S-1/A 1 d639494ds1a.htm AMENDMENT NO. 2 TO FORM S-1 Amendment No. 2 to Form S-1
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As filed with the Securities and Exchange Commission on January 28, 2014

Registration No. 333-192736

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

New Media Investment Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2711   38-3910250
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

1345 Avenue of the Americas

New York, New York, 10105

212-479-3160

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Cameron D. MacDougall, Esq.

Fortress Investment Group LLC

1345 Avenue of the Americas

New York, New York 10105

212-479-1522

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With a copy to:

Duane McLaughlin, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006

(212) 225-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be
Registered(1)

  Proposed
Maximum
Aggregate
Offering Price
per Share
 

Proposed
Maximum
Aggregate

Offering Price(3)

 

Amount of

Registration  Fee(3)(4)

Common stock, par value $0.01 per share

  25,373,120   N/A(2)   $329,175,635   $42,397.82

 

 

(1) This prospectus (“Prospectus”) relates to shares of common stock, par value $0.01 per share, of New Media Investment Group Inc. (“New Media” or the “Registrant”) which will be distributed pursuant to a spin-off transaction to the holders of common stock, par value $0.01 per share, of Newcastle Investment Corp. (“Newcastle”). The amount of New Media common stock to be registered represents the maximum number of shares of New Media common stock that will be distributed to the holders of Newcastle common stock upon consummation of the spin-off. Immediately prior to the time of the spin-off, Newcastle will hold approximately 84.6% of New Media’s outstanding shares of common stock.
(2) Not included pursuant to Rule 457(o) under the Securities Act.
(3) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f)(2) of the Securities Act. The Company estimates that the book value of the securities to be registered is equal to $329,175,635, which represents approximately 84.6% of the book value of New Media as of September 29, 2013.
(4) Previously paid.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such dates as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this Prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JANUARY 28, 2014

New Media Investment Group Inc.

Common Stock

(Par Value, $0.01 per share)

 

 

This Prospectus 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 84.6% 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. Each share of Newcastle common stock outstanding as of 5:00 PM, Eastern Time, on February 6, 2014, the record date for the spin-off (the “Record Date”), will entitle the holder thereof to receive 0.07219 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 February 13, 2014, 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’s Common Stock has been authorized for listing on the NYSE under the symbol “NEWM,” subject to official notice of issuance.

 

 

In reviewing this Prospectus, you should carefully consider the matters described under “Risk Factors” beginning on page 32 of this Prospectus.

 

 

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

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

 

 

The date of this Prospectus is                     , 2014.


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TABLE OF CONTENTS

 

     Page  

Questions and Answers About The Spin-Off

     1   

Summary

     7   

Risk Factors

     32   

Cautionary Note Regarding Forward Looking Information

     49   

The Spin-Off and Restructuring

     50   

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

     56   

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

     61   

Use of Proceeds

     63   

Determination of Offering Price

     63   

Market Price Information and Dividends

     63   

Selected Historical Consolidated Financial Data

     64   

Unaudited Pro Forma Condensed Combined Financial Information

     68   

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

     88   

Business

     116   

Our Manager and Management Agreement

     156   

Management

     161   

Compensation of Directors

     172   

Executive Compensation

     174   

Security Ownership of Certain Beneficial Owners and Management

     189   

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

     190   

Restructuring Agreements

     192   

Description of Our Capital Stock

     196   

Shares Eligible for Future Sale

     201   

Legal Matters

     203   

Experts

     203   

Where You Can Find More Information

     203   

Index To Financial Statements

     F-1   

 

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Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, we have presented in this Prospectus 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 Prospectus 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 Effective Date (as defined below) any references in this Prospectus to “we,” “our,” “us” and the “Company” refer to GateHouse, our Predecessor, and its consolidated subsidiaries, unless the context requires otherwise. Subsequent to the Effective Date, any references to GateHouse refer to GateHouse Media, LLC and its consolidated subsidiaries and any references to GateHouse Media Intermediate Holdco, Inc. refer to GateHouse Media Intermediate Holdco, LLC. References in this Prospectus to “Newcastle” generally refer to Newcastle Investment Corp. and its consolidated subsidiaries, unless the context requires otherwise. All figures included in this Prospectus are as of September 29, 2013, unless stated otherwise.

 

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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 Prospectus 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.

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’s common stockholders as of the Record Date, which will be 5:00 PM, Eastern Time, on February 6, 2014. For each share of Newcastle common stock held on the Record Date for the Distribution, Newcastle will distribute 0.07219 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 84.6% of the outstanding shares of our Common Stock. Based on the number of shares of Newcastle common stock outstanding on January 24, 2014, Newcastle expects to distribute approximately 25,373,120 shares of our Common Stock in the spin-off. For a more detailed description, see “The Spin-Off and Restructuring” in this Prospectus.

Why is Newcastle spinning off New Media?

Newcastle’s board of directors periodically reviews strategic alternatives. Newcastle’s 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. Newcastle’s board of directors believes that media assets are currently undervalued and being sold at substantial discounts. Newcastle’s board of directors also believes that New Media’s value can be increased over time through a strategy aimed at acquiring local media assets and organically growing New Media’s digital marketing business. In addition, Newcastle’s board of directors believes New Media’s prospects would be enhanced by being able to operate unfettered by REIT requirements. Accordingly, Newcastle’s board of directors has determined that the separation of New Media from Newcastle, as opposed to a sale of New Media’s Common Stock or other transaction, will provide Newcastle’s stockholders with the best opportunity to benefit from the anticipated appreciation of New Media’s value over time. Moreover, Newcastle’s board of directors believes that the execution risk of a spin-off is lower than for other types of transactions. Newcastle’s board of directors’ 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.

 

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    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 proposing and supporting a restructuring that resulted in the conversion of its debt into equity. Following the Restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

Additionally, in determining whether to effect the spin-off, Newcastle’s board of directors also considered the costs and risks relating to the spin-off, including: (i) potential costs and disruptions to the businesses as a result of the spin-off, (ii) risks of being unable to achieve the benefits expected from the spin-off, (iii) the reaction of Newcastle’s stockholders to the spin-off, (iv) the risk that one-time and ongoing costs of the spin-off may be greater than expected and (v) the tax impact of the spin-off to Newcastle and its stockholders. Newcastle’s board of directors determined that in the aggregate the potential benefits of the spin-off outweighed the potential negative factors. See “Risk Factors—Risks Related to the Distribution” and “The Spin-Off and Restructuring—Reasons for the Distribution.”

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 February 6, 2014, 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 February 13, 2014 to holders of record of Newcastle common stock as of 5:00 PM, Eastern Time, on February 6, 2014, 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 Prospectus 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

 

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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.

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 Prospectus 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 84.6% of our Common Stock. The remainder of the outstanding Common Stock will be owned by holders of GateHouse’s Outstanding Debt (as defined below) 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 Prospectus 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 Prospectus under the heading “Risk Factors” beginning on page 32.

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’s Common Stock has been authorized for listing on the NYSE under the symbol “NEWM,” subject to official notice of issuance. We anticipate that trading in shares of our Common Stock will begin on a “when-issued” basis on or shortly before

 

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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.

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 Prospectus 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 2014 REIT taxable income distribution requirements. For a more detailed discussion, see “Material 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 “Material 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 “Material 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.

 

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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.

The conditions to the Distribution are that (i) our registration statement on Form S-1, of which this Prospectus is a part, shall have become effective under the Securities Act of 1933, as amended (the “Securities Act”), and no stop order related to the registration statement shall be in effect; (ii) the listing of our Common Stock on the NYSE shall have been approved, subject to official notice of issuance; (iii) the Plan shall have been approved by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) without any appeals by any parties; and (iv) 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 transaction related thereto, shall be in effect. We note that other than the federal securities laws, there are no federal or state regulatory requirements with which we must comply. If Newcastle’s board of directors were to waive a material condition to or abandon the Distribution, Newcastle would notify its stockholders of the decision by filing a Current Report on Form 8-K.

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 satisfactory financial performance and approval by New Media’s board of directors. The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s GAAP net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results. 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—Risks Related to Our Business—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.

 

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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

1345 Avenue of the Americas

New York, NY 10105

Tel: 212-479-3160

www.newmediainvestmentgroup.com

 

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SUMMARY

This summary of certain information contained in this Prospectus 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 Prospectus 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 435 community publications, 353 related websites, 329 mobile sites and six yellow page directories, serves more than 128,000 business advertising accounts and reaches approximately 10 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.

The newspaper industry has experienced declining revenue and profitability over the past several years due to, among other things, advertisers’ shift from print to digital media and general market conditions. GateHouse, our Predecessor, was affected by this trend and experienced net losses of $160.8 million during the nine month period ended September 29, 2013 and $29.8 million during the fiscal year ended December 30, 2012. Total revenue decreased by 1.9% to $356.2 million for the nine months ended September 29, 2013 and 5.1% to $488.6 million for the year ended December 30, 2012.

We acquired our operations as part of the restructuring of GateHouse. On September 27, 2013, GateHouse commenced Chapter 11 cases in the Bankruptcy Court (the “Restructuring”) in which it sought confirmation of its Joint Prepackaged Chapter 11 Plan (as modified, amended or supplemented from time to time, the “Plan”) sponsored by Newcastle, as the holder of the majority of the Outstanding Debt (as defined below). The Bankruptcy Court confirmed the Plan on November 6, 2013. GateHouse effected the transactions contemplated by the Plan and emerged from Chapter 11 protection on November 26, 2013 (the “Effective Date”).

The Plan effectuated the Restructuring of GateHouse. On the Effective Date (1) reorganized GateHouse became a wholly owned subsidiary of New Media as a result of (a) the cancellation and discharge of the currently outstanding equity interests of Gatehouse (the holders of which received warrants issued by New Media) and (b) the issuance of equity interests in the reorganized GateHouse to New Media; (2) Local Media Group Holdings LLC (“Local Media Parent”), which was a wholly owned subsidiary of Newcastle, became a wholly owned subsidiary of New Media as a result of Newcastle’s transfer of Local Media Parent to New Media; and (3) all of

 

 

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GateHouse’s Outstanding Debt was cancelled and discharged and the holders of the Outstanding Debt received, at their option, their pro rata share of the (i) Cash-Out Offer (as defined below) and/or (ii) New Media Common Stock and the net proceeds of new credit facilities raised by reorganized GateHouse. Pursuant to the Cash-Out Offer, Newcastle offered to buy the claims of the holders of the Outstanding Debt (as defined below). As a result of these transactions, Newcastle owns 84.6% of New Media as of the Effective Date. 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.”

As of the Effective Date of the Plan, New Media’s debt structure consists of multiple credit facilities. The Revolving Credit, Term Loan and Security Agreement (the “First Lien Credit Facility”) dated November 26, 2013 by and among GateHouse, GateHouse Media Intermediate Holdco, Inc. (“GMIH”), certain wholly-owned subsidiaries of GMIH (collectively with GMIH and GateHouse, the “Loan Parties”), PNC Bank, National Association, as the administrative agent, Crystal Financial LLC, as term loan B agent and each of the lenders party thereto provides for (i) a term loan A in the aggregate principal amount of $25 million, a term loan B in the aggregate principal amount of $50 million, and a revolving credit facility in an aggregate principal amount of up to $40 million (of which $25 million was funded on the Effective Date). Borrowings under the First Lien Credit Facility bear interest at a rate per annum equal to (i) with respect to the revolving credit facility, the applicable Revolving Interest Rate (as defined the First Lien Credit Agreement), (ii) with respect to the term loan A, the Term Loan A Rate (as defined in the First Lien Credit Agreement) and (iii) with respect to the term loan B, the Term Loan B Rate (as defined in the First Lien Credit Agreement). Amounts outstanding under the term loans and revolving credit facility will be fully due and payable on November 26, 2018.

The Term Loan and Security Agreement (the “Second Lien Credit Facility” and together with the First Lien Credit Facility, the “New Credit Facilities”) dated November 26, 2013 by and among the Loan Parties, Mutual Quest Fund and each of the lenders party thereto provides for a term loan in an aggregate principal amount of $50 million. Borrowings under the Second Lien Credit Facility bear interest, at the Loan Parties’ option, equal to (1) the LIBOR Rate (as defined in the Second Lien Credit Facility) plus 11.00% or (2) the Alternate Base Rate (as defined in the Second Lien Credit Facility) plus 10.00%. The outstanding principal will be fully due and payable on the maturity date of November 26, 2019.

Pursuant to the Plan, holders of the Outstanding Debt who elected to receive New Media Common Stock received their pro rata share of the proceeds of the New Credit Facilities, net of certain transaction expenses (the “Net Proceeds”). The Net Proceeds distributed to holders of the Outstanding Debt totaled $149 million. GateHouse’s entry into the New Credit Facilities was not a condition to the effectiveness of the Plan. The proceeds of additional drawings of the revolving credit facility under the First Lien Credit Facility after the Effective Date will be applied towards ongoing working capital needs, general corporate purposes, capital expenditures and potential acquisitions.

Additionally, the Credit Agreement dated September 3, 2013, by and among Local Media Parent, the borrowers party thereto, the lenders party thereto, Capital One Business Credit Corp., as successor to 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”) provides for a $33.0 million senior secured term loan which was funded on September 3, 2013 and a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $10 million, whose full availability was activated on October 25, 2013.

The Restructuring significantly reduced New Media’s interest expense. In addition, New Media intends to focus its business strategy on building its digital marketing business and growing its online advertising business, which we believe will offset many of the challenges experienced by GateHouse. With its new capital structure and digital focus, we believe that New Media will be able to create stockholder value given its strengths and strategy. However, there can be no assurance that we will be profitable. See “Risk Factors.”

 

 

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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. However, there is no guarantee that we will be able to accomplish any of these strategic initiatives. 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 satisfactory financial performance and approval by our Board of Directors. The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s GAAP net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results.

Our Manager

We are managed by FIG LLC (our “Manager”), an affiliate of Fortress, pursuant to the terms of a Management and Advisory Agreement dated as of November 26, 2013 (the “Management Agreement”), between us and our Manager. We will draw upon the long-standing expertise and resources of Fortress, a global investment management firm with approximately $58.0 billion in fee paying assets under management as of September 30, 2013.

Pursuant to the terms of the Management Agreement, our Manager, subject to oversight by our Board of Directors, is 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 is 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. Newcastle’s board of directors believes that media assets are currently undervalued and being sold at substantial discounts. Newcastle’s board of directors also believes that New Media’s value can be increased over time through a strategy aimed at acquiring local media assets and organically growing New Media’s digital marketing business. In addition, Newcastle’s board of directors believes New Media’s prospects would be enhanced by being able to operate unfettered by REIT requirements. Accordingly, Newcastle’s board of directors has determined that the separation of New Media from Newcastle, as opposed to a sale of New Media’s Common Stock or other transaction, will provide Newcastle’s stockholders with the best opportunity to benefit from the anticipated appreciation of New Media’s value over time. Moreover, Newcastle’s board of directors believes that the execution risk of a spin-off is lower than for other types of transactions. Newcastle’s board of directors’ 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

 

 

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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 proposing and supporting a restructuring that resulted in the conversion of its debt into equity. Following the Restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

Additionally, in determining whether to effect the spin-off, Newcastle’s board of directors also considered the costs and risks relating to the spin-off, including: (i) potential costs and disruptions to the businesses as a result of the spin-off, (ii) risks of being unable to achieve the benefits expected from the spin-off, (iii) the reaction of Newcastle’s stockholders to the spin-off, (iv) the risk that one-time and ongoing costs of the spin-off may be greater than expected and (v) the tax impact of the spin-off to Newcastle and its stockholders. Newcastle’s board of directors determined that in the aggregate the potential benefits of the spin-off outweighed the potential negative factors. See “Risk Factors—Risks Related to the Distribution” and “The Spin-Off and Restructuring—Reasons for the Distribution.”

