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Article by DailyStocks_admin    (04-08-08 03:57 AM)

Filed with the SEC from Mar 27 to Apr 2

Sun-Times Media Group (SVN)
K Capital Partners said that it is considering alternatives with respect to its investment in Sun-Times Media, a Chicago-based newspaper publisher, as well as a possible means to maximize shareholder value.
The proposals include changing certain corporate-governance rules, merging or selling the company or taking it private.
K Capital has engaged Imperial Capital as its financial adviser in connection with these efforts. The shareholder said that it is also evaluating proposals that it might make at the next annual meeting.
K Capital Partners holds (12.4%) of Sun Times Media Group's class A stock.
BUSINESS OVERVIEW

Overview

The Company conducts business as a single operating segment, which is concentrated in the publishing, printing and distribution of newspapers in the greater Chicago, Illinois metropolitan area and operates various related Internet websites. The Company’s revenue for the year ended December 31, 2007 includes the Chicago Sun-Times, Post-Tribune, SouthtownStar and other newspapers in the Chicago metropolitan area and associated websites.

Unless the context requires otherwise, all references herein to the “Company” are to Sun-Times Media Group, Inc., its predecessors and consolidated subsidiaries, “Publishing” refers to Hollinger International Publishing Inc., a wholly-owned subsidiary of the Company, and “Hollinger Inc.” refers to the Company’s immediate parent and controlling stockholder, Hollinger Inc., and its affiliates (other than the Company). The “Sun-Times News Group” refers to all of the Company’s Chicago metropolitan area newspaper and related operations.

General

Sun-Times Media Group, Inc. was incorporated in the State of Delaware on December 28, 1990 as Hollinger International Inc. On June 13, 2006, our stockholders approved the amendment of the Hollinger International Inc. Restated Certificate of Incorporation, changing the Company’s name to Sun-Times Media Group, Inc., which became effective on July 17, 2006. Publishing was incorporated in the State of Delaware on December 12, 1995. The Company’s principal executive offices are at 350 North Orleans Street, Chicago, Illinois, 60654, telephone number (312) 321-2299.

Business Strategy

Evaluate Strategic Alternatives. On February 4, 2008, the Company announced that its Board of Directors has begun an evaluation of the Company’s strategic alternatives to enhance shareholder value. These alternatives may include, but are not limited to, joint ventures or strategic partnerships with third parties, and/or the sale of the Company or any or all of its assets. The Company subsequently announced that it had retained Lazard Frères & Co. LLC (“Lazard”) in connection therewith. There can be no assurances that the evaluation process will result in any specific transactions, and subject to legal requirements, the Company does not intend to disclose developments arising from the strategic evaluation process unless the Company enters into a definitive agreement for a transaction approved by its Board of Directors.

Aggressively Target Cost Reductions and Operating Efficiencies. The Company is aggressively pursuing cost reductions in response to declining advertising revenue. Integral to this effort is the evaluation and implementation of appropriate outsourcing arrangements. Newsprint and production costs have been minimized through reductions in page sizes and balancing of editorial versus advertising content and the Company intends to pursue productivity enhancements in other areas of the Company, including outsourcing of functions, if appropriate. Headcount in all areas will continue to be adjusted as required by changes in the Company’s business and the operations.

Increase Market Share by Leveraging the Company’s Leading Market Position. The Company intends to continue to leverage its position in daily readership in the Chicago market in order to drive growth in market share through emphasizing local content to readers while emphasizing the reach of the entire Sun-Times News Group network in both print and Internet products to advertisers. The Company’s primary assets are the Chicago metropolitan area newspapers, including its flagship property, the Chicago Sun-Times. The Company will seek to increase market share by taking advantage of the extensive network of publications which allows the Company to offer local advertisers geographically and demographically targeted advertising solutions and national advertisers an efficient vehicle to reach the entire Chicago market and by shifting sales resources from print to Internet to further capitalize on growth in this area and offset continuing declines in print advertising.

Publish Relevant and Trusted High Quality Newspapers. The Company is committed to maintaining the high quality of its newspaper products and editorial integrity in order to ensure continued reader loyalty.

Strong Corporate Governance Practices. The Company is committed to the implementation and maintenance of strong and effective corporate governance policies and practices and to high ethical business practices.

Internet Initiatives. The Internet is a focus for the Company in growing advertising revenue and readership. The Company is currently marketing its products to readers in both print and on the Internet, expanding its local content visibility and offering advertisers cross-marketing opportunities. Some of the Company’s more significant websites include www.suntimes.com , www.searchchicago.com/autos, www.searchchicago.com/homes , www.neighborhoodcircle.com and www.yourseason.com .

Recent Developments

On February 19, 2008, the Company announced it had entered into an agreement with Affinity Express, Inc. (“Affinity”) to handle the majority of the Company’s non-classified print and online advertising production.

On February 4, 2008, the Company announced that its Board of Directors has begun an evaluation of the Company’s strategic alternatives to enhance shareholder value. These alternatives may include, but are not limited to, joint ventures or strategic partnerships with third parties, and/or the sale of the Company or any or all of its assets. The Company subsequently announced that it had retained Lazard in connection therewith. There can be no assurances that the evaluation process will result in any specific transactions, and subject to legal requirements, the Company does not intend to disclose developments arising from the strategic evaluation process unless the Company enters into a definitive agreement for a transaction approved by its Board of Directors.

In January 2008, the Company received an examination report from the Internal Revenue Service (“IRS”) setting forth proposed adjustments to the Company’s U.S. income tax returns from 1996 through 2003. The Company plans to dispute certain of the proposed adjustments. The process for resolving disputes between the Company and the IRS is likely to entail various administrative and judicial proceedings, the timing and duration of which involve substantial uncertainties. As the disputes are resolved, it is possible that the Company will record adjustments to its financial statements that could be material to its financial position and results of operations and it may be required to make material cash payments. The timing and amounts of any payments the Company may be required to make are uncertain, but the Company does not anticipate that it will make any material cash payments to settle any of the disputed items during 2008. See Note 19 to the consolidated financial statements.

In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), the Company maintains accruals to cover contingent income tax liabilities, which are subject to adjustment when there are significant developments regarding the underlying contingencies. Based on its preliminary analysis of the adjustments proposed by the IRS, the Company does not believe that it will be necessary to record any material adjustments to its accruals with respect to the underlying income tax contingencies in 2008, but it will continue to record accruals for interest on the income tax contingencies.

In December 2007, the Company announced that its Board of Directors adopted a plan to reduce annual operating costs by $50 million. The plan, which will be implemented during the first half of 2008, includes $10 million of expected annual savings previously announced in connection with the Company’s distribution agreement with Chicago Tribune Company and the consolidation of two of the Company’s suburban newspapers in 2007 and approximately $3 million in annual savings related to advertising production outsourcing announced in February 2008.

On August 1, 2007 the Company announced that it received notice from Hollinger Inc. that certain corporate actions with respect to the Company had been taken by written consent adopted by Hollinger Inc. and its affiliate, 4322525 Canada Inc., which collectively hold a majority in voting interest in the Company. These corporate actions included (i) amending the Company’s By-Laws to increase the size of the Company’s Board of Directors from eight members to eleven members and to provide that vacancies occurring in the Board of Directors may be filled by stockholders having a majority in voting interest; (ii) removing John F. Bard, John M. O’Brien and Raymond S. Troubh as directors of the Company; and (iii) electing William E. Aziz, Brent D. Baird, Albrecht Bellstedt, Peter Dey, Edward C. Hannah and G. Wesley Voorheis as directors of the Company. On August 1, 2007, Hollinger Inc. applied for Court-supervised reorganization under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) and under applicable U.S. bankruptcy law.

Sun-Times Media Group

The Company’s properties consist of more than 100 newspapers and associated websites and news products in the greater Chicago metropolitan area. For the year ended December 31, 2007, the Company had revenue of $372.3 million and an operating loss of $140.2 million. The Company’s primary newspaper is the Chicago Sun-Times , which was founded in 1948 and is one of Chicago’s most widely read newspapers. The Chicago Sun-Times is published in a tabloid format and has the second highest daily readership and circulation of any newspaper in the Chicago metropolitan area, attracting approximately 1.4 million readers daily (as reported in the Audit Bureau of Circulations (“ABC”) reader profile study, for the period March 2006 through February 2007). The Company pursues a strategy which offers a network of publications throughout Chicago and the major suburbs in the surrounding high growth counties to allow its advertising customers the ability to target and cover their specific and most productive audiences. This strategy enables the Company to offer joint selling programs to advertisers, thereby expanding advertisers’ reach.

In addition to the Chicago Sun-Times , the Company’s newspaper properties include: Pioneer Press (“Pioneer”), which currently publishes 56 weekly newspapers, one free distribution paper and one magazine in Chicago’s northern and northwestern suburbs; the daily SouthtownStar ; the daily Post-Tribune of northwest Indiana; and publishes the Herald News in Joliet, the Courier News in Elgin, the Beacon News in Aurora and daily suburban newspapers in Naperville and Waukegan.

