EX-99.1 3 d603516dex991.htm INFORMATION STATEMENT OF NEW MEDIA INVESTMENT GROUP INC. Information Statement of New Media Investment Group Inc.
Table of Contents

Exhibit 99.1

 

LOGO

                    , 2013

Dear Newcastle Investment Corp. Stockholder:

We are pleased to inform you that on                     , 2013 the board of directors of Newcastle Investment Corp. (“Newcastle”) declared the distribution of all of its shares of common stock of New Media Investment Group Inc. (“New Media”), a majority-owned subsidiary of Newcastle, to Newcastle stockholders. Prior to the distribution, New Media will hold, directly or indirectly, all of Newcastle’s local media assets, which include over 400 newspapers, approximately 350 websites and a digital marketing services business called Propel Marketing.

Upon the distribution, Newcastle stockholders will own     % of the common stock of New Media. Newcastle’s board of directors has determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that distributing the shares of New Media is in the best interests of Newcastle.

The distribution of New Media common stock will occur on                     , 2013 by way of a taxable pro rata special dividend to Newcastle stockholders of record on the record date of the distribution. Each Newcastle stockholder will be entitled to receive              shares of New Media common stock for              shares of Newcastle common stock held by such stockholder at 5:00 PM, Eastern Time, on                     , 2013, the record date of the distribution. The New Media common stock will be issued in book-entry form only, which means that no physical stock certificates will be issued.

Stockholder approval of the distribution is not required, and you are not required to take any action to receive your New Media common stock.

Following the distribution, you will own shares in both Newcastle and New Media. The number of Newcastle shares you own will not change as a result of this distribution. Newcastle’s common stock will continue to trade on The New York Stock Exchange under the symbol “NCT.” New Media intends to apply to list its common stock on The New York Stock Exchange under the symbol “NEWM.”

The information statement, which is being mailed to all holders of Newcastle common stock on the record date for the distribution, describes the distribution in detail and contains important information about New Media, its business, financial condition and operations. We urge you to read the information statement carefully.

We want to thank you for your continued support of Newcastle and we look forward to your future support of New Media.

Sincerely,

Kenneth M. Riis

Chief Executive Officer


Table of Contents

New Media Investment Group Inc.

                    , 2013

Dear Future New Media Investment Group Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, New Media Investment Group Inc. (“New Media”). Following our separation from Newcastle Investment Corp., we will be a newly listed company primarily focused on investing in a high quality, diversified portfolio of local media assets and on growing our existing online advertising and digital marketing businesses.

We will be externally managed by an affiliate of Fortress Investment Group LLC (“Fortress”). We intend to create stockholder value through growth in our revenue and cash flow by expanding our digital marketing business, growing our online advertising business and pursuing strategic acquisitions of high quality local media assets. Our strategy will be to acquire and operate traditional local media businesses and transform them from print-centric operations to dynamic multi-media operations, through our existing online advertising and digital marketing businesses. We will also leverage our existing platform to operate these businesses more efficiently. We believe all of these initiatives will lead to revenue and cash flow growth for New Media and will enable us to pay dividends to our stockholders. We expect to distribute a substantial portion of our free cash flow as a dividend to stockholders, subject to approval by our Board of Directors.

New Media intends to apply to list its common stock on The New York Stock Exchange under the symbol “NEWM.”

We invite you to learn more about New Media by reviewing the enclosed information statement. We urge you to read the information statement carefully. We look forward to our future and to your support as a holder of New Media common stock.

Sincerely,

Michael E. Reed

Chief Executive Officer


Table of Contents

Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION

PRELIMINARY INFORMATION STATEMENT DATED SEPTEMBER 27, 2013

New Media Investment Group Inc.

Common Stock

(Par Value, $0.01 per share)

 

 

This Information Statement is being furnished to you as a stockholder of Newcastle Investment Corp. (“Newcastle”) in connection with the planned distribution (the “Distribution” or the “spin-off”) by Newcastle to its stockholders of all the shares of common stock, par value $0.01 per share, of New Media Investment Group Inc. (“New Media”) (the “Common Stock”) held by Newcastle immediately prior to the spin-off. Immediately prior to the time of the Distribution, Newcastle will hold     % of New Media’s outstanding shares of Common Stock.

At the time of the Distribution, Newcastle will distribute all of the outstanding shares of Common Stock held by Newcastle on a pro rata basis to holders of Newcastle common stock. Every              shares of Newcastle common stock outstanding as of 5:00 PM, Eastern Time, on                     , 2013, the record date for the spin-off (the “Record Date”), will entitle the holder thereof to receive              shares of Common Stock. The Distribution will be made in book-entry form. Fractional shares of Common Stock will not be distributed in the spin-off. Holders of Newcastle common stock will receive cash in lieu of fractional shares of New Media Common Stock.

The Distribution will be effective after the close of trading on the New York Stock Exchange (the “NYSE”) on                     , 2013, which we refer to hereinafter as the “Distribution Date.” Immediately after the Distribution is completed, we will be a publicly traded company independent from Newcastle.

No action will be required of you to receive shares of Common Stock, which means that:

 

    no vote of Newcastle stockholders is required in connection with this Distribution and we are not asking you for a proxy and you are requested not to send us a proxy;

 

    you will not be required to pay for the shares of our Common Stock that you receive in the Distribution; and

 

    you do not need to surrender or exchange any of your shares of Newcastle common stock in order to receive shares of our Common Stock, or take any other action in connection with the spin-off.

There is currently no trading market for our Common Stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the Record Date for the Distribution, and we expect “regular-way” trading of New Media Common Stock on a major U.S. national securities exchange to begin on the first trading day following the completion of the Distribution. New Media intends to apply to list its Common Stock on the NYSE under the symbol “NEWM.”

 

 

In reviewing this Information Statement, you should carefully consider the matters described under “Risk Factors” beginning on page 27 of this Information Statement.

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this Information Statement is                     , 2013.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Questions and Answers About The Spin-Off

     1   

Summary

     6   

Risk Factors

     27   

Cautionary Note Regarding Forward Looking Information

     41   

The Spin-Off and Restructuring

     42   

Certain U.S. Federal Income Tax Consequences of the Distribution

     48   

Certain U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders of Our Common Stock

     53   

Use of Proceeds

     55   

Determination of Offering Price

     55   

Market Price Information and Dividends

     55   

Selected Historical Consolidated Financial Data

     56   

Unaudited Pro Forma Condensed Combined Financial Information

     60   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     69   

Business

     92   

Our Manager and Management Agreement

     111   

Management

     116   

Compensation of Directors

     121   

Executive Compensation

     122   

Security Ownership of Certain Beneficial Owners and Management

     123   

Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated Entities

     124   

Restructuring Agreements

     126   

Description of Our Capital Stock

     130   

Where You Can Find More Information

     135   

Index To Financial Statements

     F-1   

Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, we have presented in this Information Statement the historical consolidated financial information of GateHouse Media Inc. and its consolidated subsidiaries (“GateHouse” or our “Predecessor”). Unless the context otherwise requires, any references in this information statement (“Information Statement”) to “we,” “our,” “us” and the “Company” refer to New Media Investment Group Inc. and its consolidated subsidiaries as in effect upon the completion of the Distribution. For periods prior to the Restructuring (as defined below) any references in this Information Statement to “we,” “our,” “us” and the “Company” refer to GateHouse, our Predecessor, and its consolidated subsidiaries, unless the context requires otherwise. References in this Information Statement to “Newcastle” generally refer to Newcastle Investment Corp. and its consolidated subsidiaries, unless the context requires otherwise. All figures included in this Information Statement are as of June 30, 2013, unless stated otherwise.


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF

The following questions and answers briefly address some commonly asked questions about the spin-off. They may not include all the information that is important to you. We encourage you to read carefully this entire Information Statement and the other documents to which we have referred you. We have included references in certain parts of this section to direct you to a more detailed discussion of each topic presented in this section. Unless the context otherwise requires, any references to “we,” “our,” “us” and the “Company” refer to New Media Investment Group Inc. and its consolidated subsidiaries as in effect upon the completion of the Distribution. For periods prior to the Restructuring, any references in this information statement to “we,” “our,” “us” and the “Company” refer to GateHouse, our Predecessor and its consolidated subsidiaries, unless the context requires otherwise. References to “Newcastle” generally refer to Newcastle Investment Corp. and its consolidated subsidiaries, unless the context requires otherwise.

What will Newcastle stockholders receive in the spin-off?

To effect the spin-off, Newcastle will make a distribution of all of the outstanding shares of New Media Common Stock held by Newcastle to Newcastle common stockholders as of the Record Date, which will be 5:00 PM, Eastern Time, on                     , 2013. For every              shares of Newcastle common stock held on the Record Date for the Distribution, Newcastle will distribute              shares of New Media Common Stock. The Distribution will be made in book-entry form. Fractional shares of Common Stock will not be distributed in the spin-off. Instead, as soon as practicable after the spin-off American Stock Transfer & Trust Company, LLC, the distribution agent, will aggregate the fractional shares of our Common Stock and sell these shares in the open market at prevailing market prices and distribute the applicable portion of the aggregate net cash proceeds of these sales to each holder who otherwise would have been entitled to receive a fractional share in the spin-off. You will not be entitled to any interest on the amount of the cash payment made in lieu of fractional shares.

Newcastle stockholders will not be required to pay for shares of our Common Stock received in the Distribution, or to surrender or exchange any shares of Newcastle common stock or take any other action to be entitled to receive our Common Stock. The Distribution of our Common Stock will not cancel or affect the number of outstanding shares of Newcastle common stock.

Immediately after the Distribution, holders of Newcastle common stock as of the Record Date will hold     % of the outstanding shares of our Common Stock. Based on the number of shares of Newcastle common stock outstanding on                     , 2013, Newcastle expects to distribute approximately              shares of our Common Stock in the spin-off. For a more detailed description, see “The Spin-Off and Restructuring” in this Information Statement.

Why is Newcastle spinning off New Media?

Newcastle’s board of directors periodically reviews strategic alternatives. The Newcastle board of directors determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the spin-off of New Media is in the best interests of Newcastle. The board’s determination was based on a number of factors, including those set forth below.

 

    Added focus and simplification. We believe the spin-off of New Media will enhance Newcastle’s focus on its primary strategy of opportunistically investing in, and actively managing, a variety of real-estate related and other investments. The spin-off will simplify Newcastle’s business by separating an asset class (media assets) that is unrelated to the remainder of Newcastle’s investment portfolio. As a result, we believe the spin-off will facilitate investor and analyst understanding of Newcastle’s core businesses. In addition, the spin-off will create a dedicated vehicle to pursue a significant investment opportunity in the media industry.

 

   

Tailored capital structure and financing options. New Media and Newcastle will have distinct and unrelated businesses, and the spin-off will enable each to create a capital structure tailored to its

 

1


Table of Contents
 

individual needs. In addition, tailored capital structures will facilitate each company’s ability to pursue acquisitions, possibly using common stock as currency, and other strategic alliances. Following the spin-off, each company may be able to attain more favorable financing terms on a stand-alone basis than Newcastle could obtain currently.

 

    Newcastle’s Real Estate Investment Trust (“REIT”) status. As a REIT, Newcastle is not suited to own an operating business indefinitely. Newcastle’s current investment in New Media originated with a 2007 debt investment in GateHouse. GateHouse became overleveraged in the financial crisis, and Newcastle determined to maximize the value of its investment by pursuing a restructuring that will result in the conversion of its debt into equity. Following the restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

The anticipated benefits of the spin-off are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated or at all. In the event that the spin-off does not result in such benefits, the costs associated with the transaction and the expenses New Media will incur as an independent public company, including management compensation and general and administrative expenses, could have a negative effect on each company’s financial condition and ability to make distributions to its stockholders. For more information about the risks associated with the separation, see “Risk Factors.”

What businesses will Newcastle engage in after the spin-off?

Newcastle will continue to be a real estate investment trust that focuses on opportunistically investing in, and actively managing, a variety of real estate-related and other investments.

Who is entitled to receive shares of our Common Stock in the spin-off?

Holders of Newcastle common stock as of 5:00 PM, Eastern Time, on                      , 2013, the Record Date for the spin-off, will be entitled to receive shares of our Common Stock in the spin-off.

When will the Distribution occur?

We expect that Newcastle will distribute the shares of our Common Stock on                     , 2013 to holders of record of Newcastle common stock as of 5:00 PM, Eastern Time, on                     , 2013, subject to certain conditions described under “The Spin-Off and Restructuring—Conditions to the Distribution.”

What do I need to do to receive my shares of New Media Common Stock?

Nothing, but we urge you to read this Information Statement carefully. Stockholders who hold Newcastle common stock as of the Record Date will not need to take any action to receive your shares of our Common Stock in the Distribution. No stockholder approval of the Distribution is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our Common Stock. If you own Newcastle common stock as of 5:00 PM, Eastern Time, on the Record Date, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our Common Stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of New Media Common Stock, or your bank or brokerage firm will credit your account for the shares. If you sell shares of Newcastle common stock in the “regular-way” market through the Distribution Date, you will also sell your right to receive shares of New Media Common Stock in the Distribution. Following the distribution, stockholders whose shares are held in book-entry form may request that their shares of New Media Common Stock held in book-entry form be transferred to a brokerage or other account at any time, without charge.

 

2


Table of Contents

Will I receive physical certificates representing shares of New Media Common Stock following the Distribution?

No. Following the Distribution, neither Newcastle nor New Media will be issuing physical certificates representing shares of New Media Common Stock. Instead, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our Common Stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of New Media Common Stock, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical stock certificates.

What will govern my rights as a New Media stockholder?

Your rights as a New Media stockholder will be governed by Delaware law, as well as our amended and restated certificate of incorporation and our amended and restated bylaws. A description of these rights is included in this Information Statement under the heading “Description of Our Capital Stock.”

Who will be the stockholders of New Media Common Stock after the Distribution?

Immediately following the Distribution, Newcastle stockholders as of the Record Date for the Distribution will own     % of our Common Stock. The remainder of the outstanding Common Stock will be owned by holders of GateHouse debt who elected to receive Common Stock in the Restructuring (as defined below) of GateHouse. See “The Spin-Off and Restructuring,” “Restructuring Agreements” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations” in this Information Statement for more information.

Are there risks associated with the spin-off and our business after the spin-off?

Yes. You should carefully review the risks described in this Information Statement under the heading “Risk Factors” beginning on page 27.

Is stockholder approval needed in connection with the spin-off?

No vote of Newcastle stockholders is required or will be sought in connection with the spin-off.

Where will I be able to trade shares of New Media Common Stock?

There is not currently a public market for New Media Common Stock. New Media intends to apply to list its Common Stock on the NYSE under the symbol “NEWM.” We anticipate that trading in shares of our Common Stock will begin on a “when-issued” basis on or shortly before the Record Date and will continue through the Distribution Date and that “regular-way” trading in shares of our Common Stock will begin on the first trading day following the Distribution Date. If trading begins on a “when-issued” basis, you may purchase or sell our Common Stock up to and including through the Distribution Date, but your transaction will not settle until after the Distribution Date. We cannot predict the trading prices for our Common Stock before, on or after the Distribution Date. If the Distribution is cancelled, your transaction will not settle and will have to be disqualified.

What if I want to sell my Newcastle common stock or New Media Common Stock?

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor. Neither Newcastle nor New Media makes any recommendations on the purchase, retention or sale of Newcastle common stock or the shares of New Media Common Stock to be distributed in the spin-off.

 

3


Table of Contents

If you decide to sell any shares before the Distribution, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Newcastle common stock or the shares of Common Stock you will receive in the Distribution. If you sell your Newcastle common stock in the “regular-way” market up to and including the Distribution Date, you will also sell your right to receive shares of Common Stock in the Distribution. If you own Newcastle common stock as of 5:00 PM, Eastern Time, on the Record Date and sell those shares on the “ex-distribution” market up to and including the Distribution Date, you will still receive the shares of Common Stock that you would be entitled to receive in respect of the Newcastle common stock you owned as of 5:00 PM, Eastern Time, on the Record Date. See “The Spin-Off and Restructuring—Trading Between the Record Date and Distribution Date” in this Information Statement for more information.

Will I be taxed on the shares of New Media Common Stock that I receive in the Distribution?

Yes. The Distribution will be in the form of a taxable special dividend to Newcastle stockholders. An amount equal to the fair market value of the shares of our Common Stock received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Newcastle, with the excess treated as a non-taxable return of capital to the extent of your tax basis in Newcastle common stock and any remaining excess treated as capital gain. If this special dividend is distributed in the structure and timeframe currently anticipated, the special dividend is expected to satisfy a portion of Newcastle’s 2013 REIT taxable income distribution requirements. For a more detailed discussion, see “Certain U.S. Federal Income Tax Consequences of the Distribution.”

How will the Distribution affect my tax basis and holding period in Newcastle common stock?

Your tax basis in shares of Newcastle held at the time of the Distribution will be reduced (but not below zero) to the extent the fair market value of the shares of our Common Stock distributed by Newcastle in the Distribution exceeds Newcastle’s current and accumulated earnings and profits, as adjusted to take account of other distributions made by Newcastle in the taxable year that includes the Distribution. Your holding period for such Newcastle shares will not be affected by the Distribution. See “Certain U.S. Federal Income Tax Consequences of the Distribution.” You should consult your own tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

What will my tax basis and holding period be for the stock of New Media that I receive in the Distribution?

Your tax basis in the shares of our Common Stock received will equal the fair market value of such shares on the date of the Distribution. Your holding period for such shares will begin the day after the date of the Distribution. See “Certain U.S. Federal Income Tax Consequences of the Distribution.”

You should consult your own tax advisor as to the particular tax consequences of the Distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

Can Newcastle decide to cancel the Distribution or modify its terms if all conditions to the Distribution have been met?

Yes. Although the Distribution is subject to the satisfaction or waiver of certain conditions, Newcastle has the right to not to complete the Distribution if at any time prior to the Distribution Date (even if all such conditions are satisfied), its board of directors determines, in its sole discretion, that the Distribution is not in the best interest of Newcastle or that market conditions are such that it is not advisable to separate New Media from Newcastle.

 

4


Table of Contents

Does New Media plan to pay dividends?

We currently expect New Media to distribute a substantial portion of free cash flow as a dividend, subject to approval by New Media’s board of directors. However, our ability to pay dividends is subject to a number of risks and uncertainties, and there can be no assurance regarding whether we will pay dividends in the future. See, for example, “Risk Factors—We may not be able to pay dividends in accordance with our announced intent or at all.”

Will the number of Newcastle shares I own change as a result of the Distribution?

No. The number of shares of Newcastle common stock you own will not change as a result of the Distribution.

What will happen to the listing of Newcastle common stock?

Nothing. It is expected that after the distribution of New Media Common Stock, Newcastle common stock will continue to be traded on the NYSE under the symbol “NCT.”

Will the Distribution affect the market price of my Newcastle shares?

Yes. As a result of the Distribution, we expect the trading price of shares of Newcastle common stock immediately following the Distribution to be lower than immediately prior to the Distribution because the trading price will no longer reflect the value of New Media’s assets. Furthermore, until the market has fully analyzed the value of Newcastle without New Media’s assets, the price of Newcastle shares may fluctuate significantly. In addition, although Newcastle believes that over time following the separation, the common stock of the separated companies should have a higher aggregate market value, on a fully distributed basis and assuming the same market conditions, than if Newcastle were to remain under its current configuration, there can be no assurance, and thus the combined trading prices of Newcastle common stock and New Media Common Stock after the Distribution may be equal to or less than the trading price of shares of Newcastle common stock before the Distribution.

Where can Newcastle stockholders get more information?

Before the Distribution, if you have any questions relating to the Distribution, you should contact:

Newcastle Investment Corp.

Investor Relations

1345 Avenue of the Americas

New York, NY 10105

Tel: 212-479-3195

www.newcastleinv.com

After the Distribution, if you have any questions relating to our Common Stock, you should contact:

New Media Investment Group Inc.

Investor Relations

Tel: 212-479-3160

 

5


Table of Contents

SUMMARY

This summary of certain information contained in this Information Statement may not include all the information that is important to you. To understand fully and for a more complete description of the terms and conditions of the spin-off, you should read this Information Statement in its entirety and the documents to which you are referred. See “Where You Can Find More Information.”

Our Company

We will be a newly listed company primarily focused on investing in a high quality, diversified portfolio of local media assets and on growing our existing online advertising and digital marketing businesses.

We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. We operate in 338 markets across 24 states. Our portfolio of products, which includes 438 community publications, 365 related websites, and six yellow page directories, serves more than 130,000 business advertising accounts and reaches approximately 12 million people on a weekly basis.

Our print and online products focus on the local community from both a content and advertising standpoint. As a result of our focus on small and midsize markets, we are usually the primary, and sometimes the sole, provider of comprehensive and in-depth local market news and information in the communities we serve. Our content is primarily devoted to topics that we believe are highly relevant and of interest to our audiences such as local news and politics, community and regional events, youth sports, opinion and editorial pages, and local schools.

More than 83% of our daily newspapers have been published for more than 100 years and 99% have been published for more than 50 years. We believe that the longevity of our publications demonstrates the value and relevance of the local information that we provide and has created a strong foundation of reader loyalty as well as a highly recognized media brand name in each community we serve.

We will be externally managed by an affiliate of Fortress Investment Group LLC (“Fortress”). We intend to create stockholder value through growth in our revenue and cash flow by expanding our digital marketing business, growing our online advertising business and pursuing strategic acquisitions of high quality local media assets. Our strategy will be to acquire and operate traditional local media businesses and transform them from print-centric operations to dynamic multi-media operations, through our existing online advertising and digital marketing businesses. We will also leverage our existing platform to operate these businesses more efficiently. We believe all of these initiatives will lead to revenue and cash flow growth for New Media and will enable us to pay dividends to our stockholders. We expect to distribute a substantial portion of our free cash flow as a dividend to stockholders, subject to approval by our Board of Directors.

We will become the owner of 100% of the equity interests in GateHouse as a result of the consummation of a pre-packaged plan under Chapter 11 of title 11 of the Bankruptcy Code (the “Plan”). In addition, prior to the spin-off, Newcastle is expected to contribute its subsidiary Local Media (as defined below) to us. After giving effect to these transactions, Newcastle will own at least 59% of our Common Stock. See “—Recent Developments,” “The Spin-Off and Restructuring,” “Restructuring Agreements” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

Our Manager

We will be managed by FIG LLC (our “Manager”), an affiliate of Fortress, pursuant to the terms of a Management and Advisory Agreement (the “Management Agreement”) dated as of                     , 2013 between

 

 

6


Table of Contents

us and our Manager . We will draw upon the long-standing expertise and resources of Fortress, a global investment management firm with $54.6 billion in fee paying assets under management as of June 30, 2013.

Pursuant to the terms of the Management Agreement, our Manager, subject to oversight by our Board of Directors, will be responsible for: (1) performing day-to-day functions, (2) determining investment criteria in conjunction with, and subject to the supervision of, our Board of Directors, (3) sourcing, analyzing and executing on investments and sales, (4) performing investment and liability management duties, including financing and hedging, and (5) performing financial and accounting management. For its services, our Manager will be entitled to an annual management fee and eligible to receive incentive compensation that is based on our performance.

Our Manager also manages Newcastle, a publicly traded REIT that pursues a broad range of real estate related investments. Our management team will not be required to exclusively dedicate their services to us and will provide services for other entities affiliated with our Manager, including, but not limited to, Newcastle.

Reasons for Distribution

Newcastle’s board of directors periodically reviews strategic alternatives. The Newcastle board determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the spin-off of New Media is in the best interests of Newcastle. The Newcastle board’s determination was based on a number of factors, including those set forth below.

 

    Added focus and simplification. We believe the spin-off of New Media will enhance Newcastle’s focus on its primary strategy of opportunistically investing in, and actively managing, a variety of real-estate related and other investments. The spin-off will simplify Newcastle’s business by separating an asset class (media assets) that is unrelated to the remainder of Newcastle’s investment portfolio. As a result, we believe the spin-off will facilitate investor and analyst understanding of Newcastle’s core businesses. In addition, the spin-off will create a dedicated vehicle to pursue a significant investment opportunity in the media industry.

 

    Tailored capital structure and financing options. New Media and Newcastle will have distinct and unrelated businesses, and the spin-off will enable each to create a capital structure tailored to its individual needs. In addition, tailored capital structures will facilitate each company’s ability to pursue acquisitions, possibly using common stock as currency, and other strategic alliances. Following the spin-off, each company may be able to attain more favorable financing terms on a stand-alone basis than Newcastle could obtain currently.

 

    Newcastle’s Real Estate Investment Trust (“REIT”) status. As a REIT, Newcastle is not suited to own an operating business indefinitely. Newcastle’s current investment in New Media originated with a 2007 debt investment in GateHouse. GateHouse became overleveraged in the financial crisis, and Newcastle determined to maximize the value of its investment by pursuing a restructuring that will result in the conversion of its debt into equity. Following the restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

Our Strengths

High Quality Assets with Leading Local Franchises. Our publications benefit from a long history in the communities we serve as the leading, and often sole, provider of comprehensive and in-depth local content. This has resulted in strong reader loyalty and high local audience penetration rates, which are highly valued by local advertisers. We continue to build on long-standing relationships with local advertisers and our in-depth knowledge of the consumers in our local markets.

Superior Value Proposition for Our Advertisers. The concentrated smaller market local focus of our portfolio provides advertisers with large reach to a targeted audience with whom they can communicate directly,

 

 

7


Table of Contents

thereby maximizing the efficiency of their advertising spending. We offer advertisers several alternatives (daily, weekly, shopper, and niche print publications as well as an array of web, mobile and tablet products) to reach consumers and to tailor the nature and frequency of their marketing messages. We also offer advertisers the ability to target consumers based on their behavior online which is an effective and efficient way for businesses to market to the right customers.

Strong Revenue Characteristics. We have strong diversification in our revenues in terms of type of revenue, product source for revenue, geographic distribution of revenues and numbers of customers. We also benefit from our strong local franchises who serve local consumers and businesses in small to mid-size markets. All of these characteristics we believe give us long term stability and viability. During the twelve months ended June 30, 2013, we generated revenue in 328 markets across 21 states, serving a fragmented and diversified local customer base. For full year 2012, we served over 128,000 business advertising accounts in our publications, and our top 20 advertisers contributed less than 5% of our total revenues. Over 3.8 million classified advertisements were placed in our publications in 2012. Additionally, for the full year 2012 we generated 60% of revenue from print product advertising, 27% from subscription income from customers, 6% from digital advertising and 7% from commercial printing work for external customers and affiliated parties.

Scale Yields Stronger Operating Profit Margins and Allows Us to Realize Operating Synergies. We believe we generate higher operating profit margins than our publications could achieve on a stand-alone basis by leveraging our operations and implementing revenue initiatives, especially digital initiatives, across a broader local footprint in a geographic cluster and by centralizing certain back office production, accounting, administrative and corporate operations. We also benefit from economies of scale in the purchase of insurance, newsprint and other large strategic supplies and equipment. Finally, we have the ability to further leverage our centralized services and buying power to reduce operating costs when making future strategic accretive acquisitions.

Strong Local Business Profile Generates Significant Cash Flow. Our strong local business franchises generate significant recurring cash flow due to our diversified revenue base, healthy operating profit margins, and our low capital expenditure and working capital requirements. With the company’s low leverage capital structure after the restructuring it will have significant available cash flow to create stockholder value, including investing in organic growth, investing in accretive acquisitions and returning cash to stockholders in the form of dividends, subject to approval by our Board of Directors. We further believe the strong cash flows generated and available to be invested will lead to consistent future dividend growth.

Large Locally Focused Sales Force. We have large and well known feet on the street local sales forces in the markets we serve. They are generally the largest locally oriented media sales force. Our sales forces and their respective local media brands tend to have strong credibility and trust within the local business communities. We have long-standing relationships with many local businesses and have the ability to get in the door with most local businesses due to these unique characteristics we enjoy. These qualities also provide leverage for our sales force to grow additional future revenue streams in our markets.

Strong Track Record of Acquiring and Integrating New Assets. We have created a national platform for consolidating local media businesses and have demonstrated an ability to successfully identify, acquire and integrate local media asset acquisitions. We have acquired over $1.6 billion of assets since 2006. We have acquired both traditional newspaper and directory businesses. We have a very scalable infrastructure and platform to leverage with future acquisitions.

Experienced Management Team. Our senior management team is made up of executives who have an average of over 20 years of experience in the media industry, including strong traditional and digital media expertise. Our executive officers have broad industry experience and a successful track record with regard to both

 

 

8


Table of Contents

business performance among its industry peer group, growing new digital business lines, and identifying and integrating strategic acquisitions. Our management team also has key strengths in managing wide geographically disbursed teams, including the sales force, and identifying and centralizing duplicate functions across businesses leading to reduced core infrastructure costs.

Our Strategy

We intend to create stockholder value through growth in our revenue and cash flow by expanding our digital marketing business, growing our online advertising business and pursuing strategic acquisitions of high quality local media assets. Our strategy will be to acquire and operate traditional local media businesses and transform them from print-centric operations to dynamic multi-media operations, through our existing online advertising and digital marketing businesses. We will also leverage our existing platform to operate these businesses more efficiently. We believe all of these initiatives will lead to revenue and cash flow growth for New Media and will enable us to pay dividends to our stockholders, subject to approval by our Board of Directors. The key elements of our strategy include:

Maintain Our Leading Position in the Delivery of Proprietary Content in Our Communities. We seek to maintain our position as a leading provider of local content in the markets we serve and to leverage this position to strengthen our relationships with both readers and advertisers, thereby increasing penetration rates and market share. A critical aspect of this approach is to continue to provide local content that is not readily obtainable elsewhere and to be able to deliver that content to our customers across multiple print and digital platforms. We believe it is very important for us to protect the content from unauthorized users who use it for their own commercial purposes. We also believe it is important for us to develop subscription revenue streams from our digitally distributed content.

Stabilize Our Core Business Operations. We have four primary drivers in our strategic plans to stabilize our core business operations, including: (i) identifying permanent structural expense reductions in our traditional business cost infrastructure and re-deploying a portion of those costs toward future growth opportunities, primarily on the digital side of our business; (ii) accelerating the growth of both our digital audiences and revenues through improvements to current products, new product development, training, opportunistic changes in hiring to create an employee base with a more diversified skill set and sharing of best practices; (iii) accelerating our consumer revenue growth through subscription pricing increases and growth in our subscriber base, which we aim to improve by employing additional strategic customer acquisition techniques, driving digital only subscriber growth through our pay meter strategy and improving our customer retention programs; and (iv) stabilizing our core print advertising revenues through improvements to pricing (understanding and selling the unique value of our local audience reach and level of engagement, at the sales rep level), packaging of products for customers that will produce the best results for them (needs based selling), more technology and training for sales management and sales representatives and increased accountability through consistent setting of expectations and measuring against those expectations on a regular basis.

Grow New Digital Business and Revenue Streams Leveraging Key Strengths. We plan to scale and expand our two new recently created digital businesses, Propel Marketing and adhance media. Propel Marketing will allow us to sell digital marketing services to small and medium sized businesses (“SMBs”) both in and outside existing markets. The SMB demand for digital service solutions is great and represents a rapidly expanding opportunity. adhance media, our private advertising exchange, allows us to more fully monetize our (and third parties’) valuable unsold digital advertising space. Advertising bought programmatically through private exchanges is expected to grow rapidly over the next five years, especially in private exchanges where advertisers get priority access to the advertising space. We also aim to leverage our large local sales forces and strong local media brands to create new business opportunities at the local market level.

Pursue Strategic Accretive Acquisitions. We intend to capitalize on the highly fragmented and distressed newspaper and directory industries. We initially expect to focus our investments in the local newspaper and

 

 

9


Table of Contents

yellow page directory sectors, primarily in the United States. We believe we have a strong operational platform, which currently owns local newspaper and directory businesses, as well as a scalable digital services business, Propel Marketing. This platform, along with deep industry specific knowledge and experience that our management team has can be leveraged to reduce costs, stabilize the core business and grow digital revenues at acquired properties. The size and fragmentation of the addressable newspaper and yellow page directory market place in the United States, the greatly reduced valuation levels that exist in these industries, and our deep experience, make this an attractive place for our initial consolidation focus and capital allocation. Over the longer term we also believe there may be opportunity to diversify and acquire these types of assets internationally, as well other traditional local media assets such as broadcast TV, out of home advertising (billboards) and radio, in the United States and internationally.

Increase Sales Force Productivity. We aim to increase the effectiveness and productivity of our sales force and, in turn, help maximize advertising revenues. We also aim to shift the culture of our sales force from that of print-centric to multi-media and feel that is critical to our long term success. Our approach includes changes to sales force compensation to be more aligned with long term strategic goals, ongoing company-wide training of sales representatives and sales managers that focuses on strengthening their ability to perform needs based assessments and selling. We set expectations by sales representatives, manager and team and regularly evaluate the performance of our sales representatives and sales management against those expectations. We believe stronger accountability and measurement of our sales force, when combined with enhanced training and access to better technologies, demographic and marketing information, will lead to greater productivity and revenue from our sales force.

Introduce New Products or Modify Our Products to Enhance our Value Proposition to Local Businesses. We believe that our established positions in local markets, combined with our publishing and distribution capabilities, allow us to develop and customize new products to address the evolving interests and needs of our readers and local businesses. A primary source for product enhancement and growth we believe exists in the digital space. Product improvement and new product development across the web, mobile and tablets will be a key component to long term success. We are actively scaling web and mobile products, including deal platforms, digital service offerings, including Propel Marketing, mobile websites and applications, and we continue to expand on our offering of behavioral targeted and audience extension advertising options.

