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Sun-Times Media Group Inc. (NYSE:SVN)

Q1 2008 Earnings Call

May 8, 2008 4:30 pm ET

Executives

Cyrus Freidheim - President and Chief Executive Officer

William Barker – Chief Financial Officer and Senior Vice President of Finance

James McDonough – Vice President, General Counsel and Secretary

Analysts

Blair Carey - Abacus

Thomas Isenberg - Open Road Partners

Adam Spielman - PPM America

Helane Becker - Citigroup

Operator

Welcome to the first quarter earnings call. (Operator instructions) I will now turn the presentation over to Mr. Jim McDonough, General Counsel.

James McDonough

Thank you, operator. Certain statements made in this presentation are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words believe, anticipate, expect, estimate, project, will be, will continue, will likely result, or similar words or phrases.

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by Sun-Times Media Group with the Securities and Exchange Commission, including in its Forms 10-K and 10-Q.

New risk factors emerge from time to time and it’s not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the company’s business or the extent to which any factor, or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

In addition, certain of the information in this presentation include non-GAAP financial measures. Reconciliations of those measures to the most directly comparable GAAP financial measures are provided on our website. Go to www.thesuntimesgroup.com, click Investor Relations and select Events and Presentations to view the reconciliation.

I’ll now turn the call over to Cyrus Freidheim, the President and Chief Executive Officer of Sun-Times Media Group.

Cyrus Freidheim

Thank you, Jim. Welcome to the Sun-Times Media Group’s first quarter 2008 earnings call. Much has been said and written recently about the state of the newspaper industry, mostly now familiar refrains about deteriorating ad revenues and circulation.

As noted in our news release earlier today, these secular changes combined with a broad-based economic downturn in industries important to newspaper advertising, make for a powerful one-two punch against nearly every company in this business.

The Sun-Times Media Group reported a net loss of $35.8 million for the first quarter, with a 12.6% decline in advertising revenue and an 8% decline in circulation revenue.

Indemnification, investigation and litigation costs were $5.5 million, mostly related to the ongoing appeals process of certain former company officers. EBITDA for our Sun-Times News Group, which is our principle operating unit, was $3.7 million loss. Bill Barker, our Chief Financial Officer will go into detail on our financials.

The industry-wide downturn in print advertising continued in the first quarter of 2008 and in a word, was brutal. The average decline in print ad revenue for the quarter for major national newspaper companies was 12%, while the Chicago area market experienced a 13% decline.

Many newspaper companies, including our largest competitor the Chicago Tribune, experienced double-digit declines in print advertising revenue from a year ago, harmed by the softening economy and the housing malaise.

Virtually all newspaper advertising categories had major declines, led by classified retail and national advertising. Within the context of this environment, the Sun-Times Media Group performed in line with our competitors in the Chicago area, meaning we have maintained or grown our market share over the last three quarters.

The positive news for the first quarter is that we were able to grow our market share even slightly, while executing a major cost reduction program. We do not foresee a turnaround in the market for at least 6 to 12 months. The housing market in the Chicago area will likely remain weak throughout 2008.

From the perspective of advertising, the economy is behaving as though it is in a recession now. Most economists are projecting low growth at best for this year. We expect the secular move of certain advertising categories, from print to the Internet, to continue probably forever.

Classified is leading the flat pack, but others are following. Industry ad revenues on the Internet slowed from its 20% plus pace in 2007, but is still growing in the first quarter. Consequently, we cannot expect the market to bail us out.

We continue to believe there is an important place for print advertising in our economy and note that total newspaper advertising is almost three times greater than total online advertising.

The online advertising market in Chicago was reported to be $890 million in 2007, and newspaper companies got only a small share of that online ad market, which to us signals a major opportunity in a growing market.

Our challenge is to increase our share of the print ad market, now about 30%, closer to our readership share, now above 41%, and to participate fully in the growing online market.