Our Strengths

High Quality Assets with Leading Local Businesses. Our publications benefit from a long history in the communities we serve as one of the leading, and often sole, providers of comprehensive and in-depth local content. This has resulted in brand recognition for our publications, 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.

Strong Value Proposition for Our Advertisers. Our portfolio enjoys a devoted readership in the local communities where we operate. By providing access to these communities, we help advertisers maximize 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 their target customers.

Diverse Revenue Streams. Our revenue streams are diversified 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. During the twelve months ended September 29, 2013, we generated revenue in 338 markets across 24 states, serving a fragmented and diversified local customer base. During the nine months ended September 29, 2013, the Company generated approximately 41% of its total revenue in two states in the Northeast and approximately 28% of its total revenue

 

 

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in two states in the Midwest. 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 Operating Profit Margins and Allows Us to Realize Operating Synergies. We believe we can 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.

Local Business Profile Generates Significant Cash Flow. Our local business profile will allow us to generate significant recurring cash flow due to our diversified revenue base, operating profit margins and our low capital expenditure and working capital requirements. As a result of the Restructuring, which extinguished GateHouse’s Outstanding Debt, our interest and debt servicing expenses are significantly lower than GateHouse’s interest and debt servicing expenses. As of the Effective Date, our debt structure consists of the New Credit Facilities and the Local Media Credit Facility. We estimate that we will have significant available cash flow totaling $50 to $70 million in 2014 which we believe will create stockholder value through our investments in organic growth, investments in accretive acquisitions and the return of 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 one of the largest locally oriented media sales forces in their respective communities. 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. We believe that these qualities also provide leverage for our sales force to grow additional future revenue streams in our markets.

Ability to Acquire and Integrate 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 $1.7 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 with regard to both 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.

The newspaper industry has experienced declining revenue and profitability over the past several years due to, among other things, advertisers’ shift from print to digital media and general market conditions. GateHouse, our Predecessor, was affected by this trend and experienced net losses of $160.8 million during the nine month period ended September 29, 2013 and $29.8 million during the fiscal year ended December 30, 2012. Total

 

 

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revenue decreased by 1.9% to $356.2 million for the nine months ended September 29, 2013 and 5.1% to $488.6 million for the year ended December 30, 2012. The Restructuring significantly reduced New Media’s interest expense. In addition, New Media intends to focus its business strategy on building its digital marketing business and growing its online advertising business, which we believe will offset many of the challenges experienced by GateHouse. With its new capital structure and digital focus, we believe that New Media will be able to create stockholder value given its strengths and strategy. However, there can be no assurance that we will be profitable. See “Risk Factors.”

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. However, there is no guarantee that we will be able to accomplish any of these strategic initiatives. 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 satisfactory financial performance and approval by our Board of Directors. The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s GAAP net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results. 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

 

 

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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 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 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.

 

 

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The newspaper industry has experienced declining revenue and profitability over the past several years due to, among other things, advertisers’ shift from print to digital media and general market conditions. GateHouse, our Predecessor, was affected by this trend and experienced net losses of $160.8 million during the nine month period ended September 29, 2013 and $29.8 million during the fiscal year ended December 30, 2012. Total revenue decreased by 1.9% to $356.2 million for the nine months ended September 29, 2013 and 5.1% to $488.6 million for the year ended December 30, 2012. The Restructuring significantly reduced New Media’s interest expense. In addition, New Media intends to focus its business strategy on building its digital marketing business and growing its online advertising business, which we believe will offset many of the challenges experienced by GateHouse. With its new capital structure and digital focus, we believe that New Media will be able to create stockholder value given its strengths and strategy. However, there can be no assurance that we will be profitable. See “Risk Factors.”

Challenges

We will likely face challenges commonly encountered by recently reorganized entities, including the risks that:

 

    even under our new capital structure, we may not be profitable; and

 

    the Restructuring may cause our vendors and suppliers to stop providing supplies or services to us or to offer to provide such services or supplies only on unfavorable terms.

As a publisher of locally based print and online media, we face a number of additional challenges, including the risks that:

 

    the growing shift within the publishing industry from traditional print media to digital forms of publication may compromise our ability to generate sufficient advertising revenues;

 

    investments in growing our digital business may not be successful, which could adversely affect our results of operations; and

 

    our advertising and circulation revenues may decline if we are unable to compete effectively with other companies in the local media industry.

For more information about New Media’s risks and challenges, see “Risk Factors.”

Management Agreement

On the Effective Date, we entered into a Management Agreement with our Manager. Our Management Agreement requires 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 Stock trading on the “regular way” market on a major U.S. national securities exchange (the “Listing”), 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.

 

 

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

 

Type

  

Description

Management Fee

   1.5% per annum of our total equity calculated and payable monthly in arrears in cash, commencing from the Listing. 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.

Reimbursement of Expenses

   Commencing from the Listing, 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.

 

 

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   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).

Grant of Options to Our Manager

   Commencing from the Listing, 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 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.

 

 

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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.

On the Effective Date, we 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 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.

 

 

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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 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 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. The Support Agreement terminated on the Effective Date of the Plan.

Pursuant to the Restructuring, Newcastle offered 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. The holders of the Outstanding Debt had 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 Net Proceeds, if any, of the New Credit Facilities. All pensions, trade and all other unsecured claims will be paid in the ordinary course.

On September 20, 2013, GateHouse commenced a pre-packaged solicitation of the Plan (the “Solicitation”). 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”) voted to accept the Plan in the Solicitation. 100% of the holders of the Outstanding Debt voted to accept the Plan and as a result, Debtors commenced Chapter 11 cases and sought approval of the Disclosure Statement and confirmation of the Plan therein. The Plan was confirmed by the Bankruptcy Court on November 6, 2013 and GateHouse emerged from bankruptcy on November 26, 2013.

On the Effective Date, the claims and interests against GateHouse were discharged primarily through the (a) issuance of 30,000,000 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 1,362,479 warrants by New Media to former equity holders in GateHouse (“Former Equity Holders”); and (e) entry into the New Credit Facilities, the Net Proceeds of which, totaling $149,000,000, went to holders of the Outstanding Debt that elected to receive New Media Common Stock. In addition, 100% of the new equity interests in GateHouse were issued to New Media. On the Effective Date, GateHouse and certain of its subsidiaries converted into limited liability companies. As of the Effective Date, Newcastle owns 84.6% of New Media’s total equity.

Upon emergence from Chapter 11, we adopted fresh-start reporting in accordance with Accounting Standards Codification Topic 852, “Reorganizations.” Under fresh-start accounting, a new entity is deemed to

 

 

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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 prior to emergence, including the historical financial information in this Prospectus. 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, as amended (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 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 or the relevant affiliates or designees will receive its pro rata share of (a) New Media Common Stock and (b) Net Proceeds of the New Credit Facilities, if any, net of certain transaction expenses. The Investment Commitment Letter terminated on the Effective Date.

GateHouse Management and Advisory Agreement

On November 26, 2013, New Media entered into the GateHouse Management and Advisory Agreement (the “GateHouse Management Agreement”) with GateHouse, pursuant to which New Media will manage the assets and the day-to-day operations of GateHouse. New Media will be responsible for, among other things (i) the purchase and sale of GateHouse’s investments (ii) the financing of GateHouse’s investments and (iii) investment advisory services. Such services may be performed by the Manager.

The GateHouse Management Agreement has an initial three-year term and will be automatically renewed for one-year terms thereafter unless terminated by New Media or GateHouse. The GateHouse Management Agreement will automatically terminate if the Management Agreement between New Media and its Manager is terminated.

Commencing from the Listing, New Media is (a) entitled to receive a management fee equal to 1.50% per annum of GateHouse’s Total Equity (as defined in the GateHouse Management Agreement) and (b) eligible to receive incentive compensation that is based on GateHouse’s performance. In addition, GateHouse is obligated to reimburse certain expenses incurred by New Media in connection with the performance of its duties under the agreement. This description is a summary and is subject to, and qualified in its entirety by, the provisions of the GateHouse Management Agreement filed as Exhibit 10.32 to our registration statement on Form S-1.

Contribution of Local Media Group Holdings LLC

Newcastle acquired Local Media Group, Inc. (f/k/a Dow Jones Local Media Group, Inc.) (“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 $53.8 million and financed the remainder of the purchase price with $33.0 million of term loan debt provided under 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 as of October 25, 2013, when the full availability of the senior secured asset-based revolving credit facility of up to $10 million under the Local Media Credit Facility was activated.

 

 

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Local Media operates print and online community media businesses 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.

Pursuant to the Plan, Newcastle contributed 100% of the stock of Local Media Parent and assigned its rights under the stock purchase agreement pursuant to which it acquired Local Media (the “Local Media SPA”) to New Media, on the Effective Date (the “Local Media Contribution”). Local Media is wholly owned by Local Media Parent. In exchange, Newcastle received New Media Common Stock equal in value to the cost of the Local Media Acquisition, subject to certain adjustments (the “Local Media Contribution Value”).

On the Effective Date, the Local Media Contribution Value was $53.8 million, consisting of approximately $82.6 million as the estimated cost of the Local Media Acquisition as adjusted to include $4.25 million in out-of-pocket transaction expenses of Newcastle and deduct $33.0 million in funded 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. The agreement has a two-year term, with automatic renewal for successive two-year periods unless terminated. While the agreement is in effect, GateHouse will receive 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.

Local Media Credit Facility

The Local Media Credit Facility provides for a $33 million senior secured term loan, which was funded on September 3, 2013, and a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $10 million, whose full availability was activated on October 25, 2013 as a result of the accession of Capital One Business Credit Corp. as a lender thereunder and as the replacement administrative and collateral agent for Credit Suisse AG, Cayman Islands Branch. Borrowings under the Local Media Credit Facility bear interest, at the borrower’s option, equal to (i) the LIBOR Rate (as defined in the Local Media Credit Facility Credit Agreement) plus the LIBOR Rate Margin (i.e., 6.50% per annum) or (ii) Base Rate (as defined in the Local Media Credit Facility Credit Agreement) plus the Base Rate Margin (i.e., 5.50% per annum). Repayments of principal are due in an amount of $203,125 per quarter for each completed fiscal quarter through September 30, 2015 and repayments of principal are due in an amount of $406,250 per quarter for each completed fiscal quarter starting December 31, 2015, with the remaining balance of principal becoming fully due and payable on the maturity date of September 4, 2018.

New Credit Facilities

The First Lien Credit Facility provides for (i) a term loan A in the aggregate principal amount of $25 million, a term loan B in the aggregate principal amount of $50 million, and a revolving credit facility in an aggregate principal amount of up to $40 million (of which $25 million was funded on the Effective Date). Borrowings under the First Lien Credit Facility bear interest at a rate per annum equal to (i) with respect to the revolving credit facility, the applicable Revolving Interest Rate (as defined the First Lien Credit Agreement), (ii) with respect to the term loan A, the Term Loan A Rate (as defined in the First Lien Credit Agreement), and (iii) with respect to the term loan B, the Term Loan B Rate (as defined in the First Lien Credit Agreement). Amounts outstanding under the term loans and revolving credit facility will be fully due and payable on November 26, 2018.

 

 

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The Second Lien Credit Facility provides for a term loan in an aggregate principal amount of $50 million. Borrowings under the Second Lien Credit Facility bear interest, at the Loan Parties’ option, equal to (1) the LIBOR Rate (as defined in the Second Lien Credit Facility) plus 11.00% or (2) the Alternate Base Rate (as defined in the Second Lien Credit Facility) plus 10.00%. The outstanding principal will be fully due and payable on the maturity date of November 26, 2019.

GateHouse’s entry into the New Credit Facilities was not a condition to the effectiveness of the Plan.

Pursuant to the Plan, holders of the Outstanding Debt who elected to receive New Media Common Stock received their pro rata share of the Net Proceeds of the New Credit Facilities. The Net Proceeds distributed to holders of the Outstanding Debt totaled $149 million. The proceeds of additional drawings of the revolving credit facility under the First Lien Credit Facility after the Effective Date will be applied towards ongoing working capital needs, general corporate purposes, capital expenditures and potential acquisitions. New Media distributed to each holder of New Media Common Stock, including Newcastle on account of the Cash-Out Offer, its pro rata share of $149 million in Net Proceeds of the New Credit Facilities. No amount of the Net Proceeds were distributed to Newcastle on account of the Local Media Contribution.

New Media Warrants

On the Effective Date, New Media was deemed to have issued and distributed 1,362,479 10-year warrants to Former Equity Holders (the “New Media Warrants”). The New Media Warrants 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 of $46.35 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. Former equity interests were 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. This description is a summary and is subject to, and qualified in its entirety by, the provisions of the Warrant Agreement filed as Exhibit 10.37 to our registration statement on Form S-1.

Registration Rights

New Media entered into a registration rights agreement with Omega Advisors, Inc. and its affiliates (collectively, “Omega”). 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 not prior to the earlier 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 “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 demand right with respect to some or all of the New Media Common Stock held by Omega under the Registration Statement (the “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 “Shelf Registration”), subject to customary exceptions and limitations. Omega is entitled to initiate up to three offerings or sales with respect to some or all of the New Media Common Stock held by Omega pursuant to the Shelf Registration.

Omega may only exercise its right to request the Demand Registration and any Shelf Registrations if the New Media Common Stock eligible to be sold pursuant to such Registration Statement or Shelf Registration is at

 

 

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least 3% of the then-outstanding New Media Common Stock. This description is a summary and is subject to, and qualified in its entirety by, the provisions of the Registration Rights Agreement filed as Exhibit 4.5 to our registration statement on Form S-1.

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 32 and the other information included elsewhere in this Prospectus.

 

 

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Corporate Information

Our principal executive offices are located at 1345 Avenue of the Americas, New York, New York, 10105. Our telephone number is 212-479-3160 and our website is www.newmediainvestmentgroup.com.

Organizational Structure

The charts below represent a simplified summary of the key companies within our organizational structure prior to the Effective Date of the Plan and after the spin-off.

 

LOGO

 

 

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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 Prospectus 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 0.07219 shares of New Media’s Common Stock for each share of Newcastle common stock held on February 6, 2014, 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 84.6% of our Common Stock outstanding immediately prior to the Distribution.

 

  Based on the 351,453,495 shares of Newcastle common stock outstanding on January 24, 2014, and the distribution ratio of 0.07219 shares of New Media Common Stock for each share of Newcastle common stock, 25,373,120 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 February 6, 2014.

 

Distribution date

The Distribution Date will be February 13, 2014.

 

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

 

 

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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:

 

    Our registration statement on Form S-1, of which this Prospectus is a part, shall have become effective under 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

Our Common Stock has been authorized for listing on the NYSE under the ticker symbol “NEWM,” subject to official notice of issuance. 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 up to and including the Distribution Date. See “The Spin-Off and Restructuring—Trading Between the Record Date and Distribution Date,” included elsewhere in this Prospectus.

 

 

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  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 2014 calendar year.

