S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on July 21, 2006

Registration No. 333-        

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


GateHouse Media, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE   2711   36-4197635
(State or Other Jurisdiction of Incorporation or Organization)  

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

 


350 Willowbrook Office Park

Fairport, New York 14450

(585) 598-0030

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

 


Polly G. Sack

General Counsel

GateHouse Media, Inc.

350 Willowbrook Office Park

Fairport, New York 14450

(585) 598-0030

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

 


Copies to:

 

William N. Dye, Esq.   Richard Aftanas, Esq.
Rosalind Fahey Kruse, Esq.   Skadden, Arps, Slate, Meagher & Flom LLP
Willkie Farr & Gallagher LLP   Four Times Square
787 Seventh Avenue   New York, New York 10036
New York, New York 10019   (212) 735-3000
(212) 728-8000  

 


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

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, please 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.  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

      

Proposed Maximum

Aggregate Offering
Price(1)(2)

      

Amount of

Registration Fee

Common Stock, $0.01 par value per share

      $200,000,000       $21,400
 
(1) Includes shares to cover over-allotments, if any, pursuant to an over-allotment option granted to the underwriters.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

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 date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated July 21, 2006.

             Shares

LOGO

GateHouse Media, Inc.

Common Stock

 


This is an initial public offering of shares of common stock of GateHouse Media, Inc. All of the shares of common stock are being sold by the company. The stockholders of the company are not selling shares of common stock in this offering.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $             and $            . GateHouse Media intends to list the common stock on the New York Stock Exchange under the symbol “            .”

See “Risk Factors” on page 11 to read about factors you should consider before buying shares of the common stock.

 


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

 


 

     Per Share    Total

Initial public offering price

   $                 $             

Underwriting discount

   $                 $             

Proceeds, before expenses, to GateHouse Media

   $                 $             

To the extent that the underwriters sell more than              shares of common stock, the underwriters have the option to purchase up to an additional              shares from GateHouse Media at the initial public offering price less the underwriting discount.

 


The underwriters expect to deliver the shares against payment in New York, New York on                     , 2006.

 

Goldman, Sachs & Co.   Wachovia Securities

 


Prospectus dated                     , 2006.


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   11

Cautionary Note Regarding Forward-Looking Statements

   21

Use of Proceeds

   22

Dividend Policy

   23

Capitalization

   24

Dilution

   25

Selected Consolidated Historical and Pro Forma Financial and Other Data

   27

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

   31

Business

   48

Management

   64

Certain Relationships and Related Transactions

   76

Security Ownership of Certain Beneficial Owners and Management

   78

Description of Certain Indebtedness

   80

Description of Capital Stock

   82

Shares Eligible for Future Sale

   85

Certain United States Federal Income Tax Considerations

   86

Underwriting

   88

Legal Matters

   93

Experts

   93

Where You Can Find More Information

   93

Index to Financial Statements

   F-1

 


This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities offered hereby in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. The information contained in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies. No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this prospectus in connection with the offer contained herein and, if given or made, such information or representations must not be relied upon as having been authorized by us. Neither the delivery of this prospectus nor any sales made hereunder shall under any circumstances create an implication that there has been no change in our affairs or those of our subsidiaries since the date hereof.

 


On May 9, 2005, FIF III Liberty Holdings LLC, an affiliate of Fortress Investment Group LLC, entered into an Agreement and Plan of Merger with GateHouse Media, Inc., formerly known as Liberty Group Publishing, Inc. (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 making FIF III Liberty Holdings LLC our principal and controlling stockholder. Prior to the effectiveness of the Merger, affiliates of Leonard Green & Partners, L.P. controlled the Company. Pursuant to the terms of the Merger, each share of the Company’s common and preferred stock was exchanged for cash and the Company’s 11 5/8% Senior Debentures due 2013 were redeemed.

On June 6, 2006, GateHouse acquired substantially all of the assets, and assumed certain liabilities of, CP Media, Inc. and acquired all of the equity interests of Enterprise NewsMedia, LLC through the purchase of the entities directly and indirectly owning such equity interests.

 

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Unless the context otherwise requires, in this prospectus:

 

  Ÿ   “Acquisitions” refers to the CNC Acquisition and the Enterprise Acquisition;

 

  Ÿ   “CP Media,” “Community Newspaper Company” and “CNC” refer to CP Media, Inc. and its predecessor entities;

 

  Ÿ   “CP Media Acquisition,” “Community Newspaper Company Acquisition” and “CNC Acquisition” refer to the acquisition of substantially all of the assets, and assumption of certain liabilities, of CP Media;

 

  Ÿ   “Enterprise” refers to Enterprise NewsMedia, LLC and its subsidiaries and predecessor entities;

 

  Ÿ   “Enterprise Acquisition” refers to the acquisition of all of the equity interests of Enterprise;

 

  Ÿ   “Fortress” refers to Fortress Investment Group LLC and certain of its affiliates, including certain funds managed by it or its affiliates;

 

  Ÿ   “GateHouse Media,” “GateHouse,” the “Company,” “we,” “our” and “us” refer to GateHouse Media, Inc. and its subsidiaries and predecessor entities;

 

  Ÿ   “Predecessor” refers to GateHouse prior to the consummation of the Merger;

 

  Ÿ   “Predecessor Period” refers to the period prior to the consummation of the Merger;

 

  Ÿ   “pro forma” refers to GateHouse after giving effect to the Merger, the Acquisitions and the 2006 Financing as of the beginning of the applicable period or as of the applicable date;

 

  Ÿ   “Successor” refers to GateHouse after the consummation of the Merger; and

 

  Ÿ   “Successor Period” refers to the period after the consummation of the Merger.

 

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PROSPECTUS SUMMARY

This summary highlights selected information more fully described elsewhere in this prospectus. Because it is a summary, it is not complete and does not contain all the information you should consider before buying shares of our common stock in this offering. You should read the entire prospectus carefully, including “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and the financial statements and the notes to those statements appearing elsewhere in this prospectus, before deciding to invest in our common stock.

GateHouse Media, Inc.

We are one of the largest publishers of locally based print and online media in the United States as measured by number of publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which currently includes 423 community publications and more than 230 related websites, serves over 125,000 business advertisers and reaches approximately 9 million people on a weekly basis. Our total pro forma revenue for the twelve months ended December 31, 2005 was $384 million.

Our core products include:

 

  Ÿ   75 daily newspapers with total paid circulation of approximately 405,000;

 

  Ÿ   231 weekly newspapers (published up to three times per week) with total paid circulation of approximately 620,000 and total free circulation of approximately 430,000;

 

  Ÿ   117 “shoppers” (generally advertising-only publications) with total circulation of approximately 1.5 million; and

 

  Ÿ   over 230 locally focused websites, which extend our franchises onto the internet.

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. Over the last 12 months, we created over 90 niche publications.

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

Over 70% of our daily newspapers have been published for more than 100 years and 93% have been published for more than 50 years. The longevity of our publications demonstrates the value and relevance of the local information that we provide and has created a strong foundation of reader loyalty and a recognized media brand name in each community we serve. Due to these factors, our publications have high audience penetration rates in our markets, thereby providing advertisers with superior access to local consumers.

We have a strong history of growth through acquisitions and new product launches. Since our inception, we have acquired 249 daily and weekly newspapers and shoppers and launched numerous new products, including 10 weekly newspapers. This strategy has been, and will continue to be, a critical component of our growth. We have demonstrated an ability to successfully integrate

 

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acquired publications and improve their performance through sound management, including revenue generating and direct cost saving initiatives. Given our scale, we see significant opportunities to continue our acquisition and integration strategy within the highly fragmented local media industry.

We operate in 285 markets across 17 states. A key element of our business strategy is geographic clustering of publications to realize operating efficiencies and provide consistent management. We share best practices across our organization, giving each publication the benefit of revenue producing and cost saving initiatives. We centralize functions such as ad composition, bookkeeping and production and give each publication in a cluster access to top quality production equipment, which enables us to cost-efficiently provide superior products and service to our customers. In addition, our size allows us to achieve economies of scale in the purchase of insurance, newsprint and other supplies. We believe that these advantages, together with the generally lower overhead costs associated with operating in small and midsize markets, allow us to generate high profit margins.

