizations,” is reported separately in Tribune Publishing’s consolidated and combined statements of income (loss). Reorganization items, net may also include professional advisory fees and other costs directly associated with the Debtors’ Chapter 11 cases; however, all professional advisory fees that were paid by TCO and other non-debtor TCO affiliates that related to all Debtors have not been allocated to Tribune Publishing as professional advisory fees are TCO reorganization expenses and do not specifically relate to the operations of Tribune Publishing.
Specifically identifiable reorganization provisions, adjustments and other costs directly related to Tribune Publishing have been included in the Successor’s consolidated and combined statement of comprehensive income for the three and nine months ended September 28, 2014 and September 29, 2013 and in the Predecessor’s consolidated and combined statements of income (loss) for December 31, 2012 and consisted of the following (in thousands):
 
 
Successor  
 
 
Predecessor
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
 
 
December 31, 2012
Reorganization costs, net:
 
 
 
 
 
 
 
 
 
 
 
Contract rejections and claim settlements
 
$
(205
)
 
$
187

 
$
(212
)
 
$
310

 
 
$

Other, net
 

 
(23
)
 
(2
)
 
(349
)
 
 

Total reorganization costs, net
 
(205
)
 
164

 
(214
)
 
(39
)
 
 

Reorganization adjustments, net
 

 

 

 

 
 
2,862,039

Fresh-start reporting adjustments, net
 

 

 

 

 
 
(107,486
)
Total reorganization items, net
 
$
(205
)
 
$
164

 
$
(214
)
 
$
(39
)
 
 
$
2,754,553

The Predecessor’s consolidated and combined statement of comprehensive income for December 31, 2012 included other reorganization items totaling $2.755 billion before taxes ($2.842 billion after taxes) arising from reorganization and fresh-start reporting adjustments. Reorganization adjustments, which were recorded to reflect the settlement of prepetition liabilities and changes in the Predecessor’s capital structure arising from the implementation of the Plan, resulted in a net reorganization gain of $2.862 billion before taxes ($2.894 billion after taxes). Fresh-start reporting adjustments, which were recorded as a result of the adoption of fresh-start reporting as of the Effective Date in accordance with ASC Topic 852, resulted in a net loss of $107.5 million before taxes ($52.1 million after taxes). The net gain resulted primarily from adjusting the Predecessor’s net carrying values for certain assets and liabilities to their fair values in accordance with ASC Topic 805, “Business Combinations,” recording related adjustments to deferred income taxes and eliminating the Predecessor’s accumulated other comprehensive income (loss) as of the Effective Date.
Tribune Publishing expects to incur certain expenses pertaining to the Chapter 11 proceedings throughout 2014 and potentially in future periods. These expenses will include primarily other costs related to the implementation of the Plan and the resolution of unresolved claims.
Fresh-Start Reporting—Reorganized Tribune Media adopted fresh-start reporting on the Effective Date in accordance with ASC Topic 852. All conditions required for the adoption of fresh-start reporting were satisfied by

14


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Reorganized Tribune Media on the Effective Date as a result, Tribune Publishing also adopted fresh-start reporting on the Effective Date.

The adoption of fresh-start reporting by Reorganized Tribune Publishing resulted in a new reporting entity for financial reporting purposes reflecting the Successor’s capital structure as of the Effective Date. Any presentation of Reorganized Tribune Publishing’s consolidated and combined financial statements as of and for periods subsequent to the Effective Date represents the financial position, results of operations and cash flows of a new reporting entity and will not be comparable to any presentation of the Predecessor’s consolidated and combined financial statements as of and for periods prior to the Effective Date, and the adoption of fresh-start reporting.
In accordance with ASC Topic 852, the Predecessor’s consolidated and combined statement of comprehensive income for December 31, 2012 includes only (i) reorganization adjustments which resulted in a net gain of $2.862 billion before taxes ($2.894 billion after taxes) and (ii) fresh-start reporting adjustments which resulted in a net loss of $107.5 million before taxes ($52.1 million after taxes). These adjustments are further summarized and described below. The Predecessor’s consolidated and combined statements of income (loss) and cash flows for December 31, 2012 exclude the results of operations and cash flows arising from the Predecessor’s business operations on December 31, 2012. Because the Predecessor’s December 31, 2012 results of operations and cash flows were not material, Tribune Publishing has elected to report them as part of Reorganized Tribune Publishing’s results of operations and cash flows for the fiscal year ended December 29, 2013.
Enterprise Value/Reorganization ValueASC Topic 852 requires, among other things, a determination of the reorganization value for Reorganized Tribune Media and allocation of such reorganization value to the fair value of Reorganized Tribune Media’s tangible assets, finite-lived intangible assets and indefinite-lived intangible assets in accordance with the provisions of ASC Topic 805, “Business Combinations,” as of the Effective Date. The reorganization value for Reorganized Tribune Media represents the amount of resources available, or that become available, for the satisfaction of postpetition liabilities and allowed prepetition claims, as negotiated between the Debtors and their creditors. This value is viewed as the fair value of Reorganized Tribune Media before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets of Reorganized Tribune Media immediately after emergence from bankruptcy. In connection with the Debtors’ Chapter 11 cases, the Debtors’ financial advisor undertook a valuation analysis to determine the value available for distribution to holders of allowed prepetition claims. Based on current and anticipated economic conditions as of the Effective Date and the direct impact of these conditions on Reorganized Tribune Media’s business, this analysis estimated a range of distributable value from the Debtors’ estates from $6.917 billion to $7.826 billion with an approximate mid-point of $7.372 billion. The confirmed Plan contemplates a distributable value for Reorganized Tribune Media of $7.372 billion. The distributable value implies an equity value for Reorganized Tribune Company of $4.536 billion after reducing the distributable value for cash distributed (or to be distributed) pursuant to the Plan and $1.1 billion of new debt undertaken by Reorganized Tribune Company.
In accordance with the provisions of ASC Topic 805, the reorganization value of Reorganized Tribune Company was allocated, in part, to the fair value of Reorganized Tribune Publishing’s tangible assets, finite-lived intangible assets, and indefinite-lived intangible assets as of the Effective Date.
Methodology, Analysis and AssumptionsThe comparable company valuation analysis methodology estimates the enterprise value of a company based on a relative comparison with publicly traded companies with similar operating and financial characteristics to the subject company. Under this methodology, TCO’s financial advisor determined a range of multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) to calculate the enterprise values of TCO’s publishing and broadcasting segments. The discounted cash flow (“DCF”) analysis is a forward-looking enterprise valuation methodology that estimates the value of an asset or business by calculating the expected future cash flows to be generated by that asset or business. Under this methodology, projected future cash flows are discounted by the enterprise’s weighted average cost of capital (“WACC”). The WACC reflects the estimated blended rate of return that would be required by debt and equity investors to invest in the enterprise based on its capital structure. Utilizing the DCF analysis, the enterprise values of TCO’s publishing and broadcasting segments were determined by calculating the present value of the projected unlevered after-tax free cash flows through 2015 plus an estimate for the value of each segment for the period beyond 2015 known as the terminal value. The terminal value was derived by either applying a multiple to the projected EBITDA for the final year of the projection period (2015) or capitalizing the projected unlevered after-tax free cash flow in the same projection period using the WACC and an assumed perpetual growth rate, discounted back to the valuation date using the WACC, as appropriate. The precedent transactions valuation methodology is based on the enterprise values of companies