Based on information accumulated by a third party from data submitted by Chicago area newspaper organizations, newspaper print advertising declined 8% for the year ended December 31, 2007 for the greater Chicago market versus the comparable period in 2006. Advertising revenue for the Company declined 10% for the year ended December 31, 2007, compared to the same 52 week period in 2006.

Advertising. Advertisements are carried either within the body of the newspapers (which are referred to as run-of-press advertising) and make up approximately 81% of the Company’s advertising revenue, as inserts, or as Internet advertisements. The Company’s advertising revenue is derived largely from local and national retailers and classified advertisers. Advertising rates and rate structures vary among the publications and are based on, among other things, circulation, readership, penetration and type of advertising (whether classified, national or retail). In 2007, retail advertising accounted for the largest share of advertising revenue (49%), followed by classified (33%) and national (18%). The Chicago Sun-Times offers a variety of advertising alternatives, including geographically zoned issues, special interest pullout sections and advertising supplements in addition to regular sections of the newspaper targeted to different readers. The Chicago area suburban newspapers offer similar alternatives to the Chicago Sun-Times platform for their daily and weekly publications. The Company operates the Reach Chicago Newspaper Network, an advertising vehicle that can reach the combined readership base of all the Company’s publications. The network allows the Company to offer local advertisers geographically and demographically targeted advertising solutions and national advertisers an efficient vehicle to reach the entire Chicago metropolitan market.

Circulation. Circulation revenue is derived primarily from two sources. The first is sales of single copies of the newspaper made through retailers and vending racks and the second is home delivery newspaper sales to subscribers. For the year ended December 31, 2007, approximately 59% of the copies of the Chicago Sun-Times reported as sold and 62% of the circulation revenue generated was attributable to single-copy sales. Approximately 80% of 2007 circulation revenue of the Company’s suburban newspapers was derived from home delivery subscription sales.

In 2004, the Audit Committee of the Board of Directors (the “Audit Committee”) initiated an internal review into practices that, in the past, resulted in the overstatement of the Chicago Sun-Times daily and Sunday circulation and determined that inflation of daily and Sunday single-copy circulation of the Chicago Sun-Times began modestly in the late 1990’s and increased over time. The Audit Committee concluded that the report of the Chicago Sun-Times circulation published in April 2004 by ABC for the 53 week period ended March 30, 2003, overstated single-copy circulation by approximately 50,000 copies on weekdays and approximately 17,000 copies on Sundays. The Audit Committee determined that inflation of single-copy circulation continued until all inflation was discontinued in early 2004. The inflation occurring after March 30, 2003 did not affect public disclosures of circulation as such figures had not been published. The Company has implemented procedures to ensure that circulation overstatements do not occur in the future.

As a result of the overstatement, the Chicago Sun-Times was censured by ABC in July 2004 and was required to undergo semi-annual audits for a two-year period thereafter. The first of these censured audits, for the 26-week period ended March 27, 2005, was released in December 2005. The second censured audit for the 26-week period ended September 25, 2005 was released in May 2007. The Company expects the final censured audits (26-week period ending March 26, 2006 and 26-week period ended September 24, 2006) to be released by the end of the first quarter of 2008.

The internal review by the Audit Committee also uncovered minor circulation misstatements at the Daily Southtown and the Star (which have since been merged to form the SouthtownStar ). These publications were censured by ABC in March 2005 and were required to undergo semi-annual audits for a two-year period thereafter. The first of these censured audits, for the 26 week period ended March 27, 2005, was released in April 2006; the audit for the 26-week period ended September 25, 2005, was released in January 2007. The third censured audit for the 26-week period ended March 26, 2006 was released in December 2007. The Company expects the final censured audit (for the 26-week period ended September 24, 2006) to be released by the end of the first quarter of 2008.

Other Publications and Business Enterprises. The Company continues to strengthen its online presence. Suntimes.com and related Sun-Times News Group websites have approximately 2.7 million unique users (as measured by Nielsen//NetRatings), with approximately 41 million page impressions per month (as measured by Omniture, Inc.). In 2004, the Sun-Times News Group participated in the launch of www.chicagojobs.com , one of the largest recruitment agencies in the Chicago market. The website provides online users and advertisers an employment website that management believes to be one of the strongest in the Chicago market. In February 2007, the Company launched www.searchchicago.com/autos featuring the inventory of more than 400 auto dealers and more than 100,000 new and used cars and trucks.

Sales and Marketing. The marketing promotions department works closely with both advertising and circulation sales and advertising teams to introduce new readers and new advertisers to the Company’s newspapers through various initiatives. The Company’s marketing departments use strategic alliances at major event productions and sporting venues, for on-site promotion and to generate subscription sales. The Chicago Sun-Times has media relationships with local television and radio outlets that have given it a presence in the market and enabled targeted audience exposure. Similarly at suburban newspapers, marketing professionals work closely with circulation sales professionals to determine circulation promotional activities, including special offers, sampling programs, in-store kiosks, sporting event promotions, dealer promotions and community event participation. Suburban newspapers generally target readers by zip code and offer marketing packages that combine the strengths of daily, bi-weekly and weekly publications.

Distribution. During 2007, the Company entered into a contract with Chicago Tribune Company for home delivery and suburban single-copy delivery of the Chicago Sun-Times and most of its suburban publications. The Company continues to distribute single-copy editions of the Chicago Sun-Times within the city of Chicago and continues to operate the circulation sales and billing functions with the exception of single copy billing in the suburbs.

Printing. The Company operates three printing facilities. The 320,000 square foot owned printing facility on Ashland Avenue in Chicago was completed in April 2001 and gives the Company printing presses with the quality and speed necessary to effectively compete with the other regional newspaper publishers. The Company also owns a 100,000 square foot printing facility in Plainfield, Illinois. Pioneer prints the main body of most of its weekly newspapers at its leased Northfield, Illinois production facility. In order to provide advertisers with more color capacity, certain of Pioneer’s newspapers’ sections are printed at the Ashland Avenue facility. The Company generally prints multiple publications at each of its printing facilities.

Competition. Each of the Company’s Chicago area newspapers competes to varying degrees with radio, broadcast and cable television, direct marketing and other communications and advertising media, including free Internet sites, as well as with other newspapers having local, regional or national circulation. The Chicago metropolitan region is served by thirteen local daily newspapers of which the Company owns eight. The Chicago Sun-Times competes in the Chicago region with the Chicago Tribune , a large established metropolitan daily and Sunday newspaper. In addition, the Chicago Sun-Times and other Company newspapers face competition from other newspapers published in adjacent or nearby locations and circulated in the Chicago metropolitan area market.

Employees and Labor Relations. As of December 31, 2007, the Company had 2,842 employees, including 273 part-time employees. Of the 2,569 full-time employees, 598 were production staff, 637 were sales and marketing personnel, 278 were circulation staff, 282 were general and administrative staff, 753 were editorial staff and 21 were facilities staff. Approximately 965, or 34% of the Company’s employees were represented by 19 collective bargaining units. Direct employee costs (including salaries, wages, severance, fringe benefits, employment-related taxes and other direct employee costs) were approximately 50% of the Company’s revenue in the year ended December 31, 2007. Contracts covering approximately 31% of union employees will expire or are being negotiated in 2008.

There have been no strikes or general work stoppages at any of the Company’s newspapers in the past five years. The Company believes that its relationships with its employees are generally good.

Raw Materials. The primary raw material for newspapers is newsprint. In 2007, approximately 79,269 metric tons were consumed by the Sun-Times News Group. Newsprint costs were approximately 13% of the Company’s revenue. Average newsprint prices decreased approximately 10% in 2007 from 2006. The Company is not dependent upon any single newsprint supplier. The Company’s access to Canadian, United States and offshore newsprint producers ensures an adequate supply of newsprint. Like other newspaper publishers in North America, the Company has not entered into any long-term fixed price newsprint supply contracts. The Company believes that its sources of supply for newsprint are adequate to meet anticipated needs.

Reorganization Activities. In December 2007, the Company announced that its Board of Directors has adopted a plan to reduce annual operating costs by $50 million. The plan, which will be implemented during the first half of 2008, includes $10 million of expected annual savings previously announced in connection with the Company’s distribution agreement with Chicago Tribune Company and the consolidation of two of the Company’s suburban newspapers. The plan also includes a reduction in full-time staffing levels. Certain of the costs directly associated with the reorganization include involuntary termination benefits amounting to approximately $6.4 million for the year ended December 31, 2007, are included in “Other operating costs” in the Consolidated Statement of Operations. An additional $0.5 million in severance not related directly to the reorganization was incurred in 2007, of which $0.7 million is included in “Other operating costs” and a $0.2 million reduction is included in “Corporate expenses” in the Consolidated Statements of Operations. These estimated costs have largely been recognized in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 112 “Employers’ Accounting for Postemployment Benefits” (“SFAS No. 112”) because most benefits are comprised of involuntary, or base, termination benefits under the Company’s established termination plan and practices.

The $6.4 million of severance and benefits is largely expected to be paid by December 31, 2008. The reorganization accrual is included in “Accounts payable and accrued expenses” in the Consolidated Balance Sheet at December 31, 2007.