Pursue a Content-Driven Digital Strategy. As consumers continue to spend more time online especially with regard to consumption of news, we believe that we are well-positioned to increase our digital penetration and generate additional online audience and revenues due to both our ability to deliver unique local content online, and the relationship our local brand names have with readers and advertisers. We believe this presents an opportunity to increase our overall audience penetration rates and drive additional subscription revenues in each of the communities we serve. We have developed pay meters at most all of our daily newspaper websites and several of our largest weeklies, which we use to charge customers fees for access to our content. These meters will enable us to grow our digital subscription income and capture revenues that shift to the web as consumers shift to the web. Finally, we intend to share resources across our organization in order to give each of our publications access to technology, digital management expertise, content and advertisers that they may not have been able to obtain or afford if they were operating independently.

Management Agreement

Prior to the completion of the Distribution, we will enter into a Management Agreement with our Manager. Our Management Agreement will require our Manager to manage our business affairs subject to the supervision of our Board of Directors.

Our Management Agreement has an initial three-year term and will be automatically renewed for one-year terms thereafter unless terminated either by us or our Manager. From the commencement date of our Common

 

 

10


Table of Contents

Stock trading on the “regular way” market on a major U.S. national securities exchange, our Manager is (a) entitled to receive from us a management fee, (b) eligible to receive incentive compensation that is based on our performance and (c) eligible to receive options to purchase New Media Common Stock upon the successful completion of an offering of shares of our Common Stock or any shares of preferred stock with an exercise price equal to the price per share paid by the public or other ultimate purchaser in the offering. In addition, we are obligated to reimburse certain expenses incurred by our Manager. Our Manager is also entitled to receive a termination fee from us under certain circumstances.

The terms of our Management Agreement are summarized below and described in more detail under “Our Manager and Management Agreement” elsewhere in this Information Statement.

 

Type

  

Description

Management Fee

   1.5% per annum of our total equity calculated and payable monthly in arrears in cash. Total equity is generally the equity transferred by Newcastle on the date on which our Common Stock trades in the “regular way” market on a major U.S. national securities exchange, plus total net proceeds from any equity capital raised (including through stock offerings), plus certain capital contributions to subsidiaries, plus the equity value of assets contributed to the Company prior to or after the date of the Management Agreement, less capital distributions and repurchases of common stock.

Incentive Compensation

   Our Manager is eligible to receive on a quarterly basis annual incentive compensation in an amount equal to the product of 25% of the dollar amount by which (a) the adjusted net income of the Company exceeds (b)(i) the weighted daily average total equity (plus cash capital raising costs), multiplied by (ii) a simple interest rate of 10% per annum. “Adjusted net income” means net income (computed in accordance with U.S. generally accepted accounting principles, (“GAAP”)), plus depreciation and amortization, and after adjustments for unconsolidated partnerships, joint ventures and permanent cash tax savings. Adjusted net income will be computed on an unconsolidated basis. The computation of adjusted net income may be adjusted at the direction of the independent directors based on changes in, or certain applications, of GAAP.

 

 

11


Table of Contents

Reimbursement of Expenses

  

After the commencement date of our Common Stock trading on the “regular way” market on a major U.S. national securities exchange, we will pay, or reimburse our Manager’s employees for performing certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are no greater than those which would be paid to outside professionals or consultants on an arm’s-length basis. We also pay all operating expenses, except those specifically required to be borne by our Manager under our Management Agreement.

 

Our Manager is responsible for all costs incident to the performance of its duties under the Management Agreement, including compensation of our Manager’s employees, rent for facilities and other “overhead” expenses. The expenses required to be paid by us include, but are not limited to, issuance and transaction costs incident to the acquisition, disposition, operation and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with the establishment and maintenance of any credit facilities and other indebtedness of ours (including commitment fees, legal fees, closing costs, etc.), expenses associated with other securities offerings of ours, the costs of printing and mailing proxies and reports to our stockholders, costs incurred by employees of our Manager for travel on our behalf, costs associated with any computer software or hardware that is used solely for us, costs to obtain liability insurance to indemnify our directors and officers and the compensation and expenses of our transfer agent.

Termination Fee

   The termination fee is payable to the Manager under the circumstances described in the section entitled “Our Manager and Management Agreement—Term; Termination.” The termination fee is equal to the sum of (1) the amount of the management fee during the 12 months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount,” if such option is exercised by the Company or the Manager. The Incentive Compensation Fair Value Amount is an amount equal to the Incentive Compensation that would be paid to the Manager if our assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments).

 

 

12


Table of Contents

Grant of Options to Our Manager

   Upon the successful completion of an offering of shares of our Common Stock or any shares of preferred stock, we will grant our Manager options equal to 10% of the number of shares being sold in the offering (excluding the shares issued to Newcastle or its affiliates in the Local Media Contribution (as defined below)), with an exercise price equal to the offering price per share paid by the public or other ultimate purchaser. For the avoidance of doubt, the listing of our Common Stock does not constitute an offering for purposes of this provision.

Conflicts of Interest

Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.

One or more of our directors have responsibilities and commitments to entities other than us, including, but not limited to, Newcastle. For example, one of our directors is also a director of Newcastle. In addition, we do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. Newcastle and other Fortress affiliates will not be restricted from pursuing other opportunities that may create conflicts or competition for us. However, our code of business conduct and ethics prohibits, subject to the terms of our amended and restated certificate of incorporation, the directors, officers and employees of our Manager from engaging in any transaction that involves an actual conflict of interest with us. See “Risk Factors—Risks Relating to Our Manager—There may be conflicts of interest in our relationship with our Manager, including with respect to corporate opportunities.”

Transactions between the Manager and any affiliate must be approved in advance by the majority of the independent directors and be determined by such independent directors to be in the best interests of the Company. If any affiliate transaction involving the acquisition of an asset from the Manager or an affiliate of the Manager is not approved in advance by a majority of the independent directors, then the Manager may be required to repurchase the asset at the purchase price (plus closing costs) to the Company.

The structure of the Manager’s compensation arrangement may have unintended consequences for us. We have agreed to pay our Manager a management fee that is not tied to our performance and incentive compensation that is based entirely on our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us, while the performance-based incentive compensation component may cause our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation of capital, to achieve higher incentive distributions. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and your investment in us.

We have entered into a Management Agreement with an affiliate of Fortress pursuant to which our management team will not be required to exclusively dedicate their services to us and will provide services for other entities affiliated with our Manager, including, but not limited to, Newcastle.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement with our Manager, may reduce the amount of time our Manager, its

 

 

13


Table of Contents

officers or other employees spend managing us. In addition, we may engage in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, including Newcastle, that present an actual, potential or perceived conflict of interest. It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.

Recent Developments

Support Agreement

On September 4, 2013, GateHouse and its affiliated debtors (the “Debtors”) announced that GateHouse, the Administrative Agent (as defined below), Newcastle and other lenders (the “Participating Lenders”) under the Amended and Restated Credit Agreement by and among certain affiliates of GateHouse, the Lenders from time to time party thereto and Cortland Products Corp., as administrative agent (the “Administrative Agent”), dated February 27, 2007 (as amended, the “2007 Credit Facility”) entered into the Restructuring Support Agreement (the “Support Agreement”), effective September 3, 2013, as may be amended, supplemented or modified from time to time, in which the parties agreed to support, subject to the terms and conditions of the Support Agreement, the restructuring of GateHouse (the “Restructuring”) pursuant to the Plan.

In the Support Agreement, the parties agreed to support the Restructuring of GateHouse’s obligations under the 2007 Credit Facility and certain interest rate swaps secured thereunder (collectively, the “Outstanding Debt”) and GateHouse’s equity pursuant to the Plan. Under the Support Agreement, each of the Participating Lenders has agreed to (a) support and take any reasonable action in furtherance of the Restructuring, (b) timely vote their Outstanding Debt to accept the Plan and not change or withdraw such vote, (c) support approval of the disclosure statement for the Plan (the “Disclosure Statement”) and confirmation of the Plan, as well as certain relief to be requested by Debtors from the Bankruptcy Court, (d) refrain from taking any action inconsistent with the confirmation or consummation of the Plan, and (e) not propose, support, solicit or participate in the formulation of any plan other than the Plan.

Pursuant to the Restructuring, Newcastle would offer to purchase the Outstanding Debt claims in cash and at 40% of (i) $1,167,449,812.96 of principal of claims under the 2007 Credit Facility, plus (ii) accrued and unpaid interest at the applicable contract non-default rate with respect thereto, plus (iii) all amounts, excluding any default interest, arising from transactions in connection with interest rate swaps secured under the 2007 Credit Facility (the “Cash-Out Offer”) on the effective date of the Plan (the “Effective Date”). The holders of the Outstanding Debt would have the option of receiving, in satisfaction of their Outstanding Debt, their pro rata share of the (i) Cash-Out Offer and/or (ii) New Media Common Stock and the net proceeds, if any, of a potential new debt facility (the “New Credit Facility”). We intend to pay all pensions, trade and all other unsecured claims in full.

As of September 19, 2013, Newcastle and its affiliates held approximately 52.2% of the principal amount currently outstanding under the 2007 Credit Facility and the other Participating Lenders held approximately 28.7% of such principal amount (in each case, including certain amounts still pending trade settlement). Additional holders of Outstanding Debt may join the Support Agreement in the future as Participating Lenders.

On September 20, 2013, GateHouse commenced a pre-packaged solicitation of the Plan (the “Solicitation”). Subject to the terms of the Support Agreement, if holders of Outstanding Debt sufficient to meet the requisite

 

 

14


Table of Contents

threshold of 67% in amount and majority in number (calculated without including any insider) necessary for acceptance of the Plan under the Bankruptcy Code (“Bankruptcy Threshold Creditors”) vote to accept the Plan in the Solicitation, Debtors intend to commence Chapter 11 cases and seek approval of the Disclosure Statement and confirmation of the Plan therein.

On the Effective Date, the claims and interests against GateHouse will be discharged primarily through the (a) issuance of shares of Common Stock of New Media and/or payment of cash to holders of claims in connection with the 2007 Credit Facility and related interest rate swaps, as described above; (b) reinstatement of certain claims; (c) entry into the Management Agreement; (d) issuance of warrants by us to existing equity holders in GateHouse, including holders of warrants, rights and options to acquire such equity interests (“Existing Equity Holders”); and (e) entry into the New Credit Facility, if any, the net proceeds of which go to holders that elect to receive New Media Common Stock. In addition, 100% of the new equity interests in GateHouse will be issued to New Media. On or after the Effective Date, GateHouse may merge into us or convert into a limited liability company. The occurrence of such merger or conversion will not be a condition to the Effective Date.

Upon emergence from the Plan, we plan to adopt fresh-start reporting in accordance with Accounting Standards Codification Topic 852, “Reorganizations.” Under fresh-start accounting, a new entity is deemed to have been created on the Effective Date of the Plan for financial reporting purposes and GateHouse’s recorded amounts of assets and liabilities will be adjusted to reflect their estimated fair values. As a result of the adoption of fresh-start accounting, our reorganized company post-emergence financial statements will generally not be comparable with the financial statements of our predecessor company prior to emergence, including the historical financial information in this Information Statement. See “Restructuring Agreements,” “The Spin-Off and Restructuring” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

Investment Commitment Letter

On September 4, 2013, Newcastle and GateHouse entered into an Investment Commitment Letter (the “Investment Commitment Letter”) in connection with the Restructuring, effective September 3, 2013.

Pursuant to the Investment Commitment Letter and the Plan, Newcastle agreed to offer to purchase the Cash-Out Offer claims.

The Investment Commitment Letter provides that, on account of the claims purchased in the Cash-Out Offer, on the Effective Date of the Plan, Newcastle will receive its pro rata share of (a) New Media Common Stock and (b) Net Proceeds of the New Credit Facility, if any, net of transaction expenses associated with transactions under the Plan.

Newcastle may assign the Investment Commitment Letter to any of its affiliates, successors or designees as may be reasonably acceptable to GateHouse. The Investment Commitment Letter will terminate automatically and immediately if the Support Agreement has terminated or ceased to be in full force and effect. In addition, the Investment Commitment Letter may be terminated with notice upon certain events, as detailed in the Investment Commitment Letter.

Contribution of Local Media Group Holdings LLC

Newcastle acquired Dow Jones Local Media Group, Inc. (renamed Local Media Group, Inc. or “Local Media”) on September 3, 2013 from News Corp. (the “Local Media Acquisition”) for approximately $82.6 million plus associated estimated transaction costs of $4.2 million. Newcastle made a total equity investment of

 

 

15


Table of Contents

$53.8 million and financed the remainder of the purchase price with $33.0 million of term loan debt. The term loan debt was provided under a Credit Agreement dated September 3, 2013, by and among Local Media Group Holdings LLC (“Local Media Parent”), the borrowers party thereto, the lenders party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and Credit Suisse Loan Funding LLC, as lead arranger (the “Local Media Credit Facility”). Newcastle contributed $2.5 million to Local Media on the closing of the Local Media Acquisition for working capital purposes, and Local Media can repay that amount when the senior secured asset-based revolving credit facility of up to $10 million under the Local Media Credit Facility becomes available.

Local Media operates print and online community media franchises in seven states including daily, Sunday and weekly newspapers, Internet sites, magazines, other news and advertising niche publications and commercial print and household distribution services and had $33 million of real estate value as determined by third-party appraisals completed in the second quarter of 2012. Local Media publishes 8 daily community newspapers and 15 weeklies in the New England, Mid-Atlantic and Pacific Coast regions of the United States. Many of these publications have been providing local content to their respective communities for over 75 years.

Under the Plan, Newcastle agreed to contribute 100% of the stock of Local Media Parent and to assign its rights under the stock purchase agreement pursuant to which it acquired Local Media (the “Local Media SPA”) to New Media, each on the Effective Date (the “Local Media Contribution”). Local Media is wholly owned by Local Media Parent. In exchange, Newcastle will receive New Media Common Stock and, at its election, $50,000 of cash, collectively equal in value to the cost of the Local Media Acquisition, subject to certain adjustments ((the “Local Media Contribution Value”).

The Local Media Contribution Value will be adjusted (a) to include (i) Newcastle’s out-of-pocket transaction expenses for the Local Media Acquisition not to exceed $4.5 million and (ii) any additional cash equity contributions made in Local Media or Local Media Parent after the Local Media Acquisition but, prior to the occurrence of the Local Media Contribution, not to exceed $2.5 million, and (iii) the net amount owing to Newcastle under the Local Media SPA and (b) to deduct the amount of (i) any dividends paid out by Local Media or Local Media Parent on or following the closing of the Local Media Acquisition and on or prior to the occurrence of the Local Media Contribution (other than in respect of the $2.5 million contributed by Newcastle on the closing date of the Local Media Acquisition for working capital purposes, which amount Local Media can repay by dividend or otherwise prior to the Effective Date) and (ii) any funded debt obligations of Local Media or Local Media Parent (other than amounts drawn under the revolver under the Local Media Credit Facility), each as determined by the Local Media Contribution agreements and Local Media SPA assignment agreement. For the avoidance of doubt, the distribution of New Media Common Stock in exchange for the Local Media Contribution will not occur prior to the distribution of the Net Proceeds of the New Credit Facility (if any) to the holders of New Media Common Stock.

Assuming a contribution date of October 31, 2013, the expected Local Media Contribution Value is $54.1 million, consisting of approximately $82.6 million as the estimated cost of the Local Media Acquisition, plus (a) (i) $4.2 million in estimated out-of-pocket transaction expenses of Newcastle and (ii) no additional net cash equity contributions and (iii) $0.3 million owing to Newcastle under the Local Media SPA, less (b) (i) no dividends paid out by Local Media or Local Media Parent (other than in respect of amounts contributed by Newcastle on the closing date for working capital purposes) and (ii) $33.0 million in anticipated term loan debt at Local Media Parent under the Local Media Credit Facility.

GateHouse manages the assets of Local Media pursuant to a management and advisory agreement that will terminate on the Effective Date. While the agreement is in effect, GateHouse receives an annual management fee of $1.1 million, subject to adjustments (up to a maximum annual management fee of $1.2 million), and an annual incentive compensation fee based on exceeding EBITDA targets of Local Media.

 

 

16


Table of Contents

New Media Warrants

On the Effective Date, or as soon as practicable thereafter, New Media will issue and distribute 10-year warrants to Existing Equity Holders to extent required under the Plan (the “New Media Warrants”). The New Media Warrants will collectively represent the right to acquire New Media Common Stock, which in the aggregate will be equal to 5% of New Media Common Stock as of the Effective Date (calculated prior to dilution from shares of New Media Common Stock issued pursuant to the Local Media Contribution) at a strike price per share calculated based on a total equity value of New Media prior to the Local Media Contribution of $1.2 billion as of the Effective Date. Existing equity interests will be cancelled under the Plan. New Media Warrants will not have the benefit of antidilution protections, other than customary protections including for stock splits and stock dividends.

New Credit Facility

GateHouse will use commercially reasonable efforts, in light of market conditions and other relevant factors, to enter into a New Credit Facility in the aggregate amount of up to approximately $150 million on the same or better terms for GateHouse than those set forth in the new debt facility term sheet attached as an exhibit to the Disclosure Statement on the Effective Date. In the event that GateHouse enters into and receives proceeds of the New Credit Facility, we will distribute to each holder of New Media Common Stock, including Newcastle on account of the Cash-Out Offer, its pro rata share of the net proceeds of the New Credit Facility net of transaction costs and expenses of GateHouse and Newcastle associated with transactions under the Plan (the “Net Proceeds”), if any. The Net Proceeds will be distributed prior to the Local Media Contribution and no amount of the Net Proceeds will be distributed to Newcastle on account of the Local Media Contribution. GateHouse’s entry into a credit facility will not be a condition to the effectiveness of the Plan.

Registration Rights

New Media will enter into a registration rights agreement with Omega Advisors, Inc. and its affiliates (collectively, “Omega”) and any other holder of Outstanding Debt that receives at least as many shares of New Media Common Stock on the Effective Date as Omega receives, provided that Omega, directly or indirectly, receives 10% or more of New Media Common Stock on the Effective Date. Under the terms of the registration rights agreement, subject to customary exceptions and limitations, New Media will be required to use commercially reasonable efforts to file a registration statement as soon as reasonably practicable, but no later than the later of (i) 120 days following the Effective Date and (ii) 14 days after the required financials are completed in the ordinary course of business, providing for the registration and sale by Omega of its New Media Common Stock (the “Initial Shelf Registration Statement”). During the first 12 months following the trading of New Media Common Stock on a major U.S. national securities exchange, subject to customary exceptions and limitations, Omega may request one underwritten demand right with respect to some or all of the New Media Common Stock held by Omega under the Initial Shelf Registration Statement (the “Initial Demand Registration”).

Once New Media is eligible to use Form S-3, New Media will be required to use commercially reasonable efforts to file a resale shelf registration statement providing for the registration and sale on a continuous or delayed basis by Omega of its New Media Common Stock (the “Resale Shelf Registration”), subject to customary exceptions and limitations.

Omega may only exercise its right to request the Initial Demand Registration and any Resale Shelf Registrations if it holds at least 3% of the then-outstanding New Media Common Stock.

 

 

17


Table of Contents

Credit Amendment to 2007 Credit Facility

On September 4, 2013, GateHouse entered into an Amendment Agreement to the 2007 Credit Facility (“Credit Amendment”) with Newcastle and certain lenders under GateHouse’s 2007 Credit Facility, effective September 3, 2013, which improved certain terms of the 2007 Credit Facility, including: a clarified and expanded definition of “Eligible Assignee” (as defined therein); an increase in the base amount in the formula used to calculate the “Permitted Investments” (as defined therein) basket from $35 million to a base of $50 million; the removal of the requirement that GateHouse’s annual financial statements not have a “going concern” or like qualification to the audit; the removal of a cross default from any Secured Hedging Agreement (as defined therein) to the 2007 Credit Facility; the removal of a Bankruptcy Default (as defined therein), arising from actions in furtherance of or indicating consent to the specified actions; and a waiver of any prior Default or Event of Default, as defined therein, including without limitation from the negotiation, entry into, or performance of the Support Agreement or the Investment Commitment Letter.

In consideration of the changes described above, GateHouse agreed to pay each of the lenders party to the Credit Amendment that timely executed the Credit Amendment and the Support Agreement an amendment fee equal to 3.5% multiplied by the aggregate Outstanding Debt held (including through trades pending settlement) by such lender (the “Amendment Fee”), unless waived in writing. Newcastle and certain other lenders elected to waive their Amendment Fee.

Risk Factors

Our business is subject to various risks. For a description of these risks, see the section entitled “Risk Factors” beginning on page 27 and the other information included elsewhere in this Information Statement.

Corporate Information

Our principal executive offices are located at             . Our telephone number is             .

 

 

18


Table of Contents

Summary of the Spin-Off

The following is a summary of the terms of the spin-off. See “The Spin-Off and Restructuring” in this Information Statement for a more detailed description of the matters described below.

 

Distributing company

Newcastle is the distributing company in the spin-off. Immediately following the Distribution, Newcastle will not own any capital stock of New Media.

 

Distributed company

New Media is the distributed company in the spin-off.

 

Primary purposes of the spin-off

For the reasons more fully discussed in “Questions and Answers About the Spin-off—What are the reasons for the spin-off?”, Newcastle believes that separating New Media from Newcastle is in the best interests of both Newcastle and New Media.

 

Distribution ratio

Each holder of Newcastle common stock will receive                 shares of New Media’s Common Stock for every                 shares of Newcastle common stock held on                     , 2013, the Record Date for the Distribution. Fractional shares of New Media’s Common Stock will not be distributed in the spin-off. Holders of Newcastle common stock will receive cash in lieu of fractional shares of New Media Common Stock.

 

Securities to be distributed

All of the shares of New Media Common Stock owned by Newcastle, which will be     % of our Common Stock outstanding immediately prior to the Distribution.

 

  Based on the                 shares of Newcastle common stock outstanding on                     , 2013, and the distribution ratio of                 share of New Media Common Stock for every                 shares of Newcastle common stock, shares of our Common Stock will be distributed to Newcastle stockholders. The number of shares of Common Stock that Newcastle will distribute to its stockholders will be reduced to the extent that cash payments are made or will be made in lieu of the issuance of fractional New Media Common Stock.

 

Record Date

The Record Date for the Distribution is 5:00 P.M., Eastern Time, on                     , 2013.

 

Distribution date

The Distribution Date will be                     , 2013.

 

The Distribution

On the Distribution Date, Newcastle, with the assistance of American Stock Transfer & Trust Company, LLC, the distribution agent, will electronically issue shares of our Common Stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our Common Stock. If

 

 

19


Table of Contents
 

you sell shares of Newcastle common stock in the “regular-way” market through the Distribution Date, you will also sell your right to receive shares of New Media Common Stock in the Distribution. Registered stockholders will receive additional information from the distribution agent shortly after the Distribution Date. Following the Distribution, stockholders whose shares are held in book-entry form may request that their shares of New Media Common Stock be transferred to a brokerage or other account at any time, without charge. Beneficial stockholders that hold shares through brokerage firms will receive additional information from their brokerage firms shortly after the Distribution Date.

 

  Fractional shares of Common Stock will not be distributed in the spin-off. Holders of Newcastle common stock will receive cash in lieu of fractional shares of New Media Common Stock. American Stock Transfer & Trust Company, LLC, the distribution agent, will aggregate all fractional shares of Newcastle common stock into whole shares, sell the whole shares in the open market at prevailing market prices on behalf of holders entitled to receive a fractional share, and distribute the aggregate net cash proceeds of the sales pro rata to these holders.

 

Conditions to Distribution

The Distribution of our Common Stock is subject to the satisfaction or waiver of the following conditions:

 

    the Securities and Exchange Commission (“SEC”) shall have declared effective our registration statement on Form 10, of which this Information Statement is a part, under the Securities Act of 1933, as amended (the “Securities Act”), and no stop order relating to the registration statement shall be in effect;

 

    the listing of our Common Stock on the NYSE shall have been approved, subject to official notice of issuance;

 

    the Plan is approved by the Bankruptcy Court without any appeals by any parties; and

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution or any of the transactions related thereto, shall be in effect.

 

  Newcastle has the right not to complete the Distribution if, at any time prior to the Distribution Date (even if all such conditions are satisfied), its board of directors determines, in its sole discretion, that the Distribution is not in the best interest of Newcastle or that market conditions are such that it is not advisable to separate New Media from Newcastle.

 

Stock exchange listing

We intend to apply to list our shares of Common Stock on the NYSE under the ticker symbol “NEWM.” We anticipate that on or prior to the Record Date for the Distribution, trading of shares of our Common Stock will begin on a “when-issued” basis and will continue

 

 

20


Table of Contents
 

up to and including the Distribution Date. See “The Spin-Off and Restructuring—Market for Common Stock—Trading Between the Record Date and Distribution Date,” included elsewhere in this Information Statement.

 

  It is expected that after the distribution of New Media Common Stock, Newcastle common stock will continue to be traded on the NYSE under the symbol “NCT.”

 

Distribution agent

American Stock Transfer & Trust Company, LLC.

 

Tax considerations

The Distribution of our Common Stock will not qualify for tax-free treatment, and an amount equal to the fair market value of the shares of our Common Stock received by you on the date of Distribution will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Newcastle. The excess will be treated as a non-taxable return of capital to the extent of your tax basis in the shares of Newcastle common stock and any remaining excess will be treated as capital gain. Your tax basis in the shares of Newcastle common stock held at the time of the Distribution will be reduced (but not below zero) to the extent the fair market value of the shares of our Common Stock distributed by Newcastle in the Distribution exceeds Newcastle’s current and accumulated earnings and profits, as adjusted to take account of other distributions made by Newcastle in the taxable year that includes the Distribution. Your holding period for such Newcastle shares will not be affected by the Distribution. Newcastle will not be able to advise stockholders of the amount of earnings and profits of Newcastle until after the end of the 2013 calendar year.

 

 

21


Table of Contents

Summary Historical Consolidated and Pro Forma Financial Data

The following selected financial data for the three years ended December 30, 2012 are derived from the audited consolidated financial statements of GateHouse, our Predecessor, which have been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst & Young LLP’s report on the consolidated financial statements for the year ended December 30, 2012, which appears elsewhere herein, includes an explanatory paragraph which describes an uncertainty about GateHouse’s ability to continue as a going concern. The financial data for the six month periods ended June 30, 2013 and July 1, 2012 are derived from the unaudited condensed consolidated financial statements of GateHouse, our Predecessor. The unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which GateHouse considers necessary for a fair presentation of the financial position and the results of operations for these periods. The selected financial data as of and for the years ended December 30, 2012, January 1, 2012 and December 31, 2010, and the selected financial data as of and for the six months ended July 1, 2012 have been revised to reflect one of GateHouse’s publications as a discontinued operation for comparability.

Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire year ending December 29, 2013. Our core business performance, as presented in our revenue and our operating and selling, general and administrative expense amounts, is not anticipated to be materially impacted by the spin-off. However, as a result of the execution of the Support Agreement, all debt, including derivative liabilities and deferred financing assets, is expected to be eliminated on the Effective Date of the Plan. This will result in a significant reduction in our interest expense and the elimination of the gain (loss) on derivative instruments and deferred financing amortization. Upon the emergence from bankruptcy, fresh start accounting will lead to changes in the basis of our property, plant and equipment and intangible assets that will impact future depreciation and amortization expense levels. Other significant changes to our financial information include that we expect to become subject to federal and state income taxation and to pay fees to our Manager. In addition, the Local Media Contribution and the expected consolidation of Local Media by GateHouse as a result of the management agreement between GateHouse and Local Media Parent, which was assigned to Local Media, will impact the financial position and the result of operations. The impact of these changes is discussed in greater detail within the Unaudited Pro Forma Condensed Combined Financial Information section of this Information Statement. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

The following selected pro forma financial information as of June 30, 2013, for the six months ended June 30, 2013 and for the year ended December 30, 2012 are based on the audited financial statements of New Media which was formed on June 18, 2013, and subsequently capitalized, the audited consolidated financial statements of GateHouse for the year ended December 30, 2012 and the unaudited consolidated financial statements of GateHouse as of and for the six months ended June 30, 2013, and the audited combined financial statements of Local Media as of and for the year ended June 30, 2013, each included in this Information Statement.

The selected pro forma financial information is provided for informational and illustrative purposes only. These tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” New Media’s historical financial statement and related notes thereto, GateHouse’s historical consolidated financial statements and notes thereto and Local Media’s historical combined financial statements and notes thereto, included elsewhere in this Information Statement. In addition, the historical financial statements of GateHouse, our Predecessor, will not be comparable following its emergence from Chapter 11 due to the effects of the consummation of the Plan, as well as adjustments for fresh-start accounting.

The pro forma financial information gives effect to the following categories of adjustments as if such transactions had occurred on January 2, 2012 for the unaudited pro forma condensed combined statements of

 

 

22


Table of Contents

operations and on June 30, 2013 for the unaudited pro forma condensed combined balance sheet. Each of these adjustments is described within the notes of the pro forma financial information included in this Information Statement:

 

    the exchange of $625.6 million Outstanding Debt that Newcastle (and its affiliates) hold and additional Outstanding Debt that Newcastle (and its affiliates) purchase in the Cash-Out Offer for New Media Common Stock on the Effective Date;

 

    the implementation of the other transactions contemplated by the Plan on the Effective Date;

 

    the adoption by GateHouse of fresh-start accounting, in accordance with Topic 852—“Reorganizations” of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) (“ASC 852”); and

 

    the impact of Local Media purchase accounting adjustments, in accordance with Topic 805 — “Business Combinations” of the FASB Accounting Standards Codification (“ASC 805”).

 

 

23


Table of Contents
    Six Months
Ended
June 30,
2013
    Six Months
Ended
June 30,
2013
    Six Months
Ended
July 1,

2012
    Year
Ended
December 30,
2012
    Year
Ended
December 30,
2012
    Year
Ended
January 1,
2012(4)
    Year
Ended
December 31,
2010
 
    Pro Forma     Historical     Historical     Pro Forma     Historical     Historical     Historical  
    (In Thousands, Except Per Share Data)  

Statement of Operations Data:

             

Revenues:

             

Advertising

  $ 189,069      $ 150,559      $ 165,870      $ 419,210      $ 330,881      $ 357,134      $ 385,579   

Circulation

    90,198        65,513        65,114        183,779        131,576        131,879        133,192   

Commercial printing and other

    26,126        14,107        12,197        50,114        26,097        25,657        25,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    305,393        230,179        243,181        653,103        488,554        514,670        544,738   

Operating costs and expenses:

             

Operating costs

    171,527        129,998        136,328        351,344        268,222        281,884        296,974   

Selling, general and administrative

    101,937        78,722        72,054        200,906        145,020        146,295        154,516   

Depreciation and amortization

    18,454        19,636        20,204        36,909        39,888        42,426        45,080   

Integration and reorganization costs and management fees paid to prior owner

    958        958        1,860        4,393        4,393        5,884        2,324   

Impairment of long-lived assets

    21,346        —          —          692        —          1,733        430   

(Gain) loss on sale of assets

    —          1,043        155        1,238        1,238        455        1,551   

Goodwill and mastheads impairment

    21,965        —          —          197,177        —          385        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (30,794     (178     12,580        (139,556     29,793        35,608        43,863   

Interest expense, amortization of deferred financing costs, gain on early extinguishment of debt, (gain) loss on derivative instruments and other

    2,439        30,425        27,993        2,750        57,463        58,361        69,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (33,233     (30,603     (15,413     (142,306     (27,670     (22,753     (25,657

Income tax expense (benefit)

    (13,011     —          43        (55,712     (207     (1,803     (155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (20,222     (30,603     (15,456     (86,594     (27,463     (20,950     (25,502

Income (loss) from discontinued operations, net of income taxes

    N/A        (1,034     (475     N/A        (2,340     (699     (542
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)

    N/A        (31,637     (15,931     N/A        (29,803     (21,649     (26,044

Basic net (loss) income from continuing operations per share

         (1)    $ (0.53 )(2)    $ (0.27 )(2)           (1)    $ (0.47 )(2)    $ (0.36 )(2)    $ (0.44 )(2) 

Diluted (loss) income from continuing operations per share

         (1)    $ (0.53 )(2)    $ (0.27 )(2)           (1)    $ (0.47 )(2)    $ (0.36 )(2)    $ (0.44 )(2) 

Basic net (loss) income from discontinued operations, net of income taxes, per share

         (1)    $ (0.01     —               (1)      (0.04     (0.01     (0.01

Diluted (loss) income from discontinued operations, net of income taxes, per share

         (1)    $ (0.01     —               (1)      (0.04     (0.01     (0.01

Basic weighted average shares outstanding

         (1)      58,063,901 (2)      58,032,205 (2)           (1)      58,041,907 (2)      57,949,815 (2)      57,723,353 (2) 

Diluted weighted average shares outstanding

         (1)      58,063,901 (2)      58,032,205 (2)           (1)      58,041,907 (2)      57,949,815 (2)      57,723,353 (2) 

 

 

24


Table of Contents
    Six Months
Ended
June 30,
2013
    Six Months
Ended
June 30,
2013
    Six Months
Ended
July 1,

2012
    Year
Ended
December 30,
2012
    Year
Ended
December 30,
2012
    Year
Ended
January 1,
2012(4)
    Year
Ended
December 31,
2010
 
    Pro Forma     Historical     Historical     Pro Forma     Historical     Historical     Historical  
    (In Thousands, Except Per Share Data)  

Statement of Cash Flow Data:

             

Net cash (used in) provided by operating activities

    N/A      $ (1,089   $ 18,226        N/A      $ 23,499      $ 22,439      $ 26,453   

Net cash used in investing activities

    N/A        (1,278     (1,295     N/A        (1,044     (731     (624

Net cash used in financing activities

    N/A        (6,648     (4,600     N/A        (7,140     (11,249     (22,010

Other Data:

    N/A            N/A         

Adjusted EBITDA(3)

    N/A      $ 18,450      $ 32,824        N/A      $ 69,766      $ 80,547      $ 89,511   

Cash interest paid

    N/A        28,750        29,005        N/A      $ 55,976      $ 58,225      $ 59,317   

 

(1) Attributable to New Media during the applicable period.
(2) Attributable to GateHouse during the applicable period.
(3) We define Adjusted EBITDA as net income (loss) from continuing operations before income tax expense (benefit), interest/financing expense, depreciation and amortization and non-cash impairments. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance in our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. Adjusted EBITDA provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely our cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and the Board to review the financial performance of our business on a monthly basis.