 

 

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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 nine month periods ended September 29, 2013 and September 30, 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 nine months ended September 30, 2012 have been revised to reflect one of GateHouse’s publications as a discontinued operation for comparability.

Operating results for the nine months ended September 29, 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 Prospectus. 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 September 29, 2013, for the nine months ended September 29, 2013 and for the year ended December 30, 2012 are based on (i) the audited financial statements of New Media which was formed on June 18, 2013 and subsequently capitalized, (ii) 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 nine months ended September 29, 2013, and (iii) the audited combined financial statements of Local Media as of and for the year ended June 30, 2013, each included in this Prospectus.

The pro forma financial information is provided for informational and illustrative purposes only and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” New Media’s historical financial statements and related notes thereto, GateHouse’s historical consolidated financial statements and notes thereto and Local Media’s historical combined financial statements and notes thereto, each included elsewhere in this Prospectus. 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. All tables are presented in thousands unless otherwise noted.

 

 

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The pro forma financial information gives effect to three categories of adjustments as if the transactions reflected in such adjustments had occurred on January 2, 2012 for the unaudited pro forma condensed combined statements of operations and on September 29, 2013 for the unaudited pro forma condensed combined balance sheet. The three categories of adjustments are summarized below.

GateHouse Effects of Plan Adjustments

 

    Approximately $1.2 billion of our Predecessor’s Outstanding Debt will be cancelled and exchanged for New Media Common Stock equal in value to 40% of the face amount of the Outstanding Debt;

 

    the equity interests in our Predecessor will be cancelled and discharged and 100% of the new equity in the reorganized GateHouse will be issued to New Media;

 

    the Former Equity Holders will receive New Media Warrants representing the right to acquire New Media Common Stock equal to 5.0% of the New Media Common Stock as of the Effective Date;

 

    commencing from the Listing, New Media will pay its Manager a management fee equal to 1.5% per annum of its Total Equity (as defined in the Management Agreement), calculated and payable monthly in arrears in cash; and

 

    the payment of additional estimated reorganization costs of $9.8 million.

GateHouse Fresh-Start and Other Adjustments

 

    The adoption by GateHouse of fresh-start accounting, in accordance with ASC 852 upon confirmation of the Plan.

Local Media Purchase Accounting and Other Adjustments

 

    Newcastle will contribute 100% of the common stock of Local Media Parent to New Media in exchange for New Media Common Stock equal in value to the cost of Newcastle’s Local Media Acquisition; and

 

    the impact of Local Media purchase accounting adjustments, in accordance with ASC 805. As Local Media was consolidated in GateHouse historical results beginning on September 3, 2013, the purchase accounting adjustments are already included in column “GateHouse Historical September 29, 2013” on the unaudited pro forma condensed combined balance sheet. The unaudited pro forma condensed combined statements of operations for December 30, 2012 and September 29, 2013 include a separate column for Local Media adjustments labeled as “Local Media Purchase Accounting and Other Adjustments.”

 

 

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    Nine Months
Ended
September 29,
2013
    Nine Months
Ended
September 29,
2013
    Nine Months
Ended
September 30,

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

  $ 281,877      $ 229,569      $ 246,010      $ 419,210      $ 330,881      $ 357,134      $ 385,579   

Circulation

    136,225        102,370        98,279        183,779        131,576        131,879        133,192   

Commercial printing and other

    41,605        24,233        18,872        50,114        26,097        25,657        25,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    459,707        356,172        363,161        653,103        488,554        514,670        544,738   

Operating costs and expenses:

             

Operating costs

    259,480        200,824        202,644        350,662        268,222        281,884        296,974   

Selling, general and administrative

    153,381        121,254        107,059        206,744        145,020        146,295        154,516   

Depreciation and amortization

    26,741        30,383        30,006        36,915        39,888        42,426        45,080   

Integration and reorganization costs

    1,380        1,380        3,457        4,393        4,393        5,884        2,324   

Impairment of long-lived assets

    111,902        91,599        —          692        —          1,733        430   

(Gain) loss on sale of assets

    1,052        1,052        534        1,238        1,238        455        1,551   

Goodwill and mastheads impairment

    21,965        —          —          197,177        —          385        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (116,194     (90,320     19,461        (144,718     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

    13,324        71,335        42,819        16,238        57,463        58,361        69,520   

Reorganization items, net

    —          9,843        —          —          N/A        N/A        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (129,518     (171,498     (23,358     (160,956     (27,670     (22,753     (25,657

Income tax expense (benefit)

    (50,706     (10,878     (207     (63,014     (207     (1,803     (155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

    (78,812     (160,620     (23,151     (97,942     (27,463     (20,950     (25,502

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

    N/A        (1,034     (2,093     N/A        (2,340     (699     (542
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    N/A        (161,654     (25,244     N/A        (29,803     (21,649     (26,044

Net (loss) income attributable to noncontrolling interest

    N/A        865        N/A        N/A        N/A        N/A        N/A   

Net (loss) income attributable to GateHouse Media

    N/A        (160,789     (25,244     N/A        N/A        N/A        N/A   

Basic net (loss) income from continuing operations attributable to GateHouse Media per share

    (2.63 )(1)    $ (2.75 )(2)    $ (0.40 )(2)      (3.26 )(1)    $ (0.47 )(2)    $ (0.36 )(2)    $ (0.44 )(2) 

Diluted net (loss) income from continuing operations attributable to GateHouse Media per share

    (2.63 )(1)    $ (2.75 )(2)    $ (0.40 )(2)      (3.26 )(1)    $ (0.47 )(2)    $ (0.36 )(2)    $ (0.44 )(2) 

Basic net (loss) income from discontinued operations, attributable to GateHouse Media, net of income taxes, per share

    N/A      $ (0.02     (0.04     N/A (1)      (0.04     (0.01     (0.01

Diluted net (loss) income from discontinued operations, attributable to GateHouse Media, net of income taxes, per share

    N/A      $ (0.02     (0.04     N/A        (0.04     (0.01     (0.01

Basic weighted average shares outstanding

    30,000,000 (1)      58,068,277 (2)      58,038,673 (2)      30,000,000 (1)      58,041,907 (2)      57,949,815 (2)      57,723,353 (2) 

Diluted weighted average shares outstanding

    30,000,000 (1)      58,068,277 (2)      58,038,673 (2)      30,000,000 (1)      58,041,907 (2)      57,949,815 (2)      57,723,353 (2) 

 

 

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    Nine Months
Ended
September 29,
2013
    Nine Months
Ended
September 29,
2013
    Nine Months
Ended
September 30,

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      $ (9,737   $ 24,222        N/A      $ 23,499      $ 22,439      $ 26,453   

Net cash used in investing activities

    N/A        (2,499     (2,014     N/A        (1,044     (731     (624

Net cash used in financing activities

    N/A        (2,538     (4,600     N/A        (7,140     (11,249     (22,010

Other Data:

    N/A            N/A         

Adjusted EBITDA(3)

    N/A      $ 20,814      $ 49,500        N/A      $ 69,766      $ 80,547      $ 89,511   

Cash interest paid

    N/A        43,400        43,778        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 that 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 Prospectus.

(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:

 

    Nine Months Ended
September 29, 2013
    Nine Months Ended
September 30, 2012
    Year Ended
December 30, 2012
    Year Ended
January 1, 2012(g)
    Year Ended
December 31, 2010
 
    (In Thousands)  

Loss from continuing operations

  $ (160,620   $ (23,151   $ (27,463   $ (20,950   $ (25,502

Income tax expense (benefit)

    (10,878     (207     (207     (1,803     (155

(Gain) loss on derivative instruments(f)

    14        (1,639     (1,635     (913     8,277   

Amortization of deferred financing costs

    803        994        1,255        1,360        1,360   

Interest expense

    69,513        43,497        57,928        58,309        60,021   

Impairment of long-lived assets

    91,599        —          —          1,733        430   

Depreciation and amortization

    30,383        30,006        39,888        42,426        45,080   

Goodwill and mastheads impairment

    —          —          —          385        —     

Adjusted EBITDA from continuing operations

  $ 20,814 (a)    $ 49,500 (b)    $ 69,766 (c)    $ 80,547 (d)    $ 89,511 (e) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(a) Adjusted EBITDA for the nine months ended September 29, 2013 included net expenses of $22,419, which are one-time in nature or non-cash compensation. Included in these net expenses of $22,419 is non-cash compensation and other expense of $20,807, non-cash portion of postretirement benefits expense of $(820), integration and reorganization costs of $1,380 and a $1,053 loss on the sale of assets.

 

(b) Adjusted EBITDA for the nine months ended September 30, 2012 included net expenses of $7,684, which are one-time in nature or non-cash compensation. Included in these net expenses of $7,684 is non-cash compensation and other expense of $4,125, non-cash portion of postretirement benefits expense of $(432), integration and reorganization costs of $3,457 and a $534 loss on the sale of assets.

Adjusted EBITDA also does not include $593 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  
     September 29,
2013
     September 29,
2013
    September 30,
2012
    December 30,
2012
    January 1,
2012
    December 31,
2010
 
     Pro Forma      Historical     Historical     Historical     Historical     Historical  
     (In Thousands)  

Balance Sheet Data:

             

Total assets

   $ 667,542       $ 426,975      $ 480,438      $ 469,766      $ 510,802      $ 546,327   

Total long-term obligations, including current maturities

     184,836         36,341        1,179,949        1,177,298        1,185,212        1,197,347   

Stockholders’ equity (deficit)

     390,197         (902,362     (829,106     (834,159     (805,632     (792,121

 

 

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RISK FACTORS

You should carefully consider the following risks and other information in this Prospectus in evaluating us and our Common Stock. Any of the following risks 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 ability to generate revenues is correlated with the economic conditions of two geographic regions of the United States.

Our Company primarily generates revenue in two geographic regions: the Northeast and the Midwest. During the nine months ended September 29, 2013, approximately 41% of our total revenues were generated in two states in the Northeast: Massachusetts and New York. During the same period, approximately 28% of our total revenues were generated in two states in the Midwest: Illinois and Ohio. As a result of this geographic concentration, our financial results, including advertising and circulation revenue, depend largely upon economic conditions in these principal market areas. Accordingly, adverse economic developments within these two regions in particular could significantly affect our consolidated operations and financial results.

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.

As of the Effective Date, GateHouse’s outstanding indebtedness includes the First Lien Credit Facility consisting of term loans in the aggregate principal amount of $75,000,000 and a revolving credit facility in an

 

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aggregate principal amount of up to $40,000,000 (of which $25,000,000 was funded on November 26, 2013) and a Second Lien Credit Facility consisting of a term loan in the aggregate principal amount of $50,000,000. Additionally, in connection with the Local Media Acquisition, Local Media Parent entered into the Local Media Credit Facility, which consists of a $33 million senior secured term loan, which was funded on September 3, 2013, and a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $10 million, whose full availability was activated on October 25, 2013. 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

 

    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.

The Local Media Credit Facility and New Credit Facilities contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

The Local Media Credit Facility and New Credit Facilities contain restrictions, covenants and representations and warranties that apply to us. If we fail to comply with any of these covenants or breach these representations or warranties in any material respect, such noncompliance would constitute a default under the Local Media Credit Facility and New Credit Facilities (subject to applicable cure periods) and the lenders could elect to declare all amounts outstanding under the agreements related thereto to be immediately due and payable and enforce their respective interests against collateral pledged under such agreements.

The covenants and restrictions in the Local Media Credit Facility and New Credit Facilities generally restrict our ability to, among other things:

 

    incur or guarantee additional debt;

 

    make certain investments or acquisitions;

 

    transfer or sell assets;

 

    make distributions on common stock;

 

    create or incur liens; and

 

    enter into transactions with affiliates.

The restrictions described above may interfere with our ability to obtain new or additional financing or may affect the manner in which we structure such new or additional financing or engage in other business activities, which may significantly limit or harm our results of operations, financial condition and liquidity. A default and any resulting acceleration of obligations could also result in an event of default and declaration of acceleration under our other existing debt agreements. Such an acceleration of our debt would have a material adverse effect on our liquidity and our ability to continue as a going concern. A default could also significantly limit our alternatives to refinance both the debt under which the default occurred and other indebtedness. This limitation

 

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may significantly restrict our financing options during times of either market distress or our financial distress, which are precisely the times when having financing options is most important. For more information regarding the covenants and requirements discussed above, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

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.

GateHouse’s independent audit report includes cautionary language on its ability to continue as a going concern.

The audit report issued by GateHouse’s independent registered public accounting firm on its audited financials for the fiscal year ended December 30, 2012, contains an explanatory paragraph regarding GateHouse’s ability to continue as a going concern. This explanatory paragraph indicates there is substantial doubt on the part of GateHouse’s independent registered public accounting firm as to its ability to continue as a going concern due to its entrance into the Support Agreement. As discussed in Note 21 to GateHouse’s Consolidated Financial Statements, the Support Agreement required GateHouse to file a voluntary petition seeking to reorganize under chapter 11 of the U.S. bankruptcy code, which it did on September 27, 2013.

GateHouse has prepared its financial statements on a going concern basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. GateHouse’s financial statements do not include any adjustments that would be necessary should it be unable to continue as a going concern and, therefore, be required to liquidate its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in its financial statements.

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 satisfactory financial performance and approval by our Board of Directors. The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s GAAP net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results. 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.

 

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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.

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.

Our Predecessor experienced declines in its credit ratings, which could adversely affect our ability to obtain new financing to fund our operations and strategic initiatives or to refinance our existing debt at attractive rates.

During 2008, GateHouse’s credit rating was downgraded to below investment grade by both Standard & Poor’s and Moody’s Investors Service. GateHouse’s credit rating was further downgraded in 2009 and 2010. These downgrades will negatively affect our cost of financing and subject us to more restrictive covenants than those that might otherwise apply. As a result, our financing options may be limited. Any future downgrades in our credit ratings could further increase our borrowing costs, subject us to more onerous terms and reduce or eliminate our borrowing flexibility in the future. Such limitations on our financing options may adversely affect our ability to refinance existing debt and incur new debt to fund our operations and strategic initiatives.

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.

 

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Our Predecessor experienced declines in advertising revenue, and further declines, which could adversely affect our results of operations and financial condition, may occur.

Our Predecessor, GateHouse, experienced declines in advertising revenue over the past few years, due primarily to the economic recession and advertisers’ shift from print to digital media. Advertising revenue decreased by $26.3 million, or 7.4%, in the year ended December 30, 2012, as compared to the year ended January 1, 2012. Advertising revenue decreased by $16.4 million, or 6.7%, in the nine months ended September 29, 2013, as compared to the nine months ended September 30, 2012. We continue to search for organic growth opportunities, including in our digital advertising business, and for ways to stabilize print revenue declines through new product launches and pricing. However, there can be no assurance that our advertising revenue will not continue to decline. Further declines in advertising revenue could adversely affect our results of operations and financial condition.

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 strategic process upgrades that could have a material adverse financial impact if unsuccessful.

We are implementing strategic process upgrades of our business. Among other things we are implementing the standardization and centralization of systems and processes, 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 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.

 

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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 profitability 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 strategy 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. For the year ended December 30, 2012, circulation revenue decreased by $0.3 million, or 0.2%, as compared to the year ended January 1, 2012. 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.

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.