CEO BACKGROUND

Mr. Bard served as Chief Financial Officer of Wm. Wrigley Jr. Company, a major producer, marketer and distributor of chewing gum, from 1990 to 2000. Mr. Bard also held the position of Executive Vice President at Wm. Wrigley Jr. Company from 1999 to 2000, and from 1990 to 1999, Mr. Bard was Senior Vice President. Prior thereto, Mr. Bard was Executive Vice President and later President of Tambrands, Inc., a manufacturer of personal hygiene products. Mr. Bard began his business career in 1963 in financial management with The Procter & Gamble Company, a diversified producer, manufacturer and distributor of branded products. Mr. Bard is also a director of Weight Watchers International, Inc. and Wm. Wrigley Jr. Company, both of which are United States public reporting companies.

Mr. Denton was elected as a director in February 2007. He is President of Providence Capital Inc., which he founded in 1991. Prior to that, he served as Managing Director for Jefferies & Co., where he headed mergers and acquisitions and represented a number of leading investors and funds. In 1982, Mr. Denton founded Pacific Equity, which was later acquired by Jefferies & Co. Early in his career, Mr. Denton worked for Donaldson Lufkin & Jenrette and founded the firm’s Hong Kong office. Mr. Denton has served on several boards of directors, including those of PolyMedica Corp., Mesa Air Group Inc., Trover Solutions Inc., Union Corporation, Inc. and Capsure Holdings, Inc.

Mr. Freidheim was appointed the Company’s President and Chief Executive Officer in November 2006. Mr. Freidheim has been Chairman of Old Harbour Partners, a private investment firm he founded, since 2004. From 2002 to 2004, Mr. Freidheim was Chairman, President and Chief Executive Officer of Chiquita Brands International Inc., a major producer, marketer and distributor of fresh produce. From 1990 to 2002, Mr. Freidheim was Vice Chairman at Booz Allen & Hamilton International, a management consulting firm, in Chicago, Illinois, having joined Booz Allen & Hamilton International in 1966. Mr. Freidheim currently serves as a director of Allegheny Energy Inc. and HSBC Finance Corporation, Inc., both of which are United States public reporting companies.

Mr. O’Brien served as the Chief Financial Officer of The New York Times Company, a major newspaper publisher, from 1998 to 2001. Mr. O’Brien joined The New York Times Company in 1960. He served in positions of increasing responsibility in the accounting and finance areas before being named a Vice President in 1980 and following that held several senior executive positions in the operations, finance and labor relations areas, including Senior Vice President for Operations, Deputy General Manager for the New York Times newspaper and Deputy Manager of The New York Times Company.

Mr. Paris served as the Company’s President and Chief Executive Officer until November 2006 and as Chairman of the Company’s Board of Directors until June 2006. Mr. Paris had been appointed Interim Chairman in January 2004 and as Interim President and Chief Executive Officer in November 2003. On January 26, 2005, the Board of Directors eliminated the word “Interim” from Mr. Paris’ titles. Mr. Paris is a Managing Director at Berenson & Company, a private investment bank. Prior to joining Berenson & Company in February 2002, Mr. Paris was Head of Investment Banking at TD Securities (USA) Inc., an investment bank subsidiary of The Toronto-Dominion Bank. Mr. Paris joined TD Securities (USA) Inc. as Managing Director and Group Head of High Yield Origination and Capital Markets in March 1996 and became a Senior Vice President of The Toronto-Dominion Bank in 2000.

Mr. Savage served for 21 years, seven years as the Chief Financial Officer, at Rogers Communications Inc., a major Toronto-based media and communications company. Mr. Savage currently serves as Chairman of Callisto Capital LP, a merchant banking firm based in Toronto, and as a director and chairman of the audit committee of Canadian Tire Corporation, Limited, which is a Canadian public reporting company.

Mr. Seitz has served as Chairman of the Company’s Board of Directors since June 2006. Mr. Seitz served as Vice Chairman of Lehman Brothers (Europe), an investment bank, from April 1995 to April 2003, following his retirement as the American Ambassador to the Court of St. James from 1991 to 1995. Mr. Seitz currently serves as a director of PCCW Limited, which is a United States public reporting company.

Mr. Troubh has been a financial consultant, his principal occupation, since prior to 1989, and has been a non-executive director of more than 25 public companies. He is a former Governor of the American Stock Exchange and a former general partner of Lazard Frères & Co., an investment banking firm. Mr. Troubh is a director of Diamond Offshore Drilling, Inc., General American Investors Company, Gentiva Health Services, Inc. and Triarc Companies, Inc., all of which are United States public reporting companies.

COMPENSATION

Base Salary

Base pay is a critical element of executive compensation because it enables the Company to recruit and retain key executives. In determining base salaries, we consider the executive’s qualifications and experience, scope of responsibilities and future potential, the goals and objectives established for the executive, the executive’s past performance, competitive salary practices for executives in comparable positions at other media industry companies, internal pay equity and the tax deductibility of base salary.

Finally, for our most senior executives, we establish base salaries at a level so that a significant portion of the total compensation opportunity that such executives can earn is directly linked to performance.

Annual Bonus Program

Annual Bonuses are designed to provide incentives for achieving short-term (i.e., annual) financial operational and individual goals. For 2006, the Company’s Annual Bonus Program provided Gordon A. Paris, the Company’s former President and Chief Executive Officer, John D. Cruickshank, the Chief Operating Officer of the Sun-Times News Group, Gregory A. Stoklosa, the Company’s former Vice President and Chief Financial Officer, and James R. Van Horn, the Company’s former Vice President, General Counsel and Secretary, an opportunity to earn an annual cash bonus for achieving specified, pre-established performance-based goals. As discussed in more detail below under “— Our Compensation Decisions,” performance goals are tied to measures of operating performance and individual goals. Other senior executive officers, including James D. McDonough, the Company’s Vice President, General Counsel and Secretary, Thomas L. Kram, the Company’s Controller and Chief Accounting Officer, and Robert T. Smith, the Company’s former Treasurer, were eligible for discretionary bonuses in 2006 based upon corporate and individual performance.

Long-Term Incentives

We believe that long-term incentive compensation is the most effective means of creating a long-term alignment of the compensation provided to officers and other key management personnel with gains realized by the Company’s stockholders. In determining the long-term incentive opportunity to be granted to senior executive officers, we take into account the individual’s position, scope of responsibility, ability to affect profits and stockholder value, the individual’s historic and recent performance, the value of the grants in relation to other elements of total compensation and competitive compensation practices. Pursuant to the terms of the LTIP, certain executive officers of the Company may receive awards of DSUs granted under the Company’s 1999 Stock Incentive Plan or any successor thereto with such terms as may be established by the Compensation Committee and set forth in a Deferred Stock Unit award agreement. Each DSU entitles the grantee to one share of the Company’s Class A common stock on the vesting date of the DSU. The DSUs that the Company has granted have typically vested 25% on each of the first through fourth anniversaries of the grant date. Vesting of the DSUs accelerates upon a grantee’s termination of employment by reason of death, permanent disability or retirement. Vesting of the DSUs also accelerates upon a change of control.

Pursuant to the terms of the LTIP, certain executive officers of the Company may also be eligible to receive a cash-based incentive award (the “Cash Incentive Award”). Receipt of the Cash Incentive Award by a participating officer is subject to the Company’s achievement of a pre-established performance measure over the three-year performance period for each award. This performance measure is based upon the total stockholder return on the Company’s Class A common stock for the three-year performance period as compared to the return of the S&P 1000 (the “Index”) for the same period. The Company’s return has to be at or above the 50th percentile of all of the companies in the Index for an officer to earn any payout of the Cash Incentive Award, and in such case the payout will be 50% at the 50th percentile, 100% at the 60th percentile, 200% at the 75th percentile and 250% at the 90th percentile, with the percentages determined on a ratable basis in between those levels. In the event of a change of control of the Company, payment of the Cash Incentive Award is accelerated to, and based on performance as of, the closing date of the change of control. The Company granted Cash Incentive Awards in 2005 to Messrs. Paris, Stoklosa, Cruickshank and Van Horn with performance to be measured for the three-year period ending on December 9, 2008. No additional Cash Incentive Awards were granted in 2006.

If before a change of control of the Company, a participating officer dies, terminates employment because of permanent disability, retires from the Company after attaining age 59 1 / 2 , or is terminated by the Company without cause, any Cash Incentive Award that was unvested at the time of his termination will become vested, and a prorated portion of no more than 100% of the target award, determined by taking into account a shortened measurement period beginning on the award date and ending on date of termination, will be paid by March 15 of the year following the year of the participating officer’s termination to the extent earned.

Cash Incentive Awards become fully vested on a change of control. In addition, Cash Incentive Awards payable after a change of control are, if earned, paid without proration or the payment limitation of 100% of the target award described in the immediately preceding paragraph.