Not all companies calculate Adjusted EBITDA using the same methods; therefore, the Adjusted EBITDA figures set forth herein may not be comparable to Adjusted EBITDA reported by other companies. A substantial portion of our Adjusted EBITDA was dedicated to the payment of interest on our outstanding indebtedness and to service other commitments, thereby reducing the funds available to us for other purposes. Adjusted EBITDA does not represent an amount of funds that is available for management’s discretionary use. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Information Statement.

 

(4) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

The table below shows the reconciliation of loss from continuing operations to Adjusted EBITDA for the periods presented:

 

    Six Months Ended
June 30, 2013
    Six Months Ended
July 1, 2012
    Year Ended
December 30, 2012
    Year Ended
January 1, 2012(g)
    Year Ended
December 31, 2010
 
    (In Thousands)  

Loss from continuing operations

  $ (30,603   $ (15,456   $ (27,463   $ (20,950   $ (25,502

Income tax expense (benefit)

    —          43        (207     (1,803     (155

(Gain) loss on derivative instruments(f)

    9        (1,644     (1,635     (913     8,277   

Amortization of deferred financing costs

    522        680        1,255        1,360        1,360   

Interest expense

    28,886        28,997        57,928        58,309        60,021   

Impairment of long-lived assets

    —          —          —          1,733        430   

Depreciation and amortization

    19,636        20,204        39,888        42,426        45,080   

Goodwill and mastheads impairment

    —          —          —          385        —     

Adjusted EBITDA from continuing operations

  $ 18,450 (a)    $ 32,824 (b)    $ 69,766 (c)    $ 80,547 (d)    $ 89,511 (e) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

25


Table of Contents

 

(a) Adjusted EBITDA for the six months ended June 30, 2013 included net expenses of $7,521, which are one-time in nature or non-cash compensation. Included in these net expenses of $7,521 is non-cash compensation and other expense of $5,948, non-cash portion of postretirement benefits expense of $(428), integration and reorganization costs of $958 and a $1,043 loss on the sale of assets.

Adjusted EBITDA also does not include $123 from our discontinued operations.

 

(b) Adjusted EBITDA for the six months ended July 1, 2012 included net expenses of $4,478, which are one-time in nature or non-cash compensation. Included in these net expenses of $4,478 is non-cash compensation and other expense of $2,707, non-cash portion of postretirement benefits expense of $(244), integration and reorganization costs of $1,860 and a $155 loss on the sale of assets.

Adjusted EBITDA also does not include $165 from our discontinued operations.

 

(c) Adjusted EBITDA for the year ended December 30, 2012 included net expenses of $11,009, which are one time in nature or non-cash compensation. Included in these net expenses of $11,009 are non-cash compensation and other expenses of $6,274, non-cash portion of post-retirement benefits expense of $(896), integration and reorganization costs of $4,393 and a $1,238 loss on the sale of assets.

Adjusted EBITDA also does not include $255 of EBITDA generated from our discontinued operations.

 

(d) Adjusted EBITDA for the year ended January 1, 2012 included net expenses of $9,461, which are one time in nature or non-cash compensation. Included in these net expenses of $9,461 are non-cash compensation and other expenses of $4,226, non-cash portion of post-retirement benefits expense of $(1,104), integration and reorganization costs of $5,884 and an $455 loss on the sale of assets.

Adjusted EBITDA also does not include $432 of EBITDA generated from our discontinued operations.

 

(e) Adjusted EBITDA for the year ended December 31, 2010 included net expenses of $8,231, which are one time in nature or non-cash compensation. Included in these net expenses of $8,231 are non-cash compensation and other expenses of $5,005, non-cash portion of post-retirement benefits expense of $(649), integration and reorganization costs of $2,324 and a $1,551 loss on the sale of assets.

Adjusted EBITDA also does not include $463 of EBITDA generated from our discontinued operations.

 

(f) Non-cash (gain) loss on derivative instruments is related to interest rate swap agreements which are financing related and are excluded from Adjusted EBITDA.

 

(g) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

 

     As of  
     June 30,
2013
     June 30,
2013
    July 1,
2012
    December 30,
2012
    January 1,
2012
    December 31,
2010
 
     Pro Forma      Historical     Historical     Historical     Historical     Historical  
     (In Thousands)  

Balance Sheet Data:

             

Total assets

   $ 671,080       $ 433,704      $ 487,406      $ 469,766      $ 510,802      $ 546,327   

Total long-term obligations, including current maturities

     35,901         1,170,200        1,180,151        1,177,298        1,185,212        1,197,347   

Stockholders’ equity (deficit)

     539,552         (848,855     (823,093     (834,159     (805,632     (792,121

 

 

26


Table of Contents

RISK FACTORS

You should carefully consider the following risks and other information in this Information Statement in evaluating us and our Common Stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into the following groups: risks related to our business, risks related to our Manager, risks related to the Distribution and risks related to our Common Stock.

Risks Related to Our Business

We depend to a great extent on the economies and the demographics of the local communities that we serve, and we are also susceptible to general economic downturns, which have had, and could continue to have, a material and adverse impact on our advertising and circulation revenues and on our profitability.

Our advertising revenues and, to a lesser extent, circulation revenues, depend upon a variety of factors specific to the communities that our publications serve. These factors include, among others, the size and demographic characteristics of the local population, local economic conditions in general and the economic condition of the retail segments of the communities that our publications serve. If the local economy, population or prevailing retail environment of a community we serve experiences a downturn, our publications, revenues and profitability in that market could be adversely affected. Our advertising revenues are also susceptible to negative trends in the general economy, like the economic downturn recently experienced, that affect consumer spending. The advertisers in our newspapers and other publications and related websites are primarily retail businesses that can be significantly affected by regional or national economic downturns and other developments. Continuing or deepening softness in the U.S. economy could also significantly affect key advertising revenue categories, such as help wanted, real estate and automotive.

Uncertainty and adverse changes in the general economic conditions of markets in which we participate may negatively affect our business.

Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors and regions of the economy, including the markets in which we participate. Adverse changes may occur as a result of weak global economic conditions, rising oil prices, wavering consumer confidence, unemployment, declines in stock markets, contraction of credit availability, declines in real estate values, or other factors affecting economic conditions in general. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications.

Our indebtedness and any future indebtedness may limit our financial and operating activities and our ability to incur additional debt to fund future needs or dividends.

Pursuant to the Plan, GateHouse may enter into the New Credit Facility on the Effective Date. Additionally, in connection with the Local Media Acquisition, Local Media Parent entered into the Local Media Credit Facility. This indebtedness and any future indebtedness we incur could:

 

    require us to dedicate a portion of cash flow from operations to the payment of principal and interest on indebtedness, including indebtedness we may incur in the future, thereby reducing the funds available for other purposes, including dividends or other distributions;

 

    subject us to increased sensitivity to increases in prevailing interest rates;

 

    place us at a competitive disadvantage to competitors with relatively less debt in economic downturns, adverse industry conditions or catastrophic external events; or

 

27


Table of Contents
    reduce our flexibility in planning for or responding to changing business, industry and economic conditions.

In addition, our indebtedness could limit our ability to obtain additional financing on acceptable terms or at all to fund future acquisitions, working capital, capital expenditures, debt service requirements, general corporate and other purposes, which would have a material effect on our business and financial condition. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance and many other factors not within our control.

We may not generate a sufficient amount of cash or generate sufficient funds from operations to fund our operations, pay dividends or repay our indebtedness.

Our ability to make payments on our indebtedness as required depends on our ability to generate cash flow from operations in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

If we do not generate sufficient cash flow from operations to satisfy our debt obligations, including interest payments and the payment of principal at maturity, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot provide assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timeliness and amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Furthermore, our ability to refinance would depend upon the condition of the finance and credit markets. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms or on a timely basis, would materially affect our business, financial condition or results of operations.

We may not be able to pay dividends in accordance with our announced intent or at all.

We have announced our intent to pay a substantial portion of our free cash flow as a dividend to our stockholders, subject to approval by our Board of Directors. Our ability to declare future dividends will depend on our future financial performance, which in turn depends on the successful implementation of our strategy and on financial, competitive, regulatory, technical and other factors, general economic conditions, demand and selling prices for our products and other factors specific to our industry or specific projects, many of which are beyond our control. Therefore, our ability to generate free cash flow depends on the performance of our operations and could be limited by decreases in our profitability or increases in costs, capital expenditures or debt servicing requirements.

Our Predecessor suspended the payments of dividends commencing with the second quarter of 2008. We will own substantially all of our Predecessor’s assets, and our Predecessor experienced revenue and cash flow declines in the years since 2008. In addition, we may acquire additional companies with declining cash flow as part of a strategy aimed at stabilizing cash flow through expense reduction and digital expansion. If our strategy is not successful, we may not be able to pay dividends.

As a holding company, we are also dependent on our subsidiaries being able to pay dividends to us. If our subsidiaries incur debt or losses, such indebtedness or loss may impair their ability to pay dividends or make other distributions to us. In addition, our ability to pay dividends will be substantially affected by the ability of our subsidiaries to provide cash to us. The ability of our subsidiaries to declare and pay dividends to us will be dependent on their cash income and cash available and may be restricted under applicable law or regulation. Under Delaware law, approval of the Board of Directors is required to approve any dividend, which may only be paid out of surplus or net profit for the applicable fiscal year. In addition, we or our subsidiaries may be subject to restrictions on the ability to pay dividends under instruments governing indebtedness. We may not be able to pay dividends in accordance with our announced intent or at all.

 

28


Table of Contents

The collectability of accounts receivable under adverse economic conditions could deteriorate to a greater extent than provided for in our financial statements and in our projections of future results.

Adverse economic conditions in the United States have increased our exposure to losses resulting from financial distress, insolvency and the potential bankruptcy of our advertising customers. Our accounts receivable are stated at net estimated realizable value and our allowance for doubtful accounts has been determined based on several factors, including receivable agings, significant individual credit risk accounts and historical experience. If such collectability estimates prove inaccurate, adjustments to future operating results could occur.

If there is a significant increase in the price of newsprint or a reduction in the availability of newsprint, our results of operations and financial condition may suffer.

The basic raw material for our publications is newsprint. We generally maintain only a 45 to 55-day inventory of newsprint, although our participation in a newsprint-buying consortium has helped ensure adequate supply. An inability to obtain an adequate supply of newsprint at a favorable price or at all in the future could have a material adverse effect on our ability to produce our publications. Historically, the price of newsprint has been volatile, reaching a high of approximately $823 per metric ton in 2008 and experiencing a low of almost $410 per metric ton in 2002. The average price of newsprint for 2012 was approximately $667 per metric ton. Recent and future consolidation of major newsprint suppliers may adversely affect price competition among suppliers. Significant increases in newsprint costs for properties and periods not covered by our newsprint vendor agreement could have a material adverse effect on our financial condition and results of operations.

We compete with a large number of companies in the local media industry; if we are unable to compete effectively, our advertising and circulation revenues may decline.

Our business is concentrated in newspapers and other print publications located primarily in small and midsize markets in the United States. Our revenues primarily consist of advertising and paid circulation. Competition for advertising revenues and paid circulation comes from direct mail, directories, radio, television, outdoor advertising, other newspaper publications, the internet and other media. For example, as the use of the internet and mobile devices has increased, we have lost some classified advertising and subscribers to online advertising businesses and our free internet sites that contain abbreviated versions of our publications. Competition for advertising revenues is based largely upon advertiser results, advertising rates, readership, demographics and circulation levels. Competition for circulation is based largely upon the content of the publication and its price and editorial quality. Our local and regional competitors vary from market to market and many of our competitors for advertising revenues are larger and have greater financial and distribution resources than us. We may incur increased costs competing for advertising expenditures and paid circulation. We may also experience a decline of circulation or print advertising revenue due to alternative media, such as the internet. If we are not able to compete effectively for advertising expenditures and paid circulation, our revenues may decline.

We are undertaking a strategic re-alignment of our business that could have a material adverse financial impact if unsuccessful.

We are undertaking a strategic re-alignment of our business. Among other things we are implementing the standardization and centralization of systems and process, the outsourcing of certain financial processes and the use of new software for our circulation, advertising and editorial systems. As a result of ongoing strategic evaluation and analysis, we have made and will continue to make changes that, if unsuccessful, could have a material adverse financial impact.

We have invested in growing our digital business, but such investments may not be successful, which could adversely affect our results of operations.

We continue to evaluate our business and how we intend to grow our digital business. Internal resources and effort are put towards this business and key partnerships have been entered into to assist with our digital business. We continue to believe that our digital businesses offer opportunities for revenue growth to support

 

29


Table of Contents

and, in some cases, offset the revenue trends we have seen in our print business. There can be no assurances that the partnerships we have entered into or the internal strategy being employed will result in generating or increasing digital revenues in amounts necessary to stabilize or offset trends in print revenues. In addition, we have a limited history of operations in this area and there can be no assurances that past performance will be indicative of future performance or future trends. If our digital strategy is not as successful as we anticipate, our financial condition, results of operations and ability to pay dividends could be adversely affected.

If we are unable to retain and grow our digital audience and advertiser base, our digital businesses will be adversely affected.

Given the ever-growing and rapidly changing number of digital media options available on the internet, we may not be able to increase our online traffic sufficiently and retain or grow a base of frequent visitors to our websites and applications on mobile devices.

Accordingly, we may not be able to create sufficient advertiser interest in our digital businesses and to maintain or increase the advertising rates of the inventory on our websites.

In addition, the ever-growing and rapidly changing number of digital media options available on the internet may lead to technologies and alternatives that we are not able to offer or about which we are not able to advise. Such circumstances could directly and adversely affect the availability, applicability, marketability and profitablity of the suite of SMB services and the private ad exchange we offer as a significant part of our digital business.

Technological developments and any changes we make to our business model may require significant capital investments. Such investments may be restricted by our current or future credit facilities.

Our business is subject to seasonal and other fluctuations, which affects our revenues and operating results.

Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. Our first fiscal quarter of the year tends to be our weakest quarter because advertising volume is at its lowest levels following the December holiday season. Correspondingly, our second and fourth fiscal quarters tend to be our strongest because they include heavy holiday and seasonal advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.

We could be adversely affected by continued declining circulation.

Overall daily newspaper circulation, including national and urban newspapers, has declined in recent years. There can be no assurance that our circulation will not continue to decline in the future. We have been able to maintain our annual circulation revenue from existing operations in recent years through, among other things, increases in our per copy prices. However, there can be no assurance that we will be able to continue to increase prices to offset any declines in circulation. Further declines in circulation could impair our ability to maintain or increase our advertising prices, cause purchasers of advertising in our publications to reduce or discontinue those purchases and discourage potential new advertising customers, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay a dividend.

The increasing popularity of digital media could also adversely affect circulation of our newspapers, which may decrease circulation revenue and cause more marked declines in print advertising. If we are not successful in offsetting such declines in revenues from our print products, our business, financial condition and prospects will be adversely affected.

 

30


Table of Contents

We have a history of losses and may not be able to achieve or maintain profitable operations in the future.

We experienced losses from continuing operations of approximately $27.5 million, $21.0 million and $25.5 million in 2012, 2011 and 2010, respectively. Our results of operations in the future will depend on many factors, including our ability to execute our business strategy and realize efficiencies through our clustering strategy. Our failure to achieve profitability in the future could adversely affect the trading price of our Common Stock and our ability to pay dividends and raise additional capital for growth.

The value of our intangible assets may become impaired, depending upon future operating results.

As part of the annual impairment assessment, as of June 30, 2013, the fair values of the Company’s reporting units for goodwill impairment testing and newspaper mastheads were estimated using the expected present value of future cash flows, recent industry transaction multiples and using estimates, judgments and assumptions that management believed were appropriate in the circumstances. The estimates and judgments used in the assessment included multiples for revenue and EBITDA, the weighted average cost of capital and the terminal growth rate. Given the current market conditions, the Company determined that recent transactions provided the best estimate of the fair value of its reporting units and no impairment indicators were identified. Additionally, the estimated fair value exceeded carrying value for all mastheads. The total Company’s estimate of fair value was reconciled to its then market capitalization (based upon the market price of the Company’s common stock and fair value of the Company’s debt) plus an estimated control premium.

The newspaper industry and the Company have experienced declining same store revenue and profitability over the past several years. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, the Company may be required to record additional impairment charges in the future.

We are subject to environmental and employee safety and health laws and regulations that could cause us to incur significant compliance expenditures and liabilities.

Our operations are subject to federal, state and local laws and regulations pertaining to the environment, storage tanks and the management and disposal of wastes at our facilities. Under various environmental laws, a current or previous owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances or petroleum at that property. Such laws often impose liability on the owner or operator without regard to fault and the costs of any required investigation or cleanup can be substantial. Although in connection with certain of our acquisitions we have rights to indemnification for certain environmental liabilities, these rights may not be sufficient to reimburse us for all losses that we might incur if a property acquired by us has environmental contamination.

Our operations are also subject to various employee safety and health laws and regulations, including those pertaining to occupational injury and illness, employee exposure to hazardous materials and employee complaints. Environmental and employee safety and health laws tend to be complex, comprehensive and frequently changing. As a result, we may be involved from time to time in administrative and judicial proceedings and investigations related to environmental and employee safety and health issues. These proceedings and investigations could result in substantial costs to us, divert our management’s attention and adversely affect our ability to sell, lease or develop our real property. Furthermore, if it is determined that we are not in compliance with applicable laws and regulations, or if our properties are contaminated, it could result in significant liabilities, fines or the suspension or interruption of the operations of specific printing facilities.

Future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to us, may give rise to additional compliance or remedial costs that could be material.

 

31


Table of Contents

Sustained increases in costs of employee health and welfare benefits may reduce our profitability. Moreover, our pension plan obligations are currently unfunded, and we may have to make significant cash contributions to our plans, which could reduce the cash available for our business.

In recent years, we have experienced significant increases in the cost of employee medical benefits because of economic factors beyond our control, including increases in health care costs. At least some of these factors may continue to put upward pressure on the cost of providing medical benefits. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.

Our pension and post retirement plans were underfunded (accumulated benefit obligation) by $15.5 million at December 30, 2012. Our pension plan invests in a variety of equity and debt securities, many of which were affected by the recent disruptions in the credit and capital markets in 2009 and 2010. Future volatility and disruption in the stock markets could cause further declines in the asset values of our pension plans. In addition, a decrease in the discount rate used to determine minimum funding requirements could result in increased future contributions. If either occurs, we may need to make additional pension contributions above what is currently estimated, which could reduce the cash available for our businesses.

We may not be able to protect intellectual property rights upon which our business relies and, if we lose intellectual property protection, our assets may lose value.

Our business depends on our intellectual property, including, but not limited to, our titles, mastheads, content and services, which we attempt to protect through patents, copyrights, trade laws and contractual restrictions, such as confidentiality agreements. We believe our proprietary and other intellectual property rights are important to our continued success and our competitive position.

Despite our efforts to protect our proprietary rights, unauthorized third parties may attempt to copy or otherwise obtain and use our content, services and other intellectual property, and we cannot be certain that the steps we have taken will prevent any misappropriation or confusion among consumers and merchants, or unauthorized use of these rights. If we are unable to procure, protect and enforce our intellectual property rights, we may not realize the full value of these assets, and our business may suffer. If we must litigate to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of third parties, such litigation may be costly and divert the attention of our management from day-to-day operations.

We depend on key personnel and we may not be able to operate or grow our business effectively if we lose the services of any of our key personnel or are unable to attract qualified personnel in the future.

The success of our business is heavily dependent on our ability to retain our management and other key personnel and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and we may not be able to retain our personnel. Although we have entered into employment agreements with certain of our key personnel, these agreements do not ensure that our key personnel will continue in their present capacity with us for any particular period of time. We do not have key man insurance for any of our current management or other key personnel. The loss of any key personnel would require our remaining key personnel to divert immediate and substantial attention to seeking a replacement. An inability to find a suitable replacement for any departing executive officer on a timely basis could adversely affect our ability to operate or grow our business.

A shortage of skilled or experienced employees in the media industry, or our inability to retain such employees, could pose a risk to achieving improved productivity and reducing costs, which could adversely affect our profitability.

Production and distribution of our various publications requires skilled and experienced employees. A shortage of such employees, or our inability to retain such employees, could have an adverse impact on our

 

32


Table of Contents

productivity and costs, our ability to expand, develop and distribute new products and our entry into new markets. The cost of retaining or hiring such employees could exceed our expectations which could adversely affect our results of operations.

A number of our employees are unionized, and our business and results of operations could be adversely affected if current or additional labor negotiations or contracts were to further restrict our ability to maximize the efficiency of our operations.

As of December 30, 2012, we employed approximately 4,565 employees, of whom approximately 691 (or approximately 15%) were represented by 23 unions. 95% of the unionized employees are in three states: Massachusetts, Illinois and Ohio and represent 27%, 38% and 30% of all our union employees, respectively. Most of our unionized employees work under collective bargaining agreements that expire in 2014.

Although our newspapers have not experienced a union strike in the recent past nor do we anticipate a union strike occurring, we cannot preclude the possibility that a strike may occur at one or more of our newspapers at some point in the future. We believe that, in the event of a newspaper strike, we would be able to continue to publish and deliver to subscribers, which is critical to retaining advertising and circulation revenues, although there can be no assurance of this.

Our potential inability to successfully execute cost control measures could result in greater than expected total operating costs.

We have implemented general cost control measures, and expect to continue such cost control efforts in the future. If we do not achieve expected savings as a result of such measures or if our operating costs increase as a result of our growth strategy, our total operating costs may be greater than expected. In addition, reductions in staff and employee benefits could affect our ability to attract and retain key employees.

We may not realize all of the anticipated benefits of the Local Media Acquisition or potential future acquisitions, which could adversely affect our business, financial condition and results of operations.

Our ability to realize the anticipated benefits of the Local Media Acquisition or potential future acquisitions of assets or companies will depend, in part, on our ability to scale-up to appropriately integrate the businesses of Local Media and other such acquired companies with our business. The process of acquiring assets or companies may disrupt our business and may not result in the full benefits expected. Additionally, we may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not even be made available or known to us. In addition, valuations of potential acquisitions may rise materially, making it economically unfeasible to complete identified acquisitions. The risks associated with the recent Local Media Acquisition and potential future acquisitions include, among others:

 

    uncoordinated market functions;

 

    unanticipated issues in integrating the operations and personnel of the acquired businesses;

 

    the incurrence of indebtedness and the assumption of liabilities;

 

    the incurrence of significant additional capital expenditures, transaction and operating expenses and non-recurring acquisition-related charges;

 

    unanticipated adverse impact on our earnings from the amortization or write-off of acquired goodwill and other intangible assets;

 

    not retaining key employees, vendors, service providers, readers and customers of the acquired businesses; and

 

    the diversion of management’s attention from ongoing business concerns.

 

33


Table of Contents

If we are unable to successfully implement our acquisition strategy or address the risks associated with the Local Media Acquisition or potential future acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than other profitable areas. Moreover, the success of any acquisition will depend upon our ability to effectively integrate the acquired assets or businesses. The acquired assets or businesses may not contribute to our revenues or earnings to any material extent, and cost savings and synergies we expect at the time of an acquisition may not be realized once the acquisition has been completed. Furthermore, if we incur indebtedness to finance an acquisition, the acquired business may not be able to generate sufficient cash flow to service that indebtedness. Unsuitable or unsuccessful acquisitions could adversely affect our business, financial condition, results of operations, cash flow and ability to pay dividends.

Our future financial results will be affected by the adoption of fresh start reporting and may not reflect historical trends.

We will be formed pursuant to the Plan to acquire substantially all of the assets of our predecessor GateHouse. The Restructuring will result in us becoming a new reporting entity and adopting fresh-start accounting. As required by fresh-start accounting, we will cause our Predecessor’s assets and liabilities to be adjusted to measured value, and we will recognize certain assets and liabilities not previously recognized in our Predecessor’s financial statements. Accordingly, our financial condition and results of operations from and after the Effective Date may not be comparable to the financial condition and results of operations reflected in our Predecessor’s historical consolidated financial statements, including those presented herein.

The bankruptcy filing may have a negative impact on our Predecessor’s image which may negatively impact our business going forward.

As a result of the Restructuring, our Predecessor may be the subject of negative publicity which may have an impact on its image and the image of its operations and its reputation, stature and relationship within the community. This negative publicity may have an effect on the terms under which some customers, advertisers and suppliers are willing to continue to do business with us and could materially adversely affect our business, financial condition and results of operations.

The Restructuring could adversely affect our business, financial condition and results of operations .

The Restructuring could adversely affect our operations, including relationships with our advertisers, employees and others. There is a risk, due to uncertainty about our future, that, among other things:

 

    advertisers could move to other forms of media, including our competitors that have comparatively greater financial resources and that are in comparatively less financial distress;

 

    employees could be distracted from performance of their duties or more easily attracted to other career opportunities; and

 

    business partners could terminate their relationship with us or demand financial assurances or enhanced performance, any of which could impair our prospects.

Any of these factors could materially adversely affect our business, financial condition and results of operations.

We cannot be certain that the Restructuring will not adversely affect our operations going forward.

We cannot provide assurance that the Restructuring will not adversely affect our future operations. Our suppliers and vendors could stop providing supplies or services to us or provide such supplies or services only on

 

34


Table of Contents

unfavorable terms such as “cash on delivery,” “cash on order” or other terms that could have an adverse impact on our short-term cash flows. In addition, the Restructuring may adversely affect our ability to retain existing readers and advertisers, attract new readers and advertisers and maintain contracts that are critical to our operations.

Risks Related to Our Manager

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement.

We are externally managed by our Manager. We are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies, to conduct our business. We are subject to the risk that our Manager will terminate the Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Furthermore, we are dependent on the services of certain key employees of our Manager whose compensation is partially or entirely dependent upon the amount of incentive or management compensation earned by our Manager and whose continued service is not guaranteed, and the loss of such services could adversely affect our operations.

There may be conflicts of interest in our relationship with our Manager, including with respect to corporate opportunities.

We have entered into a Management Agreement with an affiliate of Fortress pursuant to which our management team will not be required to exclusively dedicate their services to us and will provide services for other entities affiliated with our Manager, including, but not limited to, Newcastle.

Our amended and restated certificate of incorporation and amended and restated bylaws provide that if Newcastle or Fortress or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Newcastle or Fortress acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New Media and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Newcastle or Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, including Newcastle, that present an actual, potential or perceived conflict of interest. It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.

The management compensation structure that we have agreed to with our Manager, as well as compensation arrangements that we may enter into with our Manager in the future (in connection with new lines of business or other activities), may have unintended consequences for us. We have agreed to pay our Manager a management

 

35


Table of Contents

fee that is not tied to our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. In addition, our Manager may be eligible to receive incentive compensation, which may incentivize our Manager to invest in high risk investments. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of such measures at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative than lower-yielding investments. Moreover, because our Manager receives compensation in the form of options in connection with the completion of our common equity offerings, our Manager may be incentivized to cause us to issue additional common stock, which could be dilutive to existing stockholders. See “Description of Our Capital Stock—Corporate Opportunity.”

We may compete with affiliates of our Manager, including Newcastle, which could adversely affect our and their results of operations.

Affiliates of our Manager, including Newcastle, are not restricted in any manner from competing with us. After the Distribution, affiliates of our Manager, including Newcastle, may decide to invest in the same types of assets that we invest in. Furthermore, after the Distribution, we will have the same Manager as Newcastle and one of our directors will also be a director of Newcastle. See “—Risks Related to Our Manager—There may be conflicts of interest in our relationship with our Manager, including with respect to corporate opportunities.”

It would be difficult and costly to terminate our Management Agreement with our Manager.

It would be difficult and costly for us to terminate our Management Agreement with our Manager. The Management Agreement may only be terminated annually upon (i) the reasonable affirmative vote of a majority of at least two-thirds of our independent directors, or by a vote of the holders of a simple majority of the outstanding shares of our Common Stock, that there has been unsatisfactory performance by our Manager that is materially detrimental to us or (ii) a determination by a simple majority of our independent directors that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination by accepting a mutually acceptable reduction of fees. Our Manager will be provided 60 days’ prior notice of any termination and will be paid a termination fee equal to the amount of the management fee earned by the Manager during the twelve month period preceding such termination. In addition, following any termination of the Management Agreement, our Manager may require us to purchase its right to receive incentive compensation at a price determined as if our assets were sold for their fair market value (as determined by an appraisal, taking into account, among other things, the expected future value of the underlying investments) or otherwise we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost to us of terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause. In addition, our independent directors may not vigorously enforce the provisions of our Management Agreement against our Manager. For example, our independent directors may refrain from terminating our Manager because doing so could result in the loss of key personnel. Furthermore, we are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement.

Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our investments.

Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our Board in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of our subsidiaries, to our Board, or our or any subsidiary’s stockholders or partners for any acts or omissions by our Manager, its members, managers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees and each other

 

36


Table of Contents

person, if any, controlling our Manager harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.

Our Manager’s due diligence of business opportunities or other transactions may not identify all pertinent risks, which could materially affect our business, financial condition, liquidity and results of operations.

Our Manager intends to conduct due diligence with respect to each business opportunity or other transaction it pursues. It is possible, however, that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the business opportunity and will rely on information provided by the target of the business opportunity. In addition, if business opportunities are scarce, the process for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct a due diligence investigation may be limited, and we would be required to make business decisions based upon a less thorough diligence process than would otherwise be the case. Accordingly, business opportunities and other transactions that initially appear to be viable may prove not to be over time, due to the limitations of the due diligence process or other factors.

Risks Related to the Distribution

The ownership by our executive officers and some of our directors of shares of common stock, options, or other equity awards of Newcastle may create, or may create the appearance of, conflicts of interest.

Because some of our directors, officers and other employees of our Manager also currently hold positions with Newcastle, they own Newcastle common stock, options to purchase Newcastle common stock or other equity awards. Ownership by some of our directors and officers, after our distribution, of common stock or options to purchase common stock of Newcastle, or any other equity awards, creates, or, may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Newcastle than they do for us.

The Distribution will not qualify for tax-free treatment and may be taxable to you as a dividend.

The Distribution will not qualify for tax-free treatment. An amount equal to the fair market value of the shares of our Common Stock received by you on the date of the Distribution will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits, as determined under federal income tax principles, of Newcastle, with the excess treated first as a non-taxable return of capital to the extent of your tax basis in your shares of Newcastle common stock and then as capital gain. In addition, Newcastle or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and Newcastle or any such agent would satisfy any such withholding obligation by withholding and selling a portion of the New Media stock otherwise distributable to non-U.S. stockholders or by withholding from other property held in the non-U.S. stockholder’s account with the withholding agent. Your tax basis in shares of Newcastle stock held at the time of the Distribution will be reduced (but not below zero) to the extent the fair market value of the shares of our Common Stock distributed to you in the Distribution exceeds your ratable share of Newcastle’s current and accumulated earnings and profits. Your holding period for such shares of Newcastle stock will not be affected by the Distribution. Newcastle will not be able to advise stockholders of the amount of current or accumulated earnings and profits of Newcastle until after the end of the 2013 calendar year.

Although Newcastle will be ascribing a value to the shares of our Common Stock distributed in the Distribution for tax purposes, this valuation is not binding on the Internal Revenue Service (the “IRS”) or any other tax authority. These taxing authorities could ascribe a higher valuation to the shares of our Common Stock,

 

37


Table of Contents

particularly if our Common Stock trades at prices significantly above the value ascribed to our Common Stock by Newcastle in the period following the Distribution. Such a higher valuation may cause a larger reduction in the tax basis of your Newcastle stock or may cause you to recognize additional dividend or capital gain income. You should consult your own tax advisor as to the particular tax consequences of the Distribution to you.

Risks Related to our Common Stock

There is no existing market for our Common Stock and a trading market that will provide you with adequate liquidity may not develop for our Common Stock. In addition, once our Common Stock begins trading, the market price of our shares may fluctuate widely.

There is currently no public market for our Common Stock. It is anticipated that on or prior to the Record Date for the Distribution, trading of shares of our Common Stock will begin on a “when-issued” basis and will continue up to and including through the Distribution Date. However, there can be no assurance that an active trading market for our Common Stock will develop as a result of the Distribution or be sustained in the future.

We cannot predict the prices at which our Common Stock may trade after the Distribution. The market price of our Common Stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:

 

    our business profile and market capitalization may not fit the investment objectives of Newcastle stockholders;

 

    a shift in our investor base;

 

    our quarterly or annual earnings, or those of other comparable companies;

 

    actual or anticipated fluctuations in our operating results;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

    the failure of securities analysts to cover our Common Stock after the Distribution;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of other comparable companies;

 

    overall market fluctuations; and

 

    general economic conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our Common Stock.

Substantial sales of Common Stock may occur in connection with the Distribution, which could cause our stock price to decline.

The shares of our Common Stock that Newcastle intends to distribute to its stockholders generally may be sold immediately in the public market. Pursuant to the registration rights granted to Omega and any other holder of Outstanding Debt that receives at least as many shares of New Media Common Stock as Omega receives (provided that Omega, directly or indirectly, receives 10% or more of New Media Common Stock on the Effective Date), any sales by Omega or such other holders may lower the market prices of our Common Stock. In addition, Newcastle stockholders may sell our stock because our business profile or market capitalization as an independent company does not fit their investment objectives or because our Common Stock is not included in certain indices after the Distribution. The sales of significant amounts of our Common Stock or the perception in the market that this will occur may result in the lowering of the market price of our Common Stock.

 

38


Table of Contents

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

As a public company, we will be required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our share price and impairing our ability to raise capital.

Your percentage ownership in New Media may be diluted in the future.