Let me tell you what we’re doing in sales and marketing to achieve those objectives. We’ve doubled our New Media sales force; several new leaders have been put in place in marketing and advertising; we launched a marketing campaign “Did You Know?” which draws attention to our competitive advantages in readership.

For example, Did You Know that Sun-Times News Group reaches 80% more adults intent to buy or lease a car in the next six months than the Chicago Tribune, or reaches a 115% more readers who are looking to buy a new home, or 77% more moviegoers?

Our product development is operating at high speed with new and innovative products being introduced every week to better serve the advertising community and position us as a valued provider to our rich, Sun-Times News Group-wide consumer base.

We’re developing partnerships with a few key advertisers around their objectives in the market. Our new relationship with Jewel, Chicago’s market leader in food retailing is a good example. This has been welcome as beneficial on both sides.

We’re making it easier for our customers to reach us and advertise with us, including the ability to place classifieds online 24/7.

The results are moderately encouraging. We halted the decline in ad revenue share a year ago and continue to register modest share gains overall and important share gains in certain categories.

New Media, for example, has led the market in revenue growth for the past year and into the first quarter of 2008. It isn’t victory, but we are clearly in the game. We see the extraordinary tumult in our markets as an opportunity to realign the leadership.

Now, I will shift to a few of our other priority goals. First, we continue toward our goal of being the best multimedia news and information company in our market.

Today, we told our Fox Valley suburban staff, which publishes four daily newspapers for the Aurora, Joliet, Elgin, and Naperville communities of our bold plan to restructure and consolidate our Fox Valley operations to create a 24/7 journalistic pilot for the news and information company of the future.

We are centralizing certain editing, advertising and circulation functions at our new electronically-sophisticated facility in Aurora, while keeping local editorial and advertising functions embedded in their communities.

The ultimate goal is to transition to a true multimedia company with wideband and interactive technologies, providing our readers and advertisers the perfect mix of what they want, when they want it, and in whatever format they choose.

Some good news during the quarter, the last of our newspapers to be on censure status with the Audit Bureau of Circulation, the Chicago Sun-Times, is now back in good standing with ABC.

This was several years of effort to clean up our reporting and mend relationships with our advertisers, after discovery of inflated circulation figures across some of our publications. We are very happy to have this behind us.

Editorially, we are in excellent shape. In the first quarter, Sun-Times News Group publications again racked up several industry awards:

47 editorial awards, 12 of them first place, from the Suburban Newspapers of America;

10 Lisagor Awards;

More than 20 finalists from the prestigious Chicago Headline Club;

And Lake County News-Sun was named Business of the Year by the Lake County Chamber of Commerce. We had considered closing the New-Sun just one year ago. It is now a star in our portfolio.

Our second goal, building a strong Internet capability, remains a top priority for us. We recognize that digital communications will become the primary revenue source for news and information companies. The question is when, not whether. Our challenge is to fast-forward to the future.

Major alliances are under active discussion in New Media and we are increasing our New Media staff by about 20% to plan and execute an ambitious expansion in our online and mobile products and advertising offerings.

The performance of our existing sites made gains over last quarter and in comparison with our competition. Our unique visitors for the first quarter of 2008 were up 6% from the same period a year ago. Time on-site and page views were up over 25%, as we have added more video, blogs, and other content to our portfolio.

Turning to IT. After years of playing catch up in the investment in infrastructure and systems, we are seeing real progress. This quarter, we successfully upgraded our editorial and publications system for the Chicago Sun-Times, our largest newsroom.

We laid the groundwork for a major upgrade to our telecommunication infrastructure, to allow rich media such as video and high-definition graphics to flow across the network.

The transformation of our newspaper business into a multimedia business of online, mobile, and paper channels is being fully supported by our investment in infrastructure.

Goal three: bring our costs in line with revenues. We made significant progress on the $50 million cost reduction plan announced in December of 2007. We are on target to complete the program by June 30.

By the end of March, we had completed the lion’s share − 75% − of our planned head count reduction of approximately 500 jobs. The remaining reductions are tied to our outsourcing plans.