Participating officers who are terminated by the Company without cause or who voluntarily terminate employment for good reason following a change of control and whose awards were forfeited or paid out in connection with such termination will have their awards reinstated in the event a Change of Control Business Combination Transaction (as defined in the LTIP) occurs within six months following the participating officer’s termination. In such event, the participating officer would become entitled to receive any additional incentive award payment the participating officer would have been entitled to receive upon a Change of Control Business Combination Transaction, had the forfeiture or termination of employment not occurred.

Additional Benefits

Executive officers are generally entitled to executive life and long-term disability insurance, the premiums for which are paid for by the Company. Executive officers also participate in other employee benefit plans generally available to all employees on the same terms as similarly situated employees, including health insurance, group life and long-term disability insurance and participation in the Company’s 401(k) plan, which has historically included a discretionary Company profit sharing contribution equal to 3.5% of each participant’s W-2 compensation, up to the maximum amount allowed by law. See “— Employment Agreements.”

Our Compensation Decisions

This section of the Compensation Discussion and Analysis describes the compensation decisions that we made with respect to the named executive officers for 2006. On November 14, 2006, Cyrus F. Freidheim, Jr. succeeded Gordon A. Paris as President and Chief Executive Officer of the Company and on December 29, 2006, James D. McDonough succeeded James R. Van Horn as Vice President, General Counsel and Secretary of the Company. On February 16, 2007, Gregory A. Stoklosa’s employment with the Company as Vice President and Chief Financial Officer was terminated. On September 30, 2006, Robert T. Smith’s employment with the Company as Treasurer was terminated.

Chief Executive Officer

On November 14, 2006, the Board of Directors appointed Mr. Freidheim as the Company’s President and Chief Executive Officer to succeed Mr. Paris. In connection with Mr. Freidheim’s appointment, the Committee agreed to a compensation arrangement for Mr. Freidheim, reflected in a term sheet. Mr. Freidheim’s compensation arrangement was approved by the Compensation Committee following a review of competitive compensation opportunities for the chief executive officers of comparably-sized media and publishing companies provided by the Committee’s compensation consultant. The Compensation Committee determined that the level of Mr. Freidheim’s total compensation opportunity was important to the Company’s efforts to recruit and retain Mr. Freidheim. The Committee designed Mr. Freidheim’s overall compensation package to include equity components that would provide appropriate incentives linking Mr. Freidheim’s compensation to both the Company’s operating results and its future stock price performance. The Committee determined that EBITDA would be an appropriate measure of the Company’s operating performance because it is a key driver of stockholder value.

Mr. Freidheim’s compensation arrangement includes the following elements: (a) an annual base salary of $680,000; (b) an annual bonus for 2007 (with a target bonus of 100% of base salary and a maximum bonus of 200% of base salary) based on performance against EBITDA-based targets to be agreed, payable 50% in cash and 50% in shares of the Company’s Class A common stock, with the number of shares to be determined based on the closing price of a share of the Company’s Class A common stock on November 14, 2006 ($5.53); (c) a pro-rata target bonus for 2006 of $87,561; (d) a grant of 100,000 shares of restricted stock that vest 50% on November 15, 2007 and 50% on November 15, 2008, subject to continued employment as Chief Executive Officer on the applicable date; and (e) a grant of a “stock opportunity award” pursuant to which Mr. Freidheim will be eligible to earn (i) 50,000 shares of the Company’s Class A common stock if the average daily closing price of a share of the Company’s Class A common stock over any consecutive four-month period exceeds $7.00, and an additional 50,000 shares of the Company’s Class A common stock if the average daily closing price of a share of the Company’s Class A common stock over any consecutive four-month period exceeds $8.00, $9.00 and $10.00, respectively (so that a maximum of 200,000 shares of the Company’s Class A common stock may be earned under this portion of the stock opportunity award) and (ii) 100,000 shares (at target) or 200,000 shares (at maximum) (the “EBITDA Award”) based on performance against EBITDA-based targets to be agreed, which will be established independently of the EBITDA-based goals used for the 2007 bonus (so that a maximum of 400,000 shares of the Company’s Class A common stock in the aggregate may be earned under both portions of the stock opportunity award), subject in each case to continued employment as Chief Executive Officer on the applicable date, and provided further that any shares earned under the stock opportunity award may not be sold, transferred or otherwise disposed of by Mr. Freidheim so long as he remains Chief Executive Officer of the Company (except to pay taxes incurred in connection with earning such shares). This arrangement was approved by the independent members of the Company’s Board of Directors. Subsequently, in the first quarter of 2007, the Compensation Committee established two-year EBITDA-based targets and other long-term corporate objectives, including, but not limited to, the Company’s financial strength, organization and management and strategy going forward, for Mr. Freidheim for the EBITDA Award such that he will be eligible to earn 50,000 shares (at threshold), 100,000 shares (at target) or 200,000 shares (at maximum) based on performance against such targets and objectives. Half of the award pool will be based on the Company’s EBITDA, and the other half will be based on the Compensation Committee’s evaluation of Mr. Freidheim’s performance against such long-term corporate objectives.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The Company’s business is concentrated in the publishing, printing and distribution of newspapers under a single operating segment. The Company’s revenue includes the Chicago Sun-Times, Post-Tribune, SouthtownStar, Naperville Sun and other city and suburban newspapers in the Chicago metropolitan area. Segments that had previously been reported separately from the Sun-Times News Group are either included in discontinued operations (such as the Canadian Newspaper Operations) or included in “Corporate expenses” (such as the former Investment and Corporate Group) for all periods presented. Any remaining administrative or legacy expenses related to sold operations are also included in “Corporate expenses” for all periods presented.

The Company’s revenue is primarily derived from the sale of advertising space within the Company’s publications. Advertising revenue accounted for approximately 77% of the Company’s consolidated revenue for the year ended December 31, 2007. Advertising revenue is largely comprised of three primary sub-groups: retail, national and classified. Advertising revenue is subject to changes in the economy in general, on both a national and local level, and in individual business sectors. The Company’s advertising revenue experiences seasonality, with the first quarter typically being the lowest. Advertising revenue is recognized upon publication of the advertisement.

Approximately 21% of the Company’s revenue for the year ended December 31, 2007 was generated by circulation of the Company’s publications. This includes sales of publications to individuals on a single copy or subscription basis and to sales outlets, which then re-sell the publications. The Company recognizes circulation revenue from subscriptions on a straight-line basis over the subscription term and single-copy sales at the time of distribution. The Company also generates revenue from job printing and other activities which are recognized upon delivery.

Significant expenses for the Company are editorial, production and distribution costs and newsprint and ink. Editorial, production and distribution compensation expenses, which includes benefits, were approximately 29% of the Company’s total operating revenue and other editorial, production and distribution costs were approximately 22% of the Company’s total operating revenue for the year ended December 31, 2007. Compensation costs are recognized as employment services are rendered. Newsprint and ink costs represented approximately 14% of the Company’s total operating revenue for the year ended December 31, 2007. Newsprint prices are subject to fluctuation as newsprint is a commodity and can vary significantly from period to period. Newsprint costs are recognized upon consumption. Collectively, these costs directly related to producing and distributing the product are presented as cost of sales in the Company’s Consolidated Statement of Operations. Corporate expenses, representing all costs incurred for U.S. and Canadian administrative activities at the Corporate level including audit, tax, legal and professional fees, directors and officers insurance premiums, stock compensation, corporate wages and benefits and other public company costs, represented 21% of total operating revenue for the year ended December 31, 2007.

All significant intercompany balances and transactions have been eliminated in consolidation.

Developments Since December 31, 2007

The following events may impact the Company’s consolidated financial statements for periods subsequent to those covered by this report.

On February 19, 2008, the Company announced it had entered into an agreement with Affinity to handle the majority of the Company’s non-classified print and online advertising production. This agreement is expected to save approximately $3 million annually after the transition is completed and will result in reductions in advertising production and related staff of approximately 100 full and part-time positions.

On February 4, 2008, the Company announced that its Board of Directors has begun an evaluation of the Company’s strategic alternatives to enhance shareholder value. These alternatives may include, but are not limited to, joint ventures or strategic partnerships with third parties, and/or the sale of the Company or any or all of its assets. The Company subsequently announced that it had retained Lazard in connection therewith. There can be no assurances that the evaluation process will result in any specific transactions, and subject to legal requirements, the Company does not intend to disclose developments arising from the strategic evaluation process unless the Company enters into a definitive agreement for a transaction approved by its Board of Directors.

In January 2008, the Company received an examination report from the IRS setting forth proposed adjustments to the Company’s U.S. income tax returns from 1996 through 2003. The Company plans to dispute certain of the proposed adjustments. The process for resolving disputes between the Company and the IRS is likely to entail various administrative and judicial proceedings, the timing and duration of which involve substantial uncertainties. As the disputes are resolved, it is possible that the Company will record adjustments to its financial statements that could be material to its financial position and results of operations and it may be required to make material cash payments. The timing and amounts of any payments the Company may be required to make are uncertain, but the Company does not anticipate that it will make any material cash payments to settle any of the disputed items during 2008.