We may issue equity in order to raise capital or in connection with future acquisitions and strategic investments, which would dilute investors’ percentage ownership in New Media. In addition, your percentage ownership may be diluted if we issue equity instruments such as debt and equity financing.

Your percentage ownership in New Media may also be diluted in the future as result of the issuance of ordinary shares in New Media upon the exercise of the New Media Warrants. The New Media Warrants will collectively represent the right to acquire New Media Common Stock, which in the aggregate will be equal to 5% of New Media Common Stock as of the Effective Date (calculated prior to dilution from shares of New Media Common Stock issued pursuant to the Local Media Contribution) at a strike price calculated based on a total equity value of New Media prior to the Local Media Contribution of $1.2 billion as of the Effective Date. As a result, New Media Common Stock may be subject to dilution upon the exercise of such New Media Warrants.

Furthermore, your percentage ownership in New Media may be diluted in the future because of equity awards that we expect will be granted to our Manager pursuant to our Management Agreement. Upon the successful completion of an offering of shares of our Common Stock or any shares of preferred stock, we will grant our Manager options equal to 10% of the number of shares being sold in the offering (excluding the shares issued to Newcastle or its affiliates in the Local Media Contribution), with an exercise price equal to the offering price per share paid by the public or other ultimate purchaser. For the avoidance of doubt, the listing of our Common Stock does not constitute an offering for purposes of this provision. If our Board of Directors adopts an equity compensation plan and makes grants of equity awards to our directors, officers and employees pursuant to any such plan, any such grants would cause further dilution.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our Common Stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our Board rather than to attempt a hostile takeover. These provisions provide for:

 

    a classified board of directors with staggered three-year terms;

 

   

amendment of provisions in our amended and restated certificate of incorporation and amended and restated bylaws regarding the election of directors, classes of directors, the term of office of directors,

 

39


Table of Contents
 

the filling of director vacancies and the resignation and removal of directors only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;

 

    amendment of provisions in our amended and restated certificate of incorporation regarding corporate opportunity only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;

 

    removal of directors only for cause and only with the affirmative vote of at least 80% of the voting interest of stockholders entitled to vote in the election of directors;

 

    our Board to determine the powers, preferences and rights of our preferred stock and to issue such preferred stock without stockholder approval;

 

    provisions in our amended and restated certificate of incorporation and amended and restated bylaws prevent stockholders from calling special meetings of our stockholders;

 

    advance notice requirements applicable to stockholders for director nominations and actions to be taken at annual meetings;

 

    a prohibition, in our amended and restated certificate of incorporation, stating that no holder of shares of our Common Stock will have cumulative voting rights in the election of directors, which means that the holders of majority of the issued and outstanding shares of our Common Stock can elect all the directors standing for election; and

 

    a requirement in our amended and restated bylaws specifically denying the ability of our stockholders to consent in writing to take any action in lieu of taking such action at a duly called annual or special meeting of our stockholders.

Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is considered favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or a change in our management and Board and, as a result, may adversely affect the market price of our Common Stock and your ability to realize any potential change of control premium. See “Description of Our Capital Stock—Anti-Takeover Effects of Delaware Law, Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws.”

 

40


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD LOOKING INFORMATION

Certain statements in this Information Statement may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views regarding, among other things, our future growth, results of operations, performance and business prospects and opportunities, as well as other statements that are other than historical fact. Words such as “anticipate(s),” “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “believe(s)”, “will”, “aim”, “would”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements.

Forward-looking statements are based on management’s current expectations and beliefs and are subject to a number of known and unknown risks, uncertainties and other factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Our actual results, liquidity and financial condition may differ from the anticipated results, liquidity and financial condition indicated in these forward-looking statements. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause our actual results to differ, possibly materially from expectations or estimates reflected in such forward-looking statements, including, among others:

 

    general economic, market and political conditions;

 

    the potential adverse effects of the Restructuring;

 

    the risk that we may not realize the anticipated benefits of the Local Media Acquisition or potential future acquisitions;

 

    the availability and cost of capital for future investments;

 

    our ability to pay dividends;

 

    our ability to realize the benefits of the Management Agreement;

 

    the competitive environment in which we operate;

 

    our ability to grow our digital business and digital audience and advertiser base;

 

    our ability to recruit and retain key personnel.

Additional factors that could cause actual results to differ materially from our expectations include, but are not limited, to the risks identified by us under the heading “Risk Factors” and elsewhere in this Information Statement. Such forward-looking statements speak only as of the date on which they are made. Except to the extent required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

41


Table of Contents

THE SPIN-OFF AND RESTRUCTURING

General

The board of directors of Newcastle has determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the separation of New Media’s assets from the rest of Newcastle and the establishment of New Media as a separate, publicly traded company is in Newcastle’s best interests.

In furtherance of this plan, Newcastle will distribute all of the shares of our Common Stock held by Newcastle to holders of Newcastle common stock, subject to certain conditions. The distribution of the shares of our Common Stock will take place on                     , 2013. On the Distribution Date, each holder of Newcastle common stock will receive              shares of our Common Stock for every              shares of Newcastle common stock held as of 5:00 PM, Eastern Time, on the Record Date, as described below. Immediately following the Distribution, Newcastle’s stockholders will own     % of our Common Stock. You will not be required to make any payment, surrender or exchange your shares of Newcastle common stock or take any other action to receive your shares of our Common Stock.

The Distribution of our Common Stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the Distribution will be completed. For a more detailed description of these conditions, see the section entitled “—Conditions to the Distribution” included elsewhere in this Information Statement.

The Number of Shares You Will Receive

For every              shares of Newcastle common stock that you owned as of 5:00 PM, Eastern Time, on                     , 2013, the Record Date, you will receive              shares of our Common Stock on the Distribution Date. Fractional shares of New Media’s Common Stock will not be distributed in the spin-off. Holders of Newcastle common stock will receive cash in lieu of fractional shares of New Media Common Stock.

Transferability of Shares You Receive

The shares of New Media Common Stock distributed to Newcastle stockholders will be freely transferable, except for shares received by persons who may be deemed to be New Media “affiliates” under the Securities Act. Persons who may be deemed to be affiliates of New Media after the Distribution generally include individuals or entities that control, are controlled by or are under common control with New Media and may include directors and certain officers or principal stockholders of New Media. New Media affiliates will be permitted to sell their shares of New Media Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Rule 144.

When and How You Will Receive the Distributed Shares

Newcastle will distribute the shares of our Common Stock on                     , 2013, the Distribution Date. American Stock Transfer & Trust Company, LLC will serve as distribution agent and registrar for our Common Stock and as distribution agent in connection with the Distribution.

If you own Newcastle common stock as of 5:00 PM, Eastern Time, on the Record Date, the shares of New Media Common Stock that you are entitled to receive in the Distribution will be issued electronically, as of the Distribution Date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording stock ownership when no physical share certificates are issued to stockholders, as is the case in the Distribution.

 

42


Table of Contents

If you sell shares of Newcastle common stock in the “regular-way” market prior to the Distribution Date, you will also sell your right to receive shares of our Common Stock in the Distribution.

For more information see the section entitled “—Market for Common Stock—Trading Between the Record Date and Distribution Date” included elsewhere in this Information Statement.

Commencing on or shortly after the Distribution Date, if you hold physical stock certificates that represent your shares of Newcastle common stock, or if you hold your shares in book-entry form, and you are the registered holder of such shares, the distribution agent will mail to you an account statement that indicates the number of shares of our Common Stock that have been registered in book-entry form in your name.

Most Newcastle stockholders hold their shares of Newcastle common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank’s or brokerage firm’s books. If you hold your Newcastle common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our Common Stock that you are entitled to receive in the Distribution. If you have any questions concerning the mechanics of having shares of our Common Stock held in “street name,” we encourage you to contact your bank or brokerage firm.

Results of the Distribution

After the Distribution, we will be a separate, publicly-traded company. Immediately following the Distribution, we expect to have approximately              stockholders of record, based on the number of registered stockholders of Newcastle common stock on                     , 2013, and              holders who received our Common Stock pursuant to the Restructuring. Immediately following the Distribution, we expect to have              shares of our Common Stock outstanding. The actual number of shares to be distributed will be determined on the Record Date and will reflect any changes in the number of shares of Newcastle common stock between                     , 2013 and the Record Date for the Distribution. See “Security Ownership of Certain Beneficial Owners and Management.”

The number of shares of Common Stock that Newcastle will distribute to its stockholders will be reduced to the extent that cash payments are made in lieu of the issuance of fractional New Media Common Stock.

The Distribution will not affect the number of outstanding shares of Newcastle common stock or any rights of Newcastle stockholders.

Ownership of New Media

Immediately following the Distribution, Newcastle stockholders as of the Record Date for the Distribution will own     % of our Common Stock. The remainder of the outstanding Common Stock will be owned by holders of the Outstanding Debt who elected to receive Common Stock in the Restructuring. For a description of the Restructuring, see “The Spin-Off and Restructuring,” “Restructuring Agreements,” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations” in this Information Statement. For further information about the ownership of New Media, see “Security Ownership of Certain Beneficial Owners and Management.”

Market for Common Stock

There is currently no public market for our Common Stock. A condition to the Distribution is the listing on the NYSE of our Common Stock. We intend to apply to list our Common Stock on the NYSE under the symbol “NEWM.”

Trading Between the Record Date and Distribution Date

Beginning shortly before the Record Date and continuing up to and through the Distribution Date, we expect that there will be two markets in Newcastle common stock: a “regular-way” market and an “ex-distribution”

 

43


Table of Contents

market. Shares of Newcastle common stock that trade on the regular way market will trade with an entitlement to shares of our Common Stock distributed pursuant to the Distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to shares of our Common Stock distributed pursuant to the Distribution. Therefore, if you sell shares of Newcastle common stock in the “regular-way” market through the Distribution Date, you will also sell your right to receive shares of New Media Common Stock in the Distribution. If you own shares of Newcastle common stock as of 5:00 PM, Eastern Time, on the Record Date and sell those shares on the “ex-distribution” market through the Distribution Date, you will still receive the shares of our Common Stock that you would be entitled to receive pursuant to your ownership of the shares of Newcastle common stock on the Record Date.

Furthermore, beginning on or shortly before the Record Date and continuing up to and through the Distribution Date, we expect that there will be a “when-issued” market in our Common Stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our Common Stock that will be distributed to Newcastle stockholders on the Distribution Date. If you owned shares of Newcastle common stock as of 5:00 P.M., Eastern time, on the Record Date, you would be entitled to shares of our Common Stock distributed pursuant to the Distribution. You may trade this entitlement to shares of our Common Stock, without trading the shares of Newcastle common stock you own, on the “when-issued” market. On the first trading day following the Distribution Date, “when-issued” trading with respect to our Common Stock will end and “regular-way” trading will begin.

Conditions to the Distribution

We expect that the Distribution will occur on                     , 2013, the Distribution Date, provided that, among other conditions described in this Information Statement, the following conditions shall have been satisfied:

 

    the SEC shall have declared effective our registration statement on Form 10, of which this Information Statement is a part, under the Securities Act, and no stop order relating to the registration statement is in effect;

 

    the listing of our Common Stock on the NYSE shall have been approved, subject to official notice of issuance;

 

    the Plan is approved by the Bankruptcy Court without any appeals by any parties; and

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Distribution or any of the transactions related thereto, shall be in effect.

Newcastle has the right not to complete the Distribution if, at any time, the board of directors of Newcastle determines, in its sole discretion, that the Distribution is not in the best interests of Newcastle or that market conditions are such that it is not advisable to separate New Media from Newcastle.

Reasons for the Distribution

Newcastle’s board of directors periodically reviews strategic alternatives. The Newcastle board determined upon careful review and consideration in accordance with the applicable standard of review under Maryland law that the spin-off of New Media is in the best interests of Newcastle. The Newcastle board’s determination was based on a number of factors, including those set forth below.

 

   

Added focus and simplification. We believe the spin-off of New Media will enhance Newcastle’s focus on its primary strategy of opportunistically investing in, and actively managing, a variety of real-estate related and other investments. The spin-off will simplify Newcastle’s business by separating an

 

44


Table of Contents
 

asset class (media assets) that is unrelated to the remainder of Newcastle’s investment portfolio. As a result, we believe the spin-off will facilitate investor and analyst understanding of Newcastle’s core businesses. In addition, the spin-off will create a dedicated vehicle to pursue a significant investment opportunity in the media industry.

 

    Tailored capital structure and financing options. New Media and Newcastle will have distinct and unrelated businesses, and the spin-off will enable each to create a capital structure tailored to its individual needs. In addition, tailored capital structures will facilitate each company’s ability to pursue acquisitions, possibly using common stock as currency, and other strategic alliances. Following the spin-off, each company may be able to attain more favorable financing terms on a stand-alone basis than Newcastle could obtain currently.

 

    Newcastle’s REIT status. As a REIT, Newcastle is not suited to own an operating business indefinitely. Newcastle’s current investment in New Media originated with a 2007 debt investment in GateHouse. GateHouse became overleveraged in the financial crisis, and Newcastle determined to maximize the value of its investment by pursuing a restructuring that will result in the conversion of its debt into equity. Following the restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

The anticipated benefits of the spin-off are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated or at all. In the event that the spin-off does not result in such benefits, the costs associated with the transaction and the expenses New Media will incur as an independent public company, including management compensation and general and administrative expenses, could have a negative effect on each company’s financial condition and ability to make distributions to its stockholders. For more information about the risks associated with the separation, see “Risk Factors.”

The Restructuring

On September 4, 2013, GateHouse announced that GateHouse, Newcastle (and certain of its affiliates), the Administrative Agent, and Participating Lenders entered into the Support Agreement in which the parties agreed to support, subject to the terms and conditions of the Support Agreement, the Restructuring pursuant to the consummation of the Plan.

Pursuant to the Support Agreement and Investment Commitment Letter:

 

    Newcastle (or its designated affiliates) would make the Cash-Out Offer;

 

    The holders of the Outstanding Debt would have the option of receiving, in satisfaction of their Outstanding Debt (i) the Cash-Out Offer and/or (ii) (A) New Media Common Stock and (B) the Net Proceeds, if any, of the New Credit Facility;

 

    Newcastle would contribute its interests in Local Media to New Media in exchange for issuance of New Media Common Stock and, at Newcastle’s election, $50,000 of cash, collectively equal in value to the cost of the Local Media Acquisition (as adjusted pursuant to the Plan);

 

    On account of any purchases of the Outstanding Debt in connection with the Cash-Out Offer, Newcastle would receive a pro rata share of (a) New Media Common Stock and (b) the Net Proceeds, if any, of the New Credit Facility;

 

    GateHouse would use commercially reasonable efforts, in light of market conditions and other relevant factors, to raise a New Credit Facility in aggregate amount of up to approximately $150 million on the same or better terms for GateHouse than those set forth in the new debt facility term sheet attached as an exhibit to the Disclosure Statement. Entry into the New Credit Facility will not be a condition to the effectiveness of the Restructuring;

 

    Pension, trade and all other unsecured claims against GateHouse will be unimpaired by the Restructuring; and

 

45


Table of Contents
    The Existing Equity Interests would be cancelled, and the holders of Existing Equity Interests would receive 10-year warrants, collectively representing the right to acquire, in the aggregate, 5% of the common stock of New Media Common Stock (subject to dilution) as of the Effective Date, with the strike price per share for such warrants calculated based on a total equity value of New Media, prior to contribution of Local Media, of $1.2 billion as of the Effective Date.

As of September 19, 2013, Newcastle and its affiliates held approximately 52.2% of the principal amount currently outstanding under the 2007 Credit Facility and the other Participating Lenders held approximately 28.7% of such principal amount (in each case, including certain amounts still pending trade settlement). Additional holders of Outstanding Debt may join the Restructuring Support Agreement in the future as Participating Lenders.

On September 20, 2013, GateHouse commenced the Solicitation. Subject to the terms of the Support Agreement, if holders of Outstanding Debt sufficient to meet the requisite threshold of 67% in amount and majority in number (calculated without including any insider) necessary for acceptance of the Plan under the Bankruptcy Code (“Bankruptcy Threshold Creditors”) vote to accept the Plan in the Solicitation, Debtors intend to commence Chapter 11 cases and seek approval of the Disclosure Statement and confirmation of the Plan therein. Under the Support Agreement, each of the Participating Lenders has agreed to (a) support and take any reasonable action in furtherance of the Restructuring, (b) timely vote their Outstanding Debt to accept the Plan and not change or withdraw such vote, (c) support approval of the Disclosure Statement and confirmation of the Plan, as well as certain relief to be requested by Debtors from the Bankruptcy Court, (d) refrain from taking any action inconsistent with the confirmation or consummation of the Plan, and (e) not propose, support, solicit or participate in the formulation of any plan other than the Plan.

Upon emergence from the Plan, we plan to adopt fresh-start reporting in accordance with Accounting Standards Codification Topic 852, “Reorganizations.” Under fresh-start accounting, a new entity is deemed to have been created on the Effective Date of the Plan for financial reporting purposes and GateHouse’s recorded amounts of assets and liabilities will be adjusted to reflect their estimated fair values. As a result of the adoption of fresh-start accounting, our reorganized company post-emergence financial statements will generally not be comparable with the financial statements of our predecessor company prior to emergence, including the historical financial information in this Information Statement.

The Support Agreement could terminate prior to the Effective Date. The Support Agreement will terminate automatically upon certain events, including the following: (i) GateHouse has commenced Chapter 11 cases that are subsequently dismissed or converted to Chapter 7, or a Chapter 11 trustee, responsible officer or examiner with enlarged powers is appointed; (ii) GateHouse has elected to terminate the Support Agreement in accordance with the exercise of its fiduciary duties; or (iii) the occurrence of the earlier of (a) December 16, 2013 and (b) the Effective Date.

In the event of a material breach, the Support Agreement may be terminated by GateHouse, Newcastle, or Participating Lenders holding a majority in amount of the Outstanding Debt held by Participating Lenders other than Newcastle, Fortress Investment Group LLC, and their respective affiliates (the “Majority Unaffiliated Participating Creditors”), respectively, upon delivery of notice and the expiration of a ten business day cure period.

In addition, the Support Agreement may be terminated by Newcastle or by the Majority Unaffiliated Participating Creditors ten business days after GateHouse receives written notice that any of the following events has occurred and is continuing and such events have not been cured or waived within such ten business day period: (i) GateHouse has commenced Chapter 11 cases prior to commencing the Solicitation; (ii) fifteen business days have elapsed since the Participating Lenders became party to the Support Agreement, and the Solicitation has not been commenced; (iii) five business days have elapsed since the completion of a Solicitation in which the Bankruptcy Threshold Creditors have accepted the Plan, and GateHouse has not commenced the

 

46


Table of Contents

Chapter 11 cases; (iv) the Investment Commitment Letter has terminated or ceased to be in full force and effect; (v) a court of competent jurisdiction or other governmental or regulatory authority has issued a ruling or order restricting a material aspect of the transaction in a manner materially adverse to Newcastle or the Participating Lenders; or (vi) GateHouse has commenced the Chapter 11 cases and (a) an order is entered terminating GateHouse’s exclusive right to file a plan of reorganization, (b) GateHouse fails to file the Plan and Disclosure Statement with the bankruptcy court on the commencement date of the Chapter 11 cases, (c) the bankruptcy court has not, within specified time periods, entered interim and final orders (I) authorizing GateHouse to use cash collateral, (II) granting adequate protection to creditors holding the Outstanding Debt, and (III) approving cash managements systems, (d) GateHouse’s consensual use of cash collateral is terminated in accordance with an interim or final cash collateral order entered by the bankruptcy court, (e) the bankruptcy court has not entered an order confirming the Plan within 60 business days after the bankruptcy filing date, (f) GateHouse withdraws the Plan or publicly announces an intention not to proceed with the Plan; GateHouse files any motion, pleading, plan of reorganization and/or disclosure statement, or the bankruptcy courts enters any order, in each case, that is materially inconsistent with the term sheet attached to the Support Agreement or materially adversely affects the rights of the party seeking to terminate the Support Agreement, or (g) GateHouse challenges or supports a challenge to, or the bankruptcy court enters an order granting a challenge to, GateHouse’s obligations under or the liens securing the Outstanding Debt, or against the Administrative Agent, or Participating Lenders. On September 20, 2013, GateHouse commenced the Solicitation. See “Restructuring Agreements” and “Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

On the Effective Date, 100% of the new equity interests in GateHouse will be issued to New Media. On or after the Effective Date, GateHouse may merge into us or convert into a limited liability company. The occurrence of such merger or conversion will not be a condition to the Effective Date.

 

47


Table of Contents

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

The following is a summary of certain U.S. federal income tax consequences of the Distribution that may be relevant to beneficial holders of Newcastle stock.

For purposes of this section under the heading “Certain U.S. Federal Income Tax Consequences of the Distribution,” references to “New Media,” “we,” “our” and “us” mean only New Media Investment Group Inc. and not its subsidiaries or other lower-tier entities, except as otherwise indicated. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, published administrative interpretations of the IRS, and judicial decisions, all of which are subject to differing interpretations or to change, possibly with retroactive effect. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in this summary, and there can be no assurance that the IRS will agree with such statements and conclusions. In addition, the discussion does not describe any tax consequences arising out of the laws of any state or local or foreign jurisdiction.

This summary is for general information only and is not tax advice. The Code provisions governing the federal income tax treatment of REITs (such as Newcastle) and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. This summary does not address all possible tax considerations that may be material to an investor and does not constitute legal or tax advice. Moreover, this summary does not purport to discuss all aspects of federal income taxation that may be important to a particular investor in light of its investment or tax circumstances, or to investors subject to special tax rules, such as:

 

    financial institutions;

 

    insurance companies;

 

    dealers in securities;

 

    regulated investment companies;

 

    entities taxed as partnerships and partners therein;

 

    trusts;

 

    persons subject to the alternative minimum tax;

 

    persons who hold Newcastle stock on behalf of another person as a nominee;

 

    persons who have a “functional currency” other than the U.S. dollar

 

    persons who received Newcastle stock through the exercise of employee stock options or otherwise as compensation;

 

    persons holding Newcastle stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; and

 

    except to the extent discussed below, tax-exempt entities.

This summary assumes that investors will hold their Common Stock as a capital asset, which generally means as property held for investment.

For purposes of this discussion under the heading “Certain U.S. Federal Income Tax Consequences of the Distribution,” a U.S. holder is a beneficial holder of Newcastle stock that is a citizen or resident of the United States, a domestic corporation or otherwise subject to U.S. federal income tax on a net income basis in respect of its Newcastle stock. A “Non-U.S. holder” is a beneficial holder of Newcastle stock that is not a U.S. holder.

 

48


Table of Contents

THE FEDERAL INCOME TAX TREATMENT OF THE DISTRIBUTION TO BENEFICIAL OWNERS OF NEWCASTLE STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF THE DISTRIBUTION TO ANY PARTICULAR BENEFICIAL OWNER OF NEWCASTLE STOCK WILL DEPEND ON THE BENEFICIAL OWNER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU OF THE DISTRIBUTION IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES.

Tax Classification of the Distribution in General

For U.S. federal income tax purposes, the Distribution will not be eligible for treatment as a tax-free distribution by Newcastle with respect to its stock. Accordingly, the Distribution will be treated as if Newcastle had distributed to each Newcastle stockholder an amount equal to the fair market value of the shares of New Media Common Stock received by such stockholder, determined as of the date of the Distribution (such amount, the “amount distributed pursuant to the Distribution”). The tax consequences of the Distribution for beneficial owners of Newcastle’s stock are thus generally the same as the tax consequences of a distribution of cash by Newcastle.

Although Newcastle will ascribe a value to the shares of New Media Common Stock distributed in the Distribution, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed shares of New Media Common Stock, particularly if, following the Distribution, those shares trade at prices significantly above the value ascribed to those shares by Newcastle. Such a higher valuation may affect the distribution amount and thus the tax consequences of the Distribution to beneficial owners of Newcastle’s stock.

Newcastle will be required to recognize any taxable gain, but will not be permitted to recognize any taxable loss, with respect to the New Media Common Stock that it distributes in the Distribution.

Tax Basis and Holding Period of New Media Stock Received by Holders of Newcastle Stock

A beneficial owner of shares of New Media Common Stock will generally have a tax basis in the shares received in the Distribution that equals the fair market value of such shares on the date of the Distribution, and the holding period for such shares will begin the day after the date of the Distribution.

Tax Treatment of the Distribution to U.S. Holders

Ordinary Dividends. The portion of the amount distributed pursuant to the Distribution that is payable out of Newcastle’s current or accumulated earnings and profits, as determined under federal income tax principles, and not designated by Newcastle as a capital gain dividend (as discussed below) will generally be taken into account by a U.S. holder as ordinary income and will not be eligible for the dividends received deduction for corporations. The Distribution will not be eligible for taxation at the preferential income tax rates for qualified dividends received by U.S. holders that are individuals, trusts and estates from taxable C corporations.

If any “excess inclusion income” (as defined for U.S. federal income tax purposes) from a taxable mortgage pool or REMIC residual interest is allocated by Newcastle to any U.S. holder, that income will be taxable in the hands of the U.S. holder and would not be offset by any net operating losses of the U.S. holder that would otherwise be available. As required by IRS guidance, Newcastle intends to notify its stockholders if any portion of the amount distributed pursuant to the Distribution is attributable to excess inclusion income.

Non-Dividend Distribution. If and to the extent that the amount distributed pursuant to the Distribution is in excess of Newcastle’s current and accumulated earnings and profits, it will generally represent a return of capital and will generally not be taxable to a U.S. holder. Rather, the Distribution will reduce the adjusted basis of the

 

49


Table of Contents

holder’s shares of Newcastle stock (but not below zero) by the extent to which the value of the amount distributed exceeds Newcastle’s current and accumulated earnings and profits. A U.S. holder will however recognize gain to the extent that this excess exceeds the adjusted basis of its shares of Newcastle stock. Any such gain will generally be long-term capital gain if the holder has held its Newcastle shares for more than one year at the time of the Distribution.

Capital Gain Dividends. Any portion of the amount distributed pursuant to the Distribution that Newcastle designates as a capital gain dividend will generally be taxable to U.S. holders as long-term capital gain, except to the extent that such distribution exceeds Newcastle’s actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its Newcastle stock. Certain U.S. Holders that are not corporations are eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains.

Tax Treatment of the Distribution to Non-U.S. Holders

Ordinary Dividends. The amount distributed pursuant to the Distribution generally will constitute a dividend for U.S. federal income tax purposes to the extent of Newcastle’s current or accumulated earnings and profits, as determined under federal income tax principles, and not designated as a capital gain dividend by Newcastle. The amount treated as a dividend will be subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty. Income attributable to “excess inclusion income” allocable to the non-U.S. holder is not eligible for any exemption or reduction in the rates of applicable withholding taxes. Accordingly, Newcastle will withhold at a rate of 30% on any portion of a dividend that is paid to a non-U.S. holder and is or may be treated as attributable to that non-U.S. holder’s share of Newcastle’s excess inclusion income. As required by IRS guidance, Newcastle intends to notify its stockholders if a portion of a dividend paid by it is attributable to excess inclusion income.

Non-Dividend Distributions. The amount distributed pursuant to the Distribution, to the extent not made out of Newcastle’s current or accumulated earnings and profits, will not be subject to U.S. income tax. If Newcastle cannot determine at the time of the Distribution whether or not the amount distributed pursuant to the Distribution will exceed current and accumulated earnings and profits, the aggregate amount distributed will be subject to withholding at the rate applicable to ordinary dividends, as described above.

Notwithstanding the foregoing, if Newcastle’s stock constitutes a USRPI, if and to the extent that the amount distributed pursuant to the Distribution exceeds the sum of (a) the Non-U.S. holder’s proportionate share of Newcastle’s current and accumulated earnings and profits, as determined under federal income tax principles, and (b) the Non-U.S. holder’s basis in its Newcastle stock, it will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) in the same manner as if the Newcastle stock had been sold. In such situations, the non-U.S. holder would be required to file a U.S. federal income tax return and would be subject to the same treatment and same tax rates as a U.S. holder with respect to such excess, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals. It is not currently anticipated that Newcastle’s stock will constitute a USRPI and therefore the amount distributed pursuant to the Distribution is not likely to be subject to tax under FIRPTA. However, no assurance can be given that Newcastle’s stock will not become a USRPI.

Gain in respect of any non-dividend portion of the Distribution will nonetheless be taxable to a non-U.S. holder if the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year, and certain other conditions are met, or if the non-U.S. holder’s investment in Newcastle common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. holder.

Capital Gain Dividends. Under FIRPTA, a dividend distribution by Newcastle to a non-U.S. holder, to the extent attributable to gains from dispositions of USRPIs that Newcastle held directly or indirectly through pass-through subsidiaries (such gains, “USRPI capital gains”), will, except as described below, be considered

 

50


Table of Contents

effectively connected with a U.S. trade or business of the non-U.S. holder and will be subject to U.S. income tax at the rates applicable to U.S. individuals or corporations. Newcastle will be required to withhold tax equal to 35% of the maximum amount that could have been designated as a USRPI capital gain dividend. In addition, such amount may also be subject to a 30% branch profits tax in the hands of a non-U.S. holder that is a corporation. A distribution is not a USRPI capital gain dividend if Newcastle held an interest in the USRPI solely as a creditor. It is not anticipated that any portion of the amount distributed pursuant to the Distribution will be attributable to USRPI capital gains. However, no assurance can be given in this regard.

Capital gain dividends received by a non-U.S. holder that are attributable to dispositions of Newcastle’s assets other than USRPIs are not subject to U.S. federal income tax, unless the non-U.S. holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and certain other conditions are met, in which case the non-U.S. holder will be subject to tax on his capital gains.

Withholding of Amounts Distributable to Non-U.S. Holders in the Distribution. If Newcastle is required to withhold any amounts otherwise distributable to a non-U.S. holder in the Distribution, Newcastle or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of New Media Common Stock that such non-U.S. holder would otherwise receive or by withholding from other property held in the non-U.S. stockholder’s account with the withholding agent. Such holder may bear brokerage or other costs for this withholding procedure. A non-U.S. holder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the amounts withheld exceeded the holder’s U.S. tax liability for the year in which the Distribution occurred.

Tax Treatment of the Distribution to Tax-Exempt Holders

Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from federal income taxation. Such entities, however, may be subject to taxation on their unrelated business taxable income (“UBTI”). While some investments in real estate may generate UBTI, the IRS has ruled that dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that ruling, and provided that (1) a beneficial owner of Newcastle stock that is a tax-exempt entity (such entity, a “tax-exempt holder”) has not held Newcastle stock as “debt financed property” within the meaning of the Code (i.e., where the acquisition or holding of the property is financed through a borrowing by the tax-exempt holder), and (2) such Newcastle stock is not otherwise used in an unrelated trade or business, the Distribution generally should not give rise to UBTI to a tax-exempt holder. To the extent that Newcastle (or a part of Newcastle, or a disregarded subsidiary of Newcastle) is a taxable mortgage pool for U.S. federal income tax purposes, or if Newcastle holds residual interests in a REMIC, a portion of the dividends paid to a tax-exempt holder that is allocable to excess inclusion income may be treated as UBTI. If, however, excess inclusion income is allocable to some categories of tax-exempt holders that are not subject to UBTI, Newcastle might be subject to corporate level tax on such income, and, in that case, may reduce the amount of distributions to those holders whose ownership gave rise to the tax. As required by IRS guidance, Newcastle intends to notify its stockholders if a portion of a dividend paid by it is attributable to excess inclusion income.

Tax-exempt holders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code are subject to different UBTI rules, which generally require such holders to characterize distributions that Newcastle makes as UBTI.

In certain circumstances, a pension trust that owns more than 10% of Newcastle’s stock could be required to treat a percentage of the dividends as UBTI, if Newcastle is a “pension-held REIT.” Newcastle will not be a pension held REIT unless (1) it is required to “look through” one or more of its pension stockholders in order to satisfy certain REIT requirements and (2) either (i) one pension trust owns more than 25% of the value of Newcastle’s stock, or (ii) a group of pension trusts, each individually holding more than 10% of the value of

 

51


Table of Contents

Newcastle’s stock, collectively owns more than 50% of Newcastle’s stock. Certain restrictions on ownership and transfer of Newcastle’s stock should generally prevent a tax-exempt entity from owning more than 10% of the value of Newcastle’s stock, and should generally prevent Newcastle from becoming a pension-held REIT.

Time for Determination of the Tax Impact of the Distribution

The actual tax impact of the Distribution will be affected by a number of factors that are unknown at this time, including Newcastle’s final current and accumulated earnings and profits for 2013 (including as a result of the gain, if any, Newcastle recognizes in the Distribution), the fair market value of New Media’s Common Stock on the date of the Distribution, the extent to which Newcastle recognizes excess inclusion income during the year of the Distribution and sales of FIRPTA or other capital assets. Thus, a definitive calculation of the U.S. federal income tax impact of the Distribution will not be possible until after the end of the 2013 calendar year. Newcastle will notify its stockholders of the tax attributes of the Distribution (including the amount distributed pursuant to the Distribution) on an IRS Form 1099-DIV.

 

52


Table of Contents

CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR

NON-U.S. HOLDERS OF OUR COMMON STOCK

The following discussion is a summary of certain U.S. federal income and estate tax considerations generally applicable to the ownership and disposition of our Common Stock by Non-U.S. Holders. For purposes of this section under the heading “Certain U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders of our Common Stock”, a “Non-U.S. Holder” means a beneficial owner of our Common Stock that is a nonresident alien individual, a foreign corporation, or any other person that is not subject to U.S. federal income tax on a net income basis in respect of such Common Stock.