In regard to that, this month we launched the first phase of our program to outsource our ad production, which is the process that takes an ad or an ad idea from an advertiser and converts it to ready for the printing press.

The Chicago Sun-Times has gone live with outsourcing 50% of its ad production with no disruption for customers. The new system will facilitate the offshoring of graphics, design work for ads to India and Manila, allowing us to take advantage of work being done while we sleep.

Other properties will follow in the months ahead. Annualized savings will exceed $3 million and both service and quality are being enhanced.

The Fox Valley division of our company has entered into an agreement to outsource most of our inbound classified ad calls. We launched this week, after two weeks of successful testing. We will assess its performance and determine later this summer, whether and how to roll it out companywide.

This project will reduce costs, improve customer service and grow revenue by increasing ad sales per call. The benefits could reach several million dollars a year.

Our agreement with the Chicago Tribune Company to handle the distribution of our newspapers, which we told you about last August, has brought down our cost of distribution by 9% during the quarter compared with the first quarter of 2007.

As important, our improved customer service and capability to zone for advertisers puts us on a competitive parity with the Tribune in these key areas, which is one of our priority objectives from last year.

We see cost reduction not as a one-time project, but as an everyday commitment to improve productivity and lower cost of our business model, while protecting and enhancing the quality of our products and services. It is the way of life at the Sun-Times Media Group. Hence we will not stop at our $50 million goal.

Goal number four, we continue to work toward resolving our legacy issues. On March 25 of this year, we announced that the Sun-Times Media Group had reached a settlement with Hollinger Inc., a 20% shareholder with 70% of the voting power.

Major points of the agreement include:

The $15 million Class B shares convert 1 for 1 to A shares, eliminating the super-voting rights of Hollinger Inc.;

The company delivers 1.5 million new A shares to Hollinger Inc.;

5 of the 6 Directors appointed to Sun-Times Media Group’s Board by Inc. in August of last year will resign;

And both companies will drop all litigation against the other.

The settlement is subject to U.S and Canada court approval.

As we resolve our legacy issues, our costs are going down, including legal fees and indemnification advances; D&O insurance which was just renegotiated at a 50% reduction in costs for more flexible coverage; and lower audit fees.

The company successfully remediated its material weaknesses and general controls over information technology and overall entity level controls, which will substantially reduce audit and testing fees in 2008.

Many of you have asked about the possibility of a stock repurchase program. As we have said previously, given our situation with the IRS as well as the overall market conditions, we believe it’s prudent to preserve our cash position at this time.

In fact, one of our company’s significant strength is its cash position, which was $118 million at the end of the quarter, excluding our Canadian asset-backed commercial paper, which Bill Barker will discuss.

We are confident in our ability to sustain the company’s operation and continue our investments in strategic growth areas.

This week the company announced, it has notified New York Stock Exchange that it will not seek to cure the listing standard deficiencies it currently faces. The New York Stock Exchange has informed us that trading will be suspended at the market opening next Wednesday and that it is commencing delisting procedures.

We expect to move our stock trading to the over-the-counter bulletin board. This is not a decision we came to lightly. We decided in light of our plan to consider strategic options, we would not proceed with the actions and further costs necessary to continue our listing on the New York Stock Exchange.

This in no way affects the company’s mission to deliver the best to its readers and advertisers. It does not affect our financial situation or the way we do business, and it has no bearing on our previously announced plan to explore strategic options for the company.

Keep in mind, the cash position of the Sun-Times Media Group is strong and that your management team remains committed to all of our goals that we have set.

The company’s plan to evaluate strategic alternatives to enhance shareholder value, which we announced during the first quarter, is well underway. A large number of parties have expressed interest in acquiring one or more of the businesses, have signed non-disclosure agreements and have requested the books.

The books were sent out over the past few weeks and responses are anticipated in the latter part of this month. We will then review the responses and determine the best course of action for your company.