15


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


involved in public merger and acquisition transactions that have operating and financial characteristics similar to the subject company. Under this methodology, the enterprise value is determined by an analysis of the consideration paid and the debt assumed in the identified merger and acquisition transactions and is usually expressed as a multiple of revenues or EBITDA. Utilizing this analysis, TCO’s financial advisor determined a range of multiples of EBITDA for the trailing 12 months from the measurement date to calculate the enterprise value for TCO’s broadcasting segment. The precedent transactions valuation methodology was not used for TCO’s publishing segment due to the lack of relevant transactions.
TCO’s financial advisor applied a weighted average of the above enterprise valuation methodologies to calculate the estimated ranges of enterprise values for TCO’s publishing and broadcasting segments. The relative weighting of each valuation methodology was based on the amount of publicly available information to determine the inputs used in the calculations. In addition, TCO’s financial advisor utilized a combination of these enterprise valuation methodologies, primarily the comparable company valuation analysis methodology, to calculate the estimated ranges of fair values of TCO’s equity investments. The ranges of enterprise values for TCO’s publishing and broadcasting segments and estimated fair values of TCO’s equity investments were added to the estimated cash on hand as of the measurement date to determine the estimated range of distributable value noted above.
Fresh-Start Consolidated and Combined Balance Sheet—The table below summarizes the Predecessor’s December 30, 2012 consolidated and combined balance sheet, the reorganization and fresh-start reporting adjustments that were made to that balance sheet as of December 31, 2012, and the resulting Successor’s unaudited consolidated and combined balance sheet as of December 31, 2012.

16


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Consolidated and Combined Balance Sheets at December 30, 2012 and December 31, 2012
(In thousands)
 
 
December 30,
2012
 
Reorganization
Adjustments
 
 
Fresh-Start
Adjustments
 
 
December 31,
2012
Assets
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash
 
$
13,768

 
$

 
 
$

 
 
$
13,768

Accounts receivable, net
 
256,985

 

 
 

 
 
256,985

Inventories
 
12,537

 

 
 
5,810

(4)
 
18,347

Deferred income taxes
 
1,147

 
42,228

(1)(2)
 
(2,272
)
(4)
 
41,103

Prepaid expenses and other
 
14,733

 

 
 
(18
)
(4)
 
14,715

Total current assets
 
299,170

 
42,228

 
 
3,520

 
 
344,918

Properties
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment
 
1,938,208

 

 
 
(1,527,106
)
(4)
 
411,102

Accumulated depreciation
 
(1,322,830
)
 

 
 
1,322,830

(4)
 

Net properties
 
615,378

 

 
 
(204,276
)
 
 
411,102

Other Assets
 
 
 
 
 
 
 
 
 
 
Goodwill
 

 

 
 
15,331

(4)
 
15,331

Other intangible assets, net
 
28,911

 

 
 
37,976

(4)
 
66,887

Investments
 
3,986

 

 
 

 
 
3,986

Deferred income taxes
 

 

 
 
54,188

(4)
 
54,188

Other
 
3,787

 

 
 
(2,402
)
(4)
 
1,385

Total other assets
 
36,684

 

 
 
105,093

 
 
141,777

Total assets
 
$
951,232

 
$
42,228

 
 
$
(95,663
)
 
 
$
897,797

 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
37,710

 
$
2,528

(1)(3)
 
$

(4)
 
$
40,238

Employee compensation and benefits
 
103,077

 
322

(1)(3)
 

 
 
103,399

Deferred revenue
 
66,835

 

 
 
(171
)
(4)
 
66,664

Other current liabilities
 
26,359

 
(879
)
(1)(3)
 

 
 
25,480

Total current liabilities
 
233,981

 
1,971

 
 
(171
)
 
 
235,781

Other Non-Current Liabilities
 
66,300

 
11,679

(1)(2)(3)
 
(16,192
)
(4)
 
61,787

Liabilities Subject to Compromise
 
2,865,890

 
(2,865,890
)
(1)(3)
 

 
 

Equity (Deficit)
 
(2,214,939
)
 
2,894,468

(1)
 
(79,300
)
(4)
 
600,229

Total liabilities and equity (deficit)
 
$
951,232

 
$
42,228

 
 
$
(95,663
)
 
 
$
897,797

 (1)
Reflects adjustments arising from implementation of the Plan, including the gain on the settlement of prepetition liabilities, distributions of cash by TCO on behalf of Reorganized Tribune Publishing and the elimination of Tribune Publishing’s equity (deficit). These adjustments also include the establishment of Reorganized Tribune Publishing’s equity based on the reorganization value of Reorganized Tribune Company allocated to the fair value of Reorganized Tribune Publishing’s tangible assets, finite-lived intangible assets and indefinite-lived intangible assets as of the Effective Date. The changes in the Predecessor’s capital structure arising from the implementation of the Plan is comprised of the following adjustments (in thousands):  

17


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Liabilities subject to compromise on the Effective Date
 
$
2,865,890

Less: Liabilities assumed and reinstated on the Effective Date
 
(2,909
)
Less: Liabilities for prepetition claims to be settled subsequent to the Effective Date and other adjustments
 
(5,472
)
Liabilities subject to compromise settled on the Effective Date
 
$
2,857,509

 
 
 
Forgiveness of prepetition promissory notes held by parent
 
$
2,822,860

Cash distributions on settled claims paid by parent
 
34,649

Gain on settlement of liabilities subject to compromise
 
2,857,509

Plus: Other reorganization adjustments, net
 
4,530

Total reorganization adjustments before taxes
 
2,862,039

Plus: Income tax benefit on reorganization adjustments
 
32,429

Net reorganization gain after taxes
 
$
2,894,468

(2)
Reflects the conversion of Reorganized Tribune Company, including its qualified subchapter S subsidiaries, from a subchapter S corporation to a C corporation under the IRC.
(3)
Reflects the reclassification of certain liabilities from liabilities subject to compromise upon the assumption of certain executory contracts and unexpired leases.
(4)
The Predecessor’s consolidated and combined statement of comprehensive income for December 31, 2012 includes certain adjustments recorded as a result of the adoption of fresh-start reporting in accordance with ASC Topic 852 as of the Effective Date. These fresh-start reporting adjustments resulted in a net pretax loss which primarily resulted from adjusting the Predecessor’s recorded values for certain assets and liabilities to fair values in accordance with ASC Topic 805, and recording related adjustments to deferred income taxes. The fresh-start reporting adjustments included in the Predecessor’s statement of comprehensive income for December 31, 2012 consisted of the following items (in thousands):
 