This discussion deals only with Common Stock held as capital assets by Non-U.S. Holders who received Common Stock pursuant to the Distribution. This discussion does not cover all aspects of U.S. federal income taxation that may be relevant to the purchase, ownership or disposition of our Common Stock by investors in light of their specific facts and circumstances. In particular, this discussion does not address all of the tax considerations that may be relevant to persons in special tax situations, including persons that will hold our Common Stock in connection with a U.S. trade or business or a U.S. permanent establishment, certain former citizens or residents of the United States, and persons that are a “controlled foreign corporation,” a “passive foreign investment company” or a partnership or other pass-through entity for U.S. federal income tax purposes, or are otherwise subject to special treatment under the Code. This section does not address any other U.S. federal tax considerations (such as gift tax) or any state, local or non-U.S. tax considerations. You should consult your own tax advisors about the tax consequences of the purchase, ownership and disposition of our Common Stock in light of your own particular circumstances, including the tax consequences under state, local, foreign and other tax laws and the possible effects of any changes in applicable tax laws.

Furthermore, this summary is based upon on the Code, U.S. Treasury regulations, published administrative interpretations of the IRS, and judicial decisions, all of which are subject to differing interpretations or to change, possibly with retroactive effect. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in this summary, and there can be no assurance that the IRS will agree with such statements and conclusions.

Dividends

In the event that we make a distribution of cash or property with respect to our Common Stock, any such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of a Non-U.S. Holder’s investment, up to such Non-U.S. Holder’s tax basis in our Common Stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “—Sale, Exchange or Other Taxable Disposition of our Common Stock.”

Dividends paid to a Non-U.S. Holder generally will be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable tax treaty. Even if a Non-U.S. Holder is eligible for a lower treaty rate, we and other payors will generally be required to withhold at a 30% rate (rather than the lower treaty rate) on dividend payments to such Non-U.S. Holder, unless:

 

    such Non-U.S. Holder has furnished to us or such other payor a valid IRS Form W-8BEN or other documentary evidence establishing its entitlement to the lower treaty rate with respect to such payments and neither we nor our paying agent (or other payor) have actual knowledge or reason to know to the contrary, and

 

   

in the case of actual or constructive dividends paid on or after July 1, 2014, if required by the Foreign Account Tax Compliance Act or any intergovernmental agreement enacted pursuant to that law, such Non-U.S. Holder or any entity through which it receives such dividends have provided the withholding

 

53


Table of Contents
 

agent with certain information with respect to its or the entity’s direct and indirect U.S. owners, and if such Non-U.S. Holder holds our Common Stock through a foreign financial institution, such institution has entered into an agreement with the U.S. government to collect and provide to the U.S. tax authorities information about its accountholders (including certain investors in such institution or entity) and such Non-U.S. Holder has provided any required information to such institution.

If a Non-U.S. Holder is eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty or otherwise, it may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Investors are encouraged to consult with their own tax advisors regarding the possible implications of these withholding requirements on their investment in our Common Stock.

Sale, Exchange or Other Taxable Disposition of our Common Stock

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized on a sale, exchange or other taxable disposition of our Common Stock unless:

 

    in the case of an individual, such holder is present in the United States for 183 days or more in the taxable year of the sale, exchange or other taxable disposition, and certain other conditions are met, or

 

    we are or have been a United States real property holding corporation for federal income tax purposes and a Non-U.S. Holder held, directly or indirectly, at any time during the five-year period ending on the date of the disposition, more than 5% of our Common Stock.

In the case of the sale or disposition of our Common Stock on or after January 1, 2017, a Non-U.S. Holder may be subject to a 30% withholding tax on the gross proceeds of the sale or disposition unless the requirements described in the last bullet point under “—Dividends” above are satisfied. Investors are encouraged to consult with their own tax advisors regarding the possible implications of these withholding requirements on their investment in our Common Stock and the potential for a refund or credit in the case of any withholding tax.

We have not been, are not and do not anticipate becoming a United States real property holding corporation for U.S. federal income tax purposes.

Information Reporting and Backup Withholding

We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which Non-U.S. Holders reside under the provisions of an applicable income tax treaty.

A Non-U.S. Holder may be subject to backup withholding for dividends paid to it unless it certifies under penalty of perjury that it is a Non-U.S. Holder or otherwise establish an exemption. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such Non-U.S. Holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS.

U.S. Federal Estate Tax

Any Common Stock held (or deemed held) by an individual Non-U.S. Holder at the time of his or her death will be included in such Non-U.S. Holder’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

 

54


Table of Contents

USE OF PROCEEDS

New Media will not receive any proceeds from the Distribution of our Common Stock in the spin-off.

DETERMINATION OF OFFERING PRICE

No consideration will be paid for the shares of New Media Common Stock distributed in the spin-off.

MARKET PRICE INFORMATION AND DIVIDENDS

Market Price Data

There is no established trading market for shares of New Media Common Stock. At                     , 2013, there were shares of our Common Stock outstanding,     % of which immediately prior to the spin-off were owned by Newcastle. The remainder of the outstanding shares of our Common Stock are owned by holders of GateHouse debt who elected to receive Common Stock in the Restructuring.

In connection with the spin-off, Newcastle will distribute              shares of our Common Stock on a pro rata basis to holders of Newcastle common stock as of the Record Date for the spin-off. We intend to apply to list our Common Stock on the NYSE under the symbol “NEWM.”

Dividends

New Media expects to distribute a substantial portion of free cash flow as a dividend, subject to Board approval.

 

55


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected financial data for the five years ended December 30, 2012 are derived from the audited consolidated financial statements of GateHouse, our Predecessor, which have been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst & Young LLP’s report on the consolidated financial statements for the year ended December 30, 2012, which appears elsewhere herein, includes an explanatory paragraph which describes an uncertainty about GateHouse’s ability to continue as a going concern. The financial data for the six-month periods ended June 30, 2013 and July 1, 2012 are derived from the unaudited condensed consolidated financial statements of GateHouse, our Predecessor. The unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which GateHouse considers necessary for a fair presentation of the financial position and the results of operations for these periods. The selected financial data as of and for the years ended December 30, 2012, January 1, 2012, December 31, 2010, December 31, 2009 and December 31, 2008, and the selected financial data as of and for the six months ended July 1, 2012 have been revised to reflect one of GateHouse’s publications as a discontinued operation for comparability.

Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire year ending December 29, 2013. The historical financial statements of GateHouse, our Predecessor, will not be comparable following its emergence from Chapter 11 due to the effects of the consummation of the Plan, as well as adjustments for fresh-start accounting. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included in this Information Statement.

 

56


Table of Contents
    Six Months
Ended June 30,
2013
    Six Months
Ended July 1,
2012
    Year Ended
December 30,
2012
    Year Ended
January 1,
2012(2)
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 
    (In Thousands, Except Per Share Data)  

Statement of Operations Data:

             

Revenues:

             

Advertising

  $ 150,559      $ 165,870      $ 330,881      $ 357,134      $ 385,579      $ 398,927      $ 477,993   

Circulation

    65,513        65,114        131,576        131,879        133,192        138,233        141,803   

Commercial printing and other

    14,107        12,197        26,097        25,657        25,967        30,960        37,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    230,179        243,181        488,554        514,670        544,738        568,120        657,496   

Operating costs and expenses:

             

Operating costs

    129,998        136,328        268,222        281,884        296,974        324,263        368,345   

Selling, general and administrative

    78,722        72,054        145,020        146,295        154,516        159,197        179,198   

Depreciation and amortization

    19,636        20,204        39,888        42,426        45,080        54,237        69,897   

Integration and reorganization costs and management fees paid to prior owner

    958        1,860        4,393        5,884        2,324        1,857        7,011   

Impairment of long-lived assets

    —          —          —          1,733        430        193,041        123,717   

(Gain) loss on sale of assets

    1,043        155        1,238        455        1,551        (418     337   

Goodwill and mastheads impairment

    —          —          —          385        —          273,914        487,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (178     12,580        29,793        35,608        43,863        (437,971     (578,753

Interest expense, amortization of deferred financing costs, gain on early extinguishment of debt, (gain) loss on derivative instruments and other

    30,425        27,993        57,463        58,361        69,520        72,502        100,530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (30,603     (15,413     (27,670     (22,753     (25,657     (510,473     (679,283

Income tax expense (benefit)

    —          43        (207     (1,803     (155     342        (21,139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (30,603     (15,456     (27,463     (20,950     (25,502     (510,815     (658,144

Income (loss) from discontinued operations, net of income taxes

    (1,034     (475     (2,340     (699     (542     (19,287     (15,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ 31,637      $ 15,931      $ (29,803   $ (21,649   $ (26,044   $ (530,102   $ (673,306
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net loss from continuing operations available to common stockholders per share

  $ (0.53   $ (0.27   $ (0.47   $ (0.36   $ (0.44   $ (8.90   $ (11.53

Diluted loss from continuing operations available to common stockholders per share

  $ (0.53   $ (0.27   $ (0.47   $ (0.36   $ (0.44   $ (8.90   $ (11.53

Basic net (loss) income from discontinued operations, net of income taxes, available to common stockholders per share

  $ (0.01   $ —        $ (0.04   $ (0.01   $ (0.01   $ (0.33   $ (0.27

Diluted (loss) income from discontinued operations, net of income taxes, available to common stockholders per share

  $ (0.01   $ —        $ (0.04   $ (0.01   $ (0.01   $ (0.33   $ (0.27

Basic net loss available to common stockholders per share

  $ (0.54   $ (0.27   $ (0.51   $ (0.37   $ (0.45   $ (9.23   $ (11.80

Diluted net loss available to common stockholders per share

  $ (0.54   $ (0.27   $ (0.51   $ (0.37   $ (0.45   $ (9.23   $ (11.80

Basic weighted average shares outstanding

    58,063,901        58,032,205        58,041,907        57,949,815        57,723,353        57,412,401        57,058,454   

Diluted weighted average shares outstanding

    58,063,901        58,032,205        58,041,907        57,949,815        57,723,353        57,412,401        57,058,454   

 

57


Table of Contents
    Six Months
Ended June 30,
2013
    Six Months
Ended July 1,
2012
    Year Ended
December 30,
2012
    Year Ended
January 1,
2012(2)
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 
    (In Thousands, Except Per Share Data)  

Statement of Cash Flow Data:

             

Net cash (used in) provided by operating activities

  $ (1,089   $ 18,226      $ 23,499      $ 22,439      $ 26,453      $ 2,990      $ 20,309   

Net cash used in investing activities

    (1,278     (1,295     (1,044     (731     (624     8,400        11,675   

Net cash used in financing activities

    (6,648     (4,600     (7,140     (11,249     (22,010     (13,003     (37,533

Other Data:

             

Adjusted EBITDA(1)

  $ 18,450      $ 32,824      $ 69,766      $ 80,547      $ 89,511      $ 82,571      $ 102,664   

Cash interest paid

    28,750        29,005      $ 55,976      $ 58,225      $ 59,317      $ 67,950      $ 89,677   

 

(1) We define Adjusted EBITDA as net income (loss) from continuing operations before income tax expense (benefit), interest/financing expense, depreciation and amortization and non-cash impairments. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance in our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. Adjusted EBITDA provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely our cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and the Board to review the financial performance of our business on a monthly basis.

Not all companies calculate Adjusted EBITDA using the same methods; therefore, the Adjusted EBITDA figures set forth herein may not be comparable to Adjusted EBITDA reported by other companies. A substantial portion of our Adjusted EBITDA was dedicated to the payment of interest on our outstanding indebtedness and to service other commitments, thereby reducing the funds available to us for other purposes. Adjusted EBITDA does not represent an amount of funds that is available for management’s discretionary use. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Information Statement.

(2) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

The table below shows the reconciliation of loss from continuing operations to Adjusted EBITDA for the periods presented:

 

    Six Months
Ended June 30,
2013
    Six Months
Ended July 1,
2012
    Year Ended
December 30,
2012
    Year Ended
January 1,
2012(j)
    Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 
    (In Thousands)  

Loss from continuing operations

  $ (30,603   $ (15,456   $ (27,463   $ (20,950   $ (25,502   $ (510,815   $ (658,144

Income tax expense (benefit)

    —          43        (207     (1,803     (155     342        (21,139

(Gain) loss on derivative instruments(h)

    9        (1,644     (1,635     (913     8,277        12,672        10,119   

Gain on early extinguishment of debt(i)

    —          —          —          —          —          (7,538     —     

Amortization of deferred financing costs

    522        680        1,255        1,360        1,360        1,360        1,845   

Write-off of financing costs

    —          —          —          —          —          743        —     

Interest expense

    28,886        28,997        57,928        58,309        60,021        64,615        88,625   

Impairment of long-lived assets

    —          —          —          1,733        430        193,041        123,717   

Depreciation and amortization

    19,636        20,204        39,888        42,426        45,080        54,237        69,897   

Goodwill and mastheads impairment

    —          —          —          385        —          273,914        487,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA from continuing operations

  $ 18,450 (a)    $ 32,824 (b)    $ 69,766 (c)    $ 80,547 (d)    $ 89,511 (e)    $ 82,571 (f)    $ 102,664 (g) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

58


Table of Contents

 

(a) Adjusted EBITDA for the six months ended June 30, 2013 included net expenses of $7,521, which are one-time in nature or non-cash compensation. Included in these net expenses of $7,521 is non-cash compensation and other expense of $5,948, non-cash portion of postretirement benefits expense of $(428), integration and reorganization costs of $958 and a $1,043 loss on the sale of assets.

Adjusted EBITDA also does not include $123 from our discontinued operations.

 

(b) Adjusted EBITDA for the six months ended July 1, 2012 included net expenses of $4,478, which are one-time in nature or non-cash compensation. Included in these net expenses of $4,478 is non-cash compensation and other expense of $2,707, non-cash portion of postretirement benefits expense of $(244), integration and reorganization costs of $1,860 and a $155 loss on the sale of assets.

Adjusted EBITDA also does not include $165 from our discontinued operations.

 

(c) Adjusted EBITDA for the year ended December 30, 2012 included net expenses of $11,009, which are one time in nature or non-cash compensation. Included in these net expenses of $11,009 are non-cash compensation and other expenses of $6,274, non-cash portion of post-retirement benefits expense of $(896), integration and reorganization costs of $4,393 and a $1,238 loss on the sale of assets.

Adjusted EBITDA also does not include $255 of EBITDA generated from our discontinued operations.

 

(d) Adjusted EBITDA for the year ended January 1, 2012 included net expenses of $9,461, which are one time in nature or non-cash compensation. Included in these net expenses of $9,461 are non-cash compensation and other expenses of $4,226, non-cash portion of post-retirement benefits expense of $(1,104), integration and reorganization costs of $5,884 and an $455 loss on the sale of assets.

Adjusted EBITDA also does not include $432 of EBITDA generated from our discontinued operations.

 

(e) Adjusted EBITDA for the year ended December 31, 2010 included net expenses of $8,231, which are one time in nature or non-cash compensation. Included in these net expenses of $8,231 are non-cash compensation and other expenses of $5,005, non-cash portion of post-retirement benefits expense of $(649), integration and reorganization costs of $2,324 and a $1,551 loss on the sale of assets.

Adjusted EBITDA also does not include $463 of EBITDA generated from our discontinued operations.

 

(f) Adjusted EBITDA for the year ended December 31, 2009 included net expenses of $9,289, which are one time in nature or non-cash compensation. Included in these net expenses of $9,289 are non-cash compensation and other expenses of $8,632, non-cash portion of post-retirement benefits expense of $(782), integration and reorganization costs of $1,857 and a $418 gain on the sale of assets.

Adjusted EBITDA also does not include $(855) of EBITDA generated from our discontinued operations.

 

(g) Adjusted EBITDA for the year ended December 31, 2008 included net expenses of $24,487, which are one time in nature or non-cash compensation. Included in these net expenses of $24,487 are non-cash compensation and other expenses of $18,638, non-cash portion of post-retirement benefits expense of $(1,499), integration and reorganization costs of $7,011 and $337 loss on the sale of assets.

Adjusted EBITDA also does not include $4,663 of EBITDA generated from our discontinued operations.

 

(h) Non-cash (gain) loss on derivative instruments is related to interest rate swap agreements which are financing related and are excluded from Adjusted EBITDA.
(i) Non-cash write-off of deferred financing costs are similar to interest expense and amortization of financing fees and are excluded from Adjusted EBITDA.
(j) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

 

    As of  
    June 30,
2013
    July 1,
2012
    December 30,
2012
    January 1,
2012
    December 31,
2010
    December 31,
2009
    December 31,
2008
 
    (In Thousands)  

Balance Sheet Data:

             

Total assets

  $ 433,704      $ 487,406      $ 469,766      $ 510,802      $ 546,327      $ 591,929      $ 1,149,621   

Total long-term obligations, including current maturities

    1,170,220        1,180,151        1,177,298        1,185,212        1,197,347        1,222,102        1,242,075   

Stockholders’ equity (deficit)

    (848,855     (823,093     (834,159     (805,632     (792,121     (753,576     (229,078

 

59


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined balance sheet as of June 30, 2013 and the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2013 and for the year ended December 30, 2012 are based on the financial statements of New Media which was formed on June 18, 2013, and subsequently capitalized, the audited consolidated financial statements of GateHouse for the year ended December 30, 2012 and the unaudited consolidated financial statements of GateHouse as of and for the six months ended June 30, 2013, and the audited combined financial statements of Local Media as of and for the year ended June 30, 2013 each included in this Information Statement. New Media, GateHouse and Local Media will collectively be referred to in this section herein as “the Companies.” The Companies, subsequent to the restructuring, are referred to in this section as “the Combined Company.”

The pro forma financial information is provided for informational and illustrative purposes only. These tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” New Media’s historical financial statement and related notes thereto, GateHouse’s historical consolidated financial statements and notes thereto and Local Media’s historical combined financial statements and notes thereto, included elsewhere in this Information Statement. In addition, the historical financial statements of GateHouse, our Predecessor, will not be comparable following its emergence from Chapter 11 due to the effects of the consummation of the Plan, as well as adjustments for fresh-start accounting.

The pro forma financial information gives effect to the following categories of adjustments as if such transactions had occurred on January 2, 2012 for the unaudited pro forma condensed combined statements of operations and on June 30, 2013 for the unaudited pro forma condensed combined balance sheet. Each of these adjustments is described more fully below and within the notes of the pro forma financial information:

 

    the exchange of $625.6 million Outstanding Debt that Newcastle (and its affiliates) hold and additional Outstanding Debt that Newcastle (and its affiliates) purchase in the Cash-Out Offer for New Media Common Stock on the Effective Date and the implementation of the other transactions contemplated by the Plan on the Effective Date;

 

    the adoption by GateHouse of fresh-start accounting, in accordance with ASC 852; and

 

    the impact of Local Media purchase accounting adjustments, in accordance with ASC 805.

The pro forma financial information does not purport to represent what the Combined Company’s actual results of operations or financial position would have been had the Plan become effective or had the other transactions described above occurred on January 2, 2012 or June 30, 2013, respectively. In addition, the dollar amount of new equity and stockholders’ equity on the unaudited pro forma condensed combined balance sheet is not an estimate of the market value of the New Media Common Stock as of the Effective Date or at any other time. We make no representations as to the market value, if any, of the New Media Common Stock following GateHouse’s emergence from Chapter 11 on the Effective Date.

Reorganization Adjustments

The “GateHouse Effects of the Plan Adjustments” column in the pro forma financial information gives effect to the consummation of the Plan and the implementation of the transactions contemplated by the Plan and our recapitalization upon emergence from Chapter 11 on the Effective Date.

For additional information regarding the “GateHouse Effects of the Plan Adjustments,” see the notes to the pro forma financial information.

GateHouse Fresh-Start and Other Adjustments

The “GateHouse Fresh-Start and Other Adjustments” column of the pro forma financial information gives effect to preliminary fresh-start accounting adjustments in accordance with ASC 852 and other pro forma

 

60


Table of Contents

adjustments as described in more detail below. The reorganization value of GateHouse will be allocated to the fair value of net assets in conformity with ASC 805. The fresh-start adjustments are based on an assumed enterprise value of $478.8 million, as presented to the Bankruptcy Court and prior to giving effect to the Plan. Under ASC 805, reorganization value is generally allocated first to tangible assets and identifiable intangible assets, and lastly to excess reorganization value (i.e., goodwill).

The valuations used in this Information Statement represent current estimates based on data available. However, updates to these valuations will be completed as of the fresh-start adoption date based on the results of asset and liability valuations, as well as the related calculation of deferred income taxes. The differences between the actual valuations and the current estimated valuations used in preparing the pro forma financial information may be material and will be reflected in our future balance sheets and may affect amounts, including depreciation and amortization expense, which we will recognize in our statement of operations post-emergence. In addition, the Combined Company may recognize certain non-recurring expenses subsequent to the Effective Date related to its Chapter 11 reorganization. As such, the pro forma financial information may not accurately represent our post-emergence financial condition or results from operations and any differences may be material.

For additional information regarding the “GateHouse Fresh-Start and Other Adjustments,” see the notes to the pro forma financial information. GateHouse anticipates that it will continue to have a full valuation allowance against its deferred tax asset upon emergence from Chapter 11 and no deferred tax asset is included on the pro forma balance sheet. In this regard, GateHouse will be required to reduce its tax attributes by the excess of the adjusted issue price of indebtedness satisfied pursuant to the Restructuring over the sum of (x) the amount of cash paid and (y) the fair market value of stock delivered to holders of such indebtedness (“COD Income”). As a result, New Media will not have any net operating loss carryovers (“NOLs”) from GateHouse after the taxable year which includes the Effective Date. In addition, because GateHouse expects that the amount of COD Income will be in excess of the NOLs that GateHouse had before the Effective Date, GateHouse will be required to reduce the tax basis in its assets by the excess of the amount of COD income over the amount of NOLs that GateHouse had prior to the Effective Date, so that New Media will have a lower tax basis in its assets than GateHouse had in those assets prior to the Effective Date.

We will pay our Manager a management fee equal to 1.5% per annum of our total equity calculated and payable monthly in arrears in cash. Total equity is generally the equity transferred by Newcastle on the date on which our Common Stock trades in the “regular way” on a major U.S. national securities exchange, plus total net proceeds from any equity capital raised (including through stock offerings), plus certain capital contributions to subsidiaries, plus the equity value of certain assets contributed to the Company prior to or after the date of the Management Agreement, less capital distributions and repurchases of Common Stock. This fee is not a probable expense of New Media until the registration of the New Media Common Stock occurs, therefore, it is not reflected in the pro forma financial information.

Local Media Purchase Accounting and Other Adjustments

As part of the Plan, Newcastle has agreed to contribute Local Media to New Media in exchange for shares of common stock in New Media and, at Newcastle’s election, $50,000 of cash, collectively equal in value to the cost of the Local Media Acquisition (as adjusted pursuant to the Plan), upon the emergence from Chapter 11 on the Effective Date.

The “Local Media Purchase Accounting and Other Adjustments” column of the pro forma financial information gives effect to preliminary purchase accounting adjustments in accordance with ASC 805. The purchase price will be allocated to the fair value of the net assets acquired in accordance with ASC 805. The purchase price is estimated to be approximately $82.6 million with the associated estimated transaction costs of $4.2 million.

The valuations used in this Information Statement represent current estimates based on data available. However, updates to these valuations will be completed as of the acquisition date based on the results of asset

 

61


Table of Contents

and liability valuations, as well as the related calculation of deferred income taxes. The differences between the actual valuations and the current estimated valuations used in preparing the pro forma financial information may be material and will be reflected in our future balance sheets and may affect amounts, including depreciation and amortization expense, which we will recognize in our statement of operations post acquisition. As such, the pro forma financial information may not accurately represent our post acquisition financial condition or results from operations and any differences may be material.

On September 3, 2013, Newcastle acquired Local Media. GateHouse entered into a management and advisory agreement with Local Media Parent, which was assigned to Local Media, to manage the operations of Local Media. In return, GateHouse will receive compensation including an annual fee and will be eligible to earn an annual incentive pay out equal to 12.5% of the EBITDA of Local Media in excess of budget. Although Newcastle currently owns 100% of the equity of Local Media, GateHouse manages the daily operations of Local Media. GateHouse has determined that the management and advisory agreement results in Local Media being a variable interest entity as GateHouse has the power to direct the activities that most significantly affect the economic performance of the entity. As a result, GateHouse expects that it will be the primary beneficiary and therefore expects to consolidate Local Media’s financial position and results of operations.

Local Media’s fiscal year ends on the last Sunday in June. The unaudited pro forma condensed combined statements of operations were created with a year end on the last Sunday in December, which is consistent with historical GateHouse consolidated financial statements. The historical results of Local Media for the six months ended June 30, 2013 were derived by taking the historical results of operations of Local Media for the year ended June 30, 2013, and subtracting Local Media’s historical results of operations for the six months ended December 30, 2013. The historical results of Local Media for the twelve months ended December 30, 2012, were derived by taking the historical results of operations of Local Media for the twelve months ended June 30, 2013, and July 1, 2012, and subtracting Local Media’s historical results of operations for the six month periods from December 31, 2012 to June 30, 2013, and July 4, 2011 to January 1, 2012.

To conform the fiscal periods of Local Media’s historical financial statements to that of New Media, the following amounts were excluded from the pro forma financial information. No amounts were included more than once in the preparation of the pro forma financial information.

 

     Local Media’s Fiscal Year Ended
June 30, 2013
    Local Media’s
Fiscal Year Ended
June 30, 2012
 
     Excluded from the
Six Months Ended

June 30, 2013
     Excluded from the
Year Ended

December 30, 2012
    Excluded from the
Year Ended
December 30, 2012
 
     (In Thousands)  

Revenues

   $ 83,345       $ 75,214      $ 88,066   

Income (loss) from continuing operations

   $ 11,913       $ (39,820   $ 13,048   

 

62


Table of Contents

NEW MEDIA INVESTMENT GROUP AND SUBSIDIARIES

Unaudited Pro Forma Condensed Combined Statements of Operations

(In thousands, except share and per share data)

Year Ended December 30, 2012

 

    New Media
December 30,
2012
    GateHouse
Historical
December 30,
2012
    GateHouse
Effects of
The Plan
Adjustments
    GateHouse
Fresh Start
and Other
Adjustments
    Local Media
Historical
December 30,
2012
    Local Media
Purchase
Accounting
and Other
Adjustments
    Pro Forma
December 30,
2012
 

Revenues:

             

Advertising

  $   —        $ 330,881          $ 88,329        $ 419,210   

Circulation

    —          131,576            52,203          183,779   

Commercial printing and other

    —          26,097            24,017          50,114   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

      488,554        —          —          164,549        —          653,103   

Operating costs and expenses:

             

Operating costs

    —          268,222          (212 )(f)      139,220        (55,886 )(j)      351,344   

Selling, general, and administrative

    —          145,020              55,886  (j)      200,906   

Depreciation and amortization

    —          39,888          (14,713 )(g)      7,975        3,759  (k)      36,909   

Integration and reorganization costs

    —          4,393                4,393   

Impairment of long—lived and intangible assets

            197,869          197,869   

(Gain) loss on sale of assets

    —          1,238                1,238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          29,793        —          14,925        (180,515     (3,759     (139,556

Interest expense

    —          57,928        (57,903 )(a)          2,445  (l)      2,470   

Amortization of deferred financing costs

    —          1,255        (1,255 )(b)          365  (l)      365   

(Gain) loss on derivative instruments

    —          (1,635     1,635  (c)            —     

Other (income) expense

    —          (85             (85
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    —          (27,670     57,523        14,925        (180,515     (6,569     (142,306

Income tax expense (benefit)

    —          (207     11,895  (d)      5,843  (h)      (32,767     (40,476 )(m)      (55,712
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  $ —        $ (27,463   $ 45,628      $ 9,082      $ (147,748   $ 33,907      $ (86,594
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

    —                 

Basic and diluted:

             

Loss from continuing operations

    —          (0.47          

Basic weighted average shares outstanding

    —          58,041,907                (i ) 

Diluted weighted average shares outstanding

    —          58,041,907                (i ) 

 

63


Table of Contents

NEW MEDIA INVESTMENT GROUP AND SUBSIDIARIES

Unaudited Pro Forma Condensed Combined Statements of Operations

(In thousands, except share and per share data)

Six Months Ended June 30, 2013

 

    New Media
June 30,
2013
    GateHouse
Historical
June 30,
2013
    GateHouse
Effects of
The Plan
Adjustments
    GateHouse
Fresh Start
and Other
Adjustments
    Local Media
Historical
June 30,
2013
    Local Media
Purchase
Accounting
and Other
Adjustments
    Pro Forma
June 30,
2013
 

Revenues:

             

Advertising

  $   —        $ 150,559          $ 38,510        $ 189,069   

Circulation

    —          65,513            24,685          90,198   

Commercial printing and other

    —          14,107            12,019          26,126   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

      230,179        —          —          75,214        —          305,393   

Operating costs and expenses:

             

Operating costs

    —          129,998          (106 )(f)      68,704        (27,069 )(j)      171,527   

Selling, general, and administrative

    —          78,722        (3,854 )(e)          27,069  (j)      101,937   

Depreciation and amortization

    —          19,636          (7,049 )(g)      4,062        1,805  (k)      18,454   

Integration and reorganization costs

    —          958                958   

Impairment of long—lived and intangible assets

      1,043            42,268          43,311   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          (178     3,854        7,155        (39,820     (1,805     (30,794

Interest expense

    —          28,886        (28,859 )(a)          1,222  (l)      1,249   

Amortization of deferred financing costs

    —          522        (522 )(b)          182  (l)      182   

(Gain) loss on derivative instruments

    —          9        (9 )(c)            —     

Other (income) expense

    —          1,008                1,008   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    —          (30,603     33,244        7,155        (39,820     (3,209     (33,233

Income tax expense (benefit)

    —          —          3,156  (d)      679  (h)      (14,614     (2,232 )(m)      (13,011
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  $ —        $ (30,603   $ 30,088      $ 6,476      $ (25,206   $ (977   $ (20,222
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

    —                 

Basic and diluted:

             

Loss from continuing operations

    —          (0.53          

Basic weighted average shares outstanding

    —          58,063,901                (i ) 

Diluted weighted average shares outstanding

    —          58,063,901                (i ) 

 

GateHouse Effects of the Plan Adjustments

(a) The terms of the Plan will result in the elimination of long term debt and derivative instruments, refer to (q) below for additional discussion. This adjustment reflects the elimination of interest expense related to these instruments.
(b) This adjustment reflects the elimination of the Predecessor company’s deferred financing costs and the amortization expense as the related debt will be extinguished as part of the GateHouse Plan.
(c) The Plan will discharge all derivative instruments that are secured pursuant to the 2007 Credit Facility. As a result, this adjustment eliminates any gain or loss on these instruments.
(d) This adjustment provides the estimated impact of income tax expense based on the Combined Company’s estimated effective tax rate of 39.15%.
(e) During the six months ended June 30, 2013, GateHouse incurred $3.9 million of expenses related to the Restructuring. This adjustment removes the impact of these expenses.

GateHouse Fresh-Start and Other Adjustments

(f) This adjustment modifies historical rent expense to the amounts computed based on recording leases at their fair value.
(g)

In accordance with ASC 852, the reorganization value of GateHouse is allocated to the fair value of its assets and liabilities. For purposes of the Unaudited Pro Forma Condensed Combined Statements of Operations, the fair value of its

 

64


Table of Contents
  property, plant and equipment exceeds its carrying value by approximately $94.9 million and its intangible assets carrying value exceeds its fair value by approximately $55.2 million based on the current estimate. This adjustment modifies historical depreciation and amortization expense based on the estimated fair value of property, plant and equipment and definite-lived intangible assets. The amount of the reorganization value assigned to property, plant and equipment and intangible assets and the related pro forma calculation of depreciation and amortization expense are preliminary and subject to the completion of valuations to determine the fair market value of the tangible and intangible assets.
(h) This adjustment provides the estimated impact of income tax expense, related to fresh-start accounting adjustments, at an estimated effective tax rate of 39.15% for the Combined Company.
(i) Pursuant to the Plan,              shares of New Media Common Stock (par value of $0.01 per share and shares authorized) will be issued and outstanding on the Effective Date.

In addition, on the Effective Date, former holders of GateHouse common stock will receive New Media Warrants exercisable for              shares of New Media Common Stock at an exercise price of              per share. The New Media Warrants expire ten years from the Effective Date. For further information about the New Media Warrants, refer to note (r) to the Unaudited Pro Forma Condensed Combined Balance Sheet.

Local Media Purchase Accounting and Other Adjustments

(j) Historical results for Local Media reported operating expenses which includes both operating and selling, general and administrative expenses. This adjustment allocates expense to both categories to conform to the Predecessor company’s Statement of Operations classifications.
(k) In accordance with ASC 805, the purchase price of Local Media is allocated to the fair value of its assets and liabilities. For purposes of the Unaudited Pro Forma Condensed Combined Statements of Operations, the fair value of its property, plant and equipment exceeds its carrying value by approximately $11.9 million and the carrying value of its intangible assets exceeds its fair value by approximately $3.0 million based on the current estimate. This adjustment modifies historical depreciation and amortization expense based on the estimated fair value of property, plant and equipment and definite-lived intangible assets. The amount of the purchase price allocated to property, plant and equipment and intangible assets and the related pro forma calculation of depreciation and amortization expense are preliminary and subject to the completion of appraisals to determine the fair market value of the tangible and intangible assets.
(l) The financing of the Local Media Acquisition included $33.0 million of debt which matures in September 2018 and has an interest rate of LIBOR, or minimum of 1%, plus 6.5%. Financing costs of $1.8 million were incurred related to this financing and will be amortized over the five year term. This adjustment estimates the impact of interest expense and the amortization of deferred financing costs for Local Media. Every  18 of a percent change in LIBOR, after the 1% minimum is exceeded, would result in a $41,000 change in interest expense.
(m) This adjustment provides the estimated impact of income tax expense for Local Media at the Combined Company’s estimated effective tax rate of 39.15%.