The Board’s Strategic Alternatives Committee is running a program with the support of Lazard Frères and the management team. In response to certain shareholders, the Board approved a bylaw change allowing holders of 25% or more of the company’s stock to call a shareholder meeting 6 months after any shareholder meeting, which is consistent with the evolving best practice in corporate governance.

In summary, we continue to face a number of both industry and legacy challenges. The Sun-Times News Group remains focused on its mission to deliver the best local news coverage to the most places across the Chicago region.

The Chicago Sun-Times continues to be the number one read newspaper in Chicago and overall, the Sun-Times News Group publications have almost 3 million readers per week, second in the U.S and well ahead of our local competitors.

We are committed to telling that story better to our advertisers. We have a great committed staff. We remain committed to investing in growth areas, while adjusting our cost structure as necessary to reach profitability.

Our mission remains as always, to enhance our leadership while working toward profitability and providing you, our shareholders, with a business as strong as our journalism.

We will not lose our focus while the strategic process proceeds. Whether the ongoing strategy process results in a sale of our properties or not, we intend to maintain and strengthen the news and information franchises we own, both in print and online.

Now, we’ll turn to Bill Barker, our Chief Financial Officer, who will talk more about the quarter.

William Barker

Thanks, Cyrus. Good afternoon. I will give a brief financial overview for the quarter, then provide some details behind the P&L and balance sheet numbers that were highlighted in today’s press release. More detail will be available in our Form 10-Q, which we will file by Monday.

As Cyrus mentioned, revenue trends continued to be very challenging in the first quarter across the industry and all of our publication groups. However, we did make significant progress on our cost reduction initiatives and expect to realize additional cost benefits as the year progresses.

For the quarter, advertising revenue was $61.1 million, which was down 12.6% versus last year’s first quarter. As Cyrus mentioned, this performance was slightly better than our competition in the Chicago market.

Q1 ad revenue for the Chicago Sun-Times was down 12% versus last year, while the suburban newspapers were down 13% for the quarter.

Total Internet ad revenue for the company was plus 8% versus last year, and now represents about 5% of our total advertising revenue.

Circulation revenue was $18.3 million, which was down 8.4% versus last year. The circulation revenue decline for the Chicago Sun-Times was down 10%, while circulation revenue for the suburban newspapers was down 7%.

Total revenue for the quarter was $81 million, down 11.7% versus last year.

Turning to the cost side of the Q1 P&L, we began to see the benefits of our cost savings initiatives in the first quarter. We will continue to see increasing cost benefits on a year-over-year comparison as the year progresses, as some of the cost saving efforts were implemented during the quarter and some are still in the process of being implemented and thus we didn’t recognize a full quarter worth of savings. We are on track to achieve our $50 million cost savings objective for 2008.

We are measuring our operating cost savings target on total operating costs excluding depreciation, amortization, corporate costs and the costs in recoveries associated with indemnification, investigation and litigation. We refer to these as our Sun-Times News Group or STNG operating costs.

After adjusting for one-time costs and adjustments in both years, STNG operating costs were $6.9 million below last year for the quarter, at $84.7 million versus $91.5 million last year, which represents a 7.4% cost reduction. In addition, ongoing corporate costs were $2.1 million below last year.

Looking at the Q1 costs in some more detail; total cost of sales was 11% lower than last year at $53 million for the quarter compared to $59.8 million last year. Cost of sales includes newsprint and ink, editorial costs and costs associated with production and distribution.

Key drivers of the $6.8 million cost improvement versus last year, included a 23% reduction in newsprint consumption; lower distribution costs related to our new distribution agreement; and head count reductions enacted in the fourth quarter of last year and throughout the first quarter of this year.

The significant reduction in newsprint consumption was the result of several factors beyond lower circulation volumes. Our previously announced combination of publications, some smaller publications sizes and more focus on the ratio of advertising to news in our publications.