In accordance with the provisions of FIN 48, the Company maintains accruals to cover contingent income tax liabilities, which are subject to adjustment when there are significant developments regarding the underlying contingencies. Based on its preliminary analysis of the adjustments proposed by the IRS, the Company does not believe that it will be necessary to record any material adjustments to its accruals with respect to the underlying income tax contingencies in 2008, but it will continue to record accruals for interest on the income tax contingencies.

Significant Transactions in 2007

In December 2007, the Company announced that its Board of Directors adopted a plan to reduce annual operating costs by $50 million. The plan, which will be implemented during the first half of 2008, includes expected savings previously announced in connection with the Company’s distribution agreement with Chicago Tribune Company and the consolidation of two of the Company’s suburban newspapers. The plan also includes a reduction in full-time staffing levels. Certain of the costs directly associated with the reorganization include involuntary termination benefits amounting to approximately $6.4 million (including costs related to the suburban newspapers) for the year ended December 31, 2007 are included in “Other operating costs” in the Consolidated Statement of Operations. An additional $0.5 million in severance not related directly to the reorganization was incurred in 2007, of which $0.7 million and a reduction of costs of $0.2 million, respectively, are included in “Other operating costs” and “Corporate expenses,” respectively, in the Consolidated Statements of Operations. These estimated costs have been recognized in accordance with SFAS No. 88 (as amended) “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” related to incremental voluntary termination severance benefits and SFAS No. 112 for the involuntary, or base, portion of termination benefits under the Company’s established termination plan and practices.

On August 21, 2007, $25.0 million of the Company’s investments in Canadian CP held through a Canadian subsidiary matured but were not redeemed and remain outstanding. On August 24, 2007, $23.0 million of similar investments matured but were not redeemed and remain outstanding. The Canadian CP held by the Company was issued by two special purpose entities sponsored by non-bank entities. The Canadian CP was not redeemed at maturity due to the combination of a collapse in demand for Canadian CP and the refusal of the back-up lenders to fund the redemption due to their assertion that these events did not constitute events that would trigger a redemption obligation. The combined total of the investments held by the Company that were not redeemed and remain outstanding is $48.2 million, including accrued interest. Due to uncertainties in the timing as to when these investments will be sold or otherwise liquidated, the Canadian CP is classified as a noncurrent asset included in “Investments” on the Consolidated Balance Sheet at December 31, 2007.

A largely Canadian investor committee is leading efforts to restructure the Canadian CP that remains unredeemed. On December 23, 2007, the investor committee announced that an agreement in principle had been reached to restructure the Canadian CP, subject to the approval of the investors and various other parties. Under the agreement in principle, the Canadian CP will be exchanged for medium term notes, backed by the assets underlying the Canadian CP, having a maturity that will generally match the maturity of the underlying assets. The agreement in principle calls for $11.1 million of the Company’s medium term notes to be backed by a pool of assets that are generally similar to those backing the $11.1 million held by the Company and which were originally held by a number of special purpose entities, while the remaining $37.1 million of the Company’s medium term notes are expected to be backed by assets held by the specific special purpose entities that originally issued the Canadian CP. The stated objective of the investor committee is to complete the restructuring process by March 31, 2008. To facilitate the restructuring, commercial paper investors, sponsors of the special purpose entities and other stakeholders agreed to a standstill agreement which has been extended and is likely to continue to be extended until the restructuring process is complete. The Company cannot predict the ultimate outcome of the restructuring effort, but expects its investment will be converted into medium term notes. However, it is possible that the restructuring effort will fail and the Company or the special purpose entities may be forced to liquidate assets into a distressed market resulting in a significant realized loss for the Company.

The Canadian CP has not traded in an active market since mid-August 2007 and there are currently no market quotations available, however, the Canadian CP continues to be rated R1 (High, Under Review with Developing Implications) by Dominion Bond Rating Service. The Company has estimated the fair value of the Canadian CP assuming the agreement in principle is approved. The Company has employed a valuation model to estimate the fair value for the $11.1 million of Canadian CP that will be exchanged for medium term notes backed by the pool of assets. The valuation model used by the Company to estimate the fair value for this portion of the Canadian CP incorporates discounted cash flows, the best available information regarding market conditions and other factors that a market participant would consider for such investments. The fair value of the $37.1 million of Canadian CP that will be exchanged for medium term notes backed by assets held by specific special purpose entities was estimated using prices of securities similar to those the Company expects to receive.

During 2007, the Company’s valuation resulted in an impairment charge and reduction of $12.2 million to the estimated fair value of the Canadian CP. The assumptions used in determining the estimated fair value reflect the terms of the December 23, 2007 agreement in principle described above. The Company’s valuation assumes that the replacement notes will bear interest rates similar to short-term instruments and that such rates would otherwise be commensurate with the nature of the underlying assets and their associated cash flows. Assumptions have also been made as to the amount of restructuring costs that the Company will bear. Continuing uncertainties regarding the value of the assets which underlie the Canadian CP, the amount and timing of cash flows, the yield of any replacement notes and other outcomes of the restructuring process could give rise to a further change in the value of the Company’s investment which could materially impact the Company’s financial condition and results of operations.

On August 8, 2007, the Company entered into a contract with Chicago Tribune Company for home delivery and suburban single-copy delivery of the Chicago Sun-Times and most of its suburban publications. The Company will continue to distribute single-copy editions of the Chicago Sun-Times within the city of Chicago and will also continue to operate the circulation sales and billing functions with the exception of single copy billing in the suburbs.

The Company has completed the transfer of distribution activities to Chicago Tribune Company. Approximately 60 full and part-time positions were eliminated as a result of this arrangement and related separation costs and other costs, including lease terminations aggregating $1.8 million, are included in “Other operating costs” for the year ended December 31, 2007. See Note 3 and Note 16 to the consolidated financial statements.

On April 26, 2007, the Company entered into a written agreement with the Canada Revenue Agency (“CRA”) settling certain tax issues resulting from the disposition of certain Canadian operations in 2000. As a result, the Company’s aggregate Canadian tax and interest liabilities amounted to $36.1 million in respect of these issues. The Company recorded an income tax benefit of $586.7 million for the year ended December 31, 2007 related to this settlement. See Note 19 to the consolidated financial statements.

During the year ended December 31, 2007, the Company recognized $193.5 million of income tax expense to increase the valuation allowance for U.S. deferred tax assets. The Company believes that the increase in the valuation allowance is appropriate based on accounting guidelines that provide that cumulative losses in recent years provide significant evidence that a company should not recognize tax benefits that depend on the generation of taxable income from future operations. The Company experienced pre-tax losses in 2005, 2006 and 2007. The Company’s ability to realize its deferred tax assets is generally dependent on the generation of taxable income during the future periods in which the temporary differences are deductible and the net operating losses can be offset against taxable income.

On March 18, 2007, the Company announced settlements, negotiated and approved by the Special Committee, with Radler, (including his wholly-owned company, North American Newspapers Ltd. f/k/a F.D. Radler Ltd.) and the publishing companies Horizon and Bradford. The Company received $63.4 million in cash to settle the following: (i) claims by the Company against Radler, Horizon and Bradford, (ii) potential additional claims against Radler related to the Special Committee’s findings regarding incorrectly dated stock options and (iii) amounts due from Horizon and Bradford. The Company has recorded $47.7 million of the settlement, as a recovery, within “Indemnification, investigation and litigation costs, net of recoveries” and $7.2 million in “Interest and dividend income” in the Consolidated Statement of Operations for the year ended December 31, 2007. The remaining $8.5 million represented the collection of certain notes receivable.

2007 Compared with 2006

Income (Loss) from Continuing Operations — Overview

Income from continuing operations in 2007 amounted to $270.0 million, or income of $3.36 per share, compared to a loss of $77.6 million in 2006, or a $0.91 loss per share. In 2007, the Company recorded an income tax benefit of $420.9 million, compared to income tax expense of $57.4 million in 2006, a variation of $478.3 million, which was largely due to the settlement of tax issues with the CRA that resulted from an income tax benefit of $586.7 million largely as a result of a reduction of tax liabilities, partially offset by a charge of $193.5 million to increase the valuation allowance against U.S. deferred tax assets and to other factors as presented in Note 19 to the consolidated financial statements. The loss from continuing operations before income taxes increased from $20.2 million in 2006 to $150.9 million in 2007, an increase of $130.7 million. The decline was largely due to a decline in revenue of $48.1 million, an increase in corporate expenses of $28.0 million, an increase in other operating costs of $16.1 million, an increase in indemnification, investigation and litigation costs, net, of $25.2 million and an increase in other income (expense) of $30.4 million partially offset by lower cost of sales of $18.1 million.

Operating Revenue and Operating Loss — Overview

Operating revenue and operating loss in 2007 was $372.3 million and $140.2 million, respectively, compared with operating revenue of $420.4 million and an operating loss of $39.0 million in 2006. The decrease in operating revenue of $48.1 million compared to the prior year is largely a reflection of a decrease in advertising revenue of $37.4 million and a decrease in circulation revenue of $7.6 million. The $101.2 million increase in operating loss in 2007 is primarily due to the $48.1 million decrease in operating revenue, an increase in corporate expenses of $28.0 million largely resulting from bad debt expense of $33.7 million, an increase of $25.2 million in indemnification, investigation and litigation costs, net, an increase in other operating costs of $16.1 million, which was largely due to an impairment charge in respect of capitalized direct response advertising costs of $15.2 million, and an increase in sales and marketing costs of $3.9 million. These increases were partially offset by lower cost of sales expenses of $18.1 million, largely due to lower newsprint and ink expense of $16.6 million.