 

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

As a result of the Restructuring, which was considered a triggering event for the non-amortizable intangibles, the Company performed a valuation analysis to determine if an impairment existed as of September 29, 2013. The fair values of the Company’s reporting units for goodwill 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 and were consistent with the terms of the Plan. 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 Restructuring, the Company determined that discounted cash flows provided the best estimate of the fair value of its reporting units. The estimated fair value of the Large Daily reporting unit exceeded its carrying value and Step 2 of the analysis was not necessary. The Small Community reporting unit failed the Step 1 goodwill impairment analysis. The Company performed Step 2 of the analysis using consistent assumptions, as discussed above, and determined an impairment was not present for this reporting unit. The estimated fair value of each reporting unit’s mastheads exceeded their carrying values, using consistent assumptions as discussed above. The masthead fair value was estimated using the relief from royalty valuation method. For further information on goodwill and intangible assets, see Note 9 “Goodwill and Intangible Assets” to GateHouse’s Unaudited Condensed Consolidated Financial Statements.

Due to reductions in the Company’s operating projections during the third quarter in conjunction with the Restructuring, an impairment charge of $68,573,000 was recognized for advertiser relationships within the Company’s Metro and Small Community reporting units, an impairment charge of $19,149,000 was recognized for subscriber relationships within the Company’s Metro and Small Community reporting units, an impairment charge of $2,077,000 was recognized for customer relationships within the Company’s Metro reporting unit and an impairment charge of $1,800,000 was recognized for trade names and publication rights within the Directories business unit. Refer to Note 16 “Fair Value Measurement” for additional information on the impairment charge. For further information on the impairment charge, see Note 16 “Fair Value Measurement” to GateHouse’s Unaudited Condensed Consolidated Financial Statements.

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

 

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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.

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 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.

 

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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 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;

 

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    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.

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.

Pursuant to the Plan, we acquired substantially all of the assets of our Predecessor, GateHouse. The Restructuring resulted 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.

 

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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 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. Our Manager does not have any prior experience directly managing our Company or media-related assets. 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.

 

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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 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

 

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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 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 one of our directors, some of our officers and other employees of our Manager of shares of common stock, options, or other equity awards of Newcastle may create, or may create the appearance of, conflicts of interest.

One of our directors, and some of our officers and other employees of our Manager who provide services to us own Newcastle common stock or options to acquire Newcastle common stock, and collectively, they beneficially own approximately 9% of Newcastle common stock on a fully diluted basis. Such ownership creates, or may create the appearance of, conflicts of interest when such director, officers and other employees of our Manager 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

 

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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 2014 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, 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.

Newcastle’s board of directors has reserved the right, in its sole discretion to abandon the spin-off at any time prior to the Distribution Date. In addition, the spin-off is subject to the satisfaction or waiver (by Newcastle’s board of directors in its sole discretion) of a number of conditions. We cannot assure that any or all of these conditions will be met.

Newcastle’s board of directors has reserved the right, in its sole discretion to abandon the spin-off at any time prior to the Distribution Date. This means Newcastle may cancel or delay the planned Distribution of Common Stock of New Media if at any time the board of directors of Newcastle determines that the Distribution of such Common Stock 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. If Newcastle’s board of directors determines to cancel the spin-off, stockholders of Newcastle will not receive any Distribution of New Media Common Stock and Newcastle will be under no obligation to its stockholders to distribute such shares. In addition, the spin-off is subject to the satisfaction or waiver (by Newcastle’s board of directors in its sole discretion) of a number of conditions. See “The Spin-Off and Restructuring—Conditions to the Distribution.” We cannot assure you that any or all of these conditions will be met. The fulfillment of the conditions to the spin-off will not create any obligation on Newcastle’s part to effect the Distribution.

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;

 

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    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, any sales by Omega may lower the market prices of our Common Stock. In addition, Newcastle stockholders may sell our Common 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.

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 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

 

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Common Stock issued pursuant to the Local Media Contribution) at a strike price of $46.35 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. Commencing from the Listing, 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 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. Prior to the separation from Newcastle and the Record Date, we expect the board of directors of New Media to approve a Nonqualified Stock Option and Incentive Award Plan (the “Incentive Plan”) which will provide for the grant of equity-based awards, including restricted stock, stock options, stock appreciation rights, performance awards, restricted stock units, tandem awards and other equity-based and non-equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and advisors of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and advisors. We have initially reserved 15,000,000 shares of our Common Stock for issuance under the Incentive Plan; on the first day of each fiscal year beginning during the ten-year term of the Incentive Plan and in and after calendar year 2015, that number will be increased by a number of shares of our Common Stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year (and, in the case of fiscal year 2014, after the effective date of the Incentive Plan). For a more detailed description of the Incentive Plan, see “Management — Nonqualified Stock Option and Incentive Award Plan.”

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, 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 (provided, however, that for so long as Newcastle and certain other affiliates of Fortress and permitted transferees (collectively, the “Fortress Stockholders”) beneficially own at least 20% of our issued and outstanding Common Stock, such provisions may be amended with the affirmative vote of a majority of the voting interest of stockholders entitled to vote or by a majority of the entire Board of Directors);

 

    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 (provided, however, that for so long as the Fortress Stockholders beneficially own at least 20% of our issued and outstanding Common Stock, directors may be removed with or without cause with the affirmative vote of a majority of the voting interest of stockholders entitled to vote);

 

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    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 (provided, however, that for so long as the Fortress Stockholders beneficially own at least 20% of our issued and outstanding Common Stock, Fortress Stockholders may call 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

 

    action by our stockholders outside a meeting, in our amended and restated certificate of incorporation and our amended and restated bylaws, only by unanimous written consent (provided, however, that for so long as the Fortress Stockholders beneficially own at least 20% of our issued and outstanding Common Stock, our stockholders may act without a meeting by written consent of a majority of the voting interest of stockholders entitled to vote).

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.”

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING INFORMATION

Certain statements in this Prospectus 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 Prospectus. 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.

 

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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 February 13, 2014. On the Distribution Date, each holder of Newcastle common stock will receive 0.07219 shares of our Common Stock for each share 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 84.6% 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 Prospectus 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 Prospectus.

The Number of Shares You Will Receive

For each share of Newcastle common stock that you owned as of 5:00 PM, Eastern Time, on February 6, 2014, the Record Date, you will receive 0.07219 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 February 13, 2014, 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.

 

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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 “—Trading Between the Record Date and Distribution Date” included elsewhere in this Prospectus.

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 108 stockholders of record, based on the number of registered stockholders of Newcastle common stock on January 24, 2014, and approximately 46 holders who received our Common Stock pursuant to the Restructuring. Immediately following the Distribution, we expect to have 30,000,000 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 January 24, 2014 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 84.6% 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 Prospectus. 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. Our Common Stock has been authorized for listing on the NYSE under the symbol “NEWM,” subject to official notice of issuance.

 

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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” 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 February 13, 2014, the Distribution Date, provided that, among other conditions described in this Prospectus, the following conditions shall have been satisfied:

 

    Our registration statement on Form S-1, of which this Prospectus is a part, shall have become effective 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. Newcastle’s 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. Newcastle’s board of directors believes that media assets are currently undervalued and being sold at substantial discounts. Newcastle’s board of directors also believes that New Media’s value can be increased over time through a strategy aimed at acquiring local media assets and organically growing New Media’s digital marketing business. In addition, Newcastle’s

 

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board of directors believes New Media’s prospects would be enhanced by being able to operate unfettered by REIT requirements. Accordingly, Newcastle’s board of directors has determined that the separation of New Media from Newcastle, as opposed to a sale of New Media’s Common Stock or other transaction, will provide Newcastle’s stockholders with the best opportunity to benefit from the anticipated appreciation of New Media’s value over time and that the execution risk of a spin-off is lower than for other types of transactions. Newcastle’s board of directors’ 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 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 proposing and supporting a restructuring that resulted in the conversion of its debt into equity. Following the Restructuring, a spin-off will facilitate Newcastle’s compliance with the REIT qualification tests.

Local Media was contributed to New Media as part of the Plan. Pursuant to the Support Agreement, negotiated with the Participating Lenders, Newcastle agreed to contribute Local Media to New Media in exchange for New Media Common Stock equal to the Local Media Contribution Value. The contribution of Local Media was part of the overall consideration that Participating Lenders who elected to receive Common Stock in the Restructuring received in exchange for the extinguishment of their Outstanding Debt claims of GateHouse pursuant to the Plan.

Additionally, in determining whether to effect the spin-off, Newcastle’s board of directors also considered the costs and risks relating to the spin-off, including: (i) potential costs and disruptions to the businesses as a result of the spin-off, (ii) risks of being unable to achieve the benefits expected from the spin-off, (iii) the reaction of Newcastle’s stockholders to the spin-off, (iv) the risk that one-time and ongoing costs of the spin-off may be greater than expected and (v) the tax impact of the spin-off to Newcastle and its stockholders. Newcastle’s board of directors determined that in the aggregate the potential benefits of the spin-off outweighed the potential negative factors. See “Risk Factors—Risks Related to the Distribution” and “The Spin-Off and Restructuring—Reasons for the Distribution.”

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.”

 

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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 offered to make the Cash-Out Offer;

 

    The holders of the Outstanding Debt would have 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 Facilities;

 

    Newcastle would contribute its interests in Local Media to New Media in exchange for, pursuant to the Plan, the issuance of New Media Common Stock 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 Facilities;

 

    GateHouse would use commercially reasonable efforts, in light of market conditions and other relevant factors, to raise the New Credit Facilities, if any. GateHouse’s entry into the New Credit Facilities was not a condition to the effectiveness of the Plan.

 

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

 

    The Former Equity Holders’ interests would be cancelled, and the Former Equity Holders 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.

On September 20, 2013, GateHouse commenced the Solicitation. Under the Support Agreement, each of the Participating Lenders 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. 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”) voted to accept the Plan in the Solicitation. 100% of the holders of the Outstanding Debt voted to accept the Plan under the terms of the Support Agreement. As a result, Debtors commenced Chapter 11 cases and sought approval of the Disclosure Statement and confirmation of the Plan therein. The Plan was confirmed by the Bankruptcy Court on November 6, 2013 and GateHouse effected the transactions contemplated by the Plan to emerge from Chapter 11 protection on November 26, 2013. On the Effective Date, 100% of the new equity interests in GateHouse were issued to New Media. On the Effective Date, GateHouse and certain of its subsidiaries converted into limited liability companies. The Support Agreement terminated on the Effective Date. As of the Effective Date, Newcastle owns 84.6% of New Media’s total equity. New Media manages the assets and day-to-day operations of GateHouse pursuant to the GateHouse Management Agreement.

 

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Upon emergence from Chapter 11, we adopted 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 prior to emergence, including the historical financial information in this Prospectus.

 

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

The following is a discussion of material 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 “Material 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 discussion 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 discussion, 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 discussion does not constitute 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 discussion is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. This discussion does not address all possible tax considerations that may be material to an investor and does not constitute legal or tax advice. Moreover, this discussion 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 discussion 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 “Material 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.

 

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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

 

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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 effectively connected with a U.S. trade or business of the non-U.S. holder and will be subject to U.S. income tax

 

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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 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.

 

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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 2014 (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 2014 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.

 

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

NON-U.S. HOLDERS OF OUR COMMON STOCK

The following is a discussion 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 discussion 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 discussion, 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

 

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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.

 

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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 January 24, 2014, there were 30,000,000 shares of our Common Stock outstanding, 84.6% 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’s Outstanding Debt who elected to receive Common Stock in the Restructuring.

In connection with the spin-off, Newcastle will distribute 25,373,120 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. Our Common Stock has been authorized for listing on the NYSE under the symbol “NEWM,” subject to official notice of issuance.

Dividends

New Media expects to distribute a substantial portion of free cash flow as a dividend, subject to satisfactory financial performance and Board approval. The Board of Directors’ determinations regarding dividends will depend on a variety of factors, including the Company’s GAAP net income, free cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results.

 

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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 nine month periods ended September 29, 2013 and September 30, 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 nine months ended September 30, 2012 have been revised to reflect one of GateHouse’s publications as a discontinued operation for comparability.

Operating results for the nine months ended September 29, 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 Prospectus.

 

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    Nine Months
Ended 

September 29,
2013
    Nine Months
Ended 

September 30,
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

  $ 229,569      $ 246,010      $ 330,881      $ 357,134      $ 385,579      $ 398,927      $ 477,993   

Circulation

    102,370        98,279        131,576        131,879        133,192        138,233        141,803   

Commercial printing and other

    24,233        18,872        26,097        25,657        25,967        30,960        37,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    356,172        363,161        488,554        514,670        544,738        568,120        657,496   

Operating costs and expenses:

             

Operating costs

    200,824        202,644        268,222        281,884        296,974        324,263        368,345   

Selling, general and administrative

    121,254        107,059        145,020        146,295        154,516        159,197        179,198   

Depreciation and amortization

    30,383        30,006        39,888        42,426        45,080        54,237        69,897   

Integration and reorganization costs and management fees paid to prior owner

    1,380        3,457        4,393        5,884        2,324        1,857        7,011   

Impairment of long-lived assets

    91,599        —          —          1,733        430        193,041        123,717   

(Gain) loss on sale of assets

    1,052        534        1,238        455        1,551        (418     337   

Goodwill and mastheads impairment

    —          —          —          385        —          273,914        487,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (90,320     19,461        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

    81,178        42,819        57,463        58,361        69,520        72,502        100,530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (171,498     (23,358     (27,670     (22,753     (25,657     (510,473     (679,283

Income tax expense (benefit)

    (10,878     (207     (207     (1,803     (155     342        (21,139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

    (160,620     (23,151     (27,463     (20,950     (25,502     (510,815     (658,144

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

    (1,034     (2,093     (2,340     (699     (542     (19,287     (15,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (161,654   $ (25,244   $ (29,803   $ (21,649   $ (26,044   $ (530,102   $ (673,306
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to noncontrolling interest

    865        N/A        N/A        N/A        N/A        N/A        N/A   

Net (loss) income attributable to GateHouse Media

    (160,789     (25,244     N/A        N/A        N/A        N/A        N/A   

Basic net (loss) income from continuing operations attributable to GateHouse Media available to common stockholders per share

  $ (2.75   $ (0.40   $ (0.47   $ (0.36   $ (0.44   $ (8.90   $ (11.53

Diluted net (loss) income from continuing operations attributable to GateHouse Media available to common stockholders per share

  $ (2.75   $ (0.40   $ (0.47   $ (0.36   $ (0.44   $ (8.90   $ (11.53

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

  $ (0.02   $ (0.04   $ (0.04   $ (0.01   $ (0.01   $ (0.33   $ (0.27

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

  $ (0.02   $ (0.04   $ (0.04   $ (0.01   $ (0.01   $ (0.33   $ (0.27

Basic net (loss) attributable to GateHouse Media available to common stockholders per share

  $ (2.77   $ (0.44   $ (0.51   $ (0.37   $ (0.45   $ (9.23   $ (11.80

Diluted net (loss) attributable to GateHouse Media available to common stockholders per share

  $ (2.77   $ (0.44   $ (0.51   $ (0.37   $ (0.45   $ (9.23   $ (11.80

Basic weighted average shares outstanding

    58,068,277        58,038,673        58,041,907        57,949,815        57,723,353        57,412,401        57,058,454   

Diluted weighted average shares outstanding

    58,068,277        58,038,673        58,041,907        57,949,815        57,723,353        57,412,401        57,058,454   

 

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    Nine Months
Ended

September 29,
2013
    Nine Months
Ended 

September 30,
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

  $ (9,737   $ 24,222      $ 23,499      $ 22,439      $ 26,453      $ 2,990      $ 20,309   

Net cash used in investing activities

    (2,499     (2,014     (1,044     (731     (624     8,400        11,675   

Net cash used in financing activities

    (2,538     (4,600     (7,140     (11,249     (22,010     (13,003     (37,533

Other Data:

             

Adjusted EBITDA(1)

  $ 20,814      $ 49,500      $ 69,766      $ 80,547      $ 89,511      $ 82,571      $ 102,664   

Cash interest paid

    43,400        43,778      $ 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 Prospectus.