We believe we have been able to maintain stable revenues because of our geographic diversity, well-balanced portfolio of products, strong local franchises and broad customer base. We plan to grow our revenue, cash flow and dividends per share through a combination of (i) organic growth in our existing portfolio, (ii) acquisitions of additional assets and operating companies and (iii) the realization of economies of scale and operating efficiencies.

Our Industry

We operate in what is sometimes referred to as the “hyper-local” or community market within the media industry. Media companies that serve this segment provide highly focused local content and advertising that is generally unique to each market they serve. Community newspapers, a significant component of the hyper-local market, compete to a limited extent for advertising customers with other publications and other forms of media, including: direct mail, directories, radio, television, outdoor advertising and the internet. We believe that local publications are the most effective medium for retail advertising, which emphasizes the price of goods, in contrast to radio and broadcast and cable television, which are generally used for image advertising. We estimate that the locally oriented segment of the U.S. advertising market generated revenue of approximately $100 billion in 2005, or approximately 36% of the entire U.S. advertising market.

The U.S. community newspaper industry is large and highly fragmented. According to Dirks, Van Essen & Murray, there are more than 1,400 daily newspapers in the United States with circulations of less than 50,000, which we generally define as local or community newspapers. We believe this fragmentation provides significant acquisition and consolidation opportunities in the community newspaper industry. We also believe that fragmentation and significant acquisition opportunities exist in complementary hyper-local businesses such as directories, traders, direct mail and locally focused websites.

The primary sources of advertising revenue for local publications are small businesses, corporations, government agencies and individuals who reside in the market that a publication serves. By combining paid circulation publications with total market coverage publications such as shoppers and other specialty publications (tailored to the specific attributes of a local community), local publications are able to reach nearly 100% of the households in a distribution area. In addition to printed products, the majority of local publications have an online presence that further leverages the local brand and ensures higher penetration into a given market.

Our segment of the media industry is characterized by high barriers to entry, both economic and social. Small and midsize communities can generally sustain only one newspaper. Moreover, the brand value associated with long-term reader and advertiser loyalty, and the high start-up costs associated

 

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with developing and distributing content and selling advertisements, help to limit competition. Companies within the industry produce stable revenues and high margins as a result of these competitive dynamics and the value created for advertisers by hyper-local content and community relationships.

Our Strengths

We believe some of our most significant strengths are:

High Quality Assets with Dominant Local Franchises.    Our publications benefit from a long history as a trusted voice in the communities we serve and a reputation for comprehensive and in-depth local content. This has resulted in strong reader loyalty which is highly valued by local advertisers. We continue to build on long-standing relationships with local advertisers and our in-depth knowledge of local markets.

Superior Value Proposition for Our Advertisers.    Our publications provide a cost effective means for advertisers to reach the customers they covet due to our strong reader loyalty and high audience penetration rates. We offer advertisers several alternatives (dailies, weeklies, shoppers, online and niche publications) to reach consumers and to tailor the nature and frequency of their marketing messages. The concentrated local focus of our distribution provides advertisers with a targeted audience with whom they can communicate directly, thereby maximizing the efficiency of their advertising spending.

Stable and Diversified Advertising Revenue Base.    Our advertising revenue tends to be stable and recurring because of our strong local franchises, well-balanced portfolio of products, geographic diversity and broad customer base. We generate revenue in 285 markets across 17 states, serving a fragmented and diversified local advertising customer base. Over 125,000 individual businesses advertise in our publications, and our top 20 advertisers contributed less than 5% of our pro forma total revenues in 2005. In addition, over 1.75 million classified advertisements were placed in our publications in 2005. We believe 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.

Scale Yields Higher Margins and Allows Us to Realize Operating Synergies.    We achieve higher operating margins than our publications could achieve on a stand-alone basis by leveraging our operations and implementing revenue initiatives across a broader local footprint in a geographic cluster. Our scale enables us to centralize our corporate and administrative operations and spread costs over a larger number of publications. We also benefit from economies of scale in the purchase of insurance, newsprint and other supplies.

Strong Financial Profile Generates Significant Cash Flow.    Our business generates significant recurring cash flow due to our stable revenue, high margins, low capital expenditure and working capital requirements and currently favorable tax position.

Strong Track Record of Acquiring and Integrating New Assets.    We have created a national platform for consolidating local publications and have demonstrated an ability to improve the performance of the publications we acquire through sound management, including revenue generating and direct cost saving initiatives. Since our inception, we have acquired 249 publications in 37 transactions that contributed an aggregate of 63% of our pro forma total revenue in 2005. Excluding the Acquisitions, we have invested over $190 million and integrated 118 publications in 35 transactions. By implementing revenue generating initiatives and leveraging the economies of scale inherent in our clustering strategy we increased trailing twelve-month Adjusted EBITDA at those publications from $18 million at the time of acquisition to $24 million in 2005.

 

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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. Our executive officers have broad industry experience and a successful track record of growing businesses organically and identifying and integrating acquisitions.

Our Strategy

We seek to grow revenue, cash flow and dividends per share by leveraging our community-based franchises and relationships to increase our product offerings, penetration rates and market share in the communities we serve and by pursuing a disciplined approach to acquisitions. The key elements of our strategy are:

Maintain Our Dominance 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 in order to position our products as a “must read” within their markets.

Pursue a Disciplined and Accretive Acquisition Strategy in Existing and New Markets. We seek to grow in existing and new markets through a disciplined and cash flow accretive acquisition strategy. The local media industry is highly fragmented and we believe we have a strong platform for creating additional shareholder value. We intend to pursue acquisitions of local marketing businesses, including directories, traders and direct mail, that are accretive to our cash flow.

Leverage Benefits of Scale and Clustering to Increase Cash Flows and Margins.    We will continue to take advantage of geographic clustering to realize operating and economic efficiencies in areas such as labor, production, overhead, raw materials and distribution costs. We believe we will be able to expand our profit margins as we streamline and further centralize purchasing and administrative functions and integrate acquired properties.

Introduce New Products or Modify Our Products to Enhance the Value Proposition for Our Advertisers.    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 advertisers. These products are often specialty publications that address specific interests such as employment, healthcare, hobbies and real estate. In addition, we intend to capitalize upon our unique position in local markets to introduce other marketing oriented products such as directories, shoppers and other niche publications in both online and printed format in order to further enhance our value to advertisers.

Pursue a Content-Driven Internet Strategy.     We are well positioned to increase our online penetration and generate additional online revenues due to both our ability to deliver unique local content and our relationships with readers and advertisers. We believe our local brands and unique local content make our sites “must visit” destinations for our local audience. This presents an opportunity to increase our audience penetration rates and advertising market share in each of the communities we serve.

Increase Sales Force Productivity.    We aim to increase the productivity of our sales force and, in turn, advertising revenues, through an approach that includes ongoing company-wide training, incentive compensation programs and regular evaluation of our advertising rates to ensure that we are maximizing revenue opportunities.

 

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Recent Acquisitions and Our Recent Financing

On June 6, 2006, we consummated the Acquisitions, pursuant to which we acquired substantially all of the assets, and assumed certain liabilities, of CNC and acquired all of the equity interests of Enterprise. CNC and Enterprise were the two largest community newspaper companies in Massachusetts. The publications acquired in the Acquisitions include six dailies, 115 weeklies, 10 shoppers and numerous specialty publications that serve communities in eastern Massachusetts and now comprise our Northeast region. The operations of CNC and Enterprise contributed $180 million to our total pro forma revenue for the twelve months ended December 31, 2005 of $384 million. For additional information concerning the products acquired in the Acquisitions and our Northeast region, see “Business—Overview of Operations—Northeast Region.”

In order to finance the Acquisitions and to extend the maturities of our outstanding debt and obtain greater financial flexibility, on June 6, 2006 we entered into the following new financial arrangements through our subsidiaries:

 

  Ÿ   a $610.0 million first lien credit facility, consisting of a $570.0 million term loan facility and a $40.0 million revolving credit facility; and

 

  Ÿ   a $152.0 million second lien term loan facility.

These financing transactions are referred to as the “2006 Financing” and the first and second lien credit facilities are referred to as our “2006 Credit Facility.” In addition to funding the Acquisitions, we used the proceeds of the 2006 Financing to repay our prior revolving and term loan credit facilities and pay accrued interest in the aggregate amount of $323.6 million. For additional information on our 2006 Credit Facility, see “Description of Certain Indebtedness.”