Fair value adjustments to net properties
 
$
(204,276
)
Fair value adjustments to intangibles
 
37,431

Establish Successor’s goodwill
 
15,331

Elimination of accumulated other comprehensive income
 
33,598

Other fair value adjustments, net
 
10,430

Loss from fresh-start reporting adjustments before taxes
 
(107,486
)
Income tax benefit attributable to fair value adjustments
 
55,344

Net loss from fresh-start reporting adjustments after taxes
 
$
(52,142
)
Property, Plant and Equipment—Property, plant and equipment was adjusted to a fair value aggregating $411.1 million as of the Effective Date. The fair values of property, plant and equipment were based primarily on valuations obtained from third party valuation specialists principally utilizing the cost and market valuation approaches.
Fresh-start reporting adjustments included the elimination of the Predecessor’s aggregate accumulated depreciation balance as of December 30, 2012.
Identifiable Intangible Assets—The following intangible assets were identified by Reorganized Tribune Publishing and recorded at fair value based on valuations obtained from third party valuation specialists: newspaper mastheads, advertiser relationships, customer relationships, affiliate agreements and other contracts and agreements, including real property leases. The cost, income and market valuation approaches were utilized, as appropriate, to estimate the fair values of these intangible assets. The determination of the fair values of these identifiable intangible assets resulted in a $38.0 million net increase in other intangible assets in the Successor’s consolidated and combined balance sheet at December 31, 2012.

18


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 3: CHANGES IN OPERATIONS
Employee Reductions—Tribune Publishing identified reductions in staffing levels in its operations of 20 and 218 positions in the three and nine months ended September 28, 2014, respectively, and 226 and 330 positions in the three and nine months ended September 29, 2013, respectively. Tribune Publishing recorded a pretax credit of $0.4 million and a pretax charge of $1.9 million for the three and nine months ended September 28, 2014, respectively, and pretax charges of $3.9 million and $6.5 million for the three and nine months ended September 29, 2013, respectively. A summary of the activity with respect to Tribune Publishing’s severance accrual for the nine months ended September 28, 2014 is as follows (in thousands):
Balance at December 29, 2013
 
$
9,336

Transferred from Tribune Media Company
 
647

Provision
 
1,853

Payments
 
(9,170
)
Balance at September 28, 2014
 
$
2,666

Charges for severance and related expenses are included in selling, general and administrative expense in the accompanying consolidated and combined statements of income (loss). The severance and related expenses above exclude severance and related expenses incurred by TCO and allocated to Tribune Publishing. As part of the separation and distribution from TCO, $0.6 million of accrued severance charges were transferred to Tribune Publishing. See Note 4 for further discussion of allocated charges from TCO.
NOTE 4: RELATED PARTY TRANSACTIONS
In connection with the separation and distribution, Tribune Publishing entered into a transition services agreement (the “TSA”) and certain other agreements with TCO that govern the relationships between Tribune Publishing and TCO following the separation and distribution. Under the TSA, the providing company generally is allowed to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the services, plus, in some cases, the allocated direct costs of providing the services, generally without profit. Pursuant to the TSA, TCO provides Tribune Publishing with certain specified services on a transitional basis, including support in areas such as human resources, risk management, treasury, technology, legal, real estate, procurement, and advertising and marketing in a single market. During the three and nine months ended September 28, 2014, Tribune Publishing incurred $0.9 million in charges payable to TCO under the TSA. In addition, the TSA outlines the services that Tribune Publishing will provide TCO on a transitional basis, including in areas such as human resources, technology, legal, procurement, accounting, digital advertising operations, and advertising, marketing, event management and fleet maintenance in a single market. For the three and nine months ended September 28, 2014, TCO's charges payable to Tribune Publishing were $1.2 million under the TSA. Charges related to the TSA are included in selling, general and administrative costs in the consolidated and combined statements of income (loss).
Prior to the Distribution Date, Tribune Publishing participated in a number of corporate-wide programs administered by TCO. These included participation in TCO’s centralized treasury function, insurance programs, employee benefit programs, workers’ compensation programs, and centralized service centers and other corporate functions. The following is a discussion of the relationship with TCO, the services provided and how transactions with TCO have been accounted for in the consolidated and combined financial statements. Subsequent to the Distribution Date, any programs not governed by the TSA, as described above, are now administered by Tribune Publishing and are recorded directly to operating expenses.
Equity—Equity in the consolidated and combined balance sheets prior to the Distribution Date includes the accumulated balance of transactions between Tribune Publishing and TCO, Tribune Publishing’s paid-in-capital, and TCO’s interest in Tribune Publishing’s cumulative retained earnings, and are presented within the parent company investment component of equity and combined with accumulated other comprehensive income to total equity (deficit). The amounts comprising the accumulated balance of transactions between Tribune Publishing and TCO include (i) the cumulative net assets attributed to Tribune Publishing by TCO, (ii) the cumulative net advances to TCO representing the cumulative Tribune Publishing funds swept (net of funding provided by TCO to Tribune Publishing) as part of the centralized cash management program described further below, (iii) the cumulative charges (net of credits) allocated by TCO to Tribune Publishing for certain support services received by Tribune Publishing and (iv) related party dividends for rent payments on related party leases as described further below.

19


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Centralized Cash Management—TCO utilized a centralized approach to cash management and the financing of its operations. Under this centralized cash management program, TCO and Tribune Publishing advanced funds to each other. Accordingly, none of TCO’s cash and cash equivalents has been assigned to Tribune Publishing in the consolidated and combined financial statements. Cash in the consolidated and combined balance sheets represents either cash not advanced to TCO or cash held locally by Tribune Publishing. These transactions were recorded in equity (deficit) when advanced.
Support Services Provided and Other Amounts with TCO—Prior to the Distribution Date, Tribune Publishing received allocated charges from TCO for certain corporate support services, which were recorded within selling, general and administrative expense in Tribune Publishing’s consolidated and combined statements of income (loss). Management believes that the basis used for the allocations was reasonable and reflects the portion of such costs attributed to Tribune Publishing’s operations; however, the amounts may not be representative of the costs necessary for Tribune Publishing to operate as a separate stand-alone company. These allocated costs are summarized in the following table (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Corporate management fee
 