 

65


Table of Contents

NEW MEDIA INVESTMENT GROUP AND SUBSIDIARIES

Unaudited Pro Forma Condensed Combined Balance Sheet

(In thousands, except share and per share data)

As of June 30, 2013

 

     New Media
Historical
June 30, 2013
     GateHouse
Historical
June 30, 2013
    GateHouse
Effects of
the

Plan
Adjustments
    GateHouse
Fresh Start
and Other
Adjustments
    Local Media
Historical
June 30, 2013
     Local Media
Purchase
Accounting
and Other
Adjustments
    Pro Forma
June 30, 2013
 

Assets

                

Current assets:

                

Cash and cash equivalents

   $   —         $ 25,512      $ (17,846 )(n)      $ 567       $ 3,803  (x)    $ 12,036   

Restricted cash

     —           6,467            —             6,467   

Accounts receivable, net

     —           49,409            13,984           63,393   

Inventory

     —           5,309            1,657           6,966   

Prepaid expenses

     —           5,243            —             5,243   

Other current assets

     —           8,533            4,095         (849 )(y)      11,779   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     —           100,473        (17,846     —          20,303         2,954        105,884   

Property, plant, and equipment, net

     —           108,679          94,863  (t)      64,299         11,914  (z)      279,755   

Goodwill

     —           13,742          108,001  (t)      —           5,502  (z)      127,245   

Intangible assets, net

     —           207,208          (55,158 )(t)      4,426         (2,956 )(z)      153,520   

Deferred financing costs, net

     —           1,197        (1,197 )(o)        —           1,823  (aa)      1,823   

Other assets

     —           1,931            —           448  (ab)      2,379   

Deferred income taxes

     —           —              38,408         (38,408 )(y)      —     

Assets held for sale

     —           474            —             474   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ —         $ 433,704      $ (19,043   $ 147,706      $ 127,436       $ (18,723   $ 671,080   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

                

Current liabilities:

                

Current portion of long-term liabilities

   $ —         $ 708          $ 1,417       $ (1,417 )(y)    $ 708   

Current portion of long-term debt

        —              —           406  (aa)      406   

Accounts payable

     —           8,367            1,320           9,687   

Accrued expenses

     —           28,407          217  (u)      10,899         (34 )(z)      39,489   

Accrued interest

     —           4,701        (4,701 )(p)        —             —     

Deferred revenue

     —           24,983            7,706           32,689   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     —           67,166        (4,701     217        21,342         (1,045     82,979   

Long-term liabilities:

                

Long-term debt

     —           1,167,450        (1,167,450 )(p)        —           32,594  (aa)      32,594   

Long-term liabilities, less current portion

     —           2,062          131  (u)      12,191         (12,191 )(y)      2,193   

Derivative instruments

     —           31,053        (31,053 )(p)        —             —     

Pension and other postretirement benefit obligations

     —           14,828          (1,066 )(v)      53,265         (53,265 )(y)      13,762   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     —           1,282,559        (1,203,204     (718     86,798         (33,907     131,528   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Stockholders’ Equity (deficit):

                

Common stock

     —           568          (568 )(w)      —             —     

Common stock warrants

     —           —          2,450  (q)      —          —             2,450   

Additional paid-in capital

     —           831,369        481,280  (r)      (831,369 )(w)      —           55,822  (ac)      537,102   

Accumulated other comprehensive loss

     —           (37,928     30,968  (s)      6,960  (w)      —             —     

Accumulated income (deficit)

     —           (1,642,554     669,463  (s)      973,091  (w)      40,638         (40,638 )(ad)      —     

Treasury stock

     —           (310       310  (w)      —             —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     —           (848,855     1,184,161        148,424        40,638         15,184        539,552   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity (deficit)

   $ —         $ 433,704      $ (19,043   $ 147,706      $   127,436         $  (18,723   $   671,080   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

66


Table of Contents

 

GateHouse Effects of the Plan Adjustments

(n) This adjustment to Cash and cash equivalents reflects the estimated payment of $17.8 million of additional reorganization related expenses.
(o) This adjustment reflects the elimination of all deferred financing costs that were capitalized by the Predecessor company.
(p) This adjustment removes historical long-term debt, derivative instruments and accrued interest balances as a result of the Restructuring. The Plan contemplates a Restructuring, as follows: holders of the Outstanding Debt, and the associated accrued interest, would receive, in full and final satisfaction of their respective claims, at their election (with respect to all or any portion of their claims) to be made in connection with solicitation of the Plan, their pro rata share of:
  i. Cash pursuant to a Cash-Out Offer by Newcastle (and its affiliates) equal to 40.0% of the sum of (i) $1,167,449,812.96 of principal of claims under the 2007 Credit Facility, plus (ii) accrued and unpaid interest at the applicable contract non-default rate with respect thereto, plus (iii) all amounts, excluding any default interest, arising from transactions in connection with interest rate swaps secured under the 2007 Credit Facility on the Effective Date, and/or
  ii. 100% of New Media Common Stock and the Net Proceeds of the New Credit Facility, if any.

Creditors that do not make an election during the Solicitation period with respect to their claims will be deemed to have elected the Cash-Out Offer.

The Company will use commercially reasonable efforts based on market conditions and other factors, to enter into a New Credit Facility on the same or better terms for GateHouse than those set forth in the new debt facility term sheet attached as an exhibit to the Disclosure Statement. The Net Proceeds, if any, will be distributed to holders of New Media Common Stock on the Effective Date. For the avoidance of doubt the New Credit Facility will not be a condition precedent to the effectiveness of the Plan and the impact of the potential New Credit Facility is not reflected in the pro forma financial information.

(q) Existing Equity Holders will receive New Media Warrants representing the right to acquire equity equal to 5% of the issued and outstanding shares of New Media as of the Effective Date of the Plan, with the strike price for such warrants calculated based on a total equity value of New Media, prior to the Local Media Acquisition, of $1.2 billion as of the Effective Date, subject to adjustment. Existing Predecessor equity values will be cancelled under the Plan. The New Media Warrants are presented at their estimated fair value using an assumed dividend yield, volatility factor, risk free rate and other factors based on the terms of this transaction. These assumptions are subject to change as the terms of the reorganization are finalized.
(r) This adjustment includes the net additional paid-in capital resulting from Newcastle (and its affiliates) exchanging $625.6 million Outstanding Debt that Newcastle (and its affiliates) holds, additional Outstanding Debt that Newcastle (and its affiliates) purchases in the Cash-Out Offer for New Media Common Stock on the Effective Date and creditors who elect New Media Common Stock.
(s) This adjustment reflects the net effect of the transaction related to the consummation of the Plan on the Predecessor company’s accumulated deficit and accumulated other comprehensive loss.

GateHouse Fresh-Start and Other Adjustments

(t) In accordance with ASC 852, the reorganization value of GateHouse is allocated to the fair value of its assets and liabilities (including identifiable intangible assets). The amount of the reorganization value assigned to property, plant and equipment, goodwill and intangible assets is preliminary and subject to the completion of valuations to determine the fair value of the tangible and intangible assets.
(u) As prescribed in ASC 805, lease arrangements are recognized at fair value as of the Effective Date. This adjustment reflects the amounts estimated to record leases at their fair value. The Company continues to review the impact of lease modifications that may result from the Plan. No modifications have occurred to date and any favorable outcomes are not reflected in the pro forma financial information.
(v) In accordance with ASC 852, the reorganization value of GateHouse is allocated to the fair value of its assets and liabilities (including pension and post retirement liabilities). The amount of the reorganization value assigned to pension and post retirement liabilities is preliminary and subject to the completion of actuarial valuations to determine the fair market value.
(w) The Predecessor company’s stockholders’ deficit accounts have been eliminated in accordance with fresh- start accounting.

 

67


Table of Contents

Local Media Purchase Accounting and Other Adjustments

(x) This adjustment reflects an additional equity contribution by Newcastle for approximately $2.5 million of working capital and $4.2 million of transaction-related costs which were partly offset by an estimated $1.8 million of deferred financing costs and the elimination of the historical cash balance that was not an acquired asset.
(y) This adjustment removes those assets and liabilities that were not assumed in the Local Media Acquisition, including deferred tax assets and liabilities, current and long term pension and other benefit obligations and long-term liabilities.
(z) In accordance with ASC 805, the purchase price for Local Media is allocated to the fair value of its assets and liabilities (including identifiable intangible assets). The value assigned to property, plant and equipment, goodwill and intangible assets is preliminary and subject to the completion of valuations to determine the fair market value of the tangible and intangible assets.
(aa) The Local Media Acquisition was financed with $33.0 million of debt which matures in September 2018 and has an interest rate of LIBOR, or minimum of 1%, plus 6.5%. Financing costs of $1.8 million were incurred related to the consummation of this debt. This adjustment recognizes the deferred financing costs and debt amounts.
(ab) As prescribed in ASC 805, lease arrangements should be recognized at fair value as of the acquisition date. This adjustment recognizes the impact of favorable leases assumed in the Local Media Acquisition.
(ac) This adjustment reflects the impact of the capital contribution by Newcastle into Local Media.
(ad) This adjustment eliminates the historical stockholders’ equity as a result of purchase accounting.

 

68


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise specified or the context otherwise requires, for purposes of this section under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, references to “we,” “our” “us” and the “Company” mean GateHouse Media, Inc. (“GateHouse,” or our “Predecessor”) and its consolidated subsidiaries.

Certain reclassifications have been made to prior period financial information to conform to the current period classifications. For further information on discontinued operations, see Note 21 to GateHouse’s Consolidated Financial Statements and Note 14 to GateHouse’s Unaudited Condensed Consolidated Financial Statements.

The following discussion is based on the consolidated financial statements of GateHouse, included in this Information Statement (the “Information Statement”). The following discussion of GateHouse’s financial condition and results of operations should be read in conjunction with this entire Information Statement, including the “Risk Factors” section and GateHouse’s consolidated financial statements and the notes to those statements appearing elsewhere in this Information Statement. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Information Statement that could cause our actual future growth, results of operations, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, such forward-looking statements. See “Cautionary Note Regarding Forward Looking Information.”

Comparability of Information

Our core business performance, as presented in our revenue and our operating and selling, general, and administrative expense amounts, is not anticipated to be materially impacted by the spin-off. However, as a result of the execution of the Support Agreement (as defined below), all debt, including derivative liabilities and deferred financing assets, is expected to be eliminated on the effective date (the “Effective Date”) of the pre-packaged plan under Chapter 11 of title 11 of the Bankruptcy Code (the “Plan”). This will result in a significant reduction in our interest expense and the elimination of the gain (loss) on derivative instruments and deferred financing amortization. Upon the emergence from bankruptcy, fresh start accounting will lead to changes in the basis of our property, plant and equipment and intangible assets that will impact future depreciation and amortization expense levels. Other significant changes to our financial information include that we expect to become subject to federal and state income taxation and to pay fees to our Manager, as defined below. The impact of these changes is discussed in greater detail within the Unaudited Pro Forma Condensed Combined Financial Information section of this Information Statement.

Overview

We are one of the largest publishers of locally based print and digital media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which includes 404 community publications, 343 related websites, 313 mobile sites and six yellow page directories, serves over 128,000 business advertising accounts and reaches approximately 10 million people on a weekly basis.

Our core products include:

 

    78 daily newspapers with total paid circulation of approximately 547,000;

 

    235 weekly newspapers (published up to three times per week) with total paid circulation of approximately 282,000 and total free circulation of approximately 706,000;

 

    91 “shoppers” (generally advertising-only publications) with total circulation of approximately 1.5 million;

 

69


Table of Contents
    343 locally focused websites and 313 mobile sites, which extend our franchises onto the internet and mobile devices with approximately 97 million page views per month; and

 

    six yellow page directories, with a distribution of approximately 488,000, that covers a population of approximately 1.2 million people.

In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate.

We were incorporated in Delaware in 1997 for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company. We accounted for the initial acquisition using the purchase method of accounting.

Since 1998, we have acquired 416 daily and weekly newspapers and shoppers and launched numerous new products. We generate revenues from advertising, circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. The revenue for commercial printing is recognized upon delivery of the printed product to our customers. Directory revenue is recognized on a straight-line basis over the period in which the corresponding directory is distributed and in use in the market, which is typically 12 months.

Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter, followed by our third quarter, historically are our weakest quarters of the year in terms of revenue. Correspondingly, our second and fourth fiscal quarters, historically, are our strongest quarters. We expect that this seasonality will continue to affect our advertising revenue in future periods.

We have experienced on-going declines in print advertising revenue streams and increased volatility of operating performance, despite our geographic diversity, well-balanced portfolio of products, strong local franchises, broad customer base and reliance on smaller markets. These recent declines in print advertising revenue that we have experienced are typical in a soft economy. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience. We also believe some of the declines are due to a secular shift from print media to digital media. We are making investments in digital platforms, such as online, mobile and applications, to support our print publications in order to capture this shift as witnessed by our digital advertising revenue growth.

Our operating costs consist primarily of labor, newsprint, and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.

Compensation represents just over 50% of our operating expenses. Over the last few years, we have worked to drive efficiencies and centralization of work throughout our Company. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.

On May 9, 2005, FIF III Liberty Holdings LLC, an affiliate of Fortress Investment Group LLC (“Fortress”), entered into an Agreement and Plan of Merger with the Company pursuant to which a wholly-owned subsidiary of FIF III Liberty Holdings LLC merged with and into the Company (the “Merger”). The Merger was effective on June 6, 2005, thus at the time making FIF III Liberty Holdings LLC our principal and controlling stockholder at that time. As of June 30, 2013, Fortress beneficially owned approximately 39.6% of our outstanding common stock.

 

70


Table of Contents

Recent Developments

The newspaper industry and our Company have experienced declining same store revenue and profitability over the past several years. As a result, we previously implemented plans to reduce costs and preserve cash flow. This includes the suspension of the payment of cash dividends by GateHouse, the continued implementation of cost reduction and restructuring programs, and the sale of non-core assets. We believe these initiatives will provide the financial resources necessary to invest in the business and ensure our future success and provide sufficient cash flow to enable us to meet our commitments for the next year.

General economic conditions, including declines in consumer confidence, continued high unemployment levels, declines in real estate values, and other trends, have also impacted the markets in which we operate. Additionally, media companies continue to be impacted by the migration of consumers and businesses to an internet and mobile-based, digital medium. These conditions may continue to negatively impact print advertising and other revenue sources as well as increase operating costs in the future, even after an economic recovery.

We periodically perform testing for impairment of goodwill and newspaper mastheads in which the fair value of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the expected present value of future cash flows and recent industry transaction multiples, using estimates, judgments and assumptions, that we believe were appropriate in the circumstances. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, we may be required to record additional impairment charges in the future.

During 2008, our credit rating was downgraded to be rated below-investment grade by both Standard & Poor’s and Moody’s Investors Service and was further downgraded in 2009 and 2010. Any future long-term borrowing or the extension or replacement of our short-term borrowing will reflect the negative impact of these ratings, increase our borrowing costs, limit our financing options and subject us to more restrictive covenants than our existing debt arrangements. Additional downgrades in our credit ratings could further increase our borrowing cost, subject us to more onerous borrowing terms and reduce or eliminate our borrowing flexibility in the future.

The Company’s operating segments (Large Community Newspapers, Small Community Newspapers and Directories) are aggregated into one reportable business segment.

On September 4, 2013, GateHouse and its affiliated debtors (the “Debtors”) announced that GateHouse, the Administrative Agent (as defined below), Newcastle Investment Corp. (“Newcastle”) and other lenders (the “Participating Lenders”) under the Amended and Restated Credit Agreement by and among certain affiliates of GateHouse, the Lenders from time to time party thereto and Cortland Products Corp., as administrative agent (the “Administrative Agent”), dated February 27, 2007 (the “2007 Credit Facility”) entered into the Restructuring Support Agreement, effective September 3, 2013, as may be amended, supplemented or modified from time to time (the “Support Agreement”), in which the parties agreed to support, subject to the terms and conditions of the Support Agreement, the restructuring of GateHouse (the “Restructuring”) pursuant to the consummation of a pre-packaged plan under Chapter 11 of title 11 of the Bankruptcy Code (the “Plan”). The Support Agreement relates to the Restructuring of GateHouse’s obligations under the 2007 Credit Facility and certain interest rate swaps secured thereunder (collectively, the “Outstanding Debt”) and GateHouse’s equity pursuant to the Plan.

The Plan, once effective, will discharge claims and interests against GateHouse primarily through the (a) issuance of shares of common stock in a new holding company, New Media Investment Group Inc. (“New Media,” and such common stock, “Common Stock”) and/or payment of cash to holders of claims in connection with the 2007 Credit Facility and related interest rate swaps, (b) reinstatement of certain claims, (c) entry into the Management Agreement (as defined below), (d) issuance of warrants by New Media to existing equity holders in GateHouse, including holders of warrants, rights and options to acquire such equity interests (“Existing Equity Holders”) and (e) entry into the New Credit Facility (as defined below), if any, the net proceeds of which go to holders that elect to receive New Media Common Stock. See “The Spin-Off and Restructuring,” “Restructuring Agreements” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

 

71


Table of Contents

Pursuant to the Restructuring, Newcastle would offer to purchase the Outstanding Debt claims in cash and at 40% of (i) $1,167,449,812.96 of principal of claims under the 2007 Credit Facility, plus (ii) accrued and unpaid interest at the applicable contract non-default rate with respect thereto, plus (iii) all amounts, excluding any default interest, arising from transactions in connection with interest rate swaps secured under the 2007 Credit Facility (the “Cash-Out Offer”) on the effective date of the Plan (the “Effective Date”). The holders of the Outstanding Debt would have the option of receiving, in satisfaction of their Outstanding Debt, their pro rata share of the (i) Cash-Out Offer and/or (ii) New Media Common Stock and the net proceeds, if any, of a potential new debt facility (the “New Credit Facility”). Newcastle will receive its pro rata share of New Media Common Stock and the net proceeds of the New Credit Facility, if any, for all Outstanding Debt it holds, including Outstanding Debt purchased in the Cash-Out Offer. GateHouse intends to pay all pensions, trade and all other unsecured claims in full.

As of September 19, 2013, Newcastle and its affiliates held approximately 52.2% of the principal amount currently outstanding under the 2007 Credit Facility and the other Participating Lenders held approximately 28.7% of such principal amount (in each case, including certain amounts still pending trade settlement). Additional holders of Outstanding Debt may join the Restructuring Support Agreement in the future as Participating Lenders.

On September 20, 2013, GateHouse commenced a pre-packaged solicitation of the Plan (the “Solicitation”). Subject to the terms of the Support Agreement, if holders of Outstanding Debt sufficient to meet the requisite threshold of 67% in amount and majority in number (calculated without including any insider) necessary for acceptance of the Plan under the Bankruptcy Code (“Bankruptcy Threshold Creditors”) vote to accept the Plan in the Solicitation, Debtors intend to commence Chapter 11 cases and seek approval of the disclosure statement for the Plan (the “Disclosure Statement”) and confirmation of the Plan therein. Under the Support Agreement, each of the Participating Lenders has agreed to (a) support and take any reasonable action in furtherance of the Restructuring, (b) timely vote their Outstanding Debt to accept the Plan and not change or withdraw such vote, (c) support approval of the Disclosure Statement and confirmation of the Plan, as well as certain relief to be requested by Debtors from the Bankruptcy Court, (d) refrain from taking any action inconsistent with the confirmation or consummation of the Plan, and (e) not propose, support, solicit or participate in the formulation of any plan other than the Plan.

Upon emergence from the Plan, New Media plans to adopt fresh-start reporting in accordance with Accounting Standards Codification Topic 852, “Reorganizations.” Under fresh-start accounting, a new entity is deemed to have been created on the Effective Date for financial reporting purposes and GateHouse’s recorded amounts of assets and liabilities will be adjusted to reflect their estimated fair values. As a result of the adoption of fresh-start accounting, New Media’s reorganized company post-emergence financial statements will generally not be comparable with the financial statements of GateHouse prior to emergence, including the historical financial information in this Information Statement. See “Restructuring Agreements,” “The Spin-Off and Restructuring” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

Critical Accounting Policy Disclosure

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and other assumptions that we find reasonable under the circumstances. Actual results may differ from such estimates under different conditions. The following accounting policies require significant estimates and judgments.

 

72


Table of Contents

Goodwill and Long-Lived Assets

We assess the potential impairment of goodwill and intangible assets with indefinite lives on an annual basis in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350 “Intangibles—Goodwill and Other” (“ASC 350”). We perform our impairment analysis on each of our reporting units, represented by our six regions. The regions have discrete financial information and are regularly reviewed by management. The fair value of the applicable reporting unit is compared to its carrying value. Calculating the fair value of a reporting unit requires us to make significant estimates and assumptions. We estimate fair value by applying third-party market value indicators to projected cash flows and/or projected earnings before interest, taxes, depreciation, and amortization. In applying this methodology, we rely on a number of factors, including current operating results and cash flows, expected future operating results and cash flows, future business plans, and market data. If the carrying value of the reporting unit exceeds the estimate of fair value, we calculate the impairment as the excess of the carrying value of goodwill over its implied fair value.

We account for long-lived assets in accordance with the provisions of FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC 360”). We assess the recoverability of our long-lived assets, including property, plant and equipment and definite lived intangible assets, whenever events or changes in business circumstances indicate the carrying amount of the assets, or related group of assets, may not be fully recoverable. Factors leading to impairment include significant under-performance relative to historical or projected results, significant changes in the manner of use of the acquired assets or the strategy for our overall business and significant negative industry or economic trends. The assessment of recoverability is based on management’s estimates. If undiscounted projected future operating cash flows do not exceed the net book value of the long-lived assets, then a permanent impairment has occurred. We would record the difference between the net book value of the long-lived asset and the fair value of such asset as a charge against income in our consolidated statements of operations if such a difference arose.

The fair values of our reporting units for goodwill impairment testing and individual newspaper mastheads are estimated using the expected present value of future cash flows, recent industry transaction multiples and using estimates, judgments and assumptions that management believes are appropriate in the circumstances.

The sum of the fair values of the reporting units are reconciled to our current market capitalization (based upon the stock market price) plus an estimated control premium.

Significant judgment is required in determining the fair value of our goodwill and long-lived assets to measure impairment, including the determination of multiples of revenue and Adjusted EBITDA and future earnings projections. The estimates and judgments that most significantly affect the future cash flow estimates are assumptions related to revenue, and in particular, potential changes in future advertising (including the impact of economic trends and the speed of conversion of advertising and readership to online products from traditional print products); trends in newsprint prices; and other operating expense items.

We performed annual impairment testing of goodwill and indefinite lived intangible assets during the second quarter of 2012, 2011 and 2010. Additionally, we performed impairment testing of goodwill and indefinite lived intangibles during the first quarter of 2012 and the fourth quarter of 2011 due to operational management changes. As a result, impairment charges related to goodwill were recorded in fiscal 2012 and 2011, see additional information in Note 5 to GateHouse’s Consolidated Financial Statements.

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each group of mastheads with their carrying amount. We used a relief from royalty approach which utilizes a discounted cash flow model to determine the fair value of each newspaper masthead. Our judgments and estimates of future operating results

 

73


Table of Contents

in determining the reporting unit fair values are consistently in determining the fair value of mastheads. We performed impairment tests on newspaper mastheads as of July 1, 2012, April 1, 2012, January 1, 2012, June 26, 2011 and June 30, 2010. See Note 5 to GateHouse’s Consolidated Financial Statements for a discussion of the impairment charges taken.

Intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or change in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. We performed impairment tests on long lived assets (including intangible assets subject to amortization) as of July 1, 2012, June 26, 2011 and June 30, 2010. See Note 5 to the Consolidated Financial Statements for a discussion of the impairment charges taken.

The newspaper industry and our Company have experienced declining same store revenue and profitability over the past several years. Should general economic, market or business conditions decline, and have a negative impact on estimates of future cash flow and market transaction multiples, we may be required to record additional impairment charges in the future.

Derivative Instruments

We record all of our derivative instruments on our balance sheet at fair value pursuant to FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) and FASB ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”). Fair value is based on counterparty quotations adjusted for our credit related risk. Our derivative instruments are measured using significant unobservable inputs and they represent all liabilities measured at fair value. To the extent a derivative qualifies as a cash flow hedge under ASC 815, unrealized changes in the fair value of the derivative are recognized in accumulated other comprehensive income. However, any ineffective portion of a derivative’s change in fair value is recognized immediately in earnings. Fair values of derivatives are subject to significant variability based on market conditions, such as future levels of interest rates. This variability could result in a significant increase or decrease in our accumulated other comprehensive income and/or earnings but will generally have no effect on cash flows, provided the derivative is carried through to full term. We also assess the capabilities of our counterparties to perform under the terms of the contracts. A change in the assessment could have an impact on the accounting and economics of our derivatives.

Revenue Recognition

Advertising revenue is recognized upon publication of the advertisement. Circulation revenue from subscribers is billed to customers at the beginning of the subscription period and is recognized on a straight-line basis over the term of the related subscription. Circulation revenue from single copy sales is recognized at the time of sale. Revenue for commercial printing is recognized upon delivery. Directory revenue is recognized on a straight-line basis over the period in which the corresponding directory is distributed.

Income Taxes

We account for income taxes under the provisions of FASB ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. The assessment of the realizability of deferred tax assets involves a high degree of judgment and complexity. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected either in income or as an adjustment to goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized.

 

74


Table of Contents

FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109” (“FIN 48”) and now codified as ASC 740. ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under ASC 740, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values.

Pension and Postretirement Liabilities

FASB ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”) requires recognition of an asset or liability in the consolidated balance sheet reflecting the funded status of pension and other postretirement benefit plans such as retiree health and life, with current-year changes in the funded status recognized in the statement of stockholders’ equity.

The determination of pension plan obligations and expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement benefit plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining other postretirement benefit obligations and expense are the discount rate and the assumed health care cost-trend rates.

Our only pension plan has assets valued at $18.2 million and the plans benefit obligation is $27.1 million resulting in the plan being 67% funded.

To determine the expected long-term rate of return on pension plan’s assets, we consider the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets, input from the actuaries and investment consultants, and long-term inflation assumptions. We used an assumption of 7.75% for its expected return on pension plan assets for 2012. If we were to reduce its rate of return by 50 basis points then the expense for 2012 would have increased approximately $0.1 million.

We developed our discount rate for our other postretirement benefit plans using the same methodology as that described for the pension. The assumed health care cost-trend rate also affects other postretirement benefit liabilities and expense. A 100 basis point increase in the health care cost trend rate would result in an increase of approximately $0.4 million in the December 30, 2012 postretirement benefit obligation and a 100 basis point decrease in the health care cost trend rate would result in a decrease of approximately $0.4 million in the December 30, 2012 postretirement benefit obligation.

Self-Insurance Liability Accruals

We maintain self-insured medical and workers’ compensation programs. We purchase stop loss coverage from third parties which limits our exposure to large claims. We record a liability for healthcare and workers’ compensation costs during the period in which they occur as well as an estimate of incurred but not reported claims.

 

75


Table of Contents

Results of Operations

The following table summarizes our historical results of operations for the following periods.

GATEHOUSE MEDIA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

 

    Three
Months
Ended
June 30,
2013
    Three
Months
Ended
July 1,
2012
    Six
Months
Ended
June 30,
2013
    Six
Months
Ended
July 1,
2012
    Year Ended
December 30,
2012
    Year Ended
January 1,
2012(1)
    Year Ended
December 31,
2010
 
    (Unaudited)                    
                (In Thousands, Except Per Share Data)  

Statement of Operations Data:

             

Revenues:

             

Advertising

  $ 79,220      $ 86,952      $ 150,559      $ 165,870      $ 330,881      $ 357,134      $ 385,579   

Circulation

    33,047        32,744        65,513        65,114        131,576        131,879        133,192   

Commercial printing and other

    7,331        6,275        14,107        12,197        26,097        25,657        25,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    119,598        125,971        230,179        243,181        488,554        514,670        544,738   

Operating costs and expenses:

             

Operating costs

    64,978        68,324        129,998        136,328        268,222        281,884        296,974   

Selling, general and administrative

    41,156        35,215        78,722        72,054        145,020        146,295        154,516   

Depreciation and amortization

    9,791        9,893        19,636        20,204        39,888        42,426        45,080   

Integration and reorganization costs

    741        738        958        1,860        4,393        5,884        2,324   

Impairment of long-lived assets

    —          —          —          —          —          1,733        430   

(Gain) loss on sale of assets

    649        158        1,043        155        1,238        455        1,551   

Goodwill and mastheads impairment

    —          —          —          —          —          385        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    2,283        11,643        (178     12,580        29,793        35,608        43,863   

Interest expense

    14,456        14,449        28,886        28,997        57,928        58,309        60,021   

Amortization of deferred financing costs

    261        340        522        680        1,255        1,360        1,360   

(Gain) loss on derivative instruments

    5        (809     9        (1,644     (1,635     (913     8,277   

Other (income) expense

    737        5        1,008        (40     (85     (395     (138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (13,176     (2,342     (30,603     (15,413     (27,670     (22,753     (25,657

Income tax expense (benefit)

    —          148        —          43        (207     (1,803     (155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

  $ (13,176   $ (2,490   $ (30,603   $ (15,456   $ (27,463   $ (20,950   $ (25,502

 

(1) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

Three Months Ended June 30, 2013 Compared To Three Months Ended July 1, 2012

Revenue. Total revenue for the three months ended June 30, 2013 decreased by $6.4 million, or 5.1%, to $119.6 million from $126.0 million for the three months ended July 1, 2012. The difference between same store revenue and GAAP revenue for the current quarter is immaterial, therefore, revenue discussions will be limited to GAAP results. The decrease in total revenue was comprised of a $7.7 million, or 8.9%, decrease in advertising revenue which was offset by a $0.3 million, or 0.9%, increase in circulation revenue and a $1.0 million, or 16.8%, increase in commercial printing and other revenue. Advertising revenue declines were primarily driven

 

76


Table of Contents

by declines on the print side of our business in the local retail and classified categories, which were partially offset by growth in digital advertising. The local retail print declines reflect both secular pressures and a continuing uncertain and weak economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes which have been slightly offset by price increases in certain locations. Our circulation revenue was also impacted by approximately $0.5 million for a net to gross accounting change at two of our larger locations. The $1.0 million increase in commercial printing and other revenue is primarily the result of the launch of our small business marketing services within GateHouse Ventures during 2012.

Operating Costs. Operating costs for the three months ended June 30, 2013 decreased by $3.3 million, or 4.9%, to $65.0 million from $68.3 million for the three months ended July 1, 2012. The decrease in operating costs was primarily due to a decrease in compensation expenses, professional and consulting fees, newsprint expenses, and supplies of $1.9 million, $1.2 million, $1.1 million, and $0.3 million, respectively, which were partially offset by an increase in outside services of $1.5 million. These decreases are the result of permanent cost reductions as we continue to work to consolidate operations and improve the productivity of our labor force.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2013 increased by $5.9 million, or 16.9%, to $41.1 million from $35.2 million for the three months ended July 1, 2012. The increase in selling, general and administrative expenses was primarily due to an increase in outside services and compensation expenses of $5.0 million and $0.5 million. The increase in outside services is primarily from legal expenses related to the exploration of alternatives to improve our capital structure.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended June 30, 2013 decreased by $0.1 million to $9.8 million from $9.9 million for the three months ended July 1, 2012. The decrease in depreciation and amortization expense was primarily due to the sale and disposal of assets, which reduced depreciation expense.

Integration and Reorganization Costs. During the three months ended June 30, 2013 and July 1, 2012, we recorded integration and reorganization costs of $0.7 million and $0.7 million, respectively, primarily resulting from severance costs related to the continued consolidation of our operations resulting from our ongoing implementation of our plans to reduce costs and preserve cash flow.

(Gain) Loss on Derivative Instruments. During the three months ended July 1, 2012, we recorded a net gain on derivative instruments of $0.8 million, which was comprised of reclassifications of accumulated other comprehensive income amortization related to swaps terminated in 2008 that were partially offset by the impact of the ineffectiveness of our remaining swap agreements. The accumulated other comprehensive income reclassification for swaps terminated in 2008 was fully amortized in 2012 and the 2013 loss on derivative instruments relates only to the ineffectiveness of our remaining swaps.

Income Tax Expense. During the three months ended July 1, 2012, we recorded an income tax expense of $0.1 million due to the elimination of the tax effect related to the expiration of a previously terminated swap that could be fully recognized for tax purposes in the current year.

Net Loss from Continuing Operations. Net loss from continuing operations for the three months ended June 30, 2013 and July 1, 2012 was $13.2 million and $2.5 million, respectively. Our net loss from continuing operations increased due to the factors noted above.

Six Months Ended June 30, 2013 Compared To Six Months Ended July 1, 2012

Revenue. Total revenue for the six months ended June 30, 2013 decreased by $13.0 million, or 5.3%, to $230.2 million from $243.2 million for the six months ended July 1, 2012. The difference between same store revenue and GAAP revenue for the six month periods ended June 30, 2013 and July 1, 2012 is immaterial, therefore, revenue discussions will be limited to GAAP results. The decrease in total revenue was comprised of a $15.3 million, or 9.2%, decrease in advertising revenue which was offset by a $0.4 million, or 0.6%, increase in

 

77


Table of Contents

circulation revenue and a $1.9 million, or 15.7%, increase in commercial printing and other revenue. Advertising revenue declines were primarily driven by declines on the print side of our business in the local retail and classified categories, which were partially offset by growth in digital advertising. The local retail print declines reflect both secular pressures and a continuing uncertain and weak economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes which have been slightly offset by price increases in certain locations. Our circulation revenue was also impacted by approximately $1.0 million for a net to gross accounting change at two of our larger locations. The $1.9 million increase in commercial printing and other revenue is primarily the result of the launch of our small business marketing services within GateHouse Ventures during 2012.