We intend to use a portion of the proceeds of this offering to repay the second lien term loan facility that is currently part of our 2006 Credit Facility.

Our Principal Stockholder

As of June 30, 2006, Fortress beneficially owned approximately 96% of our outstanding common stock. Following the completion of this offering, Fortress will beneficially own approximately         % of our outstanding common stock, or         % if the underwriters’ over-allotment option is fully exercised. Fortress is not selling any shares of common stock in this offering.

Corporate Information

Our principal executive offices are located at 350 Willowbrook Office Park, Fairport, New York 14450. Our telephone number is (585) 598-0030. Our internet address is www.gatehousemedia.com. Information on our website does not constitute part of this prospectus. We were incorporated in Delaware in 1997.

 

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The Offering

 

Common stock offered by us in this offering

               shares.

Over-allotment option

               shares.

Common stock to be outstanding after the offering

  

            shares.

Use of proceeds

   We expect to use the net proceeds from the offering to repay in full the $152 million second lien term loan facility (currently part of our 2006 Credit Facility) incurred in connection with the Acquisitions and for general corporate purposes.

Dividend policy

   On                     , 2006, our board of directors declared our first regular dividend of $             per share of our common stock, or an aggregate of $             million, for the three months ended                     , 2006, which we paid on                     , 2006. We intend to continue to pay regular quarterly cash dividends to the holders of our common stock. The payment of dividends is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by financing arrangements (including the 2006 Credit Facility), legal restrictions on the payment of dividends and other factors the board of directors deems relevant. Dividends on our common stock are not cumulative. We expect that in certain quarters we may pay dividends that exceed our net income amounts for such period as calculated in accordance with generally accepted accounting principles in the United States, or GAAP.

Proposed New York Stock Exchange symbol

   “                    .”

Risk factors

   Please read the section entitled “Risk Factors” beginning on page 11 for a discussion of some of the factors you should carefully consider before deciding to invest in shares of our common stock.

The number of shares of common stock outstanding after the offering is based on the number of shares outstanding as of the date of this prospectus. This number and, unless otherwise indicated, the information presented in this prospectus:

 

  Ÿ   reflect a     -for-1 common stock split, which we will effect prior to the offering;

 

  Ÿ   assume that the underwriters’ over-allotment option, which entitles the underwriters to purchase up to              additional shares of our common stock from us, is not exercised; and

 

  Ÿ   assume an initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus.

 

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Summary Historical Consolidated and Pro Forma Financial Data

Our summary historical financial data for the fiscal year ended December 31, 2003, as of and for the fiscal year ended December 31, 2004 and for the period from January 1 to June 5, 2005 have been derived from the audited consolidated financial statements of the Predecessor included elsewhere in this prospectus. Our summary historical financial data as of December 31, 2003 has been derived from the audited financial statements of the Predecessor not included in this prospectus. Our summary historical financial data as of the fiscal year ended December 31, 2005 and for the period from June 6, 2005 to December 31, 2005 have been derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The summary historical financial data as of March 31, 2006 and for the three-month period ended March 31, 2006 have been derived from the unaudited condensed consolidated financial statements of the Successor included elsewhere in this prospectus. The summary historical financial data for the three-month period ended March 31, 2005 have been derived from the unaudited condensed consolidated financial statements of the Predecessor included elsewhere in this prospectus. These unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position as of such dates and our results of operations for such periods. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year. As a result of the Merger, our current capital structure and basis of accounting differ from those prior to the Merger. Our financial data for the periods subsequent to June 5, 2005 reflect the Merger under the purchase method of accounting. Therefore, our financial data for the Predecessor Period generally will not be comparable to our financial data for the Successor Period.

The summary pro forma condensed consolidated statement of operations data for the year ended December 31, 2005 and the three months ended March 31, 2006 give effect to the Merger, the Acquisitions and the 2006 Financing as if they had occurred on January 1, 2005. The summary pro forma condensed consolidated balance sheet information as of March 31, 2006 gives effect to the Acquisitions and the 2006 Financing as if they occurred on March 31, 2006. The summary pro forma condensed consolidated financial data below is based upon available information and assumptions that we believe are reasonable, however, we can provide no assurance that the assumptions used in the preparation of the summary pro forma condensed consolidated financial data are correct. The summary pro forma condensed consolidated financial data is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been if, in the case of pro forma statement of operations data, the Merger, the Acquisitions and the 2006 Financing had occurred on January 1, 2005, or in the case of pro forma balance sheet data, the Acquisitions and the 2006 Financing had occurred on March 31, 2006. The summary pro forma condensed consolidated financial data also should not be considered representative of our future financial condition or results of operations.

The summary pro forma, as adjusted condensed consolidated statements of operations data for the year ended December 31, 2005 and the three months ended March 31, 2006 give effect to the Merger, the Acquisitions, the 2006 Financing and this offering, and the application of the net proceeds of this offering, as if they occurred on January 1, 2005. The summary pro forma, as adjusted condensed consolidated balance sheet data as of March 31, 2006 gives effect to the Acquisitions, the 2006 Financing and this offering, and the application of the net proceeds of this offering, as if they occurred on March 31, 2006.

 

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See our unaudited pro forma financial statements included elsewhere in this prospectus for a complete description of the adjustments made to derive the pro forma statement of operations data and pro forma balance sheet data.

 

   

Year Ended

December 31,

   

Period

from
January 1,
2005 to

June 5,

2005

   

Period

from

June 6,

2005 to
December 31,
2005

  Three Months Ended
March 31,
      

Year

Ended

December 31,
2005

   

Three
Months
Ended
March 31,

2006

   

Year

Ended

December 31,
2005

 

Three
Months
Ended
March 31,

2006

    2003     2004         2005     2006          
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)   (Predecessor)     (Successor)        (Pro Forma)     (Pro Forma)     (Pro Forma,
as Adjusted)
  (Pro Forma,
as Adjusted)
    (in thousands, except share and per share data)                         

Statement of Operations Data:

                       

Revenues:

                       

Advertising

  $ 139,258     $ 148,291     $ 63,172     $ 88,798   $ 34,846     $ 36,459       $ 295,645     $ 69,372     $                $             

Circulation

    31,478       34,017       14,184       19,298     8,233       8,495         66,085       16,311      

Commercial printing and other

    11,645       17,776       8,134       11,415     4,869       5,021         22,750       5,847      
                                                                           

Total revenues

    182,381       200,084       85,490       119,511     47,948       49,975         384,480       91,530      
                                                                           

Income from operations

    30,204       34,279       5,026       17,635     6,438       3,670         38,418       4,953      

Income (loss) from continuing operations

    (14,650 )     (30,711 )     (24,831 )     9,565     (12,963 )     582         (20,973 )     (6,270 )    

Net income (loss) available to common stockholders

  $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (12,963 )   $ 582       $ (20,973 )   $ (6,270 )    

Basic and diluted weighted-average shares outstanding

    2,158,833       2,158,833       2,158,833       226,400     2,158,833       227,644         226,400       227,644     $     $  

Earnings (loss) per share available to common stockholders(1)

                       

Basic and diluted

  $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25   $ (6.00 )   $ 2.56       $ (92.64 )   $ (27.54 )   $     $  

Statement of Cash Flows Data:

                       

Other Data:

                       

(unaudited)

                       

Adjusted EBITDA(2)

  $ 45,164     $ 50,663     $ 20,726     $ 29,993   $ 10,276     $ 10,188       $ 85,224     $ 16,169     $     $  

Cash interest paid

  $ 22,754     $ 24,210     $ 16,879     $ 10,591   $ 14,298     $ 6,598            

Cash tax payments

  $ 408     $ 619     $ 459     $ 269   $ —       $ —              

Capital expenditures

  $ 2,141     $ 3,654     $ 1,015     $ 4,967   $ 544     $ 2,886            
     As of December 31,  

As of
March 31,

2006

      

As of
March 31,

2006

 

As of

March 31,

2006

     2003     2004     2005        
     (Predecessor)     (Predecessor)     (Successor)   (Successor)        (Pro Forma)   (Pro
Forma, as
Adjusted)
     (in thousands)                 

Balance Sheet Data:

                  

Total assets

   $ 492,349     $ 488,176     $ 638,726   $ 638,936       $ 1,115,784   $       

Total long-term obligations, including current maturities (excluding deferred income taxes)

     582,241       602,003       313,655     310,404         768,988    

Stockholders’ equity (deficit)

     (139,492 )     (165,577 )     232,056     235,514         235,514    

 

 

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(1) Upon the completion of a     -for-1 stock split that we will effect prior to the offering, we will have              shares of common stock outstanding. The pro forma basic and diluted earnings (loss) from continuing operations per share have been computed as if this stock split had occurred as of the beginning of each of the applicable periods presented.