(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:

 

    Nine Months
Ended 

September 29,
2013
    Nine Months
Ended 

September 30,
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

  $ (160,620   $ (23,151   $ (27,463   $ (20,950   $ (25,502   $ (510,815   $ (658,144

Income tax expense (benefit)

    (10,878     (207     (207     (1,803     (155     342        (21,139

(Gain) loss on derivative instruments(h)

    14        (1,639     (1,635     (913     8,277        12,672        10,119   

Gain on early extinguishment of debt(i)

    —          —          —          —          —          (7,538     —     

Amortization of deferred financing costs

    803        994        1,255        1,360        1,360        1,360        1,845   

Write-off of financing costs

    —          —          —          —          —          743        —     

Interest expense

    69,513        43,497        57,928        58,309        60,021        64,615        88,625   

Impairment of long-lived assets

    91,599        —          —          1,733        430        193,041        123,717   

Depreciation and amortization

    30,383        30,006        39,888        42,426        45,080        54,237        69,897   

Goodwill and mastheads impairment

    —          —          —          385        —          273,914        487,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA from continuing operations

  $ 20,814 (a)    $ 49,500 (b)    $ 69,766 (c)    $ 80,547 (d)    $ 89,511 (e)    $ 82,571 (f)    $ 102,664 (g) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(a) Adjusted EBITDA for the nine months ended September 29, 2013 included net expenses of $22,419, which are one-time in nature or non-cash compensation. Included in these net expenses of $22,419 is non-cash compensation and other expense of $20,807, non-cash portion of postretirement benefits expense of $(820), integration and reorganization costs of $1,380 and a $1,053 loss on the sale of assets.

 

(b) Adjusted EBITDA for the nine months ended September 30, 2012 included net expenses of $7,684, which are one-time in nature or non-cash compensation. Included in these net expenses of $7,684 is non-cash compensation and other expense of $4,125, non-cash portion of postretirement benefits expense of $(432), integration and reorganization costs of $3,457 and a $534 loss on the sale of assets.

Adjusted EBITDA also does not include $593 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  
    September 29,
2013
    September 30,
2012
    December 30,
2012
    January 1,
2012
    December 31,
2010
    December 31,
2009
    December 31,
2008
 
    (In Thousands)  

Balance Sheet Data:

             

Total assets

  $ 426,975      $ 480,438      $ 469,766      $ 510,802      $ 546,327      $ 591,929      $ 1,149,621   

Total long-term obligations, including current maturities

    36,341        1,179,949        1,177,298        1,185,212        1,197,347        1,222,102        1,242,075   

Stockholders’ equity (deficit)

    (902,362     (829,106     (834,159     (805,632     (792,121     (753,576     (229,078

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined balance sheet as of September 29, 2013 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 29, 2013 and for the year ended December 30, 2012 are based on (i) the financial statements of New Media, which was formed on June 18, 2013 and subsequently capitalized, (ii) the audited consolidated financial statements of GateHouse for the year ended December 30, 2012, and (iii) the unaudited consolidated financial statements of GateHouse, including Local Media, as of and for the nine months ended September 29, 2013, each included in this Prospectus. New Media, GateHouse and Local Media, subsequent to the Restructuring, are collectively referred to in this section as ‘‘the Combined Company.’’

The pro forma financial information is provided for informational and illustrative purposes only and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” New Media’s historical financial statements and related notes thereto, GateHouse’s historical consolidated financial statements and notes thereto and Local Media’s historical combined financial statements and notes thereto, each included elsewhere in this Prospectus. 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. All tables are presented in thousands unless otherwise noted.

The pro forma financial information gives effect to three categories of adjustments as if the transactions reflected in such adjustments had occurred on January 2, 2012 for the unaudited pro forma condensed combined statements of operations and on September 29, 2013 for the unaudited pro forma condensed combined balance sheet. The three categories of adjustments are summarized below:

GateHouse Effects of Plan Adjustments

 

    Approximately $1.2 billion of our Predecessor’s Outstanding Debt will be cancelled and exchanged for New Media Common Stock equal in value to 40.0% of the face amount of the Outstanding Debt;

 

    the equity interests in our Predecessor will be cancelled and discharged and 100% of the new equity in the reorganized GateHouse will be issued to New Media;

 

    the Former Equity Holders will receive New Media Warrants representing the right to acquire New Media Common Stock equal to 5.0% of the New Media Common Stock as of the Effective Date;

 

    commencing from the Listing, New Media will pay its Manager a management fee equal to 1.5% per annum of its Total Equity (as defined in the Management Agreement), calculated and payable monthly in arrears in cash; and

 

    the payment of additional estimated reorganization costs of $9.8 million.

GateHouse Fresh-Start and Other Adjustments

 

    The adoption by GateHouse of fresh-start accounting, in accordance with ASC 852 upon confirmation of the Plan.

Local Media Purchase Accounting and Other Adjustments

 

    Newcastle will contribute 100% of the common stock of Local Media Parent to New Media in exchange for New Media Common Stock equal in value to the cost of Newcastle’s Local Media Acquisition; and

 

   

the impact of Local Media purchase accounting adjustments, in accordance with ASC 805. As Local Media was consolidated in GateHouse historical results beginning on September 3, 2013, the purchase accounting adjustments are therefore included in column “GateHouse Historical September 29, 2013” on the unaudited pro forma condensed combined balance sheet. The unaudited pro forma condensed

 

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combined statements of operations for the year ended December 30, 2012 and for the nine months ended September 29, 2013 include a separate column for Local Media adjustments labeled as “Local Media Purchase Accounting and Other Adjustments.”

Each of the transactions reflected in the adjustments is described in more detail below.

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 September 29, 2013, respectively. In addition, the dollar amount of new equity and stockholders’ equity in 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 after the Effective Date.

GateHouse Effects of Plan Adjustments

The “GateHouse Effects of 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, including the recapitalization, upon emergence from Chapter 11 on the Effective Date.

The Plan provides for the issuance of new equity of reorganized GateHouse to New Media and the issuance of New Media Common Stock to the holders of GateHouse’s Outstanding Debt. The estimated reorganization gain resulting from the extinguishment of the Outstanding Debt pursuant to the Plan is approximately $721.8 million less $10.3 million accumulated other comprehensive income related to derivative instruments, $4.6 million reorganization expense on allowed claims recorded on Effective Date and less estimated reorganization costs of $9.8 million. These amounts are reflected in the unaudited pro forma condensed combined balance sheet in the “GateHouse Effects of the Plan Adjustments” column in stockholders’ deficit (total $697.1 million). These amounts are not reflected in the unaudited pro forma condensed combined statement of operations because the gain is non-recurring.

For additional information regarding the “GateHouse Effects of 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 adjustments as described in more detail below before consideration of the Local Media Contribution from Newcastle. The reorganization value of GateHouse will be allocated to the fair value of net assets in conformity with ASC 852, resulting in an estimated gain of $249.9 million upon emergence. This gain is reflected in the unaudited pro forma condensed combined balance sheet but is not reflected in the unaudited pro forma condensed combined statement of operations because this gain is non-recurring.

The total GateHouse enterprise value was estimated between approximately $385.0 million to $515.0 million, with a midpoint of $450.0 million as disclosed in the Disclosure Statement presented to the Bankruptcy Court and prior to giving effect to the Plan. Management used an enterprise value of $489.9 million as the basis for determining the reorganization value for the fresh start allocation rather than the $450.0 million midpoint of the range. This enterprise value was based upon the Cash-Out Offer and equity distribution plus estimated transaction fees and the reorganized GateHouse was ascribed this value throughout the Plan. Accordingly, fresh-start adjustments are based on this assumed enterprise value of $489.9 million. Under ASC 852, reorganization value is generally allocated first to tangible assets and identifiable intangible assets, and lastly to excess reorganization value (i.e., goodwill).

 

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GateHouse estimates its reorganization value at $559.1 million as of September 29, 2013, which consists of the following:

 

Present value of discounted cash flows of GateHouse (estimated enterprise value)

   $  489,931   

Less GateHouse transaction fees

     (7,073
  

 

 

 

Total consideration

     482,858   

Non-interest bearing liabilities not subject to compromise

     76,291   
  

 

 

 

GateHouse total assets (reorganization value)

   $ 559,149   
  

 

 

 

The fresh start adjustments are only related to GateHouse, however, the following table represents the Combined Company’s total assets on the unaudited pro forma condensed combined balance sheet. Refer to the following section “Local Media Purchase Accounting and Other Adjustments” for a more detailed description of the Local Media transaction.

 

GateHouse total assets (reorganization value)

   $ 559,149   

Local Media total assets

     108,393   
  

 

 

 

Combined Company total assets

   $ 667,542   

In order to apply fresh-start reporting, ASC 852 requires two criteria to be satisfied: (1) that total post-petition liabilities and allowed claims immediately before the date of confirmation of the Plan be in excess of reorganization value, as outlined in the table below, and (2) that holders of our Predecessor’s voting shares immediately before confirmation of the Plan receive less than 50.0% of the voting shares of the emerging entity. The table below shows how the first criterion is met.

 

Estimated post-petition current liabilities

   $ 76,291   

Liabilities deferred pursuant to Chapter 11 proceeding

     1,200,023   

Additional allowed claim upon Effective Date

     4,636   
  

 

 

 

Total post-petition liabilities and allowed claims

     1,280,950   

Reorganization value

     (559,149
  

 

 

 

Excess of liabilities over reorganization value

   $ 721,801   
  

 

 

 

The second criterion is also satisfied because the equity interests in GateHouse will be canceled and the holders of the equity interests prior to the Restructuring are expected to own less than approximately 10.0% of the reorganized GateHouse equity subsequent to the confirmation, resulting in a change in control. As a result, GateHouse plans to apply fresh start reporting upon emergence from Chapter 11.

The determination of the estimated reorganization value was based on a discounted cash flow analysis. This value was reconciled to the transaction value as outlined within the Plan and was within a reasonable range of comparable market multiples. The discounted cash flow method reflects the following assumptions:

 

    Forecasted cash flows for the three months ended December 29, 2013 and the years ending 2014 through 2016. These projections are based on the following significant assumptions:

 

    Continued declines in print advertising revenue of 5.0% to 9.0% per year, which is expected to moderate in later years;

 

    Growth in circulation revenue of up to 2.0% per year;

 

    Declines in non-digital marketing services expenses of up to 4.0% per year; and

 

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    Significant growth in digital marketing services revenue, which represents approximately 2.0% of total 2013 revenues, is projected to be 13.2% of total revenues by 2016 with the digital marketing services expense projected to increase by 200% from 2013 to 2016.

 

    A terminal value, which was determined using a growth model that applied a long-term growth rate of 0.0% to GateHouse’s projected cash flows beyond 2016. The long-term growth rate was based on GateHouse’s internal projections as well as industry growth prospects;

 

    Discount rates that considered various factors including bond yields, risk premiums, and tax rates to determine a weighted-average cost of capital (“WACC”), which represents a company’s cost of debt and equity weighted by the percentage of debt and equity in a company’s target capital structure. A WACC of 13.5% was used; and

 

    An effective tax rate of 39.15% and an assumed carry-over tax basis of $673.7 million for fixed assets and intangibles. A deferred tax asset is not reflected within the fresh start opening balances given GateHouse’s history of losses.

The estimate of reorganization value assumes that forecasted cash flows will be realized, but future results may differ significantly. There can be no assurance regarding future financial results or actual reorganization value. The estimates and assumptions used are subject to significant uncertainties, many of which are beyond GateHouse’s control. The assumptions used in the discounted cash flow analysis that have the most significant effect on GateHouse’s estimated reorganization value are estimated WACC, estimated long-term growth rates, and estimated revenues.

GateHouse anticipates the digital market to continue to grow as small to medium businesses (“SMBs”) move from print to digital advertising, primarily in the areas of online and mobile websites. Recent studies indicate that 89.0% of consumers expect all businesses to have a website, while 52.0% of SMBs do not have a website and 90.0% do not have a mobile website. The Propel Marketing digital marketing business, which GateHouse launched in 2012, offers SMBs digital services, including website design, search engine optimization, mobile websites, social media, retargeting and other advertising services. GateHouse believes that Propel Marketing is well positioned to assist SMBs in the digital space and expects Propel Marketing to contribute meaningfully to revenue growth.

If our anticipated assumptions as to the factors vary significantly, they could have a significant impact on our estimate of the enterprise value.

 

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The following table summarizes the preliminary allocation of the reorganization value to the fair value of GateHouse’s assets and liabilities and the identified intangible assets pursuant to fresh start accounting based on pro forma values as of September 29, 2013. The excess of reorganization value over the amounts allocated to the identified intangible assets and the fair value of tangible assets and liabilities will be recorded as goodwill. No assurance can be given that the amount recorded as goodwill would be recoverable as part of the required annual test for goodwill impairment.

 

Current assets

   $ 72,278   

Other assets

     2,402   

Deferred financing fees

     6,152   

Property, plant and equipment

     202,902   

Advertising relationships

     62,470   

Subscriber relationships

     37,610   

Mastheads

     41,860   

Customer relationships

     5,940   

Other intangible assets

     338   

Goodwill

     127,197   
  

 

 

 

Total assets

     559,149   

Current liabilities

     60,900   

Long-term liabilities

     164,391   
  

 

 

 

Total liabilities

     225,291   

Stockholders’ equity

     333,858   
  

 

 

 

Total liabilities and stockholders’ equity

   $ 559,149   
  

 

 

 

The Company obtained third party independent appraisals to assist in the estimation of the fair values of the subscriber relationships, advertiser relationships and customer relationships related to the fresh start valuation. The appraisals used an excess earnings approach, a form of the income approach, which values assets based upon associated estimated discounted cash flows. A static pool approach using historical attrition rates was used to estimate attrition rates of 5.0% to 7.5% for advertiser relationships, subscriber relationships and customer relationships. The growth rate was estimated to be 0.0% and the discount rates were estimated to range from 14.5% to 17.0% for advertiser relationships and 14.5% to 15.5% for subscriber and customer relationships.

Estimated cash flows extend up to periods of approximately 30 years, which takes into account that a majority of GateHouse’s newspapers have been in existence for over 50 years and many have been in existence for over 100 years. The Company plans to amortize the fair values of the subscriber and advertiser relationships over the periods at which 90.0% of the cumulative undiscounted net cash flows are estimated to be realized. Therefore, the subscriber relationships, advertiser relationships and customer relationships are expected to be amortized over an approximate 15 year period, on a straight-line basis as no other discernible pattern of usage was more readily determinable. An effective tax rate of 39.15% and carry over tax basis of $673.7 million were used in the fair value calculation.

