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Article by DailyStocks_admin    (09-15-08 07:40 AM)

Filed with the SEC from Sep 04 to Sep 10:

Sun-Times Media Group (SUTM)
Investors including Davidson Kempner Partners own 4.86 million Class A shares ( 5.9% of the total outstanding). The group has been analyzing Sun-Times Media's operations, obligations and governance structure with a view to determining how best to maximize value for shareholders.

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.

Sources of Revenue. The Company’s operating revenue is provided by the Chicago metropolitan area newspapers and related websites. The following table sets forth the sources of revenue and the percentage such sources represent of total revenue for the Company during each year in the three-year period ended December 31, 2007.

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

William E. Aziz
52
August 2007
Mr. Aziz has been the Chief Financial Officer of Hollinger Inc., the Company’s controlling stockholder, since 2007, and the Managing Partner of BlueTree Advisors, a private management advisory firm since 2002. Mr. Aziz was the Interim President and CEO of SR Telecom Inc. from 2005 to 2006 and the Interim CFO of Atlas Cold Storage Income Trust from 2003 to 2004. Mr. Aziz currently serves as a director of Tecumseh Products Company, a United States public reporting company, and as a director of Canada Bread Company Limited, a Canadian public reporting company.

Brent D. Baird
69
August 2007
Mr. Baird is a private investor and since 2001 has served as President of First Carolina Investors, Inc., a non-diversified investment company. Mr. Baird currently serves as a director of M&T Bank Corporation and Todd Shipyards Corporation, each of which is a United States public reporting company.

Albrecht W.A. Bellstedt Q.C
59
August 2007
From 1999 to 2007, Mr. Bellstedt was Executive Vice President, Law & Corporate of TransCanada Corporation, a North American energy services company. Mr. Bellstedt currently serves as a director of Canadian Western Bank, The Churchill Corporation and The Forzani Group Ltd., each of which is a Canadian public reporting company.

Herbert A. Denton
61
February 2007
Mr. Denton 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.


Peter J. Dey
67
August 2007
Since November 2005, Mr. Dey has been the Chairman of Paradigm Capital Inc., a Canadian securities firm. From January 2003 to November 2005, Mr. Dey was a partner in the law firm of Osler, Hoskin & Harcourt. Mr. Dey currently serves as a director of Addax Petroleum Corporation, Goldcorp Inc. and Redcorp Ventures Ltd., each of which is a Canadian public reporting company.

Cyrus F. Freidheim, Jr.
72
October 2005
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., which is a United States public reporting company.


Edward C. Hannah
52
August 2007
Since January 2005, Mr. Hannah has been a partner practicing in the corporate group of the law firm of Davies Ward Phillips & Vineberg LLP, which acts as corporate counsel and as litigation counsel to Hollinger Inc., the Company’s controlling stockholder, with respect to certain litigation between Hollinger Inc. and the Company. From 2003 to 2004, Mr. Hannah was Executive Vice President, Corporate Development and General Counsel of MI Developments Inc, a real estate development, construction and leasing company. From 2001 to 2003, Mr. Hannah was Executive Vice President, Corporate Development and General Counsel of Magna Entertainment Corp., a horse racing and gaming company.

Gordon A. Paris
54
May 2003
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 was a Managing Director at Berenson & Company, a private investment bank, from 2002 to November 2007. Prior to joining Berenson & Company in 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.

Graham W. Savage
59
July 2003
Mr. Savage served for 21 years, seven years as the Chief Financial Officer, at Rogers Communications Inc., a major Toronto-based media and communications company. Mr. Savage currently serves as Chairman of Callisto Capital LP, a merchant banking firm based in Toronto, and as a director and chairman of the audit committee of Canadian Tire Corporation, Limited, a Canadian public reporting company, and as a director of Cott Corporation, a United States public reporting company.

Raymond G.H. Seitz
67
July 2003
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.

G. Wesley Voorheis
54
August 2007
Mr. Voorheis is the Chief Executive Officer and a director of Hollinger Inc. Mr. Voorheis also is the Managing Director of VC & Co. Incorporated and a Partner of Voorheis & Co. LLP, which acts as an advisor to institutional and other shareholders with respect to their investments in Canadian public and private companies. Prior to the establishment of Voorheis & Co. LLP, Mr. Voorheis was a partner in a major Toronto law firm specializing in securities law and mergers and acquisitions.