 

(2) We define Adjusted EBITDA as net income (loss) from continuing operations before income tax expense (benefit), depreciation and amortization, non-cash compensation related expenses and other non-recurring items. 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 flows 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. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

 

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

 

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

 

    Year Ended December 31,    

Period from
January 1,
2005 to June 5,

2005

   

Period from
June 6, 2005 to
December 31,

2005

    Three Months Ended
March 31,
    Year Ended
December 31,
2005
    Three
Months
Ended
March 31,
2006
    Year Ended
December 31,
2005
  Three
Months
Ended
March 31,
2006
    2003     2004         2005     2006          
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)     (Predecessor)     (Successor)     (Pro forma)     (Pro forma)     (Pro forma,
as Adjusted)
  Pro forma,
as Adjusted)
    (in thousands)

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (12,963 )   $ 582     $ (20,973 )   $ (6,270 )   $                $             

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,098 )     486       3,730       (1,884 )    

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —        

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —        

Unrealized gain on derivative instrument

    —         —         —         (10,807 )     —         (2,605 )     —         —        

Loss on early extinguishment of debt

    —         —         5,525       —         5,525       —         5,525       —        

Amortization of deferred financing costs

    1,810       1,826       643       67       546       31       762       190      

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         7,780       —         —         —        

Interest expense—debt

    32,433       32,917       13,232       11,760       8,648       5,176       49,396       12,921      

(Gain) loss on sale of assets

    104       30       —         (40 )     —         441       (96 )     437      

Impairment of long-term assets

    —         1,500       —         —         —         —         —         —        

Transaction costs related to Merger

    —         —         7,703       2,850       —         —         10,553       —        

Depreciation and amortization

    13,359       13,374       5,776       8,030       3,468       3,599       30,113       7,200      

Non-cash compensation

    17       —         953       516       —         404       1,469       404      

Integration and reorganization (a)

    —         —         —         752       —         1,752       856       2,006      

Restructuring (b)

    1,480       1,480       1,268       250       370       322       2,754       641      

Non-cash portion of post retirement benefits

    —         —         —         —         —         —         1,135       525      
                                                                           

Adjusted EBITDA

  $ 45,164     $ 50,663     $ 20,726     $ 29,993     $ 10,276     $ 10,188     $ 85,224     $ 16,169     $     $  
                                                                           

 

(a) Integration and reorganization includes compensation expense related to the acquisition of new executive management, recruiting expenses and consulting fees.

 

(b) Restructuring includes severance, forgiveness of employee debt related to prior executive management and management fees paid to the prior owner.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks as well as the other information contained in this prospectus, including our consolidated financial statements and the notes to those statements, before investing in shares of our common stock. If any of the following events actually occur or risks actually materialize, our business, financial condition, results of operations or cash flow could suffer materially and adversely. In that case, the trading price of our common stock could decline and you might lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially and adversely affect our business, financial condition, results of operations or cash flow.

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 are also susceptible to general economic downturns, which could have a material and adverse impact on our advertising and circulation revenues and 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 would be adversely affected. Our advertising revenues are also susceptible to negative trends in the general economy that affect consumer spending. The advertisers in our newspapers and other publications and related websites are primarily retail businesses, which can be significantly affected by regional or national economic downturns and other developments.

Our indebtedness could adversely affect our financial health and reduce the funds available to us for other purposes, including dividend payments.

We have and, after the offering, will continue to have a significant amount of indebtedness. On March 31, 2006, after giving pro forma effect to the 2006 Financing and the use of the net proceeds from the sale of              shares of common stock at an assumed initial public offering price of $             per share, we would have had total indebtedness of $             million. Our substantial indebtedness could adversely affect our financial health in the following ways:

 

  Ÿ   a substantial portion of our cash flow from operations must be dedicated to the payment of interest on our outstanding indebtedness, thereby reducing the funds available to us for other purposes, including our ability to pay dividends on our common stock;

 

  Ÿ   our substantial degree of leverage could make us more vulnerable in the event of a downturn in general economic conditions or other adverse events in our business;

 

  Ÿ   our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and

 

  Ÿ   there would be a material and adverse effect on our business and financial condition if we are unable to service our indebtedness or obtain additional financing, as needed.

In addition, our 2006 Credit Facility contains, and future indebtedness may contain, financial and other restrictive covenants, ratios and tests that limit our ability to incur additional debt and engage in other activities that may be in our long-term best interests. Our ability to comply with the covenants, ratios or tests contained in our 2006 Credit Facility or in the agreements governing our future indebtedness may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our 2006 Credit Facility prohibits us from making dividend payments on our common stock if we are not in compliance with each of our financial covenants and our restricted

 

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payment covenant. In addition, events of default, if not waived or cured, could result in the acceleration of the maturity of our indebtedness under our 2006 Credit Facility or our other indebtedness. If we were unable to repay those amounts, the lenders under the 2006 Credit Facility could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of our indebtedness under our 2006 Credit Facility or other indebtedness, if any, our assets may not be sufficient to repay in full such indebtedness.

Although our 2006 Credit Facility limits the ability of our subsidiaries to incur additional indebtedness, the Company is not subject to these limitations. Accordingly, we may incur significantly more debt, which could also adversely affect our financial health.

We may not be able to pay or maintain dividends and the failure to do so may negatively affect our share price.

We intend to pay regular quarterly dividends to the holders of our common stock. Our ability to pay dividends, if any, will depend on, among other things, our cash flows, our cash requirements, our financial condition, contractual restrictions binding on us, provisions of applicable law and other factors that our board of directors may deem relevant. In addition, our 2006 Credit Facility contains certain restrictions on our ability to make dividend payments. There can be no assurance that we will generate sufficient cash from continuing operations in the future, or have sufficient surplus or net profits, as the case may be, under Delaware law, to pay dividends on our common stock. Our dividend policy is based upon our directors’ current assessment of our business and the environment in which we operate and that assessment could change based on competitive or technological developments (which could, for example, increase our need for capital expenditures) or new growth opportunities. Our board of directors may, in its discretion, amend or repeal this dividend policy to decrease the level of dividends or entirely discontinue the payment of dividends. The reduction or elimination of dividends may negatively affect the market price of our common stock.

We may not retain a sufficient amount of cash or generate sufficient funds from operations to consummate acquisitions, fund our operations or repay our indebtedness at maturity or otherwise.

We intend to pay regular quarterly dividends to the holders of our common stock. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, including acquisitions, or fund our operations, including unanticipated capital expenditures. Our ability to pursue any material expansion of our business, including through acquisitions or increased capital spending, will depend more than it otherwise would on our ability to obtain third party financing. There can be no assurance that such financing will be available to us at all, or at an acceptable cost.

Our ability to make payments on our indebtedness as required will depend 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. There can be no assurance that our business will generate cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

We may have difficulty integrating the acquired assets and businesses of CNC and Enterprise.

We acquired CNC and Enterprise with the expectation that these acquisitions would result in certain benefits and economies of scale, including expansion of the markets we serve and an increase in our operational efficiencies. Achieving the benefits of the Acquisitions will depend upon the successful integration of the acquired businesses into our existing operations. The integration risks associated with the Acquisitions include but are not limited to:

 

  Ÿ   the diversion of our management’s attention, as integrating the operations and assets of the acquired businesses will require a substantial amount of our management’s time;

 

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  Ÿ   difficulties associated with assimilating the operations of the acquired businesses, including billing and customer information systems;

 

  Ÿ   the ability to achieve operating and financial synergies anticipated to result from the Acquisitions;

 

  Ÿ   the level of cooperation of the applicable labor unions with various integration initiatives and efforts;

 

  Ÿ   the costs of integration may exceed our expectations; and

 

  Ÿ   failing to retain key personnel, readers and customers of CNC and Enterprise.