Operating Revenue

Operating revenue was $372.3 million in 2007 compared to $420.4 million in 2006, a decrease of $48.1 million. As previously noted, the effect of the 53rd week in 2006 added $6.6 million to operating revenue in 2006.

Advertising revenue was $287.2 million in 2007 compared with $324.6 million in 2006, a decrease of $37.4 million or 12%. The decrease was largely a result of lower retail advertising revenue of $13.9 million, lower classified advertising of $20.5 million and lower national advertising revenue of $6.3 million, partially offset by increased Internet advertising revenue of $3.3 million. The Company’s advertising revenue declined by approximately two percentage points higher than the overall Chicago market decline due to a loss in market share primarily in the first half of 2007.

Circulation revenue was $77.6 million in 2007 compared with $85.2 million in 2006, a decrease of $7.6 million. The decline in circulation revenue was attributable to declines in volume, primarily in the daily single copy category.

Operating Costs and Expenses

Total operating costs and expenses in 2007 were $512.5 million, compared with $459.3 million in 2006, an increase of $53.2 million. This increase is largely reflective of higher indemnification, investigation and litigation costs, net, of $25.2 million, after giving effect to recoveries in 2007 and 2006 of $47.7 million and $47.5 million, respectively, higher other operating costs of $16.1 million, largely due to an impairment charge in respect of capitalized direct response advertising costs of $15.2 million, higher corporate expenses of $28.0 million largely resulting from bad debt expense in respect of notes receivable from affiliates of $33.7 million, and higher sales and marketing expenses of $3.9 million. These increases were partially offset by lower cost of sales of $18.1 million, primarily lower newsprint and ink expense of $16.6 million and lower depreciation and amortization expense of $1.8 million. As previously noted, the effect of the 53rd week in 2006 added approximately $6.1 million to total operating costs and expenses in 2006.

Cost of sales, which includes newsprint and ink, as well as distribution, editorial and production costs was $240.3 million for 2007, compared with $258.4 million for 2006, a decrease of $18.1 million. Wages and benefits were $108.6 million in 2007 and $110.3 million in 2006, a decrease of $1.7 million. Newsprint and ink expense was $50.6 million for 2007, compared with $67.2 million in 2006, a decrease of $16.6 million or approximately 25%. Total newsprint consumption in 2007 decreased approximately 16% compared with 2006 reflecting reductions in page sizes and lower circulation, and the average cost per metric ton of newsprint in 2007 was approximately 10% lower than in 2006. Other cost of sales was generally flat at $81.1 million and $80.9 million in 2007 and 2006, respectively.

Included in selling, general and administrative costs are sales and marketing expenses, other operating costs including administrative support functions, such as information technology, finance and human resources, and corporate expenses and indemnification, investigation and litigation costs, net.

Total selling, general and administrative costs were $240.1 million in 2007 compared to $167.0 million for 2006, an increase of $73.1 million. The increase is largely due to higher indemnification, investigation and litigation costs, net, of $25.2 million, after giving effect to recoveries of $47.7 million and $47.5 million, in 2007 and 2006, respectively, higher corporate expenses of $28.0 million, higher other operating costs of $16.1 million and higher sales and marketing expense of $3.9 million.

Sales and marketing costs were $70.4 million in 2007, compared to $66.5 million in 2006, an increase of $3.9 million. The increase is largely due to higher bad debt expense of $1.0 million, increased wages and benefits of $2.5 million resulting from increased headcount and increased marketing and promotion expense of $1.5 million largely due to additional market research and marketing costs including those related to promoting a new look and slogan for the Chicago Sun-Times in radio and promotional billboards, partially offset by a decrease in professional fees of $1.8 million.

Other operating costs consist largely of accounting and finance, information technology, human resources, property and facilities and other general and administrative costs supporting the newspaper operations. Other operating costs were $82.3 million in 2007, compared to $66.2 million in 2006, an increase of $16.1 million. The increase reflects a $15.2 million impairment charge in respect of capitalized direct response advertising costs (see Note 16 to the consolidated financial statements), an increase in web related support and other costs of $2.3 million, increased telecommunications expense of $1.4 million and increased professional fees of $1.2 million. These increases were partially offset by lower severance cost of $4.7 million. See Note 16 to the consolidated financial statements.

Corporate operating expenses in 2007 were $79.7 million compared to $51.7 million in 2006, an increase of $28.0 million. This increase is largely due to bad debt expense of $33.7 million related to a loan to a subsidiary of Hollinger Inc. and an adjustment of $13.6 million in 2007 to decrease the estimated net proceeds related to the sale of publishing interests in prior years. These amounts are partially offset by lower compensation expenses of $10.0 million, lower legal and professional fees of $1.8 million reflecting lower internal audit and other compliance activity and professional service fees, lower insurance costs, primarily directors and officers of $2.3 million, lower business taxes of $1.6 million, lower general expenses of $0.9 million and lower property and facility costs of $0.7 million due to the closing of the New York office in 2006. The decrease in compensation reflects lower incentive compensation costs of $0.6 million, a $7.1 million reduction in severance expense and lower pension expense of $1.9 million. See Note 16 to the consolidated financial statements.

Indemnification, investigation and litigation costs, net, in 2007 were an expense of $7.8 million compared to a net recovery of $17.4 million in 2006, an increase of $25.2 million. In 2007, the Company recorded $47.7 million in recoveries resulting from a settlement with a former officer and in 2006 the Company recorded $47.5 million in recoveries resulting from an insurance settlement. Indemnification costs increased $28.9 million to $47.8 million in 2007 from $18.9 million in 2006 as the criminal proceedings against former officers took place from March 2007 to July 2007. Special Committee investigation and litigation costs decreased $3.4 million compared to 2006. See Note 17 to the consolidated financial statements.

Depreciation and amortization expense in 2007 was $32.1 million compared with $33.9 million in 2006, a decrease of $1.8 million. The Company recorded additional depreciation expense of $1.0 million and $2.7 million in 2007 and 2006, respectively, related to closing the New York office and printing facility closings in Chicago, Illinois and Gary, Indiana. Amortization expense includes $7.3 million and $7.5 million in 2007 and 2006, respectively, related to capitalized direct response advertising costs. See Note 16 to the consolidated financial statements.

Largely as a result of the items noted above, operating loss in 2007 was $140.2 million compared with $39.0 million in 2006, an increased loss of $101.2 million.

Interest and Dividend Income

Interest and dividend income in 2007 amounted to $17.8 million compared to $16.8 million in 2006, an increase of $1.0 million, largely due to $7.2 million of interest received on the settlement with Radler, somewhat offset by the interest on the loan to affiliate of $4.4 million recorded in 2006 with no corresponding income in 2007 and the effect of lower average cash balances in 2007.

Other Income (Expense), Net

Other income (expense), net, in 2007 was an expense of $27.8 million compared to income of $2.6 million in 2006. The deterioration of $30.4 million was largely due to a $19.5 million increase in foreign exchange losses and a $12.2 million write-down of Canadian CP which matured but was not redeemed and which remains outstanding, partially offset by a gain on sale of investments of $1.1 million. The increase in foreign exchange losses largely relates to the impact on U.S. denominated cash and cash equivalents held by a subsidiary in Canada and the net impact of certain intercompany and affiliated loans payable in Canadian dollars all of which result from the weakening of the U.S. dollar during 2007. See Note 18 to the consolidated financial statements.

Income Taxes

Income taxes were a benefit of $420.9 million in 2007 and an expense of $57.4 million in 2006. The benefit largely represents the impact of the settlement with the CRA, which resulted in an income tax benefit of $586.7 million. The Company’s income tax expense varies substantially from the U.S. Federal statutory rate primarily due to provisions for contingent liabilities to cover additional taxes and interest the Company may be required to pay in various tax jurisdictions, changes in the valuation allowance for tax assets and reductions of tax contingency accruals due to the resolution of uncertainties. See Note 19 to the consolidated financial statements for a complete discussion of items affecting the Company’s income taxes.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


CONSOLIDATED RESULTS OF OPERATIONS

General

During February 2006, the Company sold its remaining Canadian newspaper assets (the “Canadian Newspaper Operations”). In this quarterly report, the Canadian Newspaper Operations are reported as discontinued operations. All amounts in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relate to continuing operations, unless otherwise noted. See Note 6 to the condensed consolidated financial statements.