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

Net income (loss)

Net loss in the second quarter of 2008 amounted to $37.8 million, or $0.46 per basic share, compared to net income of $528.0 million in the second quarter of 2007, or $6.57 per basic share. The increase in net loss of $565.8 million was largely due to an increase in income tax expense of $625.9 million, reflecting a 2007 settlement of certain tax issues with the Canada Revenue Agency (“CRA”) totaling $586.7 million and lower revenues of $11.7 million. These amounts were partially offset by the impact of a bad debt expense in 2007 of $33.7 million related to a loan with an affiliate of Hollinger, a decrease in cost of sales of $6.8 million, lower indemnification, investigation and litigation costs, net, of $21.7 million, an improvement in other income (expense), net, of $5.8 million and lower depreciation and amortization expense of $1.2 million.

Net loss for the six months ended June 30, 2008 amounted to $73.6 million, or $0.91 per basic share, compared to net income of $523.2 million for the same period in 2007, or $6.51 per basic share. The increase in net loss of $596.8 million was largely due an increase in income tax expense of $621.2 million reflecting the 2007 settlement of certain tax issues with the CRA totaling $586.7 million, a 2007 settlement with a former officer (of which $47.7 million was recorded as a reduction of indemnification, investigation and litigation costs, net, and of which $7.2 million was recorded as interest income) and lower revenue of $22.5 million. These amounts were partially offset by lower bad debt expense of $33.7 million as mentioned above, a decrease in cost of sales of $13.7 million, lower indemnification, investigation and litigation costs, net, of $36.3 million (excluding the 2007 settlement of $47.7 million), an improvement in other income (expense) of $10.4 million and lower depreciation and amortization expense of $3.6 million.

Operating Revenue and Operating Loss — Overview

Operating revenue and operating loss in the second quarter of 2008 were $83.0 million and $24.0 million, respectively, compared with operating revenue of $94.7 million and an operating loss of $80.6 million in the second quarter of 2007. The decrease in operating revenue of $11.7 million compared to the second quarter of 2007 is largely a reflection of a decrease in advertising revenue of $10.5 million and circulation revenue of $0.9 million. The $56.6 million decrease in operating loss in 2008 is primarily due to lower cost of sales of $6.8 million, lower corporate expenses of $40.5 million, including the 2007 bad debt expense of $33.7 million related to a loan with an affiliate of Hollinger, lower indemnification, investigation and litigation costs, net, of $21.7 million and lower depreciation and amortization expense of $1.2 million. These items were partially offset by the lower revenue of $11.7 million and higher other operating costs of $1.7 million.

For the six months ended June 30, 2008, operating revenue and operating loss were $164.0 million and $49.8 million, respectively, compared with operating revenue of $186.5 million and an operating loss of $75.0 million in 2007. The decrease in operating revenue of $22.5 million compared to 2007 is largely a reflection of a decrease in advertising revenue of $19.3 million and circulation revenue of $2.5 million. The $25.2 million decrease in operating loss in 2008 is primarily due to lower cost of sales of $13.7 million, lower corporate expenses of $47.5 million, including the 2007 bad debt expense of $33.7 million mentioned above, lower indemnification, investigation and litigation costs, net, of $36.3 million (excluding the 2007 settlement of $47.7 million) and lower depreciation and amortization expense of $3.6 million. These items were partially offset by lower revenue of $22.5 million, the 2007 settlement of $47.7 million, higher sales and marketing costs of $1.1 million and increased other operating costs of $4.4 million.

Operating Revenue

Total operating revenue

Total operating revenue was $83.0 million in the second quarter of 2008 compared to $94.7 million for the same period in 2007, a decrease of $11.7 million, or 12%.

For the six months ended June 30, 2008, total operating revenue was $164.0 million compared to $186.5 million for the same period in 2007, a decrease of $22.5 million or 12%.

Advertising revenue

Advertising revenue was $62.7 million in the second quarter 2008 compared with $73.2 million in the second quarter of 2007, a decrease of $10.5 million or 14%. The decrease was largely a result of lower retail advertising revenue of $4.6 million, lower classified advertising revenue of $4.6 million and lower national advertising revenue of $1.4 million, slightly offset by higher internet advertising revenue of $0.1 million.

For the six months ended June 30, 2008, advertising revenue was $123.9 million compared with $143.2 million for the same period in 2007, a decrease of $19.3 million, or 13%. The decrease was largely a result of lower retail advertising revenue of $8.9 million, lower classified advertising revenue of $8.2 million and lower national advertising revenue of $2.6 million, slightly offset by higher internet advertising revenue of $0.4 million.

Circulation revenue

Circulation revenue was $18.8 million in the second quarter of 2008 compared with $19.7 million in the second quarter of 2007, a decrease of $0.9 million. The decline in circulation revenue was largely attributable to declines in volume, both in home delivery and single copy categories.