We cannot assure you that we will be successful in integrating the acquired assets into our current businesses. The failure to successfully integrate CNC and Enterprise could have a material adverse effect on our business financial condition, results of operations or cash flow.

We intend to continue to pursue acquisition opportunities, which may subject us to considerable business and financial risk.

We have grown through, and anticipate that we will continue to grow through, acquisitions of paid daily and weekly newspapers and free circulation and total market coverage publications, such as shoppers, as well as other forms of local media such as directories, traders and direct mail. We continually evaluate potential acquisitions and intend actively to pursue acquisition opportunities, some of which could be significant. 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. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:

 

  Ÿ   diverting management’s attention;

 

  Ÿ   incurring additional indebtedness and assuming liabilities;

 

  Ÿ   incurring significant additional capital expenditures, transaction and operating expenses and non-recurring acquisition-related charges;

 

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

 

  Ÿ   failing to integrate the operations and personnel of the acquired businesses;

 

  Ÿ   acquiring businesses with which we are not familiar;

 

  Ÿ   entering new markets with which we are not familiar; and

 

  Ÿ   failing to retain key personnel, readers and customers of the acquired businesses.

We may not be able to successfully manage acquired businesses or increase our cash flow from these operations. If we are unable to successfully implement our acquisition strategy or address the risks associated with 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. In addition, we may compete for certain acquisition targets with companies having greater financial resources than us. We anticipate that we may finance acquisitions through cash provided by operating activities, borrowings under our 2006 Credit Facility and other indebtedness, which would reduce our cash available for other purposes, including the repayment of indebtedness and payment of dividends.

 

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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. In 2005, on a pro forma basis, we consumed approximately 65,000 metric tons of newsprint (including for commercial printing) and the cost of our newsprint consumption related to our publications totaled approximately $25.6 million, which was approximately 7% of our 2005 pro forma advertising and circulation revenues. We generally maintain only a 30-day inventory of newsprint, although participation in a newsprint-buying consortium helps ensure adequate supply. An inability to obtain an adequate supply of newsprint at a favorable price 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 $750 per metric ton in 1996 and dropping to a low of almost $410 per metric ton in 2002. The average price of newsprint for 2005 was approximately $610 per metric ton. Significant increases in newsprint costs could have a material adverse effect on our financial condition and results of operations. See “Business—Newsprint.”

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 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 increasing 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. See “Business—Competition.”

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 holiday season. Correspondingly, our fourth fiscal quarter tends to be our strongest quarter because it includes heavy holiday season 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 declining circulation.

Overall daily newspaper circulation, including national and urban newspapers, has declined at an average annual rate of 0.5% since 1996. There can be no assurance that our circulation will not 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

 

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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 which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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. 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 we are not in compliance with applicable laws and regulations, or if our properties are contaminated, it could result in significant liabilities, fines or the suspension or interruption of the operations of specific printing facilities. Future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to us, may give rise to additional compliance or remedial costs that could be material.

We depend on key personnel and we may not be able to operate and 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.

We are dependent upon the efforts of our key personnel. In particular, we are dependent upon the management and leadership of Michael E. Reed, our Chief Executive Officer, Mark Thompson, our Chief Financial Officer, and Scott T. Champion and Randall W. Cope, our Co-Presidents and Co-Chief Operating Officers. The loss of Mr. Reed, Mr. Thompson, Mr. Champion, Mr. Cope or other key personnel could affect our ability to run our business effectively.

The success of our business is heavily dependent on our ability to retain our current 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 requires the 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 and grow our business.

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

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

 

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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.

Risks Related to Our Organization and Structure

If the ownership of our common stock continues to be highly concentrated, it may prevent you from influencing significant corporate decisions and the interests of our principal stockholder may conflict with your interests.

Following the completion of this offering, Fortress will beneficially own approximately         % of our outstanding common stock, or         % if the underwriters’ over-allotment option is fully exercised. As a result, Fortress will be able to control fundamental and significant corporate matters and transactions, including: the election of directors; mergers, consolidations or acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Additionally, Fortress, together with its affiliates, has other business activities in addition to their ownership in us. The interests of Fortress may not always coincide with our interests or the interest of our other shareholders. For example, Fortress could delay, deter or prevent acts that may be favored by our other stockholders such as hostile takeovers, changes in control and changes in management. As a result of such actions, the market price of our common stock could decline or stockholders might not receive a premium for their shares in connection with a change of control of the Company. See “Security Ownership of Certain Beneficial Owners and Management” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our Amended and Restated By-Laws.”

Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management.

Certain provisions of our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management. We have a number of anti-takeover devices in place that will hinder takeover attempts, including:

 

  Ÿ   a staggered board of directors consisting of three classes of directors, each of whom serves a three-year term;

 

  Ÿ   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;

 

  Ÿ   blank-check preferred stock;

 

  Ÿ   provisions in our amended and restated certificate of incorporation and amended and restated by-laws preventing stockholders from calling special meetings or acting by written consent in lieu of a meeting (with the exception of Fortress, so long as Fortress beneficially owns at least 50.1% of our issued and outstanding common stock);

 

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

 

  Ÿ   no provision in our amended and restated certificate of incorporation for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election.

 

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Our 2006 Credit Facility also limits our ability to enter into certain change of control transactions, which are an event of default under the 2006 Credit Facility. However, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders in certain situations, will not apply to us. This may make it easier for a third party to acquire an interest in some or all of us with Fortress’ approval, even though our other stockholders may not deem such an acquisition beneficial to their interests. See “Description of Certain Indebtedness” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law, Our Amended and Restated Certificate of Incorporation and Our Amended and Restated By-Laws.”

We are a holding company and our access to the cash flow of our subsidiaries is subject to restrictions imposed by our indebtedness.

We are a holding company with no material direct operations. Our principal assets are the equity interests we own in our direct subsidiary, GateHouse Media Holdco, Inc. (“Holdco”), through which we indirectly own equity interests in our operating subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to make dividend payments. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us. Holdco and certain of its subsidiaries are parties to our 2006 Credit Facility, which imposes restrictions on their ability to make loans, dividend payments or other payments to us. Any payment of dividends to us will be subject to the satisfaction of certain financial conditions set forth in our 2006 Credit Facility. The ability of Holdco and its subsidiaries to comply with these conditions in our 2006 Credit Facility may be affected by events that are beyond our control. We expect future borrowings by our subsidiaries to contain restrictions or prohibitions on the payment of dividends to us.

We have identified material weaknesses in our internal controls.

On April 20, 2006, we received a letter from KPMG LLP, our independent registered public accounting firm, in connection with the audit of our financial statements for the year ended December 31, 2005, which identified two material weaknesses in our internal controls over financial reporting for the same period. The Public Company Accounting Oversight Board defines a material weakness as a control deficiency, or a combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements will not be prevented or detected.

KPMG LLP identified the following two material weaknesses:

 

  Ÿ   insufficient analysis of GAAP to determine the appropriate accounting for certain unusual transactions, such as restructuring of our balance sheet in connection with the extinguishment of debt and acquisition related accounting, resulting in a number of significant adjustments to our consolidated financial statements; and failure to maintain a policy that requires a formal review of unusual or significant transactions; and

 

  Ÿ   in conjunction with the Merger, failure to appropriately establish a new basis of accounting, as required under GAAP, failure to record transaction costs associated with the Merger in the appropriate period and failure to record in the general ledger our post-closing entries to reflect the new basis of accounting.

To strengthen our accounting and finance group, we began recruiting additional finance and accounting personnel in November 2005. Since January 2006, we have hired an experienced senior management team, including a general counsel, and a strong and experienced finance and accounting

 

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group consisting of seven corporate accounting professionals and 15 shared services accounting professionals, many of whom have public company experience. The Acquisitions further strengthened our finance and accounting staff. We are in the process of centralizing certain of the accounting and reporting functions. We have also endeavored to ensure that sufficient time is made available for our personnel to adequately research, document, review and conclude on reporting matters and to increase our accounting, reporting and legal resources. While we have taken actions to address the material weaknesses identified above, additional measures may be necessary and these measures, along with other measures we expect to take to improve our internal controls, may not be sufficient to address the issues identified by KPMG LLP. If we are unable to correct weaknesses in internal controls in a timely manner, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the Securities and Exchange Commission may be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities.