Reported sales and marketing expenses increased $1.2 million to $16.5 million for the quarter. However last year’s number included a $1.9 million adjustment for capitalized direct response advertising costs such as telemarketing.

As we announced in our last conference call, we are no longer capitalizing these costs which results in higher reported sales and marketing expense, and lower reported amortization costs versus prior year.

Excluding the impact of the accounting change, sales and marketing expenses would have been $700,000 lower than last year for the quarter.

Reported other operating costs were $17.1 million for the quarter. This number includes $2 million of one-time costs primarily related to a charge taken for severance costs related to the outsourcing of ad production that we announced during the quarter.

Excluding that one-time cost, other operating costs increased by $700,000 versus last year, reflecting increased investment behind our New Media initiatives.

As I mentioned previously, corporate costs were $2.1 million lower than last year on an ongoing basis, which represented a 20% decline in ongoing costs. Last year’s reported corporate costs included $5 million one-time non-cash charge.

The ongoing cost reductions versus last year are driven by lower D&O insurance expenses and lower outside professional fees. Indemnification, investigation and litigation costs, net of recoveries, were $5.5 million for the quarter.

Last year’s first quarter which showed a net recovery of $27.6 million, included $47.7 million recovery related to a settlement with a former officer of the company.

Depreciation and amortization totaled $6.2 million in the quarter, down from $8.6 million a year ago. Depreciation was $850,000 lower than last year, as we recognized less depreciation due to the closure of our printing plant early last year.

Amortization was $1.6 million lower due to the change in accounting for capitalized direct response advertising costs, which increases reported sales and marketing expense and lowers reported amortization expense.

Thus, our Q1 operating loss was $25.8 million, which includes $2 million of one-time costs; $5.5 million in indemnification net costs; $6.2 million of depreciation and amortization; and $8.5 million of corporate costs.

Next, moving on to our balance sheet. As Cyrus mentioned, our cash and cash equivalents were $118 million at the end of the quarter. This amount does not include our investment in Canadian asset-backed commercial paper. The $118 million balance was down from $142 million at the end of last year, due to our operating loss in the quarter.

The first quarter is traditionally our lowest quarter for revenue and profit, and as mentioned previously, we expect the benefits from our cost reduction efforts to increase as the year progresses.

In addition, we have $11.5 million in recoverable income taxes on our balance sheet, which is an expected refund associated with the application of our 2007 NOL carryback. We expect to receive the refund in the third quarter of 2008, which should provide a boost to our Q3 cash flow.

We have $35 million in escrow deposits and restricted cash, which can be broken down into two distinct pieces. The first piece is cash collateral supporting letters of credit related primarily to our workers’ comp insurance policies.

The second piece is an escrow deposit securing indemnity obligations arising in connection with the sale of the company’s Canadian operations in early 2006. We must await a final judgment before determining how much, if any, of the escrow deposit we will recoup.

Two of the key items on our balance sheet are our Canadian asset-backed commercial paper investment and our income tax liability. As background, we currently hold Canadian asset-backed commercial paper with a face value of $48 million that was not redeemed in August of 2007 when demand for Canadian commercial paper dried up.

In response to the situation in the Canadian commercial paper market, an investor committee was formed and is leading efforts to restructure the commercial paper that remains unredeemed.

The current proposed solution is to replace the commercial paper with medium term notes, backed by the underlying assets of the commercial paper. The notes would have maturities that generally match the maturities of the underlying assets. The restructuring proposal is currently being reviewed in the Canadian courts.

Our Canadian asset-backed commercial paper is included in our investments line item on our balance sheet. As was the case at the end of last year, we are carrying the commercial paper at an estimated value of $36 million versus the $48 million of the face value.

Consistent with our methodology at year end, we have estimated the market value of these proposed notes based on the information available regarding the underlying assets and using index prices of securities similar to those we expect to receive.

While we feel that our estimate is reasonable and uses relevant available information, it should be noted that the Canadian commercial paper has not traded in an active market since August of last year, and we have not yet received final documentation regarding the proposed replacement medium term notes.