Income (Loss) from Continuing Operations

Loss from continuing operations in the third quarter of 2007 amounted to $194.0 million, or $2.41 per basic share, compared to a loss of $34.9 million in the third quarter of 2006, or a $0.43 loss per basic share. The increase in loss from continuing operations of $159.1 million was largely due to an increase in income taxes of $142.9 million reflecting the recognition of a $165.8 million tax expense resulting from an increase in the valuation allowance against deferred tax assets, lower revenue of $7.0 million, foreign currency losses of $8.3 million and a write-down of an investment of $4.8 million, partially offset by decreases in cost of sales of $3.2 million, selling, general and administrative expenses of $1.5 million and depreciation and amortization expense of $1.4 million.

Income from continuing operations for the nine months ended September 30, 2007 amounted to $329.2 million, or $4.09 per basic share, compared to a loss of $41.3 million, or a $0.48 loss per basic share, for the nine months ended September 30, 2006. The improvement from results of continuing operations of $370.5 million was largely due to an income tax benefit of $432.5 million, reflecting the settlement of certain tax issues with the CRA and an increase in the valuation allowance against deferred tax assets, and the settlement with Radler, of which $47.7 million was recorded as a reduction of indemnification, investigation and litigation costs, net and $7.2 million of which was recorded as interest income, as well as lower cost of sales of $11.1 million. These amounts were partially offset by lower revenue for the nine months ended September 30, 2007 of $31.1 million, an increase in indemnification, investigation and litigation costs of $31.6 million, (excluding the recovery mentioned above), an increase in corporate expenses of $36.3 million (largely resulting from $33.7 million in bad debt expense related to the loan to a subsidiary of Hollinger Inc.), and the negative impact of increased total other income (expense), net of $18.0 million.

Operating Revenue and Operating Loss — Overview

Operating revenue and operating loss in the third quarter of 2007 were $92.5 million and $23.2 million, respectively, compared with operating revenue of $99.5 million and an operating loss of $22.4 million in the third quarter of 2006. The decrease in operating revenue of $7.0 million compared to the third quarter of 2006 is largely a reflection of a decrease in advertising revenue of $4.7 million and circulation revenue of $1.4 million. The $0.8 million increase in operating loss in 2007 is primarily due to lower revenue of $7.0 million, higher sales and marketing costs of $1.3 million and increased other operating expenses of $3.2 million. These items were partially offset by lower cost of sales of $3.2 million, lower corporate expenses of $6.3 million and lower depreciation and amortization expense of $1.4 million.

For the nine months ended September 30, 2007, operating revenue and operating loss were $279.0 million and $98.2 million, respectively, compared with operating revenue of $310.1 million and an operating loss of $60.4 million for the nine months ended September 30, 2006. The decrease in operating revenue of $31.1 million compared to the same period in 2006 is largely a reflection of a decrease in advertising revenue of $24.0 million and circulation revenue of $4.3 million. The $37.8 million increase in operating loss in 2007 is primarily due to the lower revenue of $31.1 million, higher indemnification, investigation and litigation costs of $31.6 million, excluding recoveries, higher corporate expenses of $36.3 million (largely resulting from $33.7 million in bad debt expense related to the loan to a subsidiary of Hollinger Inc.) and higher sales and marketing costs of $3.2 million. These amounts were partially offset by the recovery of $47.7 million from the Radler settlement, lower cost of sales of $11.1 million and lower other operating costs of $4.4 million.

Operating Revenue

Total operating revenue

Total operating revenue was $92.5 million in the third quarter of 2007 compared to $99.5 million for the same period in 2006, a decrease of $7.0 million, or 7%.

For the nine months ended September 30, 2007, total operating revenue was $279.0 million compared to $310.1 million for the same period in 2006, a decrease of $31.1 million, or 10%.

Advertising revenue

Advertising revenue was $71.7 million in the third quarter 2007 compared with $76.4 million in the third quarter of 2006, a decrease of $4.7 million, or 6%. The decrease was largely a result of lower retail advertising revenue of $3.2 million, lower classified advertising of $3.3 million partially offset by higher national advertising revenue of $1.2 million and higher internet advertising revenue of $0.6 million.

For the nine months ended September 30, 2007, advertising revenue was $214.9 million, compared to $238.9 million for the same period in 2006, a decrease of $24.0 million, or 10%. Retail advertising revenue decreased $8.9 million, classified advertising revenue decreased $14.3 million and national advertising revenue decreased $3.6 million for the nine months ended September 30, 2007, respectively, compared to the same period in 2006. Internet revenue increased $2.8 million to $8.5 million for the nine months ended September 30, 2007 compared to $5.7 million for the same period in 2006.

Circulation revenue

Circulation revenue was $18.9 million in the third quarter of 2007 compared with $20.3 million in the third quarter of 2006, a decrease of $1.4 million. The decline in circulation revenue was attributable to declines in volume, primarily in the daily single copy category.

For the nine months ended September 30, 2007, circulation revenue was $58.6 million, compared to $62.9 million for the same period in 2006, a decrease of $4.3 million. The decline in circulation revenue was attributable to declines in volume, primarily in the daily single copy category.

Operating Costs and Expenses

Total operating costs and expenses

Total operating costs and expenses in the third quarter of 2007 were $115.8 million, compared with $121.9 million in the third quarter of 2006, a decrease of $6.1 million. This decrease is largely reflective of lower corporate expenses of $6.3 million and cost of sales of $3.2 million. These decreases were partially offset by higher indemnification, investigation and litigation costs of $0.3 million and other operating expenses of $3.2 million.

For the nine months ended September 30, 2007, total operating costs and expenses were $377.2 million, compared with $370.5 million for the comparable period in 2006, an increase of $6.7 million. This increase is largely reflective of higher corporate expenses of $36.3 million (largely resulting from $33.7 million in bad debt expense related to the loan to a subsidiary of Hollinger Inc.) and sales and marketing expenses of $3.2 million. These increases were partially offset by a decline in indemnification, investigation and litigation costs, net of $16.1 million, reflecting the $47.7 million recovery in 2007 described above, lower cost of sales of $11.1 million, lower depreciation and amortization expense of $1.2 million and lower other operating costs of $4.4 million.

Total cost of sales

Cost of sales, which includes newsprint and ink, as well as distribution, editorial and production costs was $58.9 million for the third quarter of 2007, compared with $62.1 million for the same period in 2006, a decrease of $3.2 million. Wages and benefits were $27.1 million in the third quarter of 2007 and $26.8 million in the third quarter of 2006, an increase of $0.3 million. The slight increase in wages and benefits reflects the impact of merit and union pay increases. Newsprint and ink expense was $12.2 million for the third quarter of 2007, compared with $15.8 million for the same period in 2006, a decrease of $3.6 million or 23%. Total newsprint consumption in the third quarter of 2007 decreased 11% compared with the same period in 2006, and the average cost per metric ton of newsprint in the third quarter of 2007 was 15% lower than the third quarter of 2006. Other costs of sales were generally flat at $19.6 million in the third quarter of 2007 compared to $19.5 million in the third quarter of 2006.

Cost of sales was $178.5 million for the nine months ended September 30, 2007, compared with $189.6 million for the same period in 2006, a decrease of $11.1 million. Wages and benefits were $80.4 million for the nine months ended September 30, 2007 and $81.2 million for the nine months ended September 30, 2006, a decrease of $0.8 million. The slight decrease in wages and benefits reflects the impact of workforce reductions resulting from the 2006 reorganization activities, somewhat offset by merit and union pay increases. Newsprint and ink expense was $39.1 million for the third quarter of 2007, compared with $49.5 million for the same period in 2006, a decrease of $10.4 million, or 21%. Total newsprint consumption for the nine months ended September 30, 2007 decreased 14% compared with the same period in 2006, and the average cost per metric ton of newsprint for the nine months ended September 30, 2007 was 8% lower than the same period in 2006.

Total selling, general and administrative

Included in selling, general and administrative costs are sales and marketing expenses, other operating costs including administrative support functions, such as information technology (“IT”), finance and human resources, and corporate expenses and indemnification, investigation and litigation costs, net.

Total selling, general and administrative costs were $48.9 million in the third quarter of 2007 compared with $50.4 million for the same period in 2006, a decrease of $1.5 million. Corporate expenses decreased by $6.3 million due to a reduction in severance expense resulting from the closing of the New York office in 2006. The decrease was partially offset by increases in other operating costs of $3.2 million and sales and marketing costs of $1.3 million.

For the nine months ended September 30, 2007, total selling, general and administrative costs were $174.5 million compared with $155.5 million for the same period in 2006, an increase of $19.0 million. This increase was due to higher corporate expense of $36.3 million (largely resulting from $33.7 million in bad debt expense related to the loan to a subsidiary of Hollinger Inc.) and higher sales and marketing expenses of $3.2 million, which was partially offset by lower indemnification, investigation and litigation costs, net, of $16.1 million largely due to the $47.7 million recovery in 2007, which was somewhat offset by increased indemnification costs related to criminal proceedings against certain former officers, as well as lower other operating costs of $4.4 million.

Sales and marketing

Sales and marketing costs were $18.0 million in the third quarter of 2007, compared with $16.7 million in the third quarter of 2006, an increase of $1.3 million, largely due to increased wages and benefits of $1.6 million, partially offset by lower professional fees of $0.7 million.