Risks Related to this Offering

You might not be able to sell your stock if an active market for our common stock does not develop or continue.

Prior to the offering, you could not buy or sell our common stock publicly. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the New York Stock Exchange if we are approved for listing on the New York Stock Exchange, or otherwise, or how liquid that market might become. If an active trading market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. See “Underwriting.”

The market price of our common stock may be volatile and will depend on a variety of factors, which could cause our common stock to trade at prices below the initial public offering price.

The initial public offering price of the common stock will be determined through negotiations between representatives of the underwriters and us and may not be representative of the price that will prevail in the open market. If an active trading market develops following the offering, the market price of our common stock may fluctuate significantly. Some of the factors that could affect our share price include, but are not limited to:

 

  Ÿ   variations in our quarterly operating results;

 

  Ÿ   changes in our earnings estimates;

 

  Ÿ   the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock after this offering;

 

  Ÿ   additions or departures of key management personnel;

 

  Ÿ   any increased indebtedness we may incur in the future;

 

  Ÿ   announcements by us or others and developments affecting us;

 

  Ÿ   actions by institutional stockholders;

 

  Ÿ   changes in market valuations of similar companies;

 

  Ÿ   speculation or reports by the press or investment community with respect to us or our industry in general;

 

  Ÿ   increases in market interest rates that may lead purchasers of our shares to demand a higher yield; and

 

  Ÿ   general market and economic conditions.

 

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These factors could cause our common stock to trade at prices below the initial public offering price, which could prevent you from selling your common stock at or above the initial public offering price. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods of volatility in the market price of a particular company’s securities, securities class-action litigation has often been brought against that company. If similar litigation were instituted against us, it could result in substantial costs and divert management’s attention and resources from our operations.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes, shares of preferred stock or shares of our common stock. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their share holdings in us.

After this offering, assuming the exercise in full by the underwriters of their over-allotment option, we will have an aggregate of              shares of common stock authorized but unissued and not reserved for issuance under our option plans. We may issue all of these shares without any action or approval by our stockholders. We intend to continue to actively pursue acquisitions and may issue shares of common stock in connection with these acquisitions.

Future sales of a large number of shares of our common stock in the public market, or the perception that these sales may occur, may depress our stock price and make it difficult for you to recover the full value of your investment in our shares.

If our existing stockholders sell substantial amounts of our common stock in the public market following the offering or if there is a perception that these sales may occur, the market price of our common stock could decline. These sales may also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of the offering, we will have approximately              shares of common stock outstanding, or              shares outstanding if the underwriters exercise their overallotment option in full. All of the shares of common stock sold in the offering will be freely tradable without restriction in the public market, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to a registration rights agreement, Fortress and certain of its related partnerships and permitted third-party transferees will have the right in certain circumstances to require us to register up to              shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable.

In addition, following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of              shares of common stock reserved for issuance under the GateHouse Media, Inc. Omnibus Stock Incentive Plan. Subject to any

 

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restrictions imposed on the shares granted under the GateHouse Media, Inc. Omnibus Stock Incentive Plan, shares registered under the registration statement on Form S-8 will be available for sale into the public markets.

In addition to sales pursuant to registration statements, our outstanding shares will be eligible for sale in the public market at various times, subject to the provisions of Rule 144 under the Securities Act. We and our executive officers and directors and Fortress have entered into lock-up agreements with the underwriters in the offering that impose limitations, with certain limited exceptions, on our and their ability to dispose of shares of common stock. All participants in the directed shares program have also agreed to similar restrictions on the ability to sell their shares of common stock. See “Underwriting” for more information regarding the lock-up agreements and the directed shares program. See “Shares Eligible for Future Sale” for more information regarding shares of our common stock that may be sold by existing stockholders after the completion of the offering.

You will incur immediate and substantial dilution.

The initial public offering price will be substantially higher than the pro forma and pro forma as adjusted negative net tangible book value per share of our outstanding common stock immediately after the offering. As a result, investors purchasing common stock in the offering will incur immediate and substantial dilution in the amount of $             per share. Future equity issuances may result in further dilution to investors in the offering. See “Dilution.”

Fluctuation of market interest rates may have an adverse effect on the value of your investment in our common stock.

One of the factors that investors may consider in deciding whether to buy or sell our common stock is our dividend payment per share as a percentage of our share price relative to market interest rates. If market interest rates increase, prospective investors may desire a higher rate of return on our common stock and therefore may seek securities paying higher dividends or interest or offering a higher rate of return than shares of our common stock. As a result, market interest rate fluctuations and other capital market conditions can affect the demand for and market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease, because current stockholders and potential investors will likely require a higher dividend yield and rate of return on our common stock as interest-bearing securities, such as bonds, offer more attractive returns.

The requirements of being a public company may strain our resources, including personnel, and cause us to incur additional expenses.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements may place a strain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns. Upon consummation of this offering, our costs will increase as a result of having to comply with the Exchange Act, the Sarbanes-Oxley Act and the New York Stock Exchange listing requirements, which will require us, among other things, to establish an internal audit function. We may not be able to do so in a timely fashion or without incurring significant costs.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus contain certain “forward-looking statements” (as defined in Section 27A of the Securities Act and Section 21E of the Exchange Act) that reflect our current views regarding, among other things, our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “estimates,” “seeks,” “may,” “will,” “should,” “aim” or the negative versions of these words and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this prospectus, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. Accordingly, these statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual growth, results of operations, performance and business prospects and opportunities to differ from those expressed in, or implied by, these statements. As a result, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. These risks, uncertainties and other factors are set forth under the section heading “Risk Factors” and elsewhere in this prospectus. Except to the extent required by the federal securities laws and rules and regulations of the Securities and Exchange Commission, we have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of common stock in the offering, at an assumed initial public offering price of $             per share, will be approximately $             million, or $             million if the underwriters exercise their over-allotment option in full, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us of this offering by $             million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use these funds to repay in full the $152.0 million second lien term loan facility (including accrued and unpaid interest) incurred in connection with the Acquisitions and for general corporate purposes. As of June 30, 2006, the interest rate applicable to the second lien term loan facility was 6.83%. The second lien term loan facility matures on June 6, 2014. This loan can be prepaid without penalty.

 

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DIVIDEND POLICY

On                     , 2006, our board of directors declared our first regular dividend of $             per share of our common stock, or an aggregate of $             million, for the three months ended            , 2006, which we paid on             , 2006. We intend to continue to pay regular quarterly cash dividends to the holders of our common stock. The payment of dividends is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by financing arrangements (including the 2006 Credit Facility), legal restrictions on the payment of dividends and other factors the board of directors deems relevant. Dividends on our common stock are not cumulative. In addition, we are a holding company with no direct operations and depend on loans, dividends and other payments from our subsidiaries to generate the funds necessary to pay dividends. We expect that in certain quarters we may pay dividends that exceed our net income amounts for such period as calculated in accordance with GAAP.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2006: (1) on an actual basis, (2) on a pro forma basis to give effect to the Acquisitions and the 2006 Financing and (3) as adjusted to give effect to (a) the receipt by us of the net proceeds from the sale of              shares of common stock at an assumed initial public offering price of $             per share after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us and (b) the intended application of the net proceeds of the offering. This presentation should be read in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this prospectus, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds.”