Operating Costs. Operating costs for the six months ended June 30, 2013 decreased by $6.3 million, or 4.6%, to $130.0 million from $136.3 million for the six months ended July 1, 2012. The decrease in operating costs was primarily due to a decrease in compensation expenses, professional and consulting fees, newsprint expenses, and supplies of $4.1 million, $2.2 million, $2.2 million, and $0.6 million, respectively, which were partially offset by an increase in outside services of $3.4 million. These decreases are the result of permanent cost reductions as we continue to work to consolidate operations and improve the productivity of our labor force.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2013 increased by $6.7 million, or 9.3%, to $78.7 million from $72.0 million for the six months ended July 1, 2012. The increase in selling, general and administrative expenses was primarily due to an increase in outside services and compensation expenses of $5.7 million and $0.5 million. The increase in outside services is primarily from legal expenses related to the exploration of alternatives to improve our capital structure.

Depreciation and Amortization. Depreciation and amortization expense for the six months ended June 30, 2013 decreased by $0.6 million to $19.6 million from $20.2 million for the six months ended July 1, 2012. The decrease in depreciation and amortization expense was primarily due to the sale and disposal of assets, which reduced depreciation expense.

Integration and Reorganization Costs. During the six months ended June 30, 2013 and July 1, 2012, we recorded integration and reorganization costs of $1.0 million and $1.9 million, respectively, primarily resulting from severance costs related to the continued consolidation of our operations resulting from our ongoing implementation of our plans to reduce costs and preserve cash flow.

(Gain) Loss on Derivative Instruments. During the six months ended July 1, 2012, we recorded a net gain on derivative instruments of $1.6 million, which was comprised of reclassifications of accumulated other comprehensive income amortization related to swaps terminated in 2008 that were partially offset by the impact of the ineffectiveness of our remaining swap agreements. The accumulated other comprehensive income reclassification for swaps terminated in 2008 was fully amortized in 2012 and the 2013 loss on derivative instruments relates only to the ineffectiveness of our remaining swaps.

Net Loss from Continuing Operations. Net loss from continuing operations for the six months ended June 30, 2013 and July 1, 2012 was $30.6 million and $15.5 million, respectively. Our net loss from continuing operations increased due to the factors noted above.

Year Ended December 30, 2012 Compared To Year Ended January 1, 2012

Comparisons to the prior year were impacted by two factors around the number of days in the reporting period. First, there was a 53rd week in 2011 for approximately 60% of the business already on a 52 week (5-4-4 quarterly) reporting cycle. Also in 2011, the remaining 40% of the Company changed its reporting cycle from a calendar year to a 52 week reporting cycle in order to be consistent with the rest of the Company. We estimate the 53rd week in 2011 resulted in $4.8 million of revenue and $3.8 million of operating and selling, general and administrative expense. Comparisons below have not been adjusted for this calendar change.

 

78


Table of Contents

Revenue. Total revenue for the year ended December 30, 2012 decreased by $26.1 million, or 5.1%, to $488.6 million from $514.7 million for the year ended January 1, 2012. The difference between same store revenue and GAAP revenue for the current period is immaterial, therefore, revenue discussions will be limited to GAAP results. The decrease in total revenue was comprised of a $26.3 million, or 7.4%, decrease in advertising revenue and a $0.3 million, or 0.2%, decrease in circulation revenue which was partially offset by a $0.4 million, or 1.7%, increase in commercial printing and other revenue. Advertising revenue declines were primarily driven by declines on the print side of our business in the local retail and classified categories, which were partially offset by growth in digital advertising. The local retail print declines reflect both secular pressures and an uncertain and weak economic environment. These secular trends and economic conditions have also led to a decline in our print circulation volumes which have been offset by price increases in select locations. Our circulation revenue was also impacted by approximately $1.5 million for a net to gross accounting change due to a change from a carrier to a distributor model at one of our largest locations. The $0.4 million increase in commercial printing and other revenue is primarily the result of the launch of our small business marketing services and the stabilizing of our commercial printing operations during 2012.

Operating Costs. Operating costs for the year ended December 30, 2012 decreased by $13.7 million, or 4.8%, to $268.2 million from $281.9 million for the year ended January 1, 2012. The decrease in operating costs was primarily due to a decrease in compensation expenses, newsprint and ink, delivery and utility expenses of $12.4 million, $6.5 million, $3.3 million and $0.8 million, respectively, which were partially offset by an increase in outside services of $9.0 million. This decrease is the result of permanent cost reductions as we continue to work to consolidate operations and improve the productivity of our labor force.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 30, 2012 decreased by $1.3 million, or 0.9%, to $145.0 million from $146.3 million for the year ended January 1, 2012. The decrease in selling, general and administrative expenses was primarily due to a decrease in compensation of $1.6 million. We expect that the majority of these reductions will be permanent in nature.

Depreciation and Amortization. Depreciation and amortization expense for the year ended December 30, 2012 decreased by $2.5 million to $39.9 million from $42.4 million for the year ended January 1, 2012. The decrease in depreciation and amortization expense was primarily due to the sale and disposal of assets in 2011 and 2012, which reduced depreciation expense.

Integration and Reorganization Costs. During the years ended December 30, 2012 and January 1, 2012, we recorded integration and reorganization costs of $4.4 million and $5.9 million, respectively, primarily resulting from severance costs related to the consolidation of certain print and other operations.

Impairment of Long-Lived Assets. During the year ended January 1, 2012 we incurred an impairment charge of $1.7 million related to the consolidation of our print operations and property, plant and equipment which were classified as held for sale. There were no such charges during the year ended December 30, 2012.

Goodwill and Mastheads Impairment. During the year ended January 1, 2012, we recorded a $0.4 million impairment on our goodwill due to an operational management change in the fourth quarter of 2011 which transferred a goodwill balance of $0.4 million to a reporting unit that previously did not have a goodwill balance. A similar operational change occurred in the first quarter of 2012 and resulted in a $0.2 million impairment that was subsequently reclassified to discontinued operations.

Interest Expense. Total interest expense for the year ended December 30, 2012 decreased by $0.4 million, or 0.7%, to $57.9 million from $58.3 million for the year ended January 1, 2012. The decrease was due to declines in interest rates and their related impact on the unhedged position or our debt and a slight decrease in our total outstanding debt.

 

79


Table of Contents

(Gain) Loss on Derivative Instruments. During the years ended December 30, 2012 and January 1, 2012, we recorded a net gain of $1.6 million and $0.9 million, respectively, which was comprised of reclassifications of accumulated other comprehensive income amortization related to swaps terminated in 2008 that were partially offset by the impact of the ineffectiveness of our remaining swap agreements.

Income Tax Benefit. During the year ended December 30, 2012, we recorded an income tax benefit of $0.2 million due to a reduction in uncertain tax positions which was partially offset by a tax expense due to the elimination of the tax effect related to the expiration of a previously terminated swap that could be fully recognized for tax purposes in the current year. During the year ended January 1, 2012, we recorded an income tax benefit of $1.8 million primarily due to the elimination of the tax effect related to the expiration of a previously terminated swap that could be fully recognized for tax purposes in the current year.

Net Loss from Continuing Operations. Net loss from continuing operations for the year ended December 30, 2012 was $27.5 million. Net loss from continuing operations for the year ended January 1, 2012 was $21.0 million. Our net loss from continuing operations increased due to the factors noted above.

Year Ended January 1, 2012 Compared To Year Ended December 31, 2010

Comparisons to the prior year were impacted by two factors around the number of days in the reporting period. First, there was a 53rd week in 2011 for approximately 60% of the business already on a 52 week (5-4-4 quarterly) reporting cycle. Also in 2011, the remaining 40% of the Company changed its reporting cycle from a calendar year to a 52 week reporting cycle in order to be consistent with the rest of the Company, which resulted in a one additional day for the year. The discussion of our results of operations that follows is based upon our historical results of operations for the years ended January 1, 2012 and December 31, 2010.

Revenue. Total revenue for the year ended January 1, 2012 decreased by $30.0 million, or 5.5%, to $514.7 million from $544.7 million for the year ended December 31, 2010. The difference between same store revenue and GAAP revenue for the current period is immaterial, therefore, revenue discussions will be limited to GAAP results. We estimate the impact of the 53rd week to be $4.8 million on total revenue, comparisons below have not been adjusted for this impact. The decrease in total revenue was comprised of a $28.4 million, or 7.4%, decrease in advertising revenue, a $1.3 million, or 1.0%, decrease in circulation revenue and a $0.3 million, or 1.2%, decrease in commercial printing and other revenue. Advertising revenue declines were primarily driven by declines on the print side of our business in the local retail and classified categories which were partially offset by growth in digital. The print declines reflect an uncertain economic environment, which continued to put pressure on our local advertisers. These economic conditions have also led to a decline in our circulation volumes which have been partially offset by price increases in select locations. Our circulation revenue was also impacted by approximately $0.5 million for a net to gross accounting change implemented at the beginning of the fourth quarter of 2011 at one of our largest locations which puts it more in line with the Company as a whole. The decrease in commercial printing and other revenue was due to declines in printing projects as a result of continued weak economic conditions as well as the strategic closure of certain of our print facilities.

Operating Costs. Operating costs for the year ended January 1, 2012 decreased by $15.1 million, or 5.1%, to $281.9 million from $297.0 million for the year ended December 31, 2010. The decrease in operating costs was primarily due to a decrease in compensation, newsprint and ink, delivery and postage expenses of $9.4 million, $2.6 million, $1.8 million and $0.8 million, respectively. The majority of these decreases were the result of permanent cost reductions and were implemented as we continue to work to consolidate operations and improve the productivity of our labor force. We estimate the impact of the 53rd week to be $3.8 million on operating costs and selling, general and administrative expenses.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended January 1, 2012 decreased by $8.2 million, or 5.3%, to $146.3 million from $154.5 million for the year

 

80


Table of Contents

ended December 31, 2010. The decrease in selling, general and administrative expenses was primarily due to a decrease in compensation of $10.4 million offset by an increase in professional and consulting fees of $2.0 million. We believe the majority of these reductions are also permanent in nature.

Depreciation and Amortization. Depreciation and amortization expense for the year ended January 1, 2012 decreased by $2.7 million to $42.4 million from $45.1 million for the year ended December 31, 2010. The decrease in depreciation and amortization expense was primarily due to the sale and disposal of assets in 2010 and 2011, which reduced depreciation expense.

Integration and Reorganization Costs. During the years ended January 1, 2012 and December 31, 2010, we recorded integration and reorganization costs of $5.9 million and $2.3 million, respectively, primarily resulting from severance costs related to the consolidation of certain print operations.

Impairment of Long-Lived Assets. During the year ended January 1, 2012 we incurred an impairment charge of $1.7 million related to the consolidation of certain print operations and property, plant and equipment which were classified as held for sale. There was a $0.4 million of long-lived asset impairment charge during the year ended December 31, 2010.

Goodwill and Mastheads Impairment. During the year ended January 1, 2012, we recorded a $0.4 million impairment on our goodwill due to an operational management change in the fourth quarter of 2011 which transferred a goodwill balance of $0.4 million to a reporting unit that previously did not have a goodwill balance. There were no such charges during the year ended December 31, 2010.

Interest Expense. Total interest expense for the year ended January 1, 2012 decreased by $1.7 million, or 2.9%, to $58.3 million from $60.0 million for the year ended December 31, 2010. The decrease was due to declines in interest rates and their related impact on the unhedged position or our debt and a slight decrease in our total outstanding debt.

(Gain) Loss on Derivative Instruments. During the years ended January 1, 2012 and December 31, 2010, we recorded a net gain of $0.9 million and a net loss of $8.3 million, respectively, comprised of accumulated other comprehensive income amortization related to swaps terminated in 2008 partially offset by the impact of the ineffectiveness of our remaining swap agreements.

Income Tax Benefit. Income tax benefit for the year ended January 1, 2012 was $1.8 million compared to $0.2 million for the year ended December 31, 2010. The change of $1.6 million was primarily due to the elimination of the tax effect related to the expiration of a previously terminated swap that could be fully recognized for tax purposes in the current year.

Net Loss from Continuing Operations. Net loss from continuing operations for the year ended January 1, 2012 was $21.0 million. Net loss from continuing operations for the year ended December 31, 2010 was $25.5 million. Our net loss from continuing operations decreased due to the factors noted above.

Liquidity and Capital Resources

The following represents the liquidity and capital resources disclosure of GateHouse. New Media’s primary cash requirements and cash flows are expected to be comparable to GateHouse, except that as a result of the Restructuring, New Media and its subsidiaries will have significantly less leverage and therefore substantially less interest and debt servicing expenses.

Our primary cash requirements are for working capital, debt obligations and capital expenditures. We have no material outstanding commitments for capital expenditures. Historically, we had significant long term debt and debt service obligations that do not remain following the Restructuring. For more information on our

 

81


Table of Contents

previous long term debt and debt service obligations, see Note 6 of GateHouse’s Consolidated Financial Statements. Our principal sources of funds have historically been, and are expected to continue to be, cash provided by operating activities.

As a holding company, we have no operations of our own and accordingly we have no independent means of generating revenue, and our internal sources of funds to meet our cash needs, including payment of expenses, are dividends and other permitted payments from our subsidiaries.

In the future, we expect to fund our operations through cash provided by operating activities, the incurrence of debt or the issuance of additional equity securities.

Cash Flows

Six Months Ended June 30, 2013 Compared to Six Months Ended July 1, 2012

The following table summarizes our historical cash flows for the periods presented.

 

     Six months ended
June 30, 2013
    Six months ended
July 1, 2012
 

Cash (used in) provided by operating activities

   $ (1,089   $ 18,226   

Cash used in investing activities

     (1,278     (1,295

Cash used in financing activities

     (6,648     (4,600

The discussion of our cash flows that follows is based on our historical cash flows for the six months ended June 30, 2013 and July 1, 2012.

Cash Flows from Operating Activities. Net cash used in operating activities for the six months ended June 30, 2013 was $1.1 million, a decrease of $19.3 million when compared to $18.2 million of cash provided by operating activities for the six months ended July 1, 2012. This $19.3 million decrease was the result of an increase in net loss of $15.7 million and a decrease in cash provided by working capital of $5.5 million, which was offset by an increase in non-cash charges of $1.9 million.

The $15.7 million increase in net loss for the six months ended June 30, 2013 when compared to the six months ended July 1, 2012 primarily related to the following one-time expenditures; $5.9 million investment in our small business marketing services business and $3.9 million of expenses related to our restructuring.

The $5.5 million decrease in cash provided by working capital for the six months ended June 30, 2013 when compared to the six months ended July 1, 2012 is primarily attributable to an increase in prepaid expenses of $10.0 million in December 2011 related to a newsprint pricing agreement that was not required in 2012, partially offset by an increase in accrued expenses.

The $1.9 million increase in non-cash charges primarily consisted of an increase in loss on sale of assets of $2.0 million and an increase in loss on derivative instruments of $1.7 million. These increases were partially offset by a decrease in depreciation and amortization of $1.0 million, a decrease in goodwill impairment included in discontinued operations of $0.2 million, a decrease in pension and other postretirement benefit obligations of $0.2 million, a decrease in impairment of long-lived assets included in discontinued operations of $0.2 million, and a decrease in amortization of deferred financing costs of $0.2 million.

Cash Flows from Investing Activities. Net cash used in investing activities for the six months ended June 30, 2013 was $1.3 million. During the six months ended June 30, 2013, we used $2.0 million for capital expenditures, which was offset by $0.7 million we received from the sale of publications and other assets.

Net cash used in investing activities for the six months ended July 1, 2012 was $1.3 million. During the six months ended July 1, 2012, we used $1.7 million for capital expenditures, which was offset by $0.4 million we received from the sale of real property and insurance proceeds.

 

82


Table of Contents

Cash Flows from Financing Activities. Net cash used in financing activities for the six months ended June 30, 2013 was $6.6 million due to a repayment under the 2007 Credit Facility, as amended.

Net cash used in financing activities for the six months ended July 1, 2012 was $4.6 million due to a repayment under the 2007 Credit Facility, as amended.

Changes in Financial Position

The discussion that follows highlights significant changes in our financial position and working capital from December 30, 2012 to June 30, 2013.

Accounts Receivable. Accounts receivable decreased $5.3 million from December 30, 2012 to June 30, 2013, which relates to the timing of cash collections and lower revenue recognized in the 2013 six month period compared to 2012.

Property, Plant, and Equipment. Property, plant, and equipment decreased $7.8 million during the period from December 30, 2012 to June 30, 2013, of which $8.0 million relates to depreciation and $1.7 million relates to assets sold and discontinued operations, which was partially offset by $2.0 million that was used for capital expenditures.

Intangible Assets. Intangible assets decreased $11.8 million from December 30, 2012 to June 30, 2013, which primarily relates to amortization.

Current Portion of Long-term Debt. Current portion of long-term debt decreased $6.6 million from December 30, 2012 to June 30, 2013, due to a principal payment as required by the 2007 Credit Facility, as amended, which represented 50% of the Excess Cash Flow (as defined in the 2007 Credit Facility) related to the fiscal year ended December 30, 2012.

Accounts Payable. Accounts payable decreased $1.0 million from December 30, 2012 to June 30, 2013, which primarily relates to the disposal of a of a non wholly owned subsidiary in Chicago, Illinois.

Derivative Instruments. Derivative instrument liability decreased $14.7 million from December 30, 2012 to June 30, 2013, due to changes in the fair value measurement of our interest rate swaps.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss decreased $14.7 million from December 30, 2012 to June 30, 2013, which resulted from the change in fair value of the interest rate swaps of $14.7 million.

Accumulated Deficit. Accumulated deficit increased $29.4 million from December 30, 2012 to June 30, 2013, due to a net loss of $31.6 million.

Year Ended December 30, 2012 Compared to Year Ended January 1, 2012 and Year Ended January 1, 2012 Compared to Year Ended December 31, 2010

The following table summarizes our historical cash flows for the periods presented.

 

     Year Ended
December 30,
2012
    Year Ended
January 1,
2012
    Year Ended
December 31,
2010
 
     (in thousands)  

Cash provided by operating activities

   $ 23,499      $ 22,439      $ 26,453   

Cash used in investing activities

     (1,044     (731     (624

Cash used in financing activities

     (7,140     (11,249     (22,010

 

83


Table of Contents

Cash Flows from Operating Activities. Net cash provided by operating activities for the year ended December 30, 2012 was $23.5 million. The net cash provided by operating activities resulted from a depreciation and amortization of $40.6 million, a net increase in cash provided by working capital of $10.3 million, an impairment of long-lived assets of $2.1 million, a $1.3 million loss on the sale of assets, amortization of deferred financing costs of $1.2 million, a goodwill impairment charge of $0.2 million, and non-cash compensation of $0.1 million, partially offset by a net loss of $29.8 million, a gain of $1.6 million on derivative instruments, and an increase funding of pension and other post-retirement obligations of $0.9 million. The increase in cash provided by working capital primarily resulted from a decrease in prepaid expenses related to a newsprint pricing agreement that required a prepayment of $10 million in fiscal 2011. No such prepayment was required in fiscal 2012.

Net cash provided by operating activities for the year ended January 1, 2012 was $22.4 million. The net cash provided by operating activities resulted from a depreciation and amortization of $43.4 million, an impairment of long-lived assets of $2.1 million, amortization of deferred financing costs of $1.4 million, a $0.8 million loss on the sale of assets, non-cash compensation of $0.5 million, a goodwill impairment charge of $0.4 million, partially offset by a net loss of $21.6 million, an increase funding of pension and other post-retirement obligations of $1.9 million, a net decrease in cash provided by working capital of $1.6 million, and a gain of $0.9 million on derivative instruments. The decrease in cash provided by working capital primarily resulted from a decrease in accrued expenses and an increase in prepaid expenses related to a newsprint pricing agreement that allowed for fixed pricing in 2012 below market rates from December 31, 2010 to January 1, 2012 offset by a decrease in accounts receivable and an increase in accounts payable.

Net cash provided by operating activities for the year ended December 31, 2010 was $26.5 million. The net cash provided by operating activities resulted from a depreciation and amortization of $46.1 million, a loss of $8.3 million on derivative instruments, non-cash compensation of $1.7 million, a $1.5 million loss on the sale of assets, amortization of deferred financing costs of $1.4 million, an impairment of long-lived assets of $0.8 million, partially offset by a net loss of $26.0 million, a net decrease in cash provided by working capital of $6.0 million, an increase funding of pension and other post-retirement obligations of $1.4 million. The decrease in cash provided by working capital primarily resulted from an increase in prepaid expenses related to a newsprint pricing agreement that allowed for fixed pricing in 2011 below market rates from December 31, 2009 to December 31, 2010.

Cash Flows from Investing Activities. Net cash used in investing activities for the year ended December 30, 2012 was $1.0 million. During the year ended December 30, 2012, we used $4.6 million for capital expenditures, which was offset by $3.6 million received from the sale of publications, other assets and insurance proceeds.

Net cash used in investing activities for the year ended January 1, 2012 was $0.7 million. During the year ended January 1, 2012, we used $3.3 million for capital expenditures, which was offset by $2.6 million received from the sale of publications, other assets and insurance proceeds.

Net cash used in investing activities for the year ended December 31, 2010 was $0.6 million. During the year ended December 31, 2010, we used $4.8 million for capital expenditures, which was offset by $4.2 million received from the collection of a receivable due from a previous real estate sale and the sale of other real property.

Cash Flows from Financing Activities. Net cash used in financing activities for the year ended December 30, 2012 was $7.1 million due to repayments under the 2007 Credit Facility.

Net cash used in financing activities for the year ended January 1, 2012 was $11.2 million due to a repayment under the 2007 Credit Facility.

Net cash used in financing activities for the year ended December 31, 2010 was $22.0 million, which primarily resulted from a $2.5 million repayment under the 2007 Credit Facility, the repurchase of subsidiary preferred stock of $11.5 million and an $8.0 million repayment under the Bridge Facility.

 

84


Table of Contents

Changes in Financial Position

The discussion that follows highlights significant changes in our financial position and working capital from December 30, 2012 to January 1, 2012.

Accounts Receivable. Accounts receivable decreased $4.5 million from January 1, 2012 to December 30, 2012, which relates to the timing of cash collections and lower revenue recognized in 2012 compared to 2011. An additional $1.4 million relates to assets sold during the current year.

Prepaid Expenses. Prepaid expenses decreased $9.7 million from January 1, 2012 to December 30, 2012, due to a $10.0 million prepayment during the year ended January 1, 2012 which related to a newsprint pricing agreement that allowed for fixed pricing in 2012 at below market rates. The pricing agreement for fiscal 2013 did not require a prepayment at December 30, 2012.

Property, Plant, and Equipment. Property, plant, and equipment decreased $14.4 million during the period from January 1, 2012 to December 30, 2012, of which $16.6 million relates to depreciation and $2.3 million relates to assets sold and held for sale, which was partially offset by $4.6 million that was used for capital expenditures.

Goodwill. Goodwill decreased $0.2 million from January 1, 2012 to December 30, 2012, due to an impairment charge included in income (loss) from discontinued operations.

Intangible Assets. Intangible assets decreased $27.7 million from January 1, 2012 to December 30, 2012, due to amortization of $24.0 million, $1.9 million due to an impairment of assets sold during the current year, which is included in income (loss) from discontinued operations, and $1.8 million which was sold during the current year.

Others Assets. Other assets increased $0.7 million from January 1, 2012 to December 30, 2012, due to an investment in joint ventures where our ownership is less than 10%.

Long-term Assets Held for Sale. Long-term assets held for sale decreased $0.5 million from January 1, 2012 to December 30, 2012, due to proceeds of $0.3 million and a $0.2 million impairment of assets classified as held for sale as of January 1, 2012. Assets held for sale as of December 30, 2012 consist of real estate in Winter Haven, FL.

Current Portion of Long-term Debt. Current portion of long-term debt increased $2.0 million from January 1, 2012 to December 30, 2012 due to an increase in the estimated payment as required by the 2007 Credit Facility, which represented 50% of the Excess Cash Flow related to the year ended December 30, 2012. This amount increased from $4.6 million at January 1, 2012 to $6.6 million at December 30, 2012.

Accounts Payable. Accounts payable increased $1.2 million from January 1, 2012 to December 30, 2012, which was primarily attributable to the timing of vendor payments.

Accrued Interest. Accrued interest increased $1.8 million from January 1, 2012 to December 30, 2012, which was primarily attributable to the timing of interest payments.

Long-term Debt. Long-term debt decreased $9.2 million from January 1, 2012 to December 30, 2012 due to a $6.6 million reclassification to current portion of long-term debt of a principal payment due in 2013 as required by the 2007 Credit Facility, which represented 50% of the Excess Cash Flow related to the year ended December 30, 2012 and a $2.5 million repayment under the 2007 Credit Facility from the proceeds of the sale of our Suburban Chicago publications.

Derivative Instruments. Derivative instrument liability decreased $5.9 million from January 1, 2012 to December 30, 2012, due to changes in the fair value measurement of our interest rate swaps.

 

85


Table of Contents

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss decreased $1.7 million from January 1, 2012 to December 30, 2012, which resulted from the change in fair value of the interest rate swaps of $5.9 million, which was offset by a $2.6 million change to the Company’s pension and post retirement plans, a gain on derivative instruments due to amortization of $1.6 million, and a $0.1 million reclassification of income tax benefit from accumulated other comprehensive loss.

Accumulated Deficit. Accumulated deficit increased $30.3 million from January 1, 2012 to December 30, 2012, due to a net loss of $29.8 million.

Indebtedness

As of June 30, 2013, a total of $1.2 billion was outstanding under the 2007 Credit Facility; consisting of $654.5 million under the term loan facility, $244.2 million under the delayed draw term loan facility, $268.6million under the incremental term loan facility. No amounts were outstanding under the revolving credit facility. Refer to Note 8 to the Consolidated Financial Statements for a discussion on our indebtedness.

As part of the Restructuring, we expect that our previous long term debt will be extinguished pursuant to the Support Agreement on the Effective Date of the Plan.

We will use our commercially reasonable efforts, in light of market conditions and other relevant factors, to enter into a New Credit Facility in aggregate amount of up to approximately $150 million on the same or better terms for GateHouse than those set forth in the new debt facility term sheet attached an exhibit to the Disclosure Statement to the Plan on the Effective Date. In the event that we enter into and receive proceeds from the New Credit Facility, New Media will distribute to each holder of New Media Common Stock, including Newcastle on account of the Cash-Out Offer, its pro rata share of the net proceeds of the New Credit Facility net of transaction costs and expenses of GateHouse and Newcastle associated with transactions under the Plan (the “Net Proceeds”), if any. Our entry into a credit facility will not be a condition to the effectiveness of the Plan.

In connection with the acquisition of Dow Jones Local Media Group, Inc. (“Local Media”) by Newcastle on September 3, 2013 from News Corp. (the “Local Media Acquisition”), Local Media Group Holdings LLC (“Local Media Parent”) and certain of its subsidiaries entered into the Credit Agreement dated September 3, 2013, by and among Local Media Parent, the borrowers party thereto, the lenders party thereto, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent and Credit Suisse Loan Funding LLC, as lead arranger (the “Local Media Credit Facility”). The Local Media Credit Facility consists of a $33.0 million senior secured term loan, which was funded on September 3, 2013, and a senior secured asset-based revolving credit facility of up to $10 million, but which will not be funded until certain conditions precedents have been met under the Local Media Credit Facility. Newcastle contributed $2.5 million on the closing date of the Local Media Acquisition for working capital purposes and Local Media can repay that amount when the senior secured asset-based revolving credit facility of up to $10 million under the Local Media Credit Facility becomes available. Under the Plan, Newcastle agreed to contribute its interests in Local Media Parent, the 100% owner of Local Media, on the Effective Date (the “Local Media Contribution”) to New Media.

 

86


Table of Contents

Summary Disclosure About Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual cash obligations, including estimated interest payments where applicable, as of December 30, 2012:

 

     2013      2014      2015      2016      2017      Thereafter      Total  
     (In Thousands)  

2007 Credit Facility(1)

   $ 63,324       $ 1,204,780       $ —         $ —         $ —         $ —         $ 1,268,104   

Noncompete payments

     421         286         250         200         200         200         1,557   

Operating lease obligations

     4,640         4,616         3,447         2,523         2,203         2,551         19,980   

Letters of credit

     5,182         —           —           —           —           —           5,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,567       $ 1,209,682       $ 3,697       $ 2,723       $ 2,403       $ 2,751       $ 1,294,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Pursuant to the Restructuring, the 2007 Credit Facility will be extinguished on the Effective Date.

The table above excludes future cash requirements for pension and postretirement obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. We estimate cash requirements for these obligations in 2013 totaling approximately $1,577. See Note 13 of the Notes to the Consolidated Financial Statements, “Pension and Postretirement Benefits,” included herein.

We do not have any off-balance sheet arrangements reasonably likely to have a current or future effect on our financial statements.

Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this update allow companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not the asset is impaired. The changes to the Accounting Standards Codification (“ASC”) as a result of this update are effective for annual and interim impairment test performed for fiscal years beginning after September 15, 2012. The adoption of ASU No. 2012-02 did not have a material effect on the Company’s Consolidated Financial Statements.

In February 2013, the FASB issued ASC Update No. 2013-02 “Comprehensive Income Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220)”, which amends ASC Topic 220. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition an entity is required to present either on the face of the Statement of Income or in the Notes to the Consolidated Financial Statements significant amounts reclassified out of AOCI and should be provided by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures require under GAAP that provide additional detail about these amounts. The changes to the ASC as a result of this updated guidance became effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material effect on GateHouse’s Consolidated Financial Statements.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this Information Statement, we define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.

 

87


Table of Contents

Adjusted EBITDA

We define Adjusted EBITDA as follows:

Income (loss) from continuing operations before:

 

    Income tax expense (benefit);

 

    interest/financing expense;

 

    depreciation and amortization; and

 

    non-cash impairments.

Management’s Use of Adjusted EBITDA

Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered in isolation or as an alternative to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. We believe that it also provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and GateHouse’s Board of Directors to review the financial performance of the business on a monthly basis.

Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net income (loss), include: the cash portion of interest/financing expense, income tax (benefit) provision and charges related to gain (loss) on sale of facilities represent charges (gains), which may significantly affect our financial results.

Readers of our financial statements may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. Readers of our financial statements should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge readers of our financial statements to review the reconciliation of income (loss) from continuing operations to Adjusted EBITDA, along with our Consolidated Financial Statements included elsewhere in this Information Statement. We also strongly urge readers of our financial statements to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this Information Statement, may differ from and may not be comparable to similarly titled measures used by other companies.

 

88


Table of Contents

We use Adjusted EBITDA as a measure of our core operating performance, which is evidenced by the publishing and delivery of news and other media and excludes certain expenses that may not be indicative of our core business operating results. We consider the unrealized (gain) loss on derivative instruments and the (gain) loss on early extinguishment of debt to be financing related costs associated with interest expense or amortization of financing fees. Accordingly, we exclude financing related costs such as the early extinguishment of debt because they represent the write-off of deferred financing costs and we believe these non-cash write-offs are similar to interest expense and amortization of financing fees, which by definition are excluded from Adjusted EBITDA. Additionally, the non-cash gains (losses) on derivative contracts, which are related to interest rate swap agreements to manage interest rate risk, are financing costs associated with interest expense. Such charges are incidental to, but not reflective of, our core operating performance and it is appropriate to exclude charges related to financing activities such as the early extinguishment of debt and the unrealized (gain) loss on derivative instruments which, depending on the nature of the financing arrangement, would have otherwise been amortized over the period of the related agreement and does not require a current cash settlement.

The table below shows the reconciliation of loss from continuing operations to Adjusted EBITDA for the periods presented:

 

    Three
Months
Ended
June 30,
2013
    Three
Months
Ended
July 1,
2012
    Six
Months
Ended
June 30,
2013
    Six
Months
Ended
July 1,
2012
    Year
Ended
December 30,
2012
    Year
Ended
January 1,
2012(l)
    Year
Ended
December 31,
2010
    Year
Ended
December 31,
2009
    Year
Ended
December 31,
2008
 
          (in thousands)              

Loss from continuing operations

  $ (13,176   $ (2,490   $ (30,603   $ (15,456   $ (27,463   $ (20,950   $ (25,502   $ (510,815   $ (658,144

Income tax expense (benefit)

    —          148        —          43        (207     (1,803     (155     342        (21,139

(Gain) loss on derivative instruments(j)

    5        (809     9        (1,644     (1,635     (913     8,277        12,672        10,119   

Gain on early extinguishment of debt(k)

    —          —          —          —          —          —          —          (7,538     —     

Amortization of deferred financing costs

    261        340        522        680        1,255        1,360        1,360        1,360        1,845   

Write-off of financing costs

    —          —          —          —          —          —          —          743        —     

Interest expense

    14,456        14,449        28,886        28,997        57,928        58,309        60,021        64,615        88,625   

Impairment of long-lived assets

    —          —          —          —          —          1,733        430        193,041        123,717   

Depreciation and amortization

    9,791        9,893        19,636        20,204        39,888        42,426        45,080        54,237        69,897   

Goodwill and mastheads impairment

    —          —          —          —          —          385        —          273,914        487,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA from continuing operations

  $ 11,337 (a)    $ 21,531 (b)    $ 18,450 (c)    $ 32,824 (d)    $ 69,766 (e)    $ 80,547 (f)    $ 89,511 (g)    $ 82,571 (h)    $ 102,664 (i) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Adjusted EBITDA for the three months ended June 30, 2013 included net expenses of $6,066, which are one-time in nature or non-cash compensation. Included in these net expenses of $6,066 is non-cash compensation and other expense of $4,889, non-cash portion of postretirement benefits expense of $(213), integration and reorganization costs of $741 and a $649 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $275 from our discontinued operations.

 

(b) Adjusted EBITDA for the three months ended July 1, 2012 included net expenses of $2,638, which are one-time in nature or non-cash compensation. Included in these net expenses of $2,638 is non-cash compensation and other expense of $1,890, non-cash portion of postretirement benefits expense of $(148), integration and reorganization costs of $738 and a $158 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $109 from our discontinued operations.

 

(c) Adjusted EBITDA for the six months ended June 30, 2013 included net expenses of $7,521, which are one-time in nature or non-cash compensation. Included in these net expenses of $7,521 is non-cash compensation and other expense of $5,948, non-cash portion of postretirement benefits expense of $(428), integration and reorganization costs of $958 and a $1,043 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $123 from our discontinued operations.