For the six months ended June 30, 2008, circulation revenue was $37.2 million compared with $39.7 million in for the same period in 2007, a decrease of $2.5 million. The decline in circulation revenue was largely attributable to declines in volume, both in home delivery and single copy categories.

Operating Costs and Expenses

Total operating costs and expenses

Total operating costs and expenses in the second quarter of 2008 were $107.0 million, compared with $175.4 million in the second quarter of 2007, a decrease of $68.4 million. This decrease is largely the result of lower corporate expenses of $40.5 million, including lower bad debt expense as mentioned above of $33.7 million, a decrease in indemnification, investigation and litigation costs, net of $21.7 million, lower cost of sales of $6.8 million and lower depreciation and amortization of $1.2 million. These decreases were partially offset by higher other operating costs of $1.7 million.

For the six months ended June 30, 2008, total operating costs and expenses were $213.8 million, compared with $261.4 million for the comparable period in 2007, a decrease of $47.6 million. This decrease is largely the result of lower corporate expenses of $47.5 million, including lower bad debt expense as mentioned above of $33.7 million, lower cost of sales of $13.7 million and lower depreciation and amortization of $3.6 million. These decreases were partially offset by higher indemnification, investigation and litigation costs of $11.4 million, reflecting the impact of the $47.7 million settlement in 2007, higher sales and marketing costs of $1.1 million and higher 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 $53.6 million for the second quarter of 2008, compared with $60.4 million for the same period in 2007, a decrease of $6.8 million. Wages and benefits were $23.8 million in the second quarter of 2008 and $26.6 million in the second quarter of 2007, a decrease of $2.8 million. The decrease in wages and benefits largely reflects the impact of lower headcount related to the Company’s reorganization activities. Newsprint and ink expense was $11.8 million for the second quarter of 2008, compared with $13.2 million for the same period in 2007, a decrease of $1.4 million or 11%. Total newsprint consumption in the second quarter of 2008 decreased 20% compared with the same period in 2007, reflecting lower volume and reductions in the size of the Company’s newspapers. The average cost per metric ton of newsprint in the second quarter of 2008 was 11% higher than the second quarter of 2007. Other costs of sales were $18.1 million in the second quarter of 2008 compared to $20.6 million in the second quarter of 2007, a decrease of $2.5 million largely due to lower distribution costs of $1.6 million and lower property and facilities costs of $0.4 million, both of which are largely due to outsourcing the distribution activities late in the third quarter of 2007 and lower production costs of $0.8 million.

For the six months ended June 30, 2008, cost of sales was $106.6 million compared with $120.3 million for the same period in 2007, a decrease of $13.7 million. Wages and benefits were $48.5 million for the six months ended June 30, 2008 and $53.3 million for the six months ended June 30, 2007, a decrease of $4.8 million. The decrease in wages and benefits reflects the impact of lower headcount related to the Company’s reorganization activities. Newsprint and ink expense was $22.0 million for the six months ended June 30, 2008, compared with $26.9 million for the same period in 2007, a decrease of $4.9 million or 18%. Total newsprint consumption for the six months ended June 30, 2008 decreased 21% compared with the same period in 2007, reflecting lower volume and reductions in the size of the Company’s newspapers. The average cost per metric ton of newsprint for the six months ended June 30, 2008 was 3% higher than the same period in 2007. Other costs of sales were $36.1 million for the six months ended June 30, 2008 compared to $40.1 million for the comparable period in 2007, a decrease of $4.0 million largely due to lower distribution costs of $1.8 million and lower property and facilities costs of $0.9 million, both of which are largely due to outsourcing the distribution activities late in the third quarter of 2007 and lower production costs of $1.5 million.

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 $46.9 million in the second quarter of 2008 compared with $107.4 million for the same period in 2007, a decrease of $60.5 million. The decrease was largely due to lower corporate expenses of $40.5 million, reflecting the previously mentioned bad debt expense in 2007 of $33.7 million and lower indemnification, investigation and litigation costs, net, of $21.7 million. These costs were partially offset by higher other operating costs of $1.7 million.

For the six months ended June 30, 2008, total selling, general and administrative costs were $94.5 million compared with $125.0 million for the same period in 2007, a decrease of $30.5 million. The decrease was largely due to lower corporate expenses of $47.5 million, reflecting the previously mentioned bad debt expense of $33.7 million. These costs were partially offset by higher indemnification, investigation and litigation costs, net, of $11.4 million, including the above mentioned settlement of $47.7 million, higher sales and marketing costs of $1.1 million and higher other operating costs of $4.4 million.