$
3,851

 
$
8,239

 
$
21,871

 
$
20,622

Allocated depreciation
 
1,731

 
4,836

 
11,707

 
12,482

Service center support costs
 
10,108

 
26,653

 
53,492

 
68,788

Other
 
192

 
2,045

 
3,427

 
5,330

Total
 
$
15,882

 
$
41,773

 
$
90,497

 
$
107,222

Medical and Workers’ Compensation Benefit PlansTribune Publishing participated in TCO-sponsored employee benefit plans, including medical and workers’ compensation. Allocations of benefit plan costs varied by plan type and were based on actuarial valuations of cost and/or liability, premium amounts and payroll. Total benefit plan costs allocated to Tribune Publishing amounted to $4.1 million and $27.2 million in the three and nine months ended September 28, 2014 and $12.5 million and $36.8 million in the three and nine months ended September 29, 2013, respectively, and were recorded in cost of sales and selling, general and administrative expense, as appropriate, in the consolidated and combined statements of income (loss). While management believes the cost allocation methods utilized for the benefit plans were reasonable and reflected the portion of such costs attributed to Tribune Publishing, the amounts may not be representative of the costs necessary for Tribune Publishing to operate as a stand-alone business.
Defined Benefit PlansRetirement benefits obligations pursuant to the TCO defined benefit pension plans have historically been and continue to be an obligation of TCO. Prior to the Distribution Date, Tribune Publishing accounted for costs associated with these defined benefit pension plans as a participant in multi-employer plans in accordance with ASC Topic 715. Costs related to TCO-sponsored pension plans, which totaled credits of $2.1 million and $12.5 million in the three and nine months ended September 28, 2014, respectively, and credits of $6.2 million and $17.8 million in the three and nine months ended September 29, 2013, respectively, were based upon a specific allocation of actuarially determined service costs plus an allocation of the remaining net periodic pension cost components based upon Tribune Publishing's proportional share of the pension liability. Through the Distribution Date, TCO-sponsored pension plan income allocated to Tribune Publishing is recorded in cost of sales and selling, general and administrative expense, as appropriate, in the consolidated and combined statements of income and comprehensive income. Subsequent to the Distribution Date, no further costs or credits were allocated.
Defined Contribution PlansTribune Publishing’s employees have historically participated in various TCO qualified 401(k) savings plans, which permit eligible employees to make voluntary contributions on a pretax basis. The plans allowed participants to invest their savings in various investments. Amounts charged to expense by Tribune Publishing for employer contributions to TCO 401(k) savings plans totaled $1.3 million and $7.3 million in the three and nine months ended September 28, 2014, respectively, and $2.9 million and $9.9 million in the three and nine months ended September 29, 2013, respectively, and are recorded in cost of sales and selling, general and administrative expense, as appropriate, in the consolidated and combined statements of income and comprehensive income.

20


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Related Party Lease Agreements—As described in Note 1, on December 21, 2012, the majority of the land and buildings owned by Tribune Publishing were transferred to TCO’s newly established real estate holding companies. As of the date of the transfers, the carrying value of the transferred properties was $294.5 million.
In 2013, Tribune Publishing entered into related party lease agreements with TCO to lease back certain land and buildings that were transferred on December 21, 2012. The initial term of these non-cancelable related party lease agreements is either five or ten years, with two optional renewal terms. Tribune Publishing determined that pursuant to the terms of the leases, it maintained forms of continuing involvement with the properties subject to related party leases, which, in accordance with ASC Topic 840, preclude Tribune Publishing from derecognizing those properties from its consolidated and combined financial statements. As a result, Tribune Publishing continued to account for and depreciate the carrying values of the transferred properties subject to related party leases and rent payments were accounted for as dividends to TCO. During the three and nine months ended September 29, 2013, Tribune Publishing recorded $1.2 million and $3.8 million, respectively, in depreciation expense for such properties.
On December 1, 2013, Tribune Publishing modified the related party leases to eliminate certain protections provided to the landlord in the event of default by the tenant, including the right to collect rent and other balances owed by tenant under the leases utilizing insurance proceeds received by the landlord in the event of damage and otherwise payable to the tenant, as well as the right to collect rent directly from subtenants to the extent all or a portion of the premise is sublet. Pursuant to ASC Topic 840, these provisions had precluded Tribune Publishing from derecognizing those properties from its consolidated and combined financial statements. As a result of these modifications, Tribune Publishing determined that it no longer had forms of continuing involvement with the transferred properties and derecognized such properties from its consolidated and combined financial statements by recording a $337.6 million reduction to net property, plant and equipment and a corresponding reduction to the parent company investment component of equity (deficit) in its consolidated and combined balance sheet. Tribune Publishing has accounted for these related party leases as operating leases beginning on December 1, 2013. In connection with all related party lease agreements, Tribune Publishing recognized $9.1 million and $28.2 million of rent expense for the three and nine months ended September 28, 2014, respectively, recorded in cost of sales and selling, general and administrative expense, as appropriate.
The remainder of the transferred properties, which had a carrying value of $28.5 million as of the date of the transfers, are no longer utilized in the operations of Tribune Publishing; therefore, Tribune Publishing did not enter into related party leases for those properties. Tribune Publishing entered into management agreements with the real estate holding companies pursuant to which it will manage those properties for an initial term of one year, cancelable by the real estate holding companies with a 30-day notice.
In addition, in 2013, Tribune Publishing entered into various related party lease agreements with TCO to lease the portions of the shared TCO corporate office space that Tribune Publishing continues to occupy for an initial 5-year term, with two optional renewal terms. In accordance with ASC Topic 840, Tribune Publishing has accounted for these related party leases as operating leases. Costs associated with the related party lease agreements for shared corporate office space were recorded in selling, general and administrative expense.
NOTE 5: ACQUISITIONS
Landmark Acquisition
On May 1, 2014, the Company completed an acquisition of the issued and outstanding limited liability company interests of Capital-Gazette Communications, LLC and Landmark Community Newspapers of Maryland, LLC from Landmark Media Enterprises, LLC (the “Landmark Acquisition”) for $29.0 million in cash, net of certain working capital and other closing adjustments. The Landmark Acquisition expanded the Company’s breadth of coverage in Maryland and adjacent areas and includes The Capital in the Annapolis region and the Carroll County Times and their related publications.
In connection with this acquisition, the Company incurred a total of $0.4 million of transaction costs, which were recorded in selling, general and administrative expenses in the Company’s consolidated statement of income (loss) for the nine months ended September 28, 2014.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities is as follows (in thousands):
Consideration
 
 
Cash
 
$
28,983

Less: cash acquired
 
(2
)
Net Cash
 
$
28,981

 
 
 
Allocated Fair Value of Acquired Assets and Assumed Liabilities
 
 
Accounts receivable and other current assets
 
$
2,942

Property, plant and equipment
 
560

Intangible Assets subject to amortization:
 
 
  Trade names and trademarks (useful life of 20 years)
 
7,500

  Advertiser relationships (useful life of 12 years)
 
6,500

  Other customer relationships (useful life of 7 years)
 
2,500

Accounts payable and other current liabilities
 
(3,961
)
Total identifiable net assets
 
16,041

Goodwill
 
12,940

Total net assets acquired
 
$
28,981

The allocation presented above is based upon management’s estimate of the fair values using the income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates. The definite-lived intangible assets will be amortized over a total weighted average period of 15 years that includes a 20 year life for trade names and trademarks, a 12 year life for advertiser relationships and a 7 year life for customer relationships. The acquired property and equipment will be depreciated on a straight-line basis over the respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and noncontractual relationships, as well as expected future cost and revenue synergies. The entire amount of purchase price allocated to intangible assets and goodwill will be deductible for tax purposes pursuant to IRC Section 197 over a 15 year period.
Other Acquisitions
The Company’s other acquisitions in the three and nine months ended September 28, 2014 were not significant; the Company made no acquisitions in the three and nine months ended September 29, 2013. The results of the other acquired companies and the related transaction costs were not material to the Company’s unaudited consolidated and combined financial statements and were included in the unaudited consolidated and combined statements of income (loss) since their respective dates of acquisition.
Information for other acquisitions made in the nine months ended September 28, 2014 (excluding the Landmark Acquisition) is as follows (in thousands):
Fair value of assets acquired
 