Given the length of time it has taken to reach this point in the proceedings and that there are still court approvals required, there is still considerable uncertainty about the short and medium-term market value of these proposed notes.

Regarding our tax situation, not much has changed since our last conference call. Our reported other tax liabilities increased by $13 million due to the interest we accrued on our contingent tax liabilities for the quarter.

Our other tax liabilities balance relates principally to the IRS audit for the years 1996 to 2003. However, there are also other items that contribute to the total balance.

In January, we received an examination report from the IRS setting forth proposed changes to our U.S tax returns for the period ending in 2003. Through the IRS’ appeals process, we intend to dispute certain of the proposed adjustments. We have filed our protest to the IRS’ recommended adjustments and thus have begun the formal appeals process.

At the end of the appeals process we will determine the appropriate next steps, which could include litigating certain issues in tax court. Having reviewed the IRS report, we believe our tax accruals are appropriate.

Given the sensitive nature of the discussions with the IRS, we do not intend to publicly disclose details regarding the basis upon which we have established our accruals, nor do we intend to disclose the information included in the IRS report.

As we move into the appeals process and possibly beyond, it is our belief that public disclosure of this information would be inappropriate and not in the best interest of the company.

If there are any significant developments with the IRS or if we believe we need to adjust our accruals at any point in the future, we will communicate that information as appropriate.

And with that, I will turn the call back over to Cyrus.

Cyrus Freidheim

Thank you, Bill. We are open for questions at this point.

Question-and-Answer Session

Operator

Our first question is from Blair Carey - Abacus.

Blair Carey – Abacus

I just have a quick question about the circulation numbers. Is the drop in the circulation numbers is it related to single sales or is it related to subscription?

Cyrus Freidheim

It’s more a single copy than it is subscription.

Blair Carey - Abacus

Okay. So that’s fairly typical in...

Cyrus Freidheim

The single copy is about 70% of our total, whereas subscription is about 30%. That’s for the Sun-Times, I am sorry. It’s kind of the reverse for the other ones; but single copy has been the problem and particularly with the Sun-Times.

Blair Carey - Abacus

Okay, thank you.

Operator

Our next question is from Helane Becker - Citigroup.

Helane Becker - Citigroup

You mentioned a tax refund that would be payable in 2009. Could you just say how much that was again?

William Barker

This is a refund we are filing a carryback of our 2007 loss. We should expect that refund in the third quarter of this year and it’s $11.5 million.

Helane Becker - Citigroup

Okay. Thank you.

Operator

Our next question comes from Adam Spielman - PPM America.

Adam Spielman - PPM America

Thank you, two questions. If you look at the cash balance it’s changed from December year end to today about $25 million. Is it useful at all as a way of thinking about how much cash you are burning through a quarter?

William Barker

I don’t think so. As I mentioned, first quarter is always our lowest quarter for revenue, particularly in January coming out of the holiday season, as well as our cost saving efforts ramp up and as Cyrus mentioned, we are just announcing a few of those and today are implementing those. So we should see more cost savings as we go forward. So Q1 is not a good proxy for a quarterly cash burn.

Adam Spielman - PPM America

Second question, just at a higher level obviously there is a lot of concern and gloom around the traditional newspaper business and at the same time, maybe the bright spot is the Internet and you’ve clearly talked about it.

How do you make sure that you are investing enough in the Internet properties and attracting the right kinds of people, talent? How do you balance that, while you are trying to cut all these costs?

Cyrus Freidheim

This is obviously a matter of how much we have available for it. We are putting all we feel we can spend smartly into it. And could we invest more? The answer is probably, yes. But we feel that we are pushing the machine that we have got here about as hard as we can and investing in every program that comes up that we feel is worth it.

Our cost reduction has been focused entirely on areas which do not affect our product or our Internet activities. So we feel we have got a good balance.

Adam Spielman - PPM America

Just remind me one more time, what was the face value of the Canadian?