The appraisal utilized a relief from royalty method, an income approach, to determine the fair value of mastheads. Key assumptions utilized in this valuation include revenue projections, royalty rates of 1.3% to 2.0%, a long term growth rate of 0.0% and discount rates of 14.5% to 16.5%.

 

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The table below provides the estimated fair value and the fresh start fair value adjustment for each class of intangible assets:

 

     Fair Value      Fair Value Adjustment  

Goodwill

   $ 127,197       $ 113,456  

Mastheads

     41,860         6,619  

Advertiser relationships

     62,470         11,306  

Customer relationships

     5,940         3,160  

Subscriber relationships

     37,610         17,349  

Other (including Trade Names and Publication Rights)

     338         —    

The increase in the fair value of the intangible assets pursuant to fresh start accounting in the unaudited pro forma condensed combined balance sheet primarily relates to the Company’s Large Dailies reporting unit based on the valuation methodologies, operational outlook, growth rates, discount rates and attrition rates as described above.

The Company considered the filing of bankruptcy on September 27, 2013 to be an impairment triggering event for its intangible assets. As a result, for its amortized intangible assets (advertiser relationships, customer relationships, subscriber relationships, trade names and publication rights) the Company performed a recoverability test by comparing the sum of the estimated undiscounted future cash flows generated by the underlying intangible asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows in accordance with ASC 360. For nonamortized intangible assets (goodwill and mastheads), the Company also performed an impairment analysis at the reporting unit level in accordance with ASC 350.

Based on such assessments, no impairment charge was recognized in the third quarter 2013 for intangible assets related to the Large Dailies reporting unit as the estimated fair value of the Large Dailies reporting unit and the sum of the estimated undiscounted future cash flows generated by the underlying intangible assets exceeded the respective carrying value. However, in the third quarter of 2013, the Company recorded an impairment charge of $68.6 million for advertiser relationships for the Metro and Small Community reporting units, an impairment charge of $19.1 million for subscriber relationships for the Metro and Small Community reporting units, an impairment charge of $2.1 million for customer relationships for the Metro reporting unit, and an impairment charge of $1.8 million for trade names and publication rights for the Directories reporting unit. Refer to Note 9, Goodwill and Intangible Assets to the GateHouse September 29, 2013 unaudited condensed consolidated financial statements. Due to the relatively short period of time between the third quarter impairment assessment and the estimation of pro forma fresh start fair value adjustments, the valuation methodologies, operational outlook, growth rates, discount rates and attrition rates as described above were consistently applied for both the impairment assessment and the estimation of fresh start fair value adjustments.

The Company obtained third party independent appraisals to assist in the determination of the fair values of property, plant and equipment and intangible assets. The property, plant and equipment appraisal included an analysis of recent comparable sales and offerings of land parcels in each of the subject’s markets. The appraised value used the standard accepted appraisal practices and valuation procedures. Uniform Standards of Professional Appraisal Practice require that the appraiser consider three basic approaches to value: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active market is available), and the income approach (used for intangibles). These approaches are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income. Useful lives range from 1 to 14 years for personal property and 10 to 30 years for real property.

The valuations used in this Prospectus represent current estimates based on data available. However, updates to these valuations will be completed as of the fresh-start accounting date based on the results of asset

 

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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 a result, 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 significant net operating loss carryovers (“NOLs”) from GateHouse after the taxable year which includes the Effective Date. The NOLs that are remaining after the taxable year which includes the Effective Date are subject to the limitations of Code Section 382, so that these NOLs are not expected to meaningfully offset taxable income going forward.

Local Media Purchase Accounting and Other Adjustments

On September 3, 2013, Newcastle completed the acquisition of Local Media from News Corp. The Local Media operations are managed by GateHouse, pursuant a management and advisory agreement. As a result of this agreement, management determined that Local Media is a variable interest entity and that GateHouse is the primary beneficiary because it has both the power to direct the activities that most significantly impact the economic performance of Local Media and it participates in the residual returns of Local Media that could be significant to Local Media. Because GateHouse is the primary beneficiary, it consolidated Local Media beginning September 3, 2013.

As part of the Plan, Newcastle has agreed to contribute 100% of the stock of Local Media Parent to New Media as of the Effective Date. The contribution is made to New Media to assign Newcastle’s rights under the stock purchase agreement to which it acquired Local Media as of the Effective Date. Consideration to be received by Newcastle will be the New Media Common Stock collectively equal to the cost of the Local Media Acquisition (as adjusted pursuant to the Plan) upon emergence from Chapter 11 on the Effective Date.

The Company will account for the consolidation of Local Media under the purchase method of accounting in accordance with ASC 805 as New Media will have a controlling financial interest in Local Media as of the Effective Date. Accordingly, the assets acquired and liabilities assumed will be recorded at their acquisition date fair values. New Media’s $56.3 million acquisition value as of the Effective Date is derived from the Local Media Acquisition Value of $53.8 million plus estimated additional working capital funding of $2.5 million made by Newcastle. Such acquisition value is not materially different from the acquisition value allocated upon GateHouse’s consolidation of Local Media in accordance with ASC 805 on September 3, 2013. Any excess of the acquisition value over the fair value of assets acquired and liabilities assumed was allocated to goodwill. As the numbers in the pro forma may change, the allocated goodwill is subject to significant change.

As Local Media was consolidated in GateHouse historical results beginning on September 3, 2013, the purchase accounting adjustments are therefore included in column “GateHouse Historical September 29, 2013” on the unaudited pro forma condensed combined balance sheet. The unaudited pro forma condensed combined statements of operations for the year ended December 30, 2012 and for the nine months ended September 29, 2013 include a separate column for Local Media adjustments labeled as “Local Media Purchase Accounting and Other Adjustments.”

 

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The following table summarizes the preliminary allocation of the acquisition value of $56.3 million to the fair value of Local Media’s assets and liabilities and the identified intangible assets based on pro forma values as of September 29, 2013. The excess of acquisition value over the amounts allocated to the identified intangible assets and the fair value of tangible assets and liabilities will be recorded as goodwill. No assurance can be given that the amount recorded as goodwill would be recoverable as part of the required annual test for goodwill impairment.

 

Current assets

   $ 26,747   

Property, plant and equipment

     72,786   

Mastheads

     4,100   

Goodwill

     1,845   

Other Assets

     2,915   
  

 

 

 

Total assets

     108,393   

Current liabilities

     19,147   

Long term liabilities

     32,907   
  

 

 

 

Total liabilities

     52,054   
  

 

 

 

Net assets acquired

   $ 56,339   
  

 

 

 

The Company obtained third party independent appraisals to assist in the determination of the fair values of property, plant and equipment and intangible assets. The property, plant and equipment appraisal included an analysis of recent comparable sales and offerings of land parcels in each of the subject’s markets. The appraised value is supported by the consideration paid and was determined using standard generally accepted appraisal practices and valuation procedures. The appraiser used the three basic approaches to value: the cost approach (used for equipment where an active secondary market is not available and building improvements), the direct sales comparison (market) approach (used for land and equipment where an active secondary market is available) and the income approach (used for intangible assets). These approaches used are based on the cost to reproduce assets, market exchanges for comparable assets and the capitalization of income. Useful lives range from 1 to 7 years for personal property and 17 to 38 years for real property.

The appraisal utilized a relief from royalty method, an income approach, to determine the fair value of mastheads. Key assumptions utilized in this valuation include revenue projections, a royalty rate of 1.5%, a long term growth rate of 0.0%, a tax rate of 39.15% and a discount rate of 25.0%. Based on estimated discount rates, attrition levels and other available data, the advertiser and subscriber relationships were determined to have a fair value of $0.0.

Trade accounts receivable, having an estimated fair value of $13.4 million, were included in the acquired assets. The gross contractual amount of these receivables was $14.9 million and the contractual cash flows not expected to be collected was estimated at $1.5 million as of the acquisition date.

Local Media accounted for inventory using a weighted cost methodology, which was deemed to approximate fair value. The FIFO valuation method will be utilized after the acquisition and is consistent with GateHouse’s inventory valuation. The difference between the weighted average and FIFO methodology is not expected to have a material effect on the results of operations.

For tax purposes, the amount of goodwill that is expected to be deductible is $0.5 million for Local Media.

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. Local Media results from September 3, 2013 are included in the historical GateHouse results of operations. The historical results of Local Media for the eight months ended September 2, 2013 were derived by taking the historical results of operations of Local Media for

 

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the year ended June 30, 2013, and subtracting Local Media’s historical results of operations for the six months ended December 30, 2012, and adding the two months of historical results of operations from July 1, 2013 to September 2, 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 had revenue of $28,320 and net income of $1,505 for the two month period from July 1, 2013 to September 2, 2013.

 

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

September 29, 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   

 

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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
    GateHouse
Pro Forma
    Local Media
Historical
December 30,
2012
    Local Media
Purchase
Accounting
and Other
Adjustments
    Pro Forma
December 30,
2012
 

Revenues:

               

Advertising

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

Circulation

    —          131,576            131,576        52,203          183,779   

Commercial printing and other

    —          26,097            26,097        24,017          50,114   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

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

Operating costs and expenses:

               

Operating costs

    —          268,222          (894 )(g)      267,328        139,220        (55,886 )(k)      350,662   

Selling, general, and administrative

    —          145,020        5,838  (a)        150,858          55,886  (k)      206,744   

Depreciation and amortization

    —          39,888          (14,317 )(h)      25,571        7,975        3,369  (l)      36,915   

Integration and reorganization costs

    —          4,393            4,393            4,393   

Impairment of long-lived and intangible assets

            —          197,869          197,869   

Loss (gain) on sale of assets

    —          1,238            1,238            1,238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    —          29,793        (5,838     15,211        39,166        (180,515     (3,369     (144,718

Interest expense

    —          57,928        (45,624 )(b)        12,304          2,475  (m)      14,779   

Amortization of deferred financing costs

    —          1,255        (93 )(c)        1,162          382  (m)      1,544   

(Gain) loss on derivative instruments

    —          (1,635     1,635  (d)        —              —     

Other (income) expense

    —          (85         (85         (85
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    —          (27,670     38,244        15,211        25,785        (180,515     (6,226     (160,956

Income tax (benefit) expense

    —          (207     7,370  (f)      2,932  (i)      10,095        (32,767     (40,342 )(n)      (63,014
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

  $ —        $ (27,463   $ 30,874      $ 12,279      $ 15,690      $ (147,748   $ 34,116      $ (97,942
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

               

Basic and diluted:

               

Loss from continuing operations

  $ —        $ (0.47               (3.26 )(j) 

Basic weighted average
shares outstanding

    —          58,041,907                  30,000,000 (j) 

Diluted weighted average shares outstanding

    —          58,041,907                  30,000,000 (j) 

 

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NEW MEDIA INVESTMENT GROUP AND SUBSIDIARIES

Unaudited Pro Forma Condensed Combined Statements of Operations

(In thousands, except share and per share data)

 

    Nine Months Ended September 29, 2013  
    New Media
September 29,
2013
    GateHouse
Historical
September 29,
2013
    GateHouse
Effects
of The Plan
Adjustments
    GateHouse
Fresh Start
and Other
Adjustments
    GateHouse
Pro Forma
    Local Media
Historical
September 2,
2013
    Local Media
Purchase
Accounting
and Other
Adjustments
    Pro Forma
September 29,
2013
 

Revenues:

               

Advertising

  $   —        $ 229,569          $ 229,569      $ 52,308        $ 281,877   

Circulation

    —          102,370            102,370        33,855          136,225   

Commercial printing and other

    —          24,233            24,233        17,372          41,605   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    —          356,172        —          —          356,172        103,535        —          459,707   

Operating costs and expenses:

               

Operating costs

    —          200,824          (571 )(g)      200,253        93,358        (34,131 )(k)      259,480   

Selling, general, and administrative

    —          121,254        (2,004 )(a,e)        119,250          34,131  (k)      153,381   

Depreciation and amortization

    —          30,383          (11,205 )(h)      19,178        5,351        2,212  (l)      26,741   

Integration and reorganization costs

    —          1,380            1,380            1,380   

Impairment of long-lived and intangible assets

    —          91,599            91,599        42,268          133,867   

(Gain) loss on sale of assets

    —          1,052            1,052            1,052   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    —          (90,320     2,004        11,776        (76,540     (37,442     (2,212     (116,194

Interest expense

    —          69,513        (60,003 )(b)        9,510          1,650 (m)      11,160   

Amortization of deferred financing costs

    —          803        101 (c)        904          255 (m)      1,159   

Loss (gain) on derivative instruments

    —          14        (14 )(d)        —              —     

Other expense (income)

      1,005            1,005            1,005   

Reorganization items, net

    —          9,843        (9,843 )(e)        —              —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

    —          (171,498     71,763        11,776        (87,959     (37,442     (4,117     (129,518

Income tax expense (benefit)

    —          (10,878     (20,237 )(f)      (3,321 )(i)      (34,436     (13,742     (2,528 )(n)      (50,706
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

  $ —        $ (160,620   $ 92,000      $ 15,097      $ (53,523   $ (23,700   $ (1,589   $ (78,812
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

               

Basic and diluted:

               

Loss from continuing operations

  $ —        $ (2.75             $ (2.63 )(j) 

Basic weighted average shares outstanding

    —          58,068,277                  30,000,000 (j) 

Diluted weighted average shares outstanding

    —          58,068,277                  30,000,000 (j) 

 

GateHouse Effects of the Plan Adjustments

 

(a)

Commencing from the Listing, we will pay our Manager a management fee equal to 1.5% per annum of Total Equity (as defined in the Management Agreement) calculated and payable monthly in arrears in cash. Total equity is generally the equity transferred by Newcastle to the Company upon Listing, 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 transferred to the Company prior to or after the date of the Management Agreement, less capital distributions and repurchases of common stock. In addition to the management fee and commencing from the Listing, our Manager will be eligible to receive on a quarterly basis annual incentive compensation in an amount equal to the product of 25.0% of the dollar amount by which (a) the adjusted net income of the Company

 

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  exceeds (b)(i) the weighted daily average total equity (plus cash capital raising costs), multiplied by (ii) a simple interest rate of 10.0% per annum.

This adjustment reflects the impact of the management fee and is calculated based on the pro forma financial information. A Total Equity value of $389.2 million, which is equal to the New Media pro forma additional paid in capital line item as reflected in the unaudited pro forma condensed combined balance sheet, was used in the calculation and resulted in a management fee of $5.8 million for the year ended December 30, 2012 and $4.4 million for the nine months ended September 29, 2013. The adjusted net loss, which excludes depreciation and amortization and adjusts for cash taxes, was $124.0 million for the year ended December 30, 2012 and $102.8 million for the nine months ended September 29, 2013 and resulted in no incentive compensation for the year ended December 30, 2012 and nine months ended September 29, 2013, respectively. The table below sets forth the calculation of the incentive compensation:

 

     Year ended
December 30,
2012
    Nine months ended
September 29,
2013
 

New Media pro forma net loss

   $ (97,942   $ (78,812

Plus: income taxes

     (63,014     (50,706

Plus: depreciation and amortization

     36,915        26,741   

Less: cash taxes

     —          —     
  

 

 

   

 

 

 

Adjusted net loss

     (124,041     (102,777

10% of pro forma Total Equity

     38,920        38,920   
  

 

 

   

 

 

 

Adjusted net income less 10% of pro forma Total Equity

     —          —     
  

 

 

   

 

 

 

Incentive compensation at 25% of the excess of adjusted net income over 10% of pro forma Total Equity

   $ —        $ —     
  

 

 

   

 

 

 

 

(b) The Plan provided for substantial changes to our debt structure. The interest expense adjustments will result in a net decrease of $45.6 million for the year ended December 30, 2012 and $60.0 million for the nine months ended September 29, 2013. The table below provides the calculation of the pro forma interest expense:

 

     Year ended
December 30,
2012
    Nine months ended
September 29, 2013
 

Interest expense on New Credit Facilities at 8.06%

   $ 12,090      $ 9,068   

Original issuance discount accretion

     189        142   

Elimination of interest expense on prepetition claims

     (57,903     (69,213
  

 

 

   

 

 

 

Total decrease to interest expense adjustments

   $ (45,624 )    $ (60,003 ) 
  

 

 

   

 

 

 

We estimate our weighted average interest rate on our New Credit Facilities to be approximately 8.06%. A 1/8% increase or decrease in our expected weighted average interest rate, including from an increase in LIBOR (excluding the impact of the LIBOR floor), would increase or decrease interest expense on our exit financing by approximately $0.2 million annually.