$
11,292

Liabilities assumed
 
(800
)
Net assets acquired
 
10,492

  Less: fair value of non-cash and contingent consideration
 
(4,439
)
  Less: fair value of the preexisting equity interest in MCT
 
(2,752
)
Net cash paid
 
$
3,301


21


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


On May 7, 2014, the Company acquired the remaining 50% outstanding general partnership interests of MCT from McClatchy News Services, Inc. and The McClatchy Company (collectively, “McClatchy”) for $1.2 million in cash and non-cash consideration for future services with an estimated fair value of $4.3 million. The fair value of acquired interests was based upon management’s estimate of the fair values using the income approach. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates. Prior to May 7, 2014, the Company accounted for its 50% interest in MCT as an equity method investment. In accordance with ASC Topic 805, the Company’s preexisting equity interest was remeasured to its estimated fair value of $2.8 million using the income valuation approach and the Company recognized a gain of $1.5 million in the unaudited consolidated and combined statements of income (loss) in the second quarter of 2014. The aggregate purchase price of the remaining 50% equity interest in MCT and the estimated fair value of the Company’s preexisting 50% equity interest in MCT have been allocated to the assets acquired and liabilities assumed based upon the estimated fair values of each as of the acquisition date.
NOTE 6: INVENTORIES
Inventories consisted of the following (in thousands):
 
 
September 28, 2014
 
December 29, 2013
Newsprint
 
$
14,951

 
$
13,831

Supplies and other
 
383

 
391

Total inventories
 
$
15,334

 
$
14,222

Inventories are stated at the lower of cost or market. Tribune Publishing determines cost on the first-in, first-out (“FIFO”) basis for all inventories.
NOTE 7: GOODWILL, OTHER INTANGIBLE ASSETS AND INTANGIBLE LIABILITIES
Goodwill, other intangible assets and intangible liabilities at September 28, 2014 and December 29, 2013 consisted of the following (in thousands):
 
 
September 28, 2014
 
 
December 29, 2013
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Other intangible assets subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscribers (useful life of 2 to 10 years)
 
$
6,194

 
$
(1,758
)
 
$
4,436

 
 
$
3,694

 
$
(919
)
 
$
2,775

Advertiser relationships (useful life of 2 to 13 years)
 
21,166

 
(3,823
)
 
17,343

 
 
14,332

 
(2,032
)
 
12,300

Affiliate agreements (useful life of 4 years)
 
11,929

 
(5,219
)
 
6,710

 
 
11,929

 
(2,982
)
 
8,947

Trade names (useful life of 20 years)
 
7,500

 
(158
)
 
7,342

 
 

 

 

Other (useful life of 1 to 20 years)
 
5,307

 
(832
)
 
4,475

 
 
5,132

 
(472
)
 
4,660

Total
 
$
52,096

 
$
(11,790
)
 
$
40,306

 
 
$
35,087

 
$
(6,405
)
 
$
28,682

Goodwill and other intangible assets not subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
35,404

 
 
 
 
 
 
15,331

Newspaper mastheads
 
 
 
 
 
31,800

 
 
 
 
 
 
31,800

Total goodwill and other intangible assets
 
 
 
 
 
$
107,510

 
 
 
 
 
 
$
75,813

Intangible liabilities subject to amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease contract intangible liabilities
 
(545
)
 
330

 
(215
)
 
 
(545
)
 
218

 
(327
)
Total intangible liabilities subject to amortization
 
$
(545
)
 
$
330

 
$
(215
)
 
 
$
(545
)
 
$
218

 
$
(327
)

22


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)



The changes in the carrying amounts of intangible assets subject to amortization during the nine months ended September 28, 2014 were as follows (in thousands):
Intangible assets subject to amortization
 
 
Balance at December 29, 2013
 
$
28,682

Acquisitions
 
17,009

Amortization
 
(5,385
)
Balance at September 28, 2014
 
$
40,306

The changes in the carrying amounts of intangible assets not subject to amortization and goodwill during the nine months ended September 28, 2014 were as follows (in thousands):
Other intangible assets not subject to amortization
 
 
Balance as of September 28, 2014 and December 29, 2013
 
$
31,800

 
 
 
Goodwill
 
 
Balance at December 29, 2013
 
$
15,331

Acquisitions
 
20,073

Balance at September 28, 2014
 
$
35,404

As disclosed in Note 4 to Tribune Publishing's audited consolidated and combined financial statements, Tribune Publishing reviews goodwill and other indefinite-lived intangible assets for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that an asset may be impaired, in accordance with ASC Topic 350, “Intangibles-Goodwill and Other.”
NOTE 8: INVESTMENTS
Investments consisted of equity method investments totaling $2.7 million and $2.8 million at September 28, 2014 and December 29, 2013, respectively, in the following private companies:
 
 
% Owned
Company
 
September 28, 2014
 
December 29, 2013
CIPS Marketing Group, Inc.
 
50
%
 
50
%
Homefinder.com, LLC
 
33
%
 
33
%
Locality Labs, LLC
 

 
35
%
Contend, LLC
 
20
%
 

Tribune Publishing recorded losses of $0.2 million and $0.8 million in the three and nine months ended September 28, 2014, respectively, and $0.2 million and $0.9 million in the three and nine months ended September 29, 2013, respectively, relating to its equity method investments. TCO retained the investment in Locality Labs, LLC effective with the spin-off. Tribune Publishing acquired the remaining 50% of the outstanding general partnership interests of MCT which had previously been accounted for as an equity method investment. See Note 5 for additional information on the MCT acquisition.
On August 5, 2014, the Company purchased a 20% investment for $1.0 million in Contend, LLC, a content creation company that develops and produces entertainment and marketing solutions for local, regional and national brands. The Company expects to leverage the relationship to help marketers engage and activate customers across all platforms, from print to online, social to mobile.

23


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


NOTE 9: FAIR VALUE MEASUREMENTS
Tribune Publishing measures and records in its consolidated and combined financial statements certain assets and liabilities at fair value. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and Tribune Publishing’s own assumptions (unobservable inputs). This hierarchy consists of the following three levels:

Level 1-Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2-Assets and liabilities whose values are based on inputs other than those included in Level 1, including quoted market prices in markets that are not active; quoted prices of assets or liabilities with similar attributes in active markets; or valuation models whose inputs are observable or unobservable but corroborated by market data.