William Barker

The face value of the Canadian asset-backed commercial paper is $48 million.

Adam Spielman - PPM America

Just didn’t hear everything you said. Did you ascribe any value, what you think you are going to get in securities; a new basket of securities?

William Barker

What we got is an estimate for what we think the medium term notes will be is basically 25% write down from the $48 million. So we’ve got $36 million on our balance sheet in the investments line.

Adam Spielman - PPM America

Do you think that stuff will be readily saleable when everybody gets it?

William Barker

We are not at the final steps yet. We certainly hope so; that’s certainly the plan of the restructuring committee in Canada. They are going to be rating the notes and the whole purpose of the restructuring plan was to create a secondary market.

Adam Spielman - PPM America

Okay. And then final one, I know that this is the age-long tough question on the tax liability. I understand you can’t talk about negotiations, but just remind me again, what stage is that right now, the negotiations with the government or discussion with the government?

William Barker

We received their recommended adjustments. So, they have completed their audit. We reviewed it and filed our objection letter to their recommended adjustments, which basically officially starts the appeals process.

They will then assign an appeals team to start this process. It normally takes, and again, this is a ballpark, 18 to 36 months to go through this. So, we will be back in front of the IRS making arguments. They will make their arguments and then the appeals group will evaluate it at the end of the day.

As with anything in this area, it’s going to take a while and the process probably won’t get started for another month or two, until they can find a case team to do it.

Adam Spielman - PPM America

And what was their recommended adjustment again? Whatever was disclosed.

William Barker

Like I said, we are not going to disclose that.

Adam Spielman - PPM America

Okay. That wasn’t disclosed. And then, just as you think about the cost savings plan, once you get there, assuming there continues to be some decline in the business, does that put you somewhere near cash flow breakeven?

William Barker

That’s our objective for the year is to get there. Obviously, we’ll have to keep an eye on what happens on the revenue side in the marketplace. And as Cyrus said, cost savings need to become a way of life and not just a one-time thing.

We have some big initiatives that we are undertaking right now, but if we can get the revenue back up a little bit and execute the cost savings with the reductions we are seeing in our corporate costs as well, our goal is get back to cash flow neutral.

Operator

Our next question is from Thomas Isenberg - Open Road Partners.

Thomas Isenberg - Open Road Partners

Did you mention earlier that you expect indications of interest in the media properties via Lazard by the end of this month? And if that’s so, I have a follow up to that.

Cyrus Freidheim

Yes, that’s true.

Thomas Isenberg - Open Road Partners

Okay. Let’s say you get satisfactory bids for all the assets, whatever it is, $100 to $500 million. Will there be any tax consequences to that? In the old days we were told really couldn’t sell the paper because of tax that would be owed, capital gains or whatever.

But I guess the value of it has come down and you have an accumulated deficit. So is that no longer an obstacle? Could there be a scenario where X hundred million comes into the company and then you just have to take care of the tax liability and the Hollinger bankruptcy?

William Barker

That’s certainly a scenario. Certainly with the range you put out there, possible sales possibilities, there is a wide range of tax implications. So I can’t really tell you what the tax liability would or wouldn’t be, depending on what the asset sales come in and which assets we decide to sell.

We are going to have to wait and see how that shakes out. We have got a sense of the different tax basis of the different properties. Again, given where we are on the process, obviously we don’t want to put that out there, the evaluation base.

Thomas Isenberg - Open Road Partners

All right. If you can just run the tape forward a bit, if you sell a number of assets, by my reckoning, even if you get to cash flow neutral by year end or so, which is dependent on the revenues holding up, which they may not; even though the cash looks very magnificent right now, very large, it’s going to be dwindling down and then there is still the tax thing to solve or settle.

How do you play out for Sun-Times over the next few years? How do you see things playing out?

Cyrus Freidheim

Assuming we don’t sell the assets.

Thomas Isenberg - Open Road Partners

How do you see them playing out if you see yourself selling the assets and then it playing out that way?