Sales and marketing

Sales and marketing costs were $17.6 million in the second quarter of 2008, compared with $17.7 million in the second quarter of 2007, a decrease of $0.1 million. The decrease includes largely offsetting effects related to lower marketing and promotion expense of $1.2 million, resulting from the re-launch of the Chicago Sun-Times in 2007 and direct response advertising costs expensed in 2008, but capitalized (and amortized) in 2007 of $1.4 million.

For the six months ended June 30, 2008, sales and marketing costs were $34.1 million compared with $33.0 million for the same period in 2007, an increase of $1.1 million. This increase is largely due to direct response advertising costs expensed in 2008, but capitalized in 2007 of $3.2 million, partially offset by lower marketing and promotion expenses of $1.4 million, resulting from the re-launch of the Chicago Sun-Times in 2007, lower professional fees of $0.3 million and lower volume driven postage expense of $0.2 million.

Other operating costs

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

Other operating costs were $16.2 million in the second quarter of 2008 compared with $14.5 million for the same period in 2007, an increase of $1.7 million. This increase is largely due to the disposal or write-off of property, plant and equipment of $1.8 million and higher severance related reorganization costs of $0.8 million, partially offset by lower professional fees of $0.4 million and lower telecommunication costs of $0.3 million.

For the six months ended June 30, 2008, other operating costs were $33.3 million compared with $28.9 million for the same period in 2007, an increase of $4.4 million. This increase is largely due to the disposal or write-off of property, plant and equipment totaling $2.2 million, severance related reorganization costs of $2.4 million and increased workers compensation costs of $0.8 million, primarily due to changes in estimates related to prior year claims. These costs were partially offset by lower professional fees of $0.5 million and lower telecommunication costs of $0.5 million.

Corporate expenses

Corporate expenses in the second quarter of 2008 were $9.6 million compared with $50.1 million in the second quarter of 2007, a decrease of $40.5 million. The decrease is largely due to 2007 adjustments including the bad debt expense of $33.7 million related to a loan with an affiliate of Hollinger, as well as an adjustment to gains on prior years’ sales of newspaper operations of $8.6 million. Other improvements include lower insurance costs, primarily directors and officers coverage, of $0.6 million and lower professional fees of $0.6 million. These positive impacts were partially offset by expenses of $0.4 million related to the Company’s strategic alternative process and $2.5 million related to the Revised Settlement with Hollinger. See Note 11 to the condensed consolidated financial statements.

For the six months ended June 30, 2008, corporate expenses were $18.1 million compared with $65.6 million for the six months ended June 30, 2007, a decrease of $47.5 million. The decrease is largely due to 2007 adjustments including bad debt expense of $33.7 million related to a loan with an affiliate of Hollinger, as well as an adjustment to gains on prior year’s sales of newspaper operations of $13.6 million. Other improvements include lower insurance costs, primarily directors and officers coverage, of $1.3 million and lower non-legal professional fees of $2.2 million. These positive impacts were partially offset by expenses related to the Company’s strategic alternative process of $0.4 million, higher stock-based compensation expense of $0.6 million, higher legal fees related to litigation and arbitration activities of $0.3 million, and $2.5 million related to the Revised Settlement with Hollinger. See Note 11 to the condensed consolidated financial statements.

Indemnification, investigation and litigation costs, net of recoveries

Indemnification, investigation and litigation costs, net of recoveries in the second quarter of 2008 were $3.4 million compared with $25.1 million in the second quarter of 2007, a decrease of $21.7 million. Indemnification costs decreased $18.5 million to $4.3 million in the second quarter of 2008 from $22.8 million in the second quarter of 2007 as the criminal proceedings against certain former officers concluded in July 2007 and Special Committee investigation costs decreased $1.5 million. In the three months ended June 30, 2008, the Company received $2.0 million in recoveries for legal fees that had been incurred in connection with the Hollinger CCAA proceedings. See Note 9 to the condensed consolidated financial statements.

For the six months ended June 30, 2008, indemnification, investigation and litigation costs, net of recoveries were $8.9 million compared with a net recovery of $2.5 million in the same period in 2007, an increase in net expense of $11.4 million. The Company recorded a recovery of $2.0 million of legal fees in connection with the Hollinger CCAA proceedings in 2008 and a recovery of $47.7 million resulting from a settlement with a former officer in 2007. Indemnification costs decreased $32.2 million to $8.0 million for the six months ended June 30, 2008 from $40.2 million in the same period in 2007 as the criminal proceedings against certain former officers concluded in July 2007 and Special Committee investigation costs decreased $1.7 million. See Note 9 to the condensed consolidated financial statements.