Level 3-Assets and liabilities whose values are based on valuation models or pricing techniques that utilize unobservable inputs that are significant to the overall fair value measurement.
The carrying values of cash, trade accounts receivable and trade accounts payable approximated their respective fair values due to their short term to maturity.
NOTE 10: DEBT
At September 28, 2014, Tribune Publishing had $350.0 million in variable-rate debt outstanding under the Term Loan Credit Agreement, as defined below. The weighted average interest rate for the variable-rate debt is 5.75%. At September 28, 2014, the fair value of the Term Loan Credit Agreement was estimated to be $346.5 million. The Company's Term Loan Credit Agreement is classified as Level 2 inputs, because the fair value for these instruments is determined using observable inputs in non-active markets. See below for details related to the Company's debt agreements.
Senior Term Facility
On August 4, 2014, the Company entered into a credit agreement (the “Term Loan Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Term Collateral Agent”), and the lenders party thereto (the “Senior Term Facility”). The Senior Term Facility provides for loans (the “Term Loans”) in an aggregate principal amount of $350.0 million, which were issued at a discount of $3.5 million. Subject to certain conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the Senior Term Facility may be expanded (or a new term loan facility, revolving credit facility or letter of credit facility added) by an amount up to (i) the greater of $100.0 million and an amount as will not cause the net senior secured leverage ratio after giving effect to such incurrence to exceed 2:1, plus (ii) an amount equal to all voluntary prepayments of the term loans borrowed under the Senior Term Facility on the distribution date and refinancing debt in respect of such loans, subject to certain conditions. As of September 28, 2014, the unamortized balance of the discount was $3.4 million.
The Senior Term Facility will mature on August 4, 2021 (the “Term Loan Maturity Date”). The Term Loans amortize in equal quarterly installments equal to 1.25% of the original principal amount of the Senior Term Facility with the balance payable on the Term Loan Maturity Date. In addition, however, the Senior Term Facility provides for the right of individual lenders to extend the maturity date of their loans upon the request of the Company without the consent of any other lender. The Term Loans may be prepaid, in whole or in part, without premium or penalty, except that (a) prepayments and certain refinancings of the Senior Term Facility prior to August 4, 2015 will be subject to a prepayment premium of 1.0% of the principal amount prepaid and (b) lenders will be compensated for redeployment costs, if any. Subject to certain exceptions and provisions for the ratable sharing with indebtedness secured on a pari passu basis with the Senior Term Facility, the Senior Term Facility will be subject to mandatory prepayment in an amount equal to:
100% of the net proceeds (other than those that are used to purchase certain assets within a specified time period) of certain asset sales and certain insurance recovery events;

24


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


100% of the net proceeds of the issuance or incurrence of indebtedness (other than indebtedness permitted to be incurred under the Senior Term Facility unless specifically incurred to refinance a portion of the Senior Term Facility); and
50% of annual excess cash flow for any fiscal year (beginning with the fiscal year ending December 27, 2015), such percentage to decrease to 25% on the attainment of a secured leverage ratio of 1.25:1.00 and to 0% on the attainment of a secured leverage ratio of 0.75:1.00. In addition the Company will not be required to make an excess cash flow prepayment if such payment would result in available liquidity being less than $75.0 million.
Tribune Publishing Company is the borrower under the Senior Term Facility. Each of Tribune Publishing Company’s wholly-owned domestic subsidiaries, subject to certain exceptions (collectively, the “Subsidiary Guarantors”), guarantee the payment obligations under the Senior Term Facility. All obligations of Tribune Publishing Company and each Subsidiary Guarantor under the Senior Term Facility are secured by the following: (a) a perfected security interest in substantially all present and after-acquired property consisting of accounts receivable, inventory and other property constituting the borrowing base (the “ABL Priority Collateral”), which security interest will be junior to the security interest in the foregoing assets securing the Senior ABL Facility (defined below); and (b) a perfected security interest in substantially all other assets of Tribune Publishing Company and the Subsidiary Guarantors (other than the ABL Priority Collateral and with certain other exceptions) (the “Term Loan Priority Collateral” and, together with the ABL Priority Collateral, the “Collateral”), which security interest will be senior to the security interest in the foregoing assets securing the Senior ABL Facility.
The interest rates applicable to the Term Loans will be based on a fluctuating rate of interest measured by reference to either, at the Company’s option, (i) the greater of (x) an adjusted London inter-bank offered rate (adjusted for reserve requirements) and (y) 1.00%, plus a borrowing margin of 4.75%, or (ii) an alternate base rate, plus a borrowing margin of 3.75%. Customary fees will be payable in respect of the Senior Term Facility. The Senior Term Facility contains a number of covenants that, among other things, limit the ability of Tribune Publishing Company and its restricted subsidiaries, as described in the Term Loan Credit Agreement, to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; create restrictions on the ability of Tribune Publishing Company’s restricted subsidiaries that are not Subsidiary Guarantors to pay dividends to Tribune Publishing Company or make other intercompany transfers; create negative pledges; create liens; transfer or sell assets; merge or consolidate; enter into sale leasebacks; enter into certain transactions with the Company’s affiliates; and prepay or amend the terms of certain indebtedness. The Senior Term Facility also contains certain affirmative covenants, including financial and other reporting requirements. The Senior Term Facility provides for customary events of default, including: non-payment of principal, interest or fees; violation of covenants; material inaccuracy of representations or warranties; specified cross payment default and cross acceleration to other material indebtedness; certain bankruptcy events; certain ERISA events; material invalidity of guarantees or security interests; asserted invalidity of intercreditor agreements; material judgments and change of control.
Senior ABL Facility
On August 4, 2014, Tribune Publishing Company and the Subsidiary Guarantors, in their capacities as borrowers thereunder, entered into a credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent, collateral agent (in such capacity, the “ABL Collateral Agent”), swing line lender and letter of credit issuer and the lenders party thereto (the “Senior ABL Facility”). The Senior ABL Facility provides for senior secured revolving loans and letters of credit of up to a maximum aggregate principal amount of $140.0 million (subject to availability under a borrowing base). Extensions of credit under the Senior ABL Facility will be limited by a borrowing base calculated periodically and described below. Up to $75.0 million of availability under the Senior ABL Facility is available for letters of credit and up to $15.0 million of availability under the Senior ABL Facility is available for swing line loans. The Senior ABL Facility also permits Tribune Publishing Company to increase the commitments under the Senior ABL Facility by up to $75.0 million. The “borrowing base” is defined in the ABL Credit Agreement as, at any time, the sum of (i) 85% of eligible accounts receivable (with such percentage reduced under certain circumstances), plus (ii) the lesser of (x) 10% of aggregate commitments and (y) 70% of the lower of cost and market value (determined based on the RISI index) of eligible inventory, plus (iii) qualified cash, minus (iv) availability reserves, which may include such availability reserves as the ABL Administrative Agent, in its permitted discretion, deems appropriate at such time. As of September 28, 2014, $19.3 million of the Senior ABL Facility availability supported an outstanding undrawn letter of credit in the same amount.