 

     Drawn      Rate     Weighted Average  

Revolving Credit Facility

   $ 25,000         3.45     0.58

Term Loan A

     25,000         5.00     0.83

Term Loan B

     50,000         8.75     2.92

Second Lien Credit Facility

     50,000         11.20     3.73
  

 

 

      

 

 

 
   $ 150,000           8.06 % 
  

 

 

      

 

 

 

 

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(c) The Company expects to defer approximately $6.2 million of additional financing fees, as reflected in the unaudited pro forma condensed combined balance sheet, that are directly attributable to the receipt of proceeds from the New Credit Facilities. This amount includes arrangement fees, legal, appraisal and other related costs and was estimated based on closing costs of the New Credit Facilities. The following table presents the pro forma impact of the deferred financing fees associated with the New Credit Facilities and those associated with the Outstanding Debt.

 

     Year ended
December 30,
2012
    Nine months ended
September 29,
2013
 

Total new deferred financing fees

   $ 6,152      $
6,152
  

Amortization period

     5-6 years        5-6 years   

New deferred financing fees

     1,162        872   

Elimination of deferred financing fees on Outstanding Debt

     (1,255     (771
  

 

 

   

 

 

 

Total deferred financing fee adjustments

   $ (93 )    $ 101   
  

 

 

   

 

 

 

 

(d) 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.
(e) Reflects the elimination of our bankruptcy-related restructuring expenses that were reorganized prior to the Chapter 11 filing of $6.4 million and reorganization items incurred during Chapter 11 of $9.8 million.
(f) This adjustment provides the estimated impact of income tax expense or benefit based on the Combined Company’s estimated effective tax rate of 39.15%.

The table below provides a calculation of the pro forma income tax expense for GateHouse for the year ended December 30, 2012:

 

Historical GateHouse pre-tax net loss

   $ (27,670

Effects of plan adjustments

     38,244   

Fresh start and other adjustments

     15,211   
  

 

 

 

GateHouse pro forma pre-tax net income

   $ 25,785   

Effective tax rate

     39.15
  

 

 

 

Income tax expense

   $ 10,095   
  

 

 

 

The table below provides a recalculation of the pro forma income tax benefit for GateHouse for the nine months ended September 29, 2013:

 

Historical GateHouse pre-tax net loss

   $ (171,498

Effects of plan adjustments

     71,763   

Fresh start and other adjustments

     11,776   
  

 

 

 

GateHouse pro forma pre-tax net loss

   $ (87,959

Effective tax rate

     39.15
  

 

 

 

Income tax benefit

   $ 34,436   
  

 

 

 

GateHouse Fresh-Start and Other Adjustments

(g) This adjustment will modify historical rent expense to the amounts computed based on recording leases at their fair value. The impact of resetting escalating lease terms to their new straight line expense recognition will increase rent expense by $0.2 million and $0.1 million for the year ended December 30, 2012 and nine months ended September 29, 2013, respectively. Three leases were rejected and six leases were modified which resulted in a reduction in rent expense of $0.7 million and $0.5 million for the year ended December 30, 2012 and nine months ended September 29, 2013, respectively.

 

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     As part of the fresh start valuation, leases were reviewed to determine if terms were favorable or unfavorable compared to current market conditions. Based on a comparison of contractual lease terms and current market lease rates, six leases were identified as unfavorable and a $1.0 million liability, $0.4 million current and $0.6 million long term, will be recognized for the year ended December 30, 2012. The amortization of the unfavorable lease liability will result in a decrease in rent expense of $0.4 million for the year ended December 30, 2012 on an annual basis and $0.2 million for the nine months ended September 29, 2013. No leases were identified as having favorable terms.
(h) 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 GateHouse’s property, plant and equipment exceeds its carrying value by approximately $97.1 million and its intangible assets carrying value exceeds its fair value by approximately $38.4 million based on the current estimate. This adjustment will modify 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.

The following tables provide the details on the depreciation and amortization adjustments:

 

     Year ended
December 30,
2012
    Nine months ended
September 29,
2013
 

Estimated GateHouse Successor company depreciation

   $ 18,243      $ 13,682   

Elimination of GateHouse Predecessor company depreciation

     (16,305     (12,944
  

 

 

   

 

 

 

Total increase in depreciation adjustments

   $ 1,938      $ 738   
  

 

 

   

 

 

 

 

     Year ended
December 30,
2012
    Nine months ended
September 29,
2013
 

Estimated GateHouse Successor company amortization

   $ 7,328      $ 5,496   

Elimination of GateHouse Predecessor company amortization

     (23,583     (17,439
  

 

 

   

 

 

 

Total decrease in amortization adjustments

   $ (16,255   $ (11,943
  

 

 

   

 

 

 

 

(i) This adjustment provides the estimated impact of income tax expense or benefit, related to fresh-start accounting adjustments, at an estimated effective tax rate of 39.15% for the Combined Company. Refer to note (f) for tax impacts.

 

(j) Our Predecessor’s existing equity interests outstanding as of the Effective Date were cancelled pursuant to the Plan. New Media issued 30,000,000 shares of New Media Common Stock (par value of $0.01 per share) with a value of $396.3 million, less transaction fees of $7.1 million. The pro forma basic and diluted loss per share for the year ended December 30, 2012 is estimated to be $3.26 and the pro forma basic and diluted loss per share for the nine months ended September 29, 2013 is estimated to be $2.63.

 

     Year ended
December 30, 2012
    Nine months ended
September 29, 2013
 

Pro forma net loss

   $ (97,942   $ (78,812

New Media Common Stock outstanding

     30,000        30,000   
  

 

 

   

 

 

 

Pro forma earnings per share (amounts in dollars)

   $ (3.26   $ (2.63
  

 

 

   

 

 

 

 

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In addition, on the Effective Date Former Equity Holders were deemed to have been issued 1,362,479 New Media Warrants with an estimated fair value of $1.0 million and exercisable for shares of New Media Common Stock at a price of $46.35 per share. The New Media Warrants expire ten years from the Effective Date. For further information about the New Media Warrants, refer to note (t) to the unaudited pro forma condensed combined balance sheet.

We did not include any potential shares issuable upon exercise of the Warrants in the diluted loss per share calculation as their effect would have been anti-dilutive to the per share calculations.

Local Media Purchase Accounting and Other Adjustments

(k) Historical results for Local Media reported operating expense, which includes both operating and selling, Local Media Purchase Accounting and Other Adjustments general and administrative expenses. This adjustment allocates expense to both categories to conform to our Predecessor Statement of Operations classification.
(l) In accordance with ASC 805, the purchase price of Local Media is allocated to the fair value of its assets and liabilities. The fair value of its property, plant and equipment exceeded its carrying value as of the acquisition date by approximately $9.4 million and the carrying value of its intangible assets exceeds its fair value by approximately $0.3 million. The unaudited pro forma condensed combined statement of operations reflects the depreciation and amortization adjustment based on the fair value. The pro forma adjustments to depreciation expense include an increase of $3.4 million for the year ended December 30, 2012 and $2.2 million for the nine months ended September 29, 2013. No adjustment was made for amortization expense.
(m) 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 1.00%, plus 6.50%. Financing costs of $1.9 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 1/8 of a percent change in LIBOR, after the 1.0% minimum is exceeded, would result in a $41,000 change in interest expense.

The following table provides the interest expense and financing fee amortization.

 

     Year ended
December 30,
2012
     Nine months
ended
September 29,
2013
 

Interest expense on Local Media financing at 7.50%

   $ 2,475       $ 1,650   

Deferred financing fees amortized over 5 years

   $ 382       $ 255   

 

(n) 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%.

 

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Table of Contents

NEW MEDIA INVESTMENT GROUP AND SUBSIDIARIES Unaudited Pro Forma Condensed Combined Balance Sheet (In thousands)

 

    As of September 29, 2013  
    New Media
Historical
September 29,

2013
    GateHouse
Historical
September 29,

2013
    GateHouse
Effects
of The Plan
Adjustments
    GateHouse
Fresh Start
and Other
Adjustments
    Pro Forma
September 29,

2013
 

Assets

         

Current assets:

         

Cash and cash equivalents

  $   —        $ 19,753      $ (15,920 )(o)      $ 3,833   

Restricted cash

    —          6,467            6,467   

Accounts receivable, net

    —          63,134            63,134   

Inventory

    —          7,071            7,071   

Prepaid expenses

    —          7,929            7,929   

Other current assets

    —          10,591            10,591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    —          114,945        (15,920     —          99,025   

Property, plant, and equipment, net

    —          178,625          97,063  (v)      275,688   

Goodwill

    —          14,204        1,382  (p)      113,456  (v)      129,042   

Intangible assets, net

    —          113,884          38,434  (v)      152,318   

Deferred financing costs, net

    —          1,891        6,152  (q)        8,043   

Other assets

    —          2,952            2,952   

Assets held for sale

    —          474            474   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ —        $ 426,975      $ (8,386   $ 248,953      $ 667,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ (Deficit) Equity

         

Current liabilities:

         

Current portion of long-term liabilities

  $   —        $ 700          $ 700   

Current portion of long-term debt

      609        2,625 (q)        3,234   

Accounts payable

    —          11,948            11,948   

Accrued expenses

    —          35,055          150  (w)      35,205   

Accrued interest

    —          186            186   

Deferred revenue

    —          31,399            31,399   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    —          79,897        2,625        150        82,672   

Long-term liabilities:

         

Long-term debt

    —          32,391        146,375 (q)        178,766   

Long-term liabilities, less current portion

    —          2,641          (505 )(w)      2,136   

Pension and other postretirement benefit obligations

    —          14,385          (614 )(x)      13,771   

Liabilities subject to compromise

    —          1,200,023        (1,200,023 )(r)        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    —          1,329,337        (1,051,023     (969     277,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ Equity (deficit)

         

Common stock

    —          568          (568 )(y)      —     

Common stock warrants

    —          —          995  (s)      —          995   

Additional paid-in capital

    —          831,369        389,202  (p,t)      (831,369 )(y)      389,202   

Accumulated other comprehensive loss

    —          (17,241     10,302  (u)      6,939  (y)      —     

Accumulated (deficit) income

    —          (1,771,706     697,096  (u)      1,074,610  (y)      —     

Treasury stock

    —          (310       310  (y)      —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total GateHouse Media stockholders’ equity (deficit)

    —          (957,320     1,097,595        249,922        390,197   

Noncontrolling interest

      54,958        (54,958 (p)        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

      (902,362     1,042,637        249,922        390,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

  $ —        $ 426,975      $ (8,386   $ 248,953      $ 667,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

GateHouse Effects of the Plan Adjustments

(o) This adjustment to Cash and cash equivalents reflects the estimated payment of $9.8 million of additional reorganization related expenses and the estimated payment of $6.2 million of deferred financing fees on the New Credit Facilities.

 

(p)

As part of the Plan, Newcastle has agreed to contribute 100% of the stock of Local Media Parent to New Media as of the Effective Date. The contribution is made to New Media to assign Newcastle’s rights under the stock purchase agreement to which it acquired Local Media as of the Effective Date. Consideration to be

 

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  received by Newcastle will be the New Media Common Stock collectively equal to the cost of the Local Media Acquisition (as adjusted pursuant to the Plan) upon emergence from Chapter 11 on the Effective Date.

The Company will account for the consolidation of Local Media under the purchase method of accounting in accordance with ASC 805. Accordingly, the assets acquired and liabilities assumed will be recorded at their acquisition date fair values. Any excess of the acquisition value over the fair value of assets acquired and liabilities assumed will be allocated to goodwill. The non-controlling interest of $55.0 million will be eliminated and $56.3 million of additional paid in capital and a $1.4 million adjustment to goodwill will be recorded as New Media will obtain controlling financial interest in Local Media as of the Effective Date. Refer to notes (t) and (v) for further information.

The adjustment to goodwill results from New Media’s application of ASC 805 as compared to the previously recognized goodwill recognized by GateHouse upon the consolidation of Local Media on September 3, 2013. As the numbers in the pro forma may change, the allocated goodwill is subject to significant change.

 

(q) The Loan Parties entered into $165.0 million financing facilities (collectively referred to as the “New Credit Facilities”) consisting of:

 

    $40.0 million revolving credit facility (“Revolving Credit Facility”)

 

    $25.0 million first lien credit facility term loan A (“Term Loan A”)

 

    $50.0 million first lien credit facility term loan B (“Term Loan B,” collectively with Term Loan A and the Revolving Credit Facility, the “First Lien Credit Facility”)

 

    $50.0 million second lien term loan credit facility (“Second Lien Credit Facility” and together with the First Lien Credit Facility, the “New Credit Facilities”)

The following table summarizes the amounts drawn as of the Effective Date and the related interest rates. All of the tranches have options for interest at a LIBOR based rate or a prime based rate otherwise referred to as an alternative base rate. The Company selected the use of the LIBOR rate on the Effective Date.

 

     Drawn     

Rate

Revolving Credit Facility

   $ 25,000       LIBOR + 3.25%

Term Loan A

     25,000       LIBOR+ 4.25%, LIBOR floor of 0.75%

Term Loan B

     50,000       LIBOR + 8.0%, LIBOR floor of 0.75%

Second Lien Credit Facility

     50,000       LIBOR + 11.0%

Total drawn on the Effective Date

   $ 150,000      

Principal amounts outstanding under Term Loan A and Term Loan B of the First Lien Credit Facility will be payable in quarterly installments as follows: (I) four consecutive quarterly installments each in the amount of $875,000, commencing on January 1, 2014, (II) four consecutive quarterly installments each in the amount of $1,250,000, commencing on January 1, 2015, and (III) twelve consecutive quarterly installments each in the amount $2,000,000, commencing on January 1, 2016, followed by a final payment of all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses which will be fully due and payable on November 26, 2018. The principal payments will be applied against Term Loan A until fully paid, and then to Term Loan B. The outstanding principal of the Second Lien Credit Facility will be fully due and payable on the maturity date of November 26, 2019. Only interest payments are due under the Second Lien Credit Facility until maturity.

Pursuant to the Plan, holders of the Outstanding Debt who elected to receive New Media Common Stock received their pro rata share of the proceeds of the New Credit Facilities, net of certain transaction expenses. The net proceeds distributed to holders of the Outstanding Debt totaled $149.0 million. The proceeds of additional borrowings of the Revolving Credit Facility under the First Lien Credit Facility after the

Effective Date will be applied towards ongoing working capital needs, general corporate purposes, capital expenditures and potential acquisitions.