Cyrus Freidheim

I will take two scenarios and there are multiple ones in between. If we sell all the assets, we will have cash in the company and an IRS liability and our task is to get the IRS liability as down as low as possible, because that’s what the shareholders get, what’s left with the cash.

If we don’t sell the assets, we continue to operate, then we’ve got to have cash flow positive for the business. Now, we believe we can get to cash flow neutral in the foreseeable future, assuming the market doesn’t continue to collapse. And if we do, we can last for very long time with our current cash in the bank.

Thomas Isenberg - Open Road Partners

But you are losing something like $20, $25 million a quarter, right?

Cyrus Freidheim

No, we said we lost that this quarter. As Bill said that’s an unusual quarter, the first quarter. We can’t use that as a standard and there are several factors in here that come to play.

One is that we still got legacy costs, which are now going away slowly, but they are going away. And secondly the operations, because of the cost reduction program taking effect, we are coming closer to cash flow neutral.

If the revenue environment becomes a little less hostile, then our operations will go to at least cash flow neutral, we hope positive over time and then the company can last forever.

Thomas Isenberg - Open Road Partners

All right, that would be nice. One last thing if I may Cyrus, historically management doesn’t like to comment on but sometimes the management does; the stock price was hitting new all-time lows at $0.49. Part of that was probably forced selling because of the delisting, and any thoughts about the stock price just to the extent you can comment on it. I am just wondering how management and how you see the stock at $0.50?

Cyrus Freidheim

We think it is unfortunate to what happened today and although we did expect some reaction, that was a pretty severe reaction to the delisting. We called shareholders that own 85% of the stock and we were able to get a hold of about two-thirds of them and none of them were forced to sell.

So the selling we don’t think is necessarily forced selling. But I can’t make any comment about the future of the stock price. I think it has got its own feel and you people seem to know it better than we do. I don’t think insiders are very good judges of what the stock price is or should be.

Thomas Isenberg - Open Road Partners

Okay. Just wanted to get the impressions based on the assets that you have vis-à-vis the stock price. But thank you very much.

Operator

Our next question comes from Blair Carey - Abacus.

Blair Carey - Abacus

I just had a question I wanted to follow up on. The indemnification costs up until fairly recently, have been not a cash stream because of either money that has been paid in from insurance companies for settlements. There is a large amount that is still outstanding. Do you foresee sometime in the future that the company could potentially recover some of those costs?

Cyrus Freidheim

We don’t know; we certainly are going to try hard to do so. There are some costs that we believe we can recover, but others are questionable. But we are trying very hard. We are certainly going to the courts to recoup the advancements. We still have some insurance left that is, we think, resolved, but we haven’t got them paid yet on the fourth layer of our D&O insurance. So, there is still some cash to come in.

Blair Carey - Abacus

So, with the additional cash to come in, that’s as you said from the D&O insurance; at some point in time do you decide that you are not going to keep paying these expenses anymore? Is that the next step for the company?

Cyrus Freidheim

We did that and the Delaware court told us that we had to continue during the appeal. Once the appeal is completed, then there is no more requirement.

Blair Carey - Abacus

Okay. Thanks.

Operator

As there are no further questions in queue, I’ll hand the call back to management for any closing remarks.

Cyrus Freidheim

Thank you, and we appreciate your support. I just want to make one comment at the end here and that is, really from a neck down we are a different company. And we’ve done everything we think we can to improve the operation; to change the business model; change management; resize the cost structure; handle our legacy issues − all of which we think have resulted in a significantly stronger company.

The problem we face is a single one and it’s a huge one and it’s affecting everybody in the industry and we are doing everything we can to not just allow ourselves to be battered about by it, but to take as many actions directly toward the improvement of our sales position and the strengthening of our future, which is our Internet and digital businesses.

So we are doing what we can. We understand it is a rough time; the stock has not done well and we appreciate the support you have and we’ll look forward to talking to you in the next call.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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