25


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The Senior ABL Facility will mature on August 4, 2019. In addition, however, the Senior ABL Facility provides for the right of individual lenders to extend the termination date of their commitments upon the request of Tribune Publishing Company without the consent of any other lender. The Senior ABL Facility may be prepaid at Tribune Publishing Company’s option at any time without premium or penalty (except for lender’s redeployment costs, if any) and will be subject to mandatory prepayment if the outstanding Senior ABL Facility exceeds either the aggregate commitments with respect thereto or the current borrowing base, in an amount equal to such excess. Mandatory prepayments do not result in a permanent reduction of the lenders’ commitments under the Senior ABL Facility.
Tribune Publishing Company and the Subsidiary Guarantors are the borrowers under the Senior ABL Facility. Tribune Publishing Company and the Subsidiary Guarantors guarantee the payment obligations under the Senior ABL Facility. All obligations of Tribune Publishing Company and each Subsidiary Guarantor under the Senior ABL Facility are secured by the following: (a) a perfected security interest in the ABL Priority Collateral, which security interest will be senior to the security interest in such collateral securing the Senior Term Facility; and (b) a perfected security interest in the Term Loan Priority Collateral, which security interest will be junior to the security interest in such collateral securing the Senior Term Facility.
Until the date that is one day before the maturity date of the Senior ABL Facility, at the option of the applicable borrower, the interest rates applicable to the loans under the Senior ABL Facility will be based on either (i) an adjusted London inter-bank offered rate (adjusted for reserve requirements), plus a borrowing margin of 1.50% or (ii) an alternate base rate, plus a borrowing margin of 0.50%. Customary fees will be payable in respect of the Senior ABL Facility, including commitment fees of 0.25% and letter of credit fees. The Senior ABL Facility contains a number of covenants that, among other things, limit or restrict the ability of Tribune Publishing Company and its restricted subsidiaries as described in the ABL Credit Agreement to: incur more indebtedness; pay dividends; redeem stock or make other distributions in respect of equity; make investments; create restrictions on the ability of the Company’s restricted subsidiaries that are not Subsidiary Guarantors to pay dividends to Tribune Publishing Company or make other intercompany transfers; create negative pledges; enter into certain transactions with the Company’s affiliates; and prepay or amend the terms of certain indebtedness. In addition, if Tribune Publishing Company’s availability (as defined in the ABL Credit Agreement) under the Senior ABL Facility falls below the greater of $14.0 million and 10% of the lesser of the aggregate revolving commitments and the borrowing base, Tribune Publishing Company will be required to maintain a fixed charge coverage ratio of at least 1.0:1.0, as defined in the Senior ABL Facility. The Senior ABL Facility also contains certain affirmative covenants, including financial and other reporting requirements. The Senior ABL Facility also provides for customary events of default, including: non-payment of principal; interest or fees; violation of covenants; material inaccuracy of representations or warranties; specified cross default and cross acceleration to other material indebtedness; certain bankruptcy events; certain ERISA events; material invalidity of guarantees or security interest; asserted invalidity of intercreditor agreements; material judgments and change of control.
Letter of Credit Agreement
On August 4, 2014, Tribune Publishing Company and JPMorgan Chase Bank, N.A., as letter of credit issuer (the “L/C Issuer”) entered into a letter of credit agreement (the “Letter of Credit Agreement”). The Letter of Credit Agreement provides for the issuance of standby letters of credit of up to a maximum aggregate principal face of $30.0 million. The Letter of Credit Agreement permits Tribune Publishing Company, at the sole discretion of L/C Issuer, to request to increase the amount available to be issued under the Letter of Credit Agreement up to an aggregate maximum face amount of $50.0 million. The Letter of Credit Agreement is scheduled to terminate on August 4, 2019, provided that the L/C Issuer may, in its sole discretion, extend the scheduled termination date. Tribune Publishing Company’s obligations under the Letter of Credit Agreement are secured in favor of the L/C Issuer by a first priority security interest in a specified cash collateral account. Customary fees will be payable in respect of the Letter of Credit Agreement. The Letter of Credit Agreement contains certain affirmative covenants, including financial and other reporting requirements. The Letter of Credit Agreement also provides for customary events of default, including: non-payment; violation of covenants; material inaccuracy of representations and warranties; specified cross-default to other material indebtedness; certain bankruptcy events; material invalidity of credit documents and failure to satisfy the minimum collateral condition. As of September 28, 2014, a $27.5 million undrawn letter of credit was outstanding against the Letter of Credit Agreement. This Letter of Credit Agreement was collateralized with $27.5 million of cash held in a specified cash collateral account. The specified cash account is required to remain as long as the undrawn letter of credit remains outstanding and is recorded in other long-term assets in the consolidated financial statements.

26


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


The Company's long-term debt maturities are as follows:
2014
$

2015
17,500

2016
17,500

2017
17,500

2018
17,500

2019
17,500

Thereafter
262,500

 
$
350,000

NOTE 11: INCOME TAXES
Subchapter S Corporation Election and Subsequent Conversion to C Corporation—On March 13, 2008, TCO filed an election to be treated as a subchapter S corporation under the Internal Revenue Code, with the election effective as of the beginning of TCO’s 2008 fiscal year. TCO also elected to treat nearly all of its subsidiaries, including nearly all of the subsidiaries through which Tribune Publishing operates, as qualified subchapter S subsidiaries. Subject to certain limitations (such as built-in-gains tax applicable for ten years to gains accrued prior to the election), TCO and Tribune Publishing were not subject to federal income tax. Although most states in which TCO and Tribune Publishing operate recognize S corporation status, some impose tax at a reduced rate. Certain Tribune Publishing non-qualified subchapter S subsidiaries were subject to federal and state income taxes as C corporations.
On the Effective Date, TCO emerged from bankruptcy and issued shares of common stock to non-qualifying S corporation shareholders as more fully described in Note 2. As a result, TCO’s S corporation election was terminated and TCO, including Tribune Publishing, became taxable as a C corporation. As a C corporation, Reorganized Tribune Publishing is subject to income taxes at a higher effective tax rate beginning in the first quarter of 2013. The effect of this conversion was recorded in connection with Reorganized Tribune Publishing’s adoption of fresh-start reporting as described in Note 2. Accordingly, Tribune Publishing’s deferred income tax assets and liabilities were reinstated at a higher effective tax rate as of the Effective Date.
In conjunction with emergence from bankruptcy, Tribune Publishing was discharged from certain debt obligations as more fully described in Note 2. Generally, for federal tax purposes, the discharge of a debt obligation in a bankruptcy proceeding for an amount less than its adjusted issue price (as defined in the IRC) creates cancellation of indebtedness income (“CODI”) that is excludable from the obligor’s taxable income. However, certain income tax attributes are reduced by the amount of CODI. The prescribed order of income tax attribute reduction is as follows: (i) net operating losses for the year of discharge and net operating loss carryforwards, (ii) most credit carryforwards, including the general business credit and the minimum tax credit, (iii) net capital losses for the year of discharge and capital loss carryforwards and (iv) the tax basis of the debtors’ assets. Reorganized Tribune Publishing does not have any net operating loss carryforwards, credit carryforwards or capital loss carryforwards at the Effective Date and therefore these tax attribute reduction provisions do not apply. Based on Reorganized Tribune Publishing’s consolidated balance sheet on the Effective Date, Reorganized Tribune Publishing will not have a significant tax basis reduction resulting from the CODI rules.
Other—Tribune Publishing filed an election effective December 30, 2013 to be taxed as a C corporation. Accordingly, Tribune Publishing has computed income taxes as a separate return filing group. For the nine months ended September 29, 2013, Tribune Publishing’s operations were included in TCO’s federal and state C corporation income tax returns and income taxes payable were settled through the parent investment component of equity. For the purposes of these consolidated and combined financial statements, Tribune Publishing has computed its income taxes for the nine months ended September 29, 2013 as if it were filing separate returns.
For the three and nine months ended September 28, 2014, Tribune Publishing recorded income tax expense of $0.5 million and $20.1 million, respectively. The effective tax rate on pretax income was 147.6% and 42.8% in the three and nine months ended September 28, 2014, respectively. For the three months ended September 28, 2014, the rate differs from the