 

     As of March 31, 2006
     Actual     Pro forma     Pro forma
as adjusted
     (in thousands, except share data)

Cash and cash equivalents(1)

   $ 992     $ 29,863     $             
                      

Debt:

      

Borrowings under revolving credit facility(2)

   $ 6,090     $ 32,000     $  

Term loan, including current portion(3)

     303,658       722,000    

Long-term liabilities, including current portion

     656       1,575    
                      

Total long-term debt, including current portion (excluding deferred income taxes)

     310,404       755,575     $  
                      

Stockholders’ equity:

      

Preferred stock, $0.01 par value:              shares authorized; No shares issued and outstanding on an actual, pro forma and pro forma as adjusted basis

     —         —         —  

Common stock, $0.01 par value,              shares authorized, actual and pro forma, and 229,850 shares authorized, as adjusted,              shares issued and outstanding, actual and pro forma, and              shares issued and outstanding, as adjusted

     2       2    

Additional paid-in-capital

     223,343       223,343    

Accumulated other comprehensive income

     2,272       2,272    

Notes receivable

     (250 )     (250 )  

Retained earnings

     10,147       10,147    
                      

Total stockholders’ equity

     235,514       235,514    
                      

Total capitalization

   $ 545,918     $ 991,089     $  
                      

(1) A $1.00 increase (decrease) in the assumed offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) our cash and cash equivalents by $             and our total capitalization by $            , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
(2) As of March 31, 2006, on a pro forma basis, we had $1.7 million available under the revolving credit facility under the 2006 Credit Facility (of which $6.3 million was committed under letters of credit).
(3) We will use a portion of the net proceeds to repay the second lien term loan (including any accrued and unpaid interest). Following this offering the first lien term loan and revolving facilities under the 2006 Credit Facility will remain in effect.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma negative net tangible book value per share of our common stock after this offering. We calculate negative net tangible book value per share by dividing the negative net tangible book value (total assets less intangible assets, deferred financing costs and total liabilities) by the number of outstanding shares of common stock.

Based on shares outstanding as of March 31, 2006, our pro forma negative net tangible book value at March 31, 2006 was $681.5 million, or $(2.97) per share.

After giving effect to (1) the receipt by us of the net proceeds from the sale of             shares of common stock at an assumed initial public offering price of $             per share; (2) the Acquisitions and the 2006 Financing; and (3) the intended application of the net proceeds of the offering, our pro forma negative net tangible book value at March 31, 2006 would be $             million, or $             per share. This represents an immediate increase in the pro forma negative net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

       $                
        

Negative net tangible book value per share at March 31, 2006

   ($1.29 )  
        

Pro forma negative net tangible book value per share at March 31, 2006

    
        

Increase per share attributable to new investors in the offering

    
        

Pro forma negative net tangible book value per share at March 31, 2006 after the offering

    
        

Dilution per share to new investors

     $                 
        

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) our pro forma as adjusted negative net tangible book value by $             million, our as adjusted negative net tangible book value per share after this offering by $             per share, and the dilution per share to new investors by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. An increase (or decrease) of 1,000,000 shares from the expected number of shares to be sold in the offering, assuming no change in the initial public offering price from the price assumed above, would increase (decrease) our negative net tangible book value after giving effect to the transactions by approximately $             million, increase (decrease) our adjusted negative net tangible book value per share after giving effect to the transactions by $             per share, and decrease (increase) the dilution in negative net tangible book value per share to new investors in this offering by $             per share, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option. The pro forma information discussed above is illustrative only.

 

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The following table summarizes, on a pro forma basis as of March 31, 2006, the difference among existing stockholders and new investors with respect to the number of shares of common stock purchased from us in the offering, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing common stock in the offering:

 

     Shares Purchased   Total Consideration  

Average Price

Per Share

     Number    Percentage   Amount    Percentage  
     (amounts in thousands, except share data)

Existing stockholders

   229,850                %   $ 223,146                %   $ 971

New investors in the offering

            
                      

Total

                  %   $                  %  
                      

A $1.00 increase (decrease) in the initial public offering price from the assumed initial public offering price of $             per share would increase (or decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $             million, $             million and $            , respectively, assuming no change to the number of shares offered by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other expenses of the offering.

The above information excludes shares of common stock that the underwriters have the option to purchase from us solely to cover over-allotments.

 

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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

Our historical financial data as of and for the fiscal year ended December 31, 2003, as of and for the fiscal year ended December 31, 2004 and for the period from January 1 to June 5, 2005 have been derived from the audited consolidated financial statements of the Predecessor included elsewhere in this prospectus. The historical financial data as of December 31, 2003 and as of and for the years ended December 31, 2001 and 2002 are derived from the audited consolidated financial statements of the Predecessor not included in this prospectus. Our historical financial data as of the fiscal year ended December 31, 2005 and for the period from June 6, 2005 to December 31, 2005 have been derived from the audited consolidated financial statements of the Successor included elsewhere in this prospectus. The historical financial data as of March 31, 2006 and for the three-month period ended March 31, 2006 have been derived from the unaudited condensed consolidated financial statements of the Successor included elsewhere in this prospectus. The historical financial data for the three-month period ended March 31, 2005 have been derived from the unaudited condensed consolidated financial statements of the Predecessor included elsewhere in this prospectus. These unaudited condensed consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of our financial position as of such dates and our results of operations for such periods. The results for periods of less than a full year are not necessarily indicative of the results to be expected for any interim period or for a full year. As a result of the Merger, our current capital structure and our basis of accounting differ from those prior to the Merger. Our financial data in respect of all reporting periods subsequent to June 5, 2005 reflect the Merger under the purchase method of accounting. Therefore, our financial data for the Predecessor Period generally will not be comparable to our financial data for the Successor Period. The selected historical consolidated financial data and notes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those statements included elsewhere in this prospectus.

The pro forma condensed consolidated statement of operations data for the year ended December 31, 2005 and the three months ended March 31, 2006 give effect to the Merger, the Acquisitions and the 2006 Financing as if they had occurred on January 1, 2005. The pro forma condensed consolidated balance sheet information as of March 31, 2006 gives effect to the Acquisitions and the 2006 Financing as if they occurred on March 31, 2006. The pro forma as adjusted condensed consolidated financial data below is based upon available information and assumptions that we believe are reasonable, however, we can provide no assurance that the assumptions used in the preparation of the pro forma condensed consolidated financial data are correct. The pro forma condensed consolidated financial data is for illustrative and informational purposes only and is not intended to represent or be indicative of what our financial condition or results of operations would have been if, in the case of pro forma statement of operations data, the Merger, the Acquisitions and the 2006 Financing had occurred as adjusted on January 1, 2005, or in the case of pro forma balance sheet data, the Acquisitions and the 2006 Financing had occurred on March 31, 2006. The pro forma condensed consolidated financial data also should not be considered representative of our future financial condition or results of operations.

The summary pro forma, as adjusted condensed consolidated statements of operations data for the year ended December 31, 2005 and the three months ended March 31, 2006 give effect to the Merger, the Acquisitions, the 2006 Financing and this offering, and the application of the net proceeds of this offering, as if they occurred on January 1, 2005. The summary pro forma, as adjusted condensed consolidated balance sheet data as of March 31, 2006 gives effect to the Acquisitions, the 2006 Financing and this offering, and the application of the net proceeds of this offering, as if they occurred on March 31, 2006.

 

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See our unaudited pro forma financial statements included elsewhere in this prospectus for a complete description of the adjustments made to derive the pro forma statement of operations data and pro forma balance sheet data.

 

    Year Ended December 31,    

Period

from
January 1,
2005 to
June 5,

2005

   

Period from
June 6,

2005 to
December 31,
2005

  Three Months Ended
March 31,
         Year
Ended
December 31,
2005
   

Three
Months
Ended

March 31,
2006

   

Year

Ended
December 31,
2005

 

Three
Months
Ended

March 31,
2006

    2001     2002     2003     2004         2005     2006            
    (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)   (Predecessor)     (Successor)          (Pro Forma)     (Pro Forma)     (Pro Forma,
as Adjusted)
  (Pro Forma,
as Adjusted)
    (in thousands, except per share data)                            

Statement of Operations Data:

                             

Revenues:

                             

Advertising

  $ 142,628     $ 142,086     $ 139,258     $ 148,291     $ 63,172     $ 88,798   $ 34,846     $ 36,459         $ 295,645     $ 69,372     $                $             

Circulation

    31,984       32,105       31,478       34,017       14,184       19,298     8,233       8,495           66,085       16,311        

Commercial printing and other

    13,136       11,962       11,645       17,776       8,134       11,415     4,869       5,021           22,750       5,847        
                                                                                             

Total revenues

    187,748       186,153       182,381       200,084       85,490       119,511     47,948       49,975           384,480       91,530        
 

Operating costs and expenses:

                             