Depreciation and amortization

Depreciation and amortization expense in the second quarter of 2008 was $6.4 million compared with $7.6 million in 2007, a decrease of $1.2 million. In the second quarter of 2007, amortization expense included $1.9 million related to capitalized direct response advertising costs. As indicated by recent declines in circulation and related advertising revenue, the benefit period of direct response advertising costs can best be described as indeterminate and are expensed as incurred in 2008 in “Sales and marketing” expenses in the Condensed Consolidated Statement of Operations.

For the six months ended June 30, 2008, depreciation and amortization expense was $12.6 million compared with $16.2 million for the same period in 2007, a decrease of $3.6 million. In the first six months of 2007, the Company recorded additional depreciation expense of $1.0 million related to the printing facility in Gary, Indiana, which was closed in March 2007. In addition, for the six months ended June 30, 2007, amortization expense included $3.4 million related to capitalized direct response advertising costs, which, as previously mentioned, are expensed as incurred in 2008. Operating loss

As a result of the items noted above, operating results improved by $56.6 million to an operating loss of $24.0 million in the second quarter of 2008 compared with $80.6 million operating loss for the same period in 2007. For the six months ended June 30, 2008, operating loss was $49.8 million compared with a $75.0 million operating loss for the same period in 2007, a decrease of $25.2 million.

Interest and Dividend Income

Interest and dividend income in the three months ended June 30, 2008 amounted to $0.9 million compared to $3.4 million for the same period in 2007, a decrease of $2.5 million, largely due to lower interest income earned as a result of lower average invested cash balances, including the effect of Canadian asset-backed commercial paper (“Canadian CP”). For the six months ended June 30, 2008, interest and dividend income amounted to $2.4 million compared to $13.7 million in 2007, a decrease of $11.3 million, largely due to $7.2 million of interest received on the settlement with a former officer in the first quarter of 2007 and lower average invested cash balances, including the effect of Canadian CP.

Other Income (expense), net

Other income (expense), net in the second quarter of 2008 was an expense of $1.1 million compared to an expense of $6.9 million for the same period in 2007. The $5.8 million improvement was largely due to a decrease in foreign exchange losses of $6.9 million, partially offset by a gain on sale of investments in 2007 of $1.0 million. See Note 4 to the condensed consolidated financial statements. The improvement in foreign exchange largely relates to the impact on U.S. denominated cash and cash equivalents held by a subsidiary in Canada and certain intercompany loans payable to a subsidiary in Canada in U.S. dollars, both reflecting smaller U.S. dollar exchange rate changes compared to the three months ended June 30, 2007. See Note 7 to the condensed consolidated financial statements.

For the six months ended June 30, 2008, other income (expense), net was income of $3.0 million compared to an expense of $7.4 million for the same period in 2007. The $10.4 million improvement was largely due to an improvement in foreign exchange effects of $11.8 million to a gain of $3.4 million, partially offset by a gain on sale of investments in 2007 of $1.0 million. See Note 4 to the condensed consolidated financial statements. The improvement in foreign exchange largely relates to the impact on U.S. denominated cash and cash equivalents held by a subsidiary in Canada and certain intercompany loans payable to a subsidiary in Canada in U.S. dollars, both resulting from an improved U.S. dollar exchange rate change in 2008 compared to the same six months ended June 30, 2007. See Note 7 to the condensed consolidated financial statements.

Income Taxes

Income taxes were an expense of $13.5 million in the second quarter of 2008 compared to a benefit of $612.4 million in the second quarter of 2007. The benefit in 2007 primarily represents the impact of the settlement of certain tax issues with the CRA, which resulted in the reversal of tax liabilities of $586.7 million in the second quarter of 2007. 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 and 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 $8.0 million in the second quarter of 2008 and $12.2 million for the second quarter of 2007. See Note 8 to the condensed consolidated financial statements.

For the first six months of 2008, income taxes were an expense of $29.0 million compared to a benefit of $592.2 million for the first six months of 2007. The 2007 benefit primarily represents the impact of the settlement of certain tax issues with the CRA, which resulted in the reversal of tax liabilities of $586.7 million in the second quarter of 2007. 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 and 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 $15.8 million in the first six months ended June 30, 2008 and $32.2 million for the same period in 2007. The Company also recognized approximately $3.0 million of additional contingent tax liabilities largely related to changes in estimated interest in respect of those liabilities. See Note 8 to the condensed consolidated financial statements.

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