27


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


U.S. federal statutory rate of 35% primarily due to the cumulative effect of a change in the estimated annual effective tax rate for the six months ended June 29, 2014 of 42.1% to an estimated annual effective tax rate for the nine months ended September 28, 2014 of 42.8%. This rate increase resulted in a $0.3 million increase in tax expense. For the nine months ended September 28, 2014, this rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, net of federal benefit, non-deductible expenses, certain transaction costs not fully deductible for tax purposes and the domestic production activities deduction. For the three and nine months ended September 29, 2013, Tribune Publishing recorded income tax expense of $8.5 million and $41.3 million, respectively. The effective tax rate on pretax income was 31.8% and 40.2% in the three and nine months ended September 29, 2013. This rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes, net of federal benefit, nondeductible expenses, certain transaction costs not fully deductible for tax purposes and the domestic production activities deduction.
NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFITS
Multiemployer Pension Plans—Tribune Publishing contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. See Note 4 for the description of costs and credits related to TCO-sponsored pension plans.
Postretirement Benefits Other Than Pensions—Prior to the Distribution Date, retirement benefits are provided to eligible employees of Tribune Publishing through defined benefit pension plans sponsored by TCO. Subsequent to the Distribution Date, Tribune Publishing provides postretirement health care and life insurance benefits to Tribune Publishing employees. There is some variation in the provisions of these plans, including different provisions for lifetime maximums, prescription drug coverage and certain other benefits. The components of net periodic benefit cost for Tribune Publishing were as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Service cost
 
$
99

 
$
103

 
$
275

 
$
325

Interest cost
 
461

 
386

 
1,277

 
1,160

Amortization of gain
 
(8
)
 

 
(22
)
 

Net periodic benefit cost
 
$
552

 
$
489

 
$
1,530

 
$
1,485

Expected Future Benefit Payments—For 2014 Tribune Publishing expects to contribute $5.0 million to its other postretirement plans.
NOTE 13: STOCK-BASED COMPENSATION
On April 1, 2014, TCO's compensation committee, acting for TCO as Tribune Publishing's sole shareholder, approved the Tribune Publishing Company 2014 Omnibus Incentive Plan (“Tribune Publishing Equity Plan”), for the purpose of granting stock awards to directors, officers, and employees of Tribune Publishing. Stock awarded pursuant to the Tribune Publishing Equity Plan is limited to ten percent of Tribune Publishing common stock.
The Tribune Publishing Equity Plan provides for the granting of stock options, stock appreciation rights, restricted stock units (“RSU”), performance share units (“PSU”), restricted and unrestricted stock awards, dividend equivalents and cash awards. Pursuant to ASC Topic 718, “Compensation-Stock Compensation,” Tribune Publishing measures stock-based compensation costs on the grant date based on the estimated fair value of the award and recognizes compensation costs on a straight-line basis over the requisite service period for the entire award. The Tribune Publishing Equity Plan allows employees to surrender to Tribune Publishing shares of vested common stock upon vesting of their stock awards or at the time they exercise their stock options in lieu of their payment of the required withholdings for employee taxes. Tribune Publishing does not withhold taxes in excess of minimum required statutory requirements. Under the Tribune Publishing Equity Plan, the exercise price of a stock option award cannot be less than the market price of Tribune Publishing common stock at the time the stock option award is granted and the maximum contractual term cannot exceed 10 years.

28


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


In the period since the Distribution Date through September 28, 2014, 362,388 options and 556,379 RSUs were issued under the Tribune Publishing Equity Plan.
Prior to the Distribution Date, the Company's employees were eligible to participate in TCO's 2013 Equity Incentive Plan (“TCO Equity Incentive Plan”). The TCO Equity Incentive Plan provided for the granting of non-qualified stock options (“NSO”), RSUs, PSUs and restricted and unrestricted stock awards. Effective with the Distribution Date, 90,752 TCO options and 93,790 TCO RSUs were converted to 363,872 Tribune Publishing options and 375,780 Tribune Publishing RSUs, respectively. These awards were modified under the mandatory anti-dilution provision of the grants and no incremental cost was recorded.
Prior to the Distribution Date, stock-based compensation expense for participants in the TCO Equity Incentive Plan who are solely dedicated to Tribune Publishing has been included within selling, general and administrative expense within these consolidated and combined financial statements. Stock-based compensation expense for participants in the TCO Equity Incentive Plan who provide services to but are not solely dedicated to Tribune Publishing have been allocated to Tribune Publishing through the corporate management fee and technology service center support costs, as described in Note 4. In the three and nine months ended September 28, 2014, the Company was allocated $0.8 million and $4.9 million, respectively, of stock-based compensation expense through the corporate management fee and technology service center support costs. Stock-based compensation allocated to the Company was $0.8 million and $1.3 million in the three and nine months ended September 29, 2013, respectively.
Stock-based compensation expense under both plans consolidated and combined related to Tribune Publishing’s employees during the three and nine months ended September 28, 2014 totaled $0.9 million and $2.2 million, respectively. Stock-based compensation expense related to Tribune Publishing's employees totaled $0.3 million and $1.1 million for the three and nine months ended September 29, 2013, respectively.
As of September 28, 2014, Tribune Publishing had not yet recognized compensation cost related to options of $3.2 million on nonvested options with a weighted average remaining recognition period of 3.0 years. Additionally, as of September 28, 2014, Tribune Publishing had not yet recognized compensation cost related to RSUs of $13.9 million on nonvested awards with a weighted average remaining recognition period of 2.96 years.
NOTE 14: EARNINGS PER SHARE
Basic earnings (loss) per common share is calculated by dividing net income (loss) attributable to Tribune Publishing common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per common share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of common shares under equity-based compensation plans except where the inclusion of such common shares would have an anti-dilutive impact.

29


TRIBUNE PUBLISHING COMPANY
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Continued)
(Unaudited)


For the three and nine months ended September 28, 2014 and September 29, 2013, basic and diluted earnings per common share were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2014
 
September 29, 2013
 
September 28, 2014
 
September 29, 2013
Income (loss) - Numerator:
 
 
 
 
 
 
 
 
Net income available to Tribune Publishing stockholders plus assumed conversions
 
$
(156
)
 
$
18,284

 
$
26,819

 
$