 

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In addition, the New Credit Facilities contain customary restrictive covenants, including, but not limited to, restrictions on the ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets with usual and customary exceptions to such limitations.

The New Credit Facilities also contain certain customary events of default, including, without limitation, payment defaults, cross-defaults, breaches of representations and warranties, covenant defaults, certain events of bankruptcy and insolvency, certain customary ERISA events, judgment defaults, change of control and failure of any guaranty or security document supporting the facility to be in full force and effect.

The New Credit Facilities have a Fixed Charge Coverage Ratio, Maximum Leverage Ratio and Minimum EBITDA amounts which must be tested quarterly.

In conjunction with our new borrowings, we incurred approximately $6.2 million of deferred financing fees and approximately $1.0 million in original issuance costs. The deferred financing fees will be amortized on the straight-line method over the lives of the financing facilities as straight-line approximates the effective interest method. The original issuance costs associated with the financing facilities are reflected as a reduction to the carrying value of the debt. The carrying value is accreted up to face value over the term of the debt. The table below details these amounts and the related amortization period:

 

     Total Amounts      Amortization Period  

Deferred financing fees

   $ 6,152         5-6 years   

Original issuance costs

     1,000         5-6 years   
  

 

 

    

 

 

 

Total

   $ 7,152         5-6 years   
  

 

 

    

 

 

 

 

(r) This adjustment removes historical long-term debt, derivative instruments and accrued interest balances as a result of the Restructuring.

 

(s) Former Equity Holders will receive New Media Warrants representing the right to acquire equity equal to 5.0% 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 contribution, 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 were valued at $0.73 per share using the Black-Scholes valuation model. Significant assumptions used in determining the fair value of such warrants at issuance included an assumed dividend yield of 6.9%, share price volatility of 41.7% and a risk-free rate of return of 2.7% with a 10 year term. The dividend yield and volatility assumption were based on the implied volatility and historical realized volatility for comparable companies. The risk-free rate assumption was based on 10-year U.S. Treasury bond yields. On the Effective Date, Former Equity Holders were deemed to have been issued 1,362,479 New Media Warrants with a value of $1.0 million.

 

(t) This adjustment reflects the net additional paid in capital resulting from the exchange of approximately $1.2 billion Outstanding Debt at 40% for New Media Common Stock plus the contribution of Local Media, plus the estimated working capital funding provided by Newcastle, less the New Credit Facilities’ net proceeds distributed to Outstanding Debt holders as follows:

 

Exchange by Newcastle of $547.8 million Outstanding Debt acquired other than in the Cash-Out Offer for New Media Common Stock

   $ 219,125   

Exchange by Newcastle of $441.5 million Outstanding Debt acquired in the Cash-Out Offer for New Media Common Stock

     176,615   

Exchange by debtholders other than Newcastle of $215.3 million Outstanding Debt for New Media Common Stock

     86,123   

Contribution by Newcastle of Local Media for New Media Common Stock

     56,339   

Less New Credit Facility net proceeds

     (149,000
  

 

 

 

Total adjustment to additional paid in capital

   $ 389,202   
  

 

 

 

 

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(u) This adjustment reflects the net effect of the transaction related to the consummation of the Plan on our Predecessor’s accumulated deficit and accumulated other comprehensive loss.

The table below provides a summary of the adjustments to accumulated deficit as it pertains to the Plan:

 

Liabilities subject to compromise eliminated:

  

Secured indebtedness of $1,167,450 and accrued interest outstanding of $4,133

   $ 1,171,583   

Derivative instrument liability

     28,440   
  

 

 

 

Total liabilities subject to compromise eliminated

     1,200,023   

Additional allowed claim upon Effective Date

     4,636   

Consideration given:

  

Issuance of New Media common stock

     (332,863

Issuance of New Media warrants

     (995

Issuance of New Credit Facilities, net

     (149,000
  

 

 

 

Gain on extinguishment of debt

     721,801   

OCI derivative instruments

     (10,302

Reorganization expense on allowed claims recorded upon Effective Date

     (4,636

Payments of reorganization expenses related to professional fees, chapter 11 exit costs and bank fees

     (9,767
  

 

 

 

Total adjustment to accumulated deficit

   $ 697,096   
  

 

 

 

The adjustment to accumulated other comprehensive loss reflects the elimination of the derivative instruments which will be extinguished pursuant to the Plan.

GateHouse Fresh-Start and Other Adjustments

 

(v) 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. The reorganization value of assets in excess of amounts allocated to identified tangible and intangible assets will be recorded as Successor company goodwill. See “GateHouse Fresh Start and Other Adjustments” section for the discussion of the valuation of property, plant and equipment and intangible assets and the table below for how goodwill is estimated.

 

Business enterprise value

   $ 489,931   

Less: Transaction fees

     (7,073

Add: Fair value of liabilities excluded from enterprise value

     76,291   

Less: Fair value of tangible assets

     (283,734

Less: Fair value of identified intangible assets

     (148,218
  

 

 

 

Reorganization value of assets in excess of amounts allocated to identified tangible and intangible assets (Successor company goodwill)

   $ 127,197   
  

 

 

 

The remaining portion of the goodwill of $1.8 million represents Local Media goodwill, which is

compromised of $0.4 million in the historical balance as of September 29, 2013 and the Plan

Effect adjustment of $1.4 million. Refer to Note (p) for further discussion on the fair value

allocation of Local Media.

 

(w)

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. At September 29, 2013, accrued expenses and long-term liabilities, less current portion included $0.2 million and $1.1 million

 

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  related to leases with escalating payment terms. This adjustment eliminates those historical balances. The income approach was used to value the leases. Key assumptions included contract rent (the physical attributes of the lease location, lease commencement date, future rent adjustments, termination dates and relevant option terms), market rent, options, and discount rate. As part of the fresh start valuation, leases were reviewed to determine if terms were favorable or unfavorable. Based on a comparison of contractual lease terms and current market lease rates, eight leases were identified as unfavorable and a $1.0 million liability, $0.4 million current and $0.6 million long term, was recognized.
(x) 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 valuation assumptions were consistent with those used as of December 30, 2012. However, the discount rate for the pension plan is estimated at 4.5%, and the postretirement medical and life plan is estimated at 3.9%. 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.
(y) Our Predecessor’s stockholders’ deficit accounts have been eliminated in accordance with fresh- start accounting.

 

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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 19 to GateHouse’s Consolidated Financial Statements and Note 18 to GateHouse’s Unaudited Condensed Consolidated Financial Statements.

The following discussion is based on the consolidated financial statements of GateHouse, included in this Prospectus (the “Prospectus”). The following discussion of GateHouse’s financial condition and results of operations should be read in conjunction with this entire Prospectus, including the “Risk Factors” section and GateHouse’s consolidated financial statements and the notes to those statements appearing elsewhere in this Prospectus. 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 Prospectus 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 restructuring of GateHouse (the “Restructuring”), all debt, including derivative liabilities and deferred financing assets, was eliminated on November 26, 2013, the effective date (the “Effective Date”) of the pre-packaged plan under Chapter 11 of title 11 of the United States Bankruptcy Code (the “Plan”). This resulted 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 Prospectus.

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 strategy is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, including the acquisition of Local Media Group Inc. (f/k/a Dow Jones Local Media Group, Inc) (“Local Media”), which includes 435 community publications, 353 related websites, 329 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:

 

    86 daily newspapers with total paid circulation of approximately 771,000;

 

    252 weekly newspapers (published up to three times per week) with total paid circulation of approximately 324,000 and total free circulation of approximately 704,000;

 

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    97 “shoppers” (generally advertising-only publications) with total circulation of approximately 1.9 million;

 

    353 locally focused websites and 329 mobile sites, which extend our businesses onto the internet and mobile devices with approximately 96 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.

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 September 29, 2013, Fortress beneficially owned approximately 39.6% of our outstanding common stock.

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 businesses, broad customer base and reliance on smaller markets. We may experience additional declines and volatility in the future. 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.

 

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

Recent Developments

Industry

The newspaper industry and our Company have experienced declining same store revenue and profitability over the past several years. These trends eliminated the availability to GateHouse of additional borrowings under the 2007 Credit Facility, as defined below. 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, together with the Restructuring described below, will provide the appropriate capital structure and 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. The Company expects that it will have adequate capital resources and liquidity to meet its working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.

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.

Restructuring

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 pursuant to the consummation of 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.

 

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On September 20, 2013, GateHouse commenced a pre-packaged solicitation of the Plan (the “Solicitation”). Under the Support Agreement, which terminated on the Effective Date, each of the Participating Lenders 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. 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”) voted to accept the Plan in the Solicitation. 100% of the holders of the Outstanding Debt voted to accept the Plan under the terms of the Support Agreement. As a result, Debtors commenced Chapter 11 cases and sought approval of the disclosure statement for the Plan (the “Disclosure Statement”) and confirmation of the Plan therein. The Plan was confirmed by the Bankruptcy Court on November 6, 2013 and GateHouse effected the transactions contemplated by the Plan to emerge from bankruptcy protection on November 26, 2013. On the Effective Date, Newcastle owns 84.6% of New Media’s total equity.

On September 27, 2013, we filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code, case number 13-12503. On November 6, 2013 the Bankruptcy Court confirmed the Plan. GateHouse effected the transactions contemplated by the Plan and emerged from Chapter 11 protection on November 26, 2013, the Effective Date.

The Plan discharged 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 former equity holders in GateHouse (“Former Equity Holders”) and (e) entry into the New Credit Facilities (as defined below) the net proceeds of which were distributed to holders that elected 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.”

Pursuant to the Restructuring, Newcastle purchased 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. The holders of the Outstanding Debt had 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 new debt facilities (the “New Credit Facilities”). Newcastle received its pro rata share of New Media Common Stock and the $149,000,000 in net proceeds of the New Credit Facilities for all Outstanding Debt it holds, including Outstanding Debt purchased in the Cash-Out Offer. All pensions, trade and all other unsecured claims will be paid in the ordinary course.

On August 27, 2013, GateHouse entered into a management agreement (the “Local Media Management Agreement”) with and among Local Media Group Holdings LLC (“Local Media Parent”) to manage the operations of its direct subsidiary Local Media. The Company has determined that the Local Media Management Agreement results in Local Media being a variable interest entity (“VIE”) and has consolidated Local Media’s financial position and results of operations from September 3, 2013. On September 3, 2013, Local Media Parent completed its acquisition of thirty three publications from News Corp Inc. Local Media is not part of the bankruptcy filing and will continue to operate in the ordinary course of business.

 

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Upon emergence from Chapter 11, New Media adopted 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 Prospectus. 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 decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated. Due to the bankruptcy filing, we have applied debtor-in-possession accounting as described in FASB ASC Topic 852, “Reorganizations” (“ASC 852”). The following accounting policies require significant estimates and judgments.

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.

 

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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 “Goodwill and Intangible Assets.”

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 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, “Goodwill and Intangible Assets,” 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, “Goodwill and Intangible Assets,” 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.

 

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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.

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 plan’s 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.

 

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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.

 

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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
September 29,
2013
    Three
Months
Ended
September 30,
2012
    Nine
Months
Ended
September 29,
2013
    Nine
Months
Ended
September 30,
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

  $ 79,009      $ 80,140      $ 229,569      $ 246,010      $ 330,881      $ 357,134      $ 385,579   

Circulation

    36,857        33,165        102,370        98,279        131,576        131,879        133,192   

Commercial printing and other

    10,126        6,675        24,233        18,872        26,097        25,657        25,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    125,992        119,980        356,172        363,161        488,554        514,670        544,738   

Operating costs and expenses:

             

Operating costs

    70,826        66,316        200,824        202,644        268,222        281,884        296,974   

Selling, general and administrative

    42,532        35,004        121,254        107,059        145,020        146,295        154,516   

Depreciation and amortization

    10,747        9,802        30,383        30,006        39,888        42,426        45,080   

Integration and reorganization costs

    422        1,597        1,380        3,457        4,393        5,884        2,324   

Impairment of long-lived assets

    91,599        —          91,599        —          —          1,733        430   

(Gain) loss on sale of assets

    9        379        1,052        534        1,238        455        1,551   

Goodwill and mastheads impairment

    —          —          —          —          —          385        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (90,143     6,882        (90,320     19,461        29,793        35,608        43,863   

Interest expense

    40,627        14,500        69,513        43,497        57,928        58,309        60,021   

Amortization of deferred financing costs

    281        314        803        994        1,255        1,360        1,360   

(Gain) loss on derivative instruments

    4        5        14        (1,639     (1,635     (913     8,277   

Other (income) expense

    (3     7        1,005        (33     (85     (395     (138

Reorganization items, net

    9,843        —          9,843        —          N/A        N/A        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

    (140,895     (7,944     (171,498     (23,358     (27,670     (22,753     (25,657

Income tax expense (benefit)

    (10,878     (250     (10,878     (207     (207     (1,803     (155
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

  $ (130,017   $ (7,694   $ (160,620   $ (23,151   $ (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.

 

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Three Months Ended September 29, 2013 Compared To Three Months Ended September 30, 2012

Revenue. Total revenue for the three months ended September 29, 2013 increased by $6.0 million, or 5.0%, to $126.0 million from $120.0 million for the three months ended September 30, 2012. The increase in total revenue was comprised of a $1.1 million, or 1.4%, decrease in advertising revenue which was offset by a $3.7 million, or 11.1%, increase in circulation revenue and a $3.4 million, or 51.7%, increase in commercial printing and other revenue. Advertising revenue includes an additional $5.8 million from Local Media in 2013 while total company excluding Local Media (“Gatehouse Standalone”) declines were $6.9 million or 8.7%. 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 primarily 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 increase in circulation revenue was primarily due to circulation revenue from Local Media of $3.7 million. The increase in commercial printing and other revenue was primarily due to commercial printing and other revenue from Local Media of $2.5 million as well as increases in our small business marketing services within GateHouse Media Ventures. GateHouse Ventures is an operating subsidiary of GateHouse that develops high-growth business ventures that leverage GateHouse resources and access to local markets to expand the local services we offer, while also expanding our geographic reach. Propel Marketing, our digital marketing solutions company, is the primary business in GateHouse Ventures.

Operating Costs. Operating costs for the three months ended September 29, 2013 increased by $4.5 million, or 6.8%, to $70.8 million from $66.3 million for the three months ended September 30, 2012. The increase in operating costs was primarily due to operating costs of Local Media of $7.9 million, which was partially offset by a decrease in GateHouse Standalone compensation expenses, newsprint expenses, and professional and consulting fees of $1.5 million, $1.3 million, and $1.0 million, respectively. 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. Selling, general and administrative expenses for the three months ended September 29, 2013 increased by $7.5 million, or 21.5%, to $42.5 million from $35.0 million for the three months ended September 30, 2012. The increase in selling, general and administrative expenses was primarily due to selling, general and administrative expenses of Local Media of $4.4 million and an increase in GateHouse Standalone outside services and compensation expenses of $2.9 million and $0.2 million. The increase in outside services is primarily from legal expenses of $2.6 million related to reorganization costs.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 29, 2013 increased by $0.9 million to $10.7 million from $9.8 million for the three months ended September 30, 2012. Depreciation and amortization expense increased due to depreciation expense of Local Media of $0.9 million.

Integration and Reorganization Costs. Duri