For the nine months ended September 30, 2007, sales and marketing costs were $51.7 million compared with $48.5 million for the same period in 2006, an increase of $3.2 million, largely due to additional market research and marketing costs including those related to promoting a new look and slogan for the Chicago Sun-Times in radio and promotional billboards of $1.6 million, increased wages and benefits of $1.3 million, increased bad debt expense of $0.2 million and increased temporary staffing of $0.4 million, partially offset by lower professional fees of $0.9 million.

Other operating costs

Other operating costs consist largely of accounting and finance, IT, human resources, property and facilities and other general and administrative costs supporting the newspaper operations.

Other operating costs were $16.1 million in the third quarter of 2007 compared with $12.9 million for the same period in 2006, an increase of $3.2 million. This increase is largely due to $1.4 million in costs related to the transfer of certain newspaper distribution responsibilities to the Chicago Tribune Company, including distribution facility lease termination charges and severance expense, increased web related support and other costs of $0.9 million, increased professional fees of $0.5 million and increased telecommunication expense of $0.3 million.

For the nine months ended September 30, 2007, other operating costs were $45.0 million compared with $49.4 million for the same period in 2006, a decrease of $4.4 million. This decrease is largely due to lower reorganization costs and severance expense of $9.8 million, largely resulting from the reorganization activities in 2006, the $0.8 million write-off of certain cancelled system development projects in 2006 and a $0.6 million reduction in a reserve for a contract dispute in 2007, partially offset by $1.4 million in costs related to the transfer of certain newspaper distribution responsibilities to the Chicago Tribune Company, increased web related support and other costs of $2.0 million, increased wages and benefits of $0.9 million, increased professional fees of $1.0 million, costs associated with the removal of a printing press for a closed facility of $0.4 million, increased telecommunication costs of $1.1 million and increased property and facilities costs of $0.5 million.

Corporate expenses

Corporate operating expenses in the third quarter of 2007 were $7.7 million compared with $14.0 million in the third quarter of 2006, a decrease of $6.3 million. The decrease is largely due to a decrease in compensation costs of $3.6 million, lower insurance costs, primarily directors and officers coverage, of $0.8 million, lower non-legal professional fees of $1.3 million, lower business taxes of $0.5 million and lower facility expenses of $0.2 million, due to the closing of the New York office in 2006 partially offset by higher legal fees related to litigation and arbitration activities of $0.2 million. The decrease in compensation is largely due to lower pension expense related to legacy Canadian plans of $0.9 million and lower severance costs of $4.1 million, due to the closing of the New York office in 2006 somewhat offset by higher stock compensation expense of $1.2 million primarily due to the automatic vesting of DSU’s resulting from the change in control initiated by Hollinger Inc.

For the nine months ended September 30, 2007, corporate operating expenses were $73.3 million compared with $37.0 million for the nine months ended September 30, 2006, an increase of $36.3 million. This increase is largely due to bad debt expense of $33.7 million related to the loan to a subsidiary of Hollinger Inc. (see Note 7 to the condensed consolidated financial statements), adjustments of $13.6 million in 2007 to decrease the estimated net proceeds to be received related to the sale of publishing interests in prior years and higher legal fees of $3.1 million reflecting higher litigation and arbitration costs, partially offset by lower compensation expenses of $8.0 million, $2.0 million recorded in 2006 related to an estimated liability for unclaimed property and lower insurance costs, primarily directors and officers coverage, of $1.5 million, lower non-legal professional fees of $1.1 million, lower facility expense of $0.5 million, due to the closing of the New York office in 2006, lower business taxes of $0.3 million and lower general expenses of $0.6 million. The decrease in compensation is largely due to lower pension expense related to legacy Canadian plans of $3.3 million and lower severance costs of $5.3 million, partially offset by higher stock-based compensation costs of $0.7 million.

Indemnification, investigation and litigation costs, net of recoveries

Indemnification, investigation and litigation costs, net of recoveries in the third quarter of 2007 were $7.0 million compared with $6.7 million in the third quarter of 2006, an increase of $0.3 million. Indemnification costs increased $1.4 million to $5.6 million in the third quarter of 2007 from $4.2 million in the third quarter of 2006 as the criminal proceedings against certain former officers concluded in July 2007 while Special Committee investigation and litigation costs decreased $1.1 million. See Note 10 to the condensed consolidated financial statements.

For the nine months ended September 30, 2007, indemnification, investigation and litigation costs, net of recoveries was an expense of $4.5 million compared to an expense of $20.6 million in the third quarter of 2006, an improvement of $16.1 million. In 2007, the Company recorded a net recovery of $47.7 million resulting from a settlement with a former officer. Indemnification costs increased $33.3 million to $45.7 million for the nine months ended September 30, 2007 from $12.4 million in same period in 2006 as the criminal proceedings against certain former officers began in March 2007 and concluded in July 2007. For the nine months ended September 30, 2007, Special Committee investigation and litigation costs decreased $1.7 million versus the same period in 2006. See Note 10 to the condensed consolidated financial statements.

Depreciation and amortization

Depreciation and amortization expense in the third quarter of 2007 was $8.0 million compared with $9.4 million in 2006, a decrease of $1.4 million. In the third quarter of 2006, the Company recorded additional depreciation expense of $0.7 million related to the Harlem Avenue printing plant, which was closed in October 2006 and $0.7 million related to the printing facility in Gary, Indiana, which was closed in March 2007. Amortization expense includes $2.0 million and $2.1 million for the third quarter of 2007 and the third quarter of 2006, respectively, related to capitalized direct response advertising costs.

For the nine months ended September 30, 2007, depreciation and amortization expense was $24.2 million compared with $25.4 million for the same period in 2006, a decrease of $1.2 million, largely due to an additional $1.3 million in depreciation in 2006 related to the Harlem Avenue printing plant. Amortization expense includes $5.4 million for the first nine months of 2007 and $5.5 million for the first nine months of 2006 related to capitalized direct response advertising costs.

Operating loss

As a result of the items noted above, operating loss in the third quarter of 2007 was $23.2 million compared with a $22.4 million operating loss for the same period in 2006, an increase of $0.8 million. For the nine months ended September 30, 2007, operating loss was $98.2 million compared with a $60.4 million operating loss for the same period in 2006, an increase of $37.8 million.

Interest and Dividend Income

Interest and dividend income in the three months ended September 30, 2007 amounted to $2.4 million compared to $4.1 million for the same period in 2006, a decrease of $1.7 million, largely due to the interest on the loan to affiliate of $1.1 million recorded in 2006, with no corresponding income in 2007. For the nine months ended September 30, 2007, interest and dividend income amounted to $16.1 million compared to $12.8 million in 2006, an increase of $3.3 million, largely due to the $7.2 million of interest received on the settlement with Radler, somewhat offset by the interest on the loan to affiliate of $3.2 million recorded in 2006, with no corresponding income in 2007.

Other Income (expense), net

Other income (expense), net in the third quarter of 2007 was an expense of $13.2 million compared to income of $0.5 million for the same period in 2006. The $13.7 million deterioration was largely due to an increase in foreign exchange losses of $8.3 million and a write-down of an investment of $4.8 million. The increase in foreign exchange losses largely relates to the impact on U.S. denominated cash and cash equivalents in Canada and certain intercompany loans payable in Canadian dollars resulting from the weakening of the U.S. dollar during the quarter.

For the nine months ended September 30, 2007 other income (expense), net was an expense of $20.6 million compared to income of $0.6 million for the same period in 2006. The $21.2 million deterioration was largely due to a $17.8 million increase in foreign exchange losses and a write-down of investments of $4.8 million, partially offset by an improvement of gain (loss) on sale of investments of $1.1 million. The increase in foreign exchange losses largely relates to the impact on U.S. denominated cash and cash equivalents in Canada and the net impact of certain intercompany loans payable in Canadian dollars resulting from the weakening of the U.S. dollar during the first nine months of 2007.

Income Taxes

Income taxes were an expense of $159.7 million in the third quarter of 2007 largely due to the recognition of an increase of $165.8 million in the valuation allowance related to deferred tax assets compared to an expense of $16.8 million in the third quarter of 2006. Generally, the Company’s income tax expense varies substantially from the U.S. Federal statutory rate primarily due to changes in the valuation allowance related to deferred tax assets, provisions or reductions related to contingent liabilities including interest the Company may be required to pay in various tax jurisdictions. Provisions for additional interest on contingent liabilities, net of related tax benefits, amounted to $8.1 million in the third quarter of 2007 and $18.7 million for the third quarter of 2006. See Note 9 to the condensed consolidated financial statements.

For the first nine months of 2007, income taxes were a benefit of $432.5 million compared with a benefit of $6.2 million for the first nine months of 2006. The larger benefit primarily represents the impact of the settlement with the CRA, which resulted in the reversal of certain tax liabilities of $586.7 million, partially offset by an increase of $165.8 million in the valuation allowance related to deferred tax assets. Provisions for additional interest on contingent liabilities, net of related tax benefits, amounted to $40.3 million in the first nine months ended September 30, 2007 and $50.1 million for the same period in 2006. See Note 9 to the condensed consolidated financial statements.

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