 

(d) Adjusted EBITDA for the six months ended July 1, 2012 included net expenses of $4,478, which are one-time in nature or non-cash compensation. Included in these net expenses of $4,478 is non-cash compensation and other expense of $2,707, non-cash portion of postretirement benefits expense of $(244), integration and reorganization costs of $1,860 and a $155 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $165 from our discontinued operations.

 

89


Table of Contents
(e) Adjusted EBITDA for the year ended December 30, 2012 included net expenses of $11,009, which are one time in nature or non-cash compensation. Included in these net expenses of $11,009 are non-cash compensation and other expenses of $6,274, non-cash portion of post-retirement benefits expense of $(896), integration and reorganization costs of $4,393 and a $1,238 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $255 of EBITDA generated from our discontinued operations.

 

(f) Adjusted EBITDA for the year ended January 1, 2012 included net expenses of $9,461, which are one time in nature or non-cash compensation. Included in these net expenses of $9,461 are non-cash compensation and other expenses of $4,226, non-cash portion of post-retirement benefits expense of $(1,104), integration and reorganization costs of $5,884 and an $455 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $432 of EBITDA generated from our discontinued operations.

 

(g) Adjusted EBITDA for the year ended December 31, 2010 included net expenses of $8,231, which are one time in nature or non-cash compensation. Included in these net expenses of $8,231 are non-cash compensation and other expenses of $5,005, non-cash portion of post-retirement benefits expense of $(649), integration and reorganization costs of $2,324 and a $1,551 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $463 of EBITDA generated from our discontinued operations.

 

(h) Adjusted EBITDA for the year ended December 31, 2009 included net expenses of $9,289, which are one time in nature or non-cash compensation. Included in these net expenses of $9,289 are non-cash compensation and other expenses of $8,632, non-cash portion of post-retirement benefits expense of $(782), integration and reorganization costs of $1,857 and a $418 gain on the sale of assets.

 

     Adjusted EBITDA also does not include $(855) of EBITDA generated from our discontinued operations.

 

(i) Adjusted EBITDA for the year ended December 31, 2008 included net expenses of $24,487, which are one time in nature or non-cash compensation. Included in these net expenses of $24,487 are non-cash compensation and other expenses of $18,638, non-cash portion of post-retirement benefits expense of $(1,499), integration and reorganization costs of $7,011 and $337 loss on the sale of assets.

 

     Adjusted EBITDA also does not include $4,663 of EBITDA generated from our discontinued operations.

 

(j) Non-cash (gain) loss on derivative instruments is related to interest rate swap agreements which are financing related and are excluded from Adjusted EBITDA.

 

(k) Non-cash write-off of deferred financing costs are similar to interest expense and amortization of financing fees and are excluded from Adjusted EBITDA.

 

(l) The year ended January 1, 2012 included a 53rd week of operations for approximately 60% of the business.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flow. In the normal course of business, exposure to certain of these market risks is managed as described below.

Interest Rates

On August 18, 2008, we terminated interest rate swaps with a total notional amount of $570.0 million. At December 30, 2012, after consideration of the interest rate swaps described below, $570.0 million of the remaining principal amount of our term loans are subject to floating interest rates.

Our debt structure and interest rate risks are managed through the use of floating rate debt and interest rate swaps. Our primary exposure is to LIBOR. A 100 basis point change in LIBOR would change our income from continuing operations before income taxes on an annualized basis by approximately $5.6 million, based on average pro forma floating rate debt outstanding during 2012, after consideration of the interest rate swaps of $625.0 million described below, and average amounts outstanding under the revolving credit facility during 2012.

On February 27, 2007, we executed an interest rate swap in the notional amount of $100.0 million with a forward starting date of February 28, 2007. The interest rate swap has a term of seven years. Under this swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 5.14% and receive an amount from the swap counterparty representing, interest on the notional amount at a rate equal to the one month LIBOR.

On April 4, 2007, we executed an additional interest rate swap in the notional amount of $250.0 million with a forward starting date of April 13, 2007. The interest rate swap has a term of seven years. Under this swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 4.971% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to one month LIBOR.

 

90


Table of Contents

On April 13, 2007, we executed an additional interest rate swap in the notional amount of $200.0 million with a forward starting date of April 30, 2007. The interest rate swap has a term of seven years. Under this swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 5.079% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to one month LIBOR.

On September 18, 2007, we executed an additional interest rate swap based on a notional amount of $75.0 million with a forward starting date of September 18, 2007. The interest rate swap has a term of seven years. Under the swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 4.941% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to one month LIBOR.

Commodities

Certain materials we use are subject to commodity price changes. We manage this risk through instruments such as purchase orders, membership in a buying consortium, fixed pricing agreements for certain newsprint purchases and continuing programs to mitigate the impact of cost increases through identification of sourcing and operating efficiencies. Primary commodity price exposures are newsprint, energy costs and, to a lesser extent, ink.

A $10 per metric ton newsprint price change would result in a corresponding annualized change in our income from continuing operations before income taxes of $0.4 million based on newsprint usage for the year ended December 30, 2012 of approximately 41,400 metric tons. In 2013, 95% of the companies’ newsprint is fixed through a pricing agreement, therefore only 5% of the usage would be impacted by a price increase.

 

91


Table of Contents

BUSINESS

Unless otherwise specified or the context otherwise requires, for purposes of this section under the heading “Business”, references to “we,” “our,” “us” and the “Company” mean GateHouse and its consolidated subsidiaries.

General Overview

We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. Our portfolio of products, which includes 404 community publications, 343 related websites, 313 mobile sites and six yellow page directories, serves over 128,000 business advertising accounts and reaches approximately 10 million people on a weekly basis.

Our core products include:

 

    78 daily newspapers with total paid circulation of approximately 547,000;

 

    235 weekly newspapers (published up to three times per week) with total paid circulation of approximately 282,000 and total free circulation of approximately 706,000;

 

    91 “shoppers” (generally advertising-only publications) with total circulation of approximately 1.5 million;

 

    343 locally focused websites and 313 mobile sites, which extend our franchises onto the internet and mobile devices with approximately 97 million page views per month; and

 

    six yellow page directories, with a distribution of approximately 488,000, that covers a population of approximately 1.2 million people.

In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate.

Our print and online products focus on the local community from both a content and advertising standpoint. As a result of our focus on small and midsize markets, we are usually the primary, and sometimes, the sole provider of comprehensive and in-depth local market news and information in the communities we serve. Our content is primarily devoted to topics that we believe are highly relevant and of interest to our audience such as local news and politics, community and regional events, youth sports, opinion and editorial pages, and local schools.

More than 86% of our daily newspapers have been published for more than 100 years and 100% have been published for more than 50 years. We believe that the longevity of our publications demonstrates the value and relevance of the local information that we provide and has created a strong foundation of reader loyalty and a highly recognized media brand name in each community we serve. As a result of these factors, we believe that our publications have high local audience penetration rates in our markets, thereby providing advertisers with strong local market reach.

We have a history of growth through acquisitions and new product launches. Since our inception, we have acquired 420 daily and weekly newspapers, shoppers and directories. Due to the weak economic backdrop over the past several years and tough financing market we have not done an acquisition since 2009 and instead have focused on transforming our business to a multi-media content and advertising business while maintaining our local orientation and pursuing cost reductions and de-levering opportunities. As part of our cost reduction efforts, we have engaged in a series of individual restructuring programs, designed primarily to right size our employee base, consolidate facilities and improve operations.

We operate in 328 markets across 21 states. A key element of our business strategy is geographic clustering of publications to realize operating efficiencies and provide consistent management practices. We share best

 

92


Table of Contents

practices across our organization, giving each publication the benefit of proven and executable revenue producing and cost saving initiatives. We regionally cluster functions such as ad composition, accounting and production and give each publication in a cluster access to top quality production equipment, which we believe enables us to cost-efficiently provide superior products and service to our customers. We are also centralizing certain functions across the entire company, particularly in the ad production and content areas in an effort to become more efficient and better serve our publications and customers. In addition, we believe that our size allows us to achieve economies of scale.

We believe that below average industry advertising revenue volatility is a result of our geographic diversity combined with our concentration of small markets. We have revenues coming from markets across 21 states, the large number of products we publish and our fragmented, diversified local advertising customer base. We also believe that local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels in which to reach the local audience. We believe we are also less reliant than large metropolitan newspapers upon classified advertising, particularly the recruiting and real estate categories, which are generally more sensitive to economic conditions.

Our operating costs consist primarily of labor, newsprint, and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.

Compensation represents just over 50% of our operating expenses. Over the last few years, we have worked to drive efficiencies and centralization of work throughout our Company. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.

On September 4, 2013, Debtors and the Participating Lenders under the 2007 Credit Facility entered into a Support Agreement in which the parties agreed to support, subject to the terms and conditions of the Support Agreement, the restructuring of GateHouse pursuant to the consummation of the Plan. The Plan, once effective, will discharge claims and interests against GateHouse primarily through the (a) issuance of shares of Common Stock of New Media and/or payment of cash to holders of claims in connection with the 2007 Credit Facility and related interest rate swaps, (b) reinstatement of certain claims, (c) entry into the Management Agreement (as defined below), (d) issuance of warrants by New Media to Existing Equity Holders and (e) entry into the New Credit Facility, if any, the net proceeds of which go to holders that elect to receive New Media Common Stock. See “The Spin-Off and Restructuring,” “Restructuring Agreements” and Note 21 to GateHouse’s Consolidated Financial Statements, “Subsequent Events and Going Concern Considerations.”

Industry Overview

We operate in what is sometimes referred to as the “hyper-local” or community market within the media industry. Media companies that serve this segment provide highly focused local content and advertising that is generally unique to each market they serve and is not readily obtainable from other sources. Local publications include community newspapers, websites, shoppers, traders, real estate guides, special interest magazines and directories. Due to the unique nature of their content, community publications compete for advertising customers with other forms of traditional media, including: direct mail, directories, radio, television, and outdoor advertising. We also compete with new digital and social media businesses for advertising customers. We believe that local print and online publications are the most effective medium for local retail advertising, which emphasizes the price of goods in an effort to move inventory on a regular basis, in contrast to radio, broadcast and cable, television, and the internet, which are generally used for image or branding advertising. In addition, we believe local print and online publications generally have the highest local audience penetration rates, which allows local advertisers to get their message to a large portion of the local audience.

Locally focused media in small and midsize communities is distinct from national and urban media delivered through outlets such as television, radio, metropolitan and national newspapers and the internet. Larger

 

93


Table of Contents

media outlets tend to offer broad based information to a geographically scattered audience, which tends to be more of a commodity. In contrast, locally focused media delivers a highly focused product that is often the only source of local news and information in the market it serves. Our segment of the media industry is also characterized by high barriers to entry, both economic and social. Small and midsize communities can generally only sustain one newspaper. Moreover, the brand value associated with long-term reader and advertiser loyalty, and the high start-up costs associated with developing and distributing content and selling advertisements, help to limit competition.

Advertising Market

The primary sources of advertising revenue for local publications are small businesses, corporations, government agencies and individuals who reside in the market that a publication serves. By combining paid circulation publications with total market coverage publications such as shoppers and other specialty publications (tailored to the specific attributes of a local community), local publications are able to reach nearly 100% of the households in a distribution area. As macroeconomic conditions in advertising change due to increasing internet and mobile usage and the wide array of available information sources, we have seen advertisers shift their focus to have a digital component to their local advertising strategy. To that end, in addition to printed products, the majority of our local publications have an online presence that further leverages the local brand, ensures higher penetration into the market, and provides a digital alternative for local advertisers.

Digital Media

The time spent online and on mobile devices each day by media consumers continues to grow and newspaper web and mobile sites offer a wide variety of content providing comprehensive, in-depth and up to the minute coverage of news and current events. The ability to generate, publish and archive more news and information than most other sources has allowed newspapers to produce some of the most visited sites on the internet. Newspaper websites have shown to be some of the most visited websites by online media news consumers.

We believe that our local publications are well positioned to capitalize on their existing market franchises and grow their total audience base by publishing proprietary local content digitally; via the internet, mobile websites and mobile applications. Local digital media include traditional classifieds, directories of business information, local advertising, databases, audience-contributed content and mobile applications. We believe this additional community-specific content will further extend and expand both the reach and the brand of our publications with readers and advertisers. We believe that building a strong local digital business extends the core audience of a local publication.

The opportunity created by the digital extension of the core audience makes local digital advertising an attractive complement for existing print advertisers, while opening up opportunities to attract new local advertisers that have never advertised with local publications. In addition, we believe that national advertisers have an interest in reaching buyers on a hyper-local level and, although they historically have not been significant advertisers in community publications, we believe the digital media offers them a powerful medium to reach local audiences. This opportunity is further enhanced by our behavioral targeting products which allow advertisers to reach specific demographics of our audience. We also plan to hire a new digital only sales force to focus on digital growth in key designated market areas (“DMAs”).

We believe that a strong digital business will not only enhance our revenues but we also believe that we have the knowledge and reach to help other businesses maximize their digital opportunities. Accordingly, we have launched two digital businesses designed to help others grow their digital presence: Propel Marketing and adhance media. Propel Marketing will allow us to sell digital marketing services to small and medium sized businesses (“SMBs”) both in and outside existing markets. adhance media, our private advertising exchange, allows us to more

 

94


Table of Contents

fully monetize our (and third parties’) valuable unsold digital advertising space. See “Risk Factors—Risks Related to Our Business—We have invested in growing our digital business, but such investments may not be successful, which could adversely affect our results of operations.”

Circulation

Overall daily newspaper print circulation, including national and urban newspapers, has been declining steadily over the past several years. Small and midsize local market newspapers have generally had smaller declines and more stability in their paid print circulation volumes due to the relevant and unique hyper-local news they produce. In addition, this unique and valuable hyper-local content allows smaller market newspapers to continue to raise prices, leading to stable circulation revenues.

Our Strengths

High Quality Assets with Leading Local Franchises. Our publications benefit from a long history in the communities we serve as the leading, and often sole, provider of comprehensive and in-depth local content. This has resulted in strong reader loyalty and high local audience penetration rates, which are highly valued by local advertisers. We continue to build on long-standing relationships with local advertisers and our in-depth knowledge of the consumers in our local markets.

Superior Value Proposition for Our Advertisers. The concentrated smaller market local focus of our portfolio provides advertisers with large reach to a targeted audience with whom they can communicate directly, thereby maximizing the efficiency of their advertising spending. We offer advertisers several alternatives (daily, weekly, shopper, and niche print publications as well as an array of web, mobile and tablet products) to reach consumers and to tailor the nature and frequency of their marketing messages. We also offer advertisers the ability to target consumers based on their behavior online which is an effective and efficient way for businesses to market to the right customers.

Strong Revenue Characteristics. We have strong diversification in our revenues in terms of type of revenue, product source for revenue, geographic distribution of revenues and numbers of customers. We also benefit from our strong local franchises who serve local consumers and businesses in small to mid-size markets. All of these characteristics we believe give us long term stability and viability. During the twelve months ended June 30, 2013, we generated revenue in 328 markets across 21 states, serving a fragmented and diversified local customer base. For full year 2012, we served over 128,000 business advertising accounts in our publications, and our top 20 advertisers contributed less than 5% of our total revenues. Over 3.8 million classified advertisements were placed in our publications in 2012. Additionally, for the full year 2012 we generated 60% of revenue from print product advertising, 27% from subscription income from customers, 6% from digital advertising and 7% from commercial printing work for external customers and affiliated parties.

Scale Yields Stronger Operating Profit Margins and Allows Us to Realize Operating Synergies. We believe we generate higher operating profit margins than our publications could achieve on a stand-alone basis by leveraging our operations and implementing revenue initiatives, especially digital initiatives, across a broader local footprint in a geographic cluster and by centralizing certain back office production, accounting, administrative and corporate operations. We also benefit from economies of scale in the purchase of insurance, newsprint and other large strategic supplies and equipment. Finally, we have the ability to further leverage our centralized services and buying power to reduce operating costs when making future strategic accretive acquisitions.

Strong Local Business Profile Generates Significant Cash Flow. Our strong local business franchises generate significant recurring cash flow due to our diversified revenue base, healthy operating profit margins, and our low capital expenditure and working capital requirements. With the company’s low leverage capital structure after the Restructuring it will have significant available cash flow to create stockholder value, including investing in organic growth, investing in accretive acquisitions and returning cash to stockholders in the form of dividends, subject to approval by our Board of Directors. We further believe the strong cash flows generated and available to be invested will lead to consistent future dividend growth.

 

95


Table of Contents

Large Locally Focused Sales Force. We have large and well known feet on the street local sales forces in the markets we serve. They are generally the largest locally oriented media sales force. Our sales forces and their respective local media brands tend to have strong credibility and trust within the local business communities. We have long-standing relationships with many local businesses and have the ability to get in the door with most local businesses due to these unique characteristics we enjoy. These qualities also provide leverage for our sales force to grow additional future revenue streams in our markets.

Strong Track Record of Acquiring and Integrating New Assets. We have created a national platform for consolidating local media businesses and have demonstrated an ability to successfully identify, acquire and integrate local media asset acquisitions. We have acquired over $1.6 billion of assets since 2006. We have acquired both traditional newspaper and directory businesses. We have a very scalable infrastructure and platform to leverage with future acquisitions.

Experienced Management Team. Our senior management team is made up of executives who have an average of over 20 years of experience in the media industry, including strong traditional and digital media expertise. Our executive officers have broad industry experience and a successful track record with regard to both business performance among its industry peer group, growing new digital business lines, and identifying and integrating strategic acquisitions. Our management team also has key strengths in managing wide geographically disbursed teams, including the sales force, and identifying and centralizing duplicate functions across businesses leading to reduced core infrastructure costs.

Our Strategy

We intend to create stockholder value through growth in our revenue and cash flow by expanding our digital marketing business, growing our online advertising business and pursuing strategic acquisitions of high quality local media assets. Our strategy will be to acquire and operate traditional local media businesses and transform them from print-centric operations to dynamic multi-media operations, through our existing online advertising and digital marketing businesses. We will also leverage our existing platform to operate these businesses more efficiently. We believe all of these initiatives will lead to revenue and cash flow growth for New Media and will enable us to pay dividends to our stockholders. We expect to distribute a substantial portion of our free cash flow as a dividend to stockholders, subject to approval by our Board of Directors. The key elements of our strategy include:

Maintain Our Leading Position in the Delivery of Proprietary Content in Our Communities. We seek to maintain our position as a leading provider of local content in the markets we serve and to leverage this position to strengthen our relationships with both readers and advertisers, thereby increasing penetration rates and market share. A critical aspect of this approach is to continue to provide local content that is not readily obtainable elsewhere and to be able to deliver that content to our customers across multiple print and digital platforms. We believe it is very important for us to protect the content from unauthorized users who use it for their own commercial purposes. We also believe it is important for us to develop subscription revenue streams from our digitally distributed content.

Stabilize Our Core Business Operations. We have four primary drivers in our strategic plans to stabilize our core business operations, including: (i) identifying permanent structural expense reductions in our traditional business cost infrastructure and re-deploying a portion of those costs toward future growth opportunities, primarily on the digital side of our business; (ii) accelerating the growth of both our digital audiences and revenues through improvements to current products, new product development, training, opportunistic changes in hiring to create an employee base with a more diversified skill set and sharing of best practices; (iii) accelerating our consumer revenue growth through subscription pricing increases and growth in our subscriber base, which we aim to improve by employing additional strategic customer acquisition techniques, driving digital only subscriber growth through our pay meter strategy and improving our customer retention programs; and (iv) stabilizing our core print advertising revenues through improvements to pricing (understanding and selling

 

96


Table of Contents

the unique value of our local audience reach and level of engagement, at the sales rep level), packaging of products for customers that will produce the best results for them (needs based selling), more technology and training for sales management and sales representatives and increased accountability through consistent setting of expectations and measuring against those expectations on a regular basis.

Grow New Digital Business and Revenue Streams Leveraging Key Strengths. We plan to scale and expand our two new recently created digital businesses, Propel Marketing and adhance media. Propel Marketing will allow us to sell digital marketing services to SMBs both in and outside existing markets. The SMB demand for digital service solutions is great and represents a rapidly expanding opportunity. adhance media, our private advertising exchange, allows us to more fully monetize our (and third parties’) valuable unsold digital advertising space. Advertising bought programmatically through private exchanges is expected to grow rapidly over the next five years, especially in private exchange where advertisers get priority access to the advertising space. We also aim to leverage our large local sales forces and strong local media brands to create new business opportunities at the local market level.

Pursue Strategic Accretive Acquisitions. We intend to capitalize on the highly fragmented and distressed newspaper and directory industries. We initially expect to focus our investments in the local newspaper and yellow page directory sectors, primarily in the United States. We believe we have a strong operational platform, which currently owns local newspaper and directory businesses, as well as a scalable digital services business, Propel Marketing. This platform, along with deep industry specific knowledge and experience that our management team has can be leveraged to reduce costs, stabilize the core business and grow digital revenues at acquired properties. The size and fragmentation of the addressable newspaper and yellow page directory market place in the United States, the greatly reduced valuation levels that exist in these industries, and our deep experience make this an attractive place for our initial consolidation focus and capital allocation. Over the longer term we also believe there may be opportunity to diversify and acquire these types of assets internationally, as well other traditional local media assets such as broadcast TV, out of home advertising (billboards) and radio, in the United States and internationally.

Increase Sales Force Productivity. We aim to increase the effectiveness and productivity of our sales force and, in turn, help maximize advertising revenues. We also aim to shift the culture of our sales force from that of print-centric to multi-media and feel that is critical to our long term success. Our approach includes changes to sales force compensation to be more aligned with long term strategic goals, ongoing company-wide training of sales representatives and sales managers that focuses on strengthening their ability to perform needs based assessments and selling. We set expectations by sales representatives, manager and team and regularly evaluate the performance of our sales representatives and sales management against those expectations. We believe stronger accountability and measurement of our sales force, when combined with enhanced training and access to better technologies, demographic and marketing information, will lead to greater productivity and revenue from our sales force.

Introduce New Products or Modify Our Products to Enhance our Value Proposition to Local Businesses. We believe that our established positions in local markets, combined with our publishing and distribution capabilities, allow us to develop and customize new products to address the evolving interests and needs of our readers and local businesses. A primary source for product enhancement and growth we believe exists in the digital space. Product improvement and new product development across the web, mobile and tablets will be a key component to long term success. We are actively scaling web and mobile products, including deal platforms, digital service offerings, including Propel Marketing, mobile websites and applications, and we continue to expand on our offering of behavioral targeted and audience extension advertising options.

Pursue a Content-Driven Digital Strategy. As consumers continue to spend more time online especially with regard to consumption of news, we believe that we are well-positioned to increase our digital penetration and generate additional online audience and revenues due to both our ability to deliver unique local content online, and the relationship our local brand names have with readers and advertisers. We believe this presents an

 

97


Table of Contents

opportunity to increase our overall audience penetration rates and drive additional subscription revenues in each of the communities we serve. We have developed pay meters at most all of our daily newspaper websites and several of our largest weeklies, which we use to charge customers fees for access to our content. These meters will enable us to grow our digital subscription income and capture revenues that shift to the web as consumers shift to the web. Finally, we intend to share resources across our organization in order to give each of our publications access to technology, digital management expertise, content and advertisers that they may not have been able to obtain or afford if they were operating independently.

Products

Our product mix consists of four publication types: (i) daily newspapers, (ii) weekly newspapers, (iii) shoppers and (iv) niche publications. Most of these publications have a digital presence as discussed in the following table. Some of the key characteristics of each of these types of publications are also summarized in the table below.

 

   

Daily Newspapers

 

Weekly Newspapers

 

Shoppers

 

Niche Publications

Cost:

  Paid   Paid and free   Paid and free   Paid and free

Distribution:

  Distributed four to seven days per week   Distributed one to three days per week   Distributed weekly   Distributed weekly, monthly or on annual basis

Format:

  Printed on newsprint, folded   Printed on newsprint, folded   Printed on newsprint, folded or booklet   Printed on newsprint or glossy, folded, booklet, magazine or book

Content:

  50% editorial (local news and coverage of community events, some national headlines) and 50% ads (including classifieds)   50% editorial (local news and coverage of community events, some national headlines for smaller markets which cannot support a daily newspaper) and 50% ads (including classifieds)   Almost 100% ads, primarily classifieds, display and inserts   Niche content and targeted ads (e.g., Chamber of Commerce city guides, tourism guides and special interest publications such as, seniors, golf, real estate, calendars and directories)

Income:

  Revenue from advertisers, subscribers, rack/box sales   Paid: Revenue from advertising, subscribers, rack/box sales   Paid: Revenue from advertising, rack/box sales   Paid: Revenue from advertising, rack/box sales
    Free: Advertising revenue only, provide 100% market coverage.   Free: Advertising revenue only, provide 100% market coverage   Free: Advertising revenue only

Internet Availability:

  Maintain locally oriented websites, mobile sites and mobile apps, for select locations   Major publications maintain locally oriented websites and mobile sites for select locations   Major publications maintain locally oriented websites   Selectively available online

 

98


Table of Contents

Overview of Operations

We operate in three publication groups: Small Community Newspapers, Metros and Large Daily Newspapers. A list of our dailies, weeklies, shoppers and websites in each of our publication groups is included as Exhibit 99.2 to New Media’s registration statement on Form 10. We also operate over 343 related websites and 313 mobile sites.

The following table sets forth information regarding our publications.

 

     Number of Publications      Circulation(1)  
Operating Group    Dailies      Weeklies      Shoppers      Paid      Free      Total
Circulation
 

Small Community Newspapers

     59         105         72         304,259         1,217,531         1,521,790   

Metro Newspapers

     7         127         7         276,231         503,391         779,622   

Large Daily Newspapers

     12         3         12         248,847         511,107         759,854   

Total

     78         235         91         829,337         2,232,029         3,061,366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Circulation statistics are estimated by our management as of December 30, 2012, except that audited circulation statistics, to the extent available, are utilized as of the audit date.

Small Community Newspaper Group. Our Small Community Newspaper group encompasses publications typically located in communities have a population less than 35,000 people, in the states of Illinois, Missouri, Kansas, Michigan, California, Minnesota, Arkansas, New York, Louisiana, Pennsylvania, West Virginia, Colorado, Nebraska, Oklahoma, North Dakota, Tennessee, and Iowa. There are a total of 59 daily newspapers, 105 weekly newspapers and 72 shoppers. In addition to a good geographic mix, we benefit from a diverse economic and employment base across this group.

From the western shore of Lake Michigan to the eastern shore of the Mississippi River and running over 400 miles north to south, Illinois is a picture of manufacturing, agricultural and recreational diversity. Coupled with major daily newspapers from our Large Daily Newspaper Group in Rockford, Peoria, and the state capital of Springfield, we are the largest publishing company in Illinois. 20 paid daily newspapers, 30 paid weekly newspapers, and 20 shoppers provide inclusive coverage across the state which are further supported by four print production facilities.

La Junta in the southeastern part of the state represents the Colorado properties. Along with La Junta we also serve Bent County and Fowler and produce the weekly agricultural newspaper, The Ag Journal.

We are represented in California by two daily newspapers in Ridgecrest and Yreka, five paid weekly papers in Dunsmuir, Mt. Shasta, Weed, Gridley and Taft, and five shoppers in Gridley, Mt. Shasta, Ridgecrest and Yreka. These publications reach from northern California through the southern desert and China Lake naval base in Ridgecrest.

The greatest concentration of circulation and market presence in Missouri is in the northern part of the state where we operate seven daily newspapers and four weekly newspapers and five shoppers. We serve the 22,000 square mile area from Hannibal, on the state’s eastern border, to the western border and from Columbia in the south to the Iowa border in the north. Local employers include the University of Missouri and other colleges, local and federal governments, State Farm Insurance and 3M.

Our southern Missouri operations are clustered around Lake of the Ozarks and Joplin. Located midway between Kansas City and St. Louis and approximately 90 miles from Springfield, Missouri, our three daily newspapers, seven weekly newspapers and three shoppers that serve the Lake of the Ozarks area reach approximately 165,000 people.

 

99


Table of Contents

Located in southwest Missouri and southeast Kansas is our Joplin cluster with three daily and four weekly newspapers and four shoppers, serving a population of approximately 170,000. There are several colleges and universities in the area, a National Guard Fort, several large medical centers and a diverse mix of retail businesses, including the 120-store Northpark Mall.

This group also includes our Kansas City cluster with six publications (two daily and two weekly newspapers and two shoppers) located in the eastern Kansas cities of Leavenworth and Lansing and on the Missouri side, Independence and Blue Springs. The Leavenworth Times was one of our original daily newspapers and the balance of the cluster was acquired afterward. In addition, we secured the military publication, The Fort Leavenworth Lamp, in Fort Leavenworth. The Kansas City cluster is home to several prominent companies, including Hallmark, H&R Block, Interstate Bakeries, and the University of Kansas.

The Wichita cluster consists of three dailies, six weeklies and three shoppers in the towns of Andover, Augusta, El Dorado, Pratt, Wellington, Newton and McPherson near Wichita, Kansas. The clustering of the small dailies in this area allows the group to sell advertisers a package providing access to multiple communities. Major aircraft manufacturers Boeing, Bombardier, Cessna and Raytheon have facilities nearby and McConnell Air Force Base is a major component of the local economy.

We also have clusters in and around Grand Forks, North Dakota (home to the Grand Forks Air Force Base and the University of North Dakota) and near Mason City, Iowa, where Cargill, ConAgra, Kraft, Winnebago and Fort Dodge Animal Health, a division of Wyeth, each maintain significant operations.

We are represented in southwestern Minnesota through seven paid weekly newspapers and four shoppers. St. James, Redwood Falls, Sleepy Eye, Granite Falls, Cottonwood, Wabasso, and Montevideo are all communities with populations of 10,000 and under. These papers represent the primary local news and information source for these communities.

In Louisiana, we have an operating cluster in the southwestern part of the state, located between Lake Charles and Alexandria. This cluster consists of five publications located in the cities of Leesville, Sulpher, DeRidder and Vinton. Local employers include major manufacturers such as Alcoa, Firestone, International Paper and Proctor & Gamble.

Our Baton Rouge cluster consists of four weeklies and three shoppers in the southeastern Louisiana cities of Donaldsville, Gonzales, and Plaquemine. Numerous petrochemical companies such as BASF, Exxon Mobil and Dow Chemical, plus universities including Louisiana State, support the local economies.

In southwestern New York, our operations are centered around five publications based in Steuben County. In Corning, The Leader, a 7,709 circulation daily newspaper, dominates the eastern half of the county and shares its hometown namesake with Corning Incorporated. The Hornell Evening Tribune circulates daily throughout the western half of the county. Situated directly between these two dailies in the county seat of Bath is the 10,850 circulation Steuben Courier, a free-distribution weekly. The Pennysaver Plus, a standalone shopper, solidifies this flagship group.

We also have a strong presence in the print advertising markets in three other New York counties that surround Steuben. In Allegany County to the west, the Wellsville Daily Reporter and its shopper, the Pennysaver Plus, cover most households. In Livingston County to the north, the Pennysaver Plus and the Genesee Country Express complement one another with combined circulation of 33,480. In Yates County to the north and east, The Chronicle-Express and Chronicle Ad-Visor shopper distribute weekly to nearly 14,000 households centered around the county seat of Penn Yan.

In nearby Chemung County, the 21,000 circulation Horseheads Shopper anchors our presence in this area. The majority of the southwestern New York cluster parallels Interstate 86 across the central southern tier of

 

100


Table of Contents

New York State, which is benefiting from continued improvement and expansion under an omnibus federal highway appropriations bill. Moreover, the cluster has several colleges and universities nearby, including Cornell University, Ithaca College, Elmira College and Houghton College.

Our Honesdale cluster, approximately 30 miles from Scranton, Pennsylvania, consists of seven publications in the cities of Carbondale, Honesdale and Hawley, Pennsylvania, along with Liberty, New York, located just across the Delaware River to the east. The cluster was created from our daily and shopper operations in Honesdale and later supplemented by our acquisition of weeklies and shoppers in Carbondale and Liberty. Local employers include General Dynamics, Blue Cross/Blue Shield, Commonwealth Telephone and various colleges and universities, medical centers and governmental agencies.

Our Pennsylvania/West Virginia cluster includes dailies in Waynesboro, Pennsylvania, Keyser and Ripley, West Virginia. We also have two weeklies throughout the group and a commercial printing operation in Ravenswood, West Virginia.

We have a strong presence in southern Michigan where five of our dailies, Adrian, Coldwater, Holland, Hillsdale and Sturgis, along with two weeklies and seven shoppers blanket the southern tier of the state and into Indiana. The 12,853 circulation Holland Sentinel is the flagship publication of the group. This area has several large employers, including Delphi, ConAgra, Tecumseh Products, Kellogg, JCI, Herman Miller, Hayworth, Gentex, Jackson State Prison, and a number of colleges and universities.

The communities we serve in the Small Community Newspaper group are largely rural but also support educational institutions, government agencies (including prisons and military bases), tourism, veterinary medicine and ethanol and agricultural chemical manufacturing. The area also includes automotive (including recreational vehicles), boat, home construction products and furniture manufacturing businesses.

The following table sets forth information regarding the number of publications and production facilities in the Small Community Newspaper Group:

 

     Publications      Production
Facilities
 

State of Operations

   Dailies      Weeklies      Shoppers     

Illinois

     15         30         13         2   

Missouri

     13         15         12         5   

Kansas

     5         10         7         1   

Michigan

     8         2         10         4   

California

     2         5         5         1   

Minnesota

     1         8         6         0   

Arkansas

     3         11         0         2   

New York

     3         4         7         0   

Louisiana

     1         8         4         1   

Pennsylvania

     2         4         2         2   

West Virginia

     1         2         2         2   

Colorado

     1         3         0         1   

Nebraska

     0         2         2         0