Operating costs

    94,805       87,103       86,484       97,198       40,007       61,001     24,336       25,789           184,763       45,779        

Selling, general and administrative

    52,115       51,977       52,230       53,703       26,978       30,035     13,706       16,476           120,729       33,161        

Depreciation and amortization(1)

    20,575       16,473       13,359       13,374       5,776       8,030     3,468       3,599           30,113       7,200        

Transaction costs related to Merger

    —         —         —         —         7,703       2,850     —         —             10,553       —          

Impairment of long-term assets

    —         —         —         1,500       —         —       —         —             —         —          

Gain (loss) on sale of assets

    —         —         (104 )     (30 )     —         40     —         (441 )         (96 )     437        
                                                                                             

Income from operations

    20,253       30,600       30,204       34,279       5,026       17,635     6,438       3,670           38,418       4,953        

Interest expense, amortization of deferred financing costs, unrealized gain on derivative instruments and other

    40,710       35,730       49,545       63,762       32,884       1,020     22,499       2,602           55,661       13,107        
                                                                                             

Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle

    (20,457 )     (5,130 )     (19,341 )     (29,483 )     (27,858 )     16,615     (16,061 )     1,068           (17,243 )     (8,154 )      

Income tax expense (benefit)

    2,004       1,648       (4,691 )     1,228       (3,027 )     7,050     (3,098 )     486           3,730       (1,884 )      
                                                                                             

Income (loss) from continuing operations before cumulative effect of change in accounting principle

    (22,461 )     (6,778 )     (14,650 )     (30,711 )     (24,831 )     9,565     (12,963 )     582           (20,973 )     (6,270 )      

Income from discontinued operations, net of income taxes

    2,769       5,557       486       4,626       —         —       —         —             —         —          
                                                                                             

Net income (loss) before cumulative effect of change in accounting principle

  $ (19,692 )   $ (1,221 )   $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (12,963 )   $ 582         $ (20,973 )   $ (6,270 )   $                $             
                                                                                             

Cumulative effect of change in accounting principle, net of tax

    —         (1,449 )     —         —         —         —       —         —             —         —          
                                                                                             

Net Income (loss)

  $ (19,692 )   $ (2,470 )   $ (14,164 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (12,963 )   $ 582         $ (20,973 )   $ (6,270 )   $                $             
                                                                                             

Net income (loss) available to common stockholders

  $ (39,681 )   $ (25,292 )   $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565   $ (12,963 )   $ 582         $ (20,973 )   $ (6,270 )   $                $             
                                                                                             

 

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Table of Contents
    Year Ended December 31,    

Period from
January 1, 2005
to June 5,

2005

   

Period from
June 6,

2005 to
December 31,
2005

  Three Months Ended
March 31,
 

Year

Ended

December 31,

2005

   

Three
Months

Ended

March 31,

2006

   

Year Ended

December 31,

2005

 

Three
Months
Ended
March 31,

2006

    2001     2002     2003     2004         2005     2006        
    (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)   (Predecessor)     (Successor)   (Pro Forma)     (Pro Forma)     (Pro Forma,
as Adjusted)
  (Pro Forma,
as Adjusted)
    (in thousands, except per share data)                    

Net income (loss) from continuing operations per share

  $ (19.55 )   $ (13.62 )   $ (12.53 )   $ (14.23 )   $ (11.50 )   $ 42.25   $ (6.00 )   $ 2.56   $ (92.64 )   $ (27.54 )   $                $             

Net income (loss) available to common stockholders per share(2)

  $ (18.27 )   $ (11.72 )   $ (12.31 )   $ (12.08 )   $ (11.50 )   $ 42.25   $ (6.00 )   $ 2.56   $ (92.64 )   $ (27.54 )   $                $             

Other Data (unaudited):

                       

Adjusted EBITDA(3)

      $ 45,164     $ 50,663     $ 20,726     $ 29,993   $ 10,276     $ 10,188   $ 85,224     $ 16,169     $                $             

Cash interest paid

      $ 22,754     $ 24,210     $ 16,879     $ 10,591   $ 14,298     $ 6,598        

Cash tax payments

      $ 408     $ 619     $ 459     $ 269   $ —       $ —          

 

    As of December 31,  

As of

March 31,

2006

  As of
March 31,
2006
  As of
March 31,
2006
       
    2001     2002     2003     2004     2005          
    (Predecessor)     (Predecessor)     (Predecessor)     (Predecessor)     (Successor)   (Successor)   (Pro Forma)  

(Pro Forma,

as Adjusted)

       
    (in thousands)                

Balance Sheet Data:

                   

Total assets

  $ 543,902     $ 506,325     $ 492,349     $ 488,176     $ 638,726   $ 638,936   $ 115,784   $                 

Total long-term obligations, including current maturities (excluding deferred income taxes)

    580,757       564,843       582,241       602,003       313,655     310,404     768,988      

Stockholders’ equity (deficit)

    (87,661 )     (112,936 )     (139,492 )     (165,577 )     232,056     235,514     235,514      

(1) As of January 1, 2002 we implemented Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which replaced the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an annual impairment test. SFAS No. 142 also establishes requirements for identifiable intangible assets. The transition provisions of SFAS No. 142 required that the useful lives of previously recognized intangible assets be reassessed and the remaining amortization periods adjusted accordingly. Prior to adoption of SFAS No. 142, advertiser and subscriber relationship intangible assets were amortized over estimated remaining useful lives of 40 and 33 years, respectively. Upon the adoption of SFAS No. 142, we concluded that, based upon current economic conditions and pricing strategies, the remaining useful lives for advertiser and subscriber relationship intangible assets were 30 and 20 years, respectively, and the amortization periods were adjusted accordingly, with effect from January 1, 2002. As a result of the Merger, the Company performed a valuation of intangible assets based on current economic conditions at such time. The remaining useful lifes of advertiser and subscriber relationships were revised to 18 and 19 years, respectively, effective June 6, 2005. In addition, upon adoption of SFAS No. 142, we ceased amortization of goodwill. We also ceased amortization of our mastheads because we determined that the useful life of our mastheads is indefinite.

 

(2) Upon the completion of our proposed initial public offering and the completion of a     -for-1 stock split which we will effect prior to the offering, we will have             shares of common stock outstanding. The pro forma basic and diluted income (loss) per share from continuing operations and pro forma weighted-average shares outstanding have been computed as if the events described above had occurred as of the beginning of each of the applicable periods presented.

 

 

(3) We define Adjusted EBITDA as net income (loss) from continuing operations before income tax expense (benefit), depreciation and amortization, non-cash compensation related expenses and other non-recurring items. 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 flows 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. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

 

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

 

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Table of Contents
   The table below shows the reconciliation of income (loss) from continuing operations to Adjusted EBITDA for the periods presented:

 

    Year Ended December 31,    

Period from
January 1,
2005 to June 5,

2005

   

Period from
June 6, 2005 to
December 31,

2005

    Three Months Ended
March 31,
   

Year

Ended
December 31,
2005

    Three
Months
Ended
March 31,
2006
   

Year

Ended
December 31,
2005

  Three
Months
Ended
March 31,
2006
    2003     2004         2005     2006          
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)     (Predecessor)     (Successor)     (Pro forma)     (Pro forma)     (Pro forma,
as Adjusted)
  Pro forma,
as Adjusted)
    (in thousands)                      

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (12,963 )   $ 582     $ (20,973 )   $ (6,270 )   $                $             

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,098 )     486       3,730       (1,884 )    

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —        

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —        

Unrealized gain on derivative instrument

    —         —         —         (10,807 )     —         (2,605 )     —         —        

Loss on early extinguishment of debt

    —         —         5,525       —         5,525       —         5,525       —        

Amortization of deferred financing costs

    1,810       1,826       643       67       546       31       762       190      

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         7,780       —         —         —        

Interest expense—debt

    32,433       32,917       13,232       11,760       8,648       5,176       49,396       12,921      

(Gain) loss on sale of assets

    104       30       —         (40 )     —         441       (96 )     437      

Impairment of long-term assets

    —         1,500       —         —         —         —         —         —        

Transaction costs related to Merger

    —         —         7,703       2,850       —         —         10,553       —        

Depreciation and amortization

    13,359       13,374       5,776       8,030       3,468       3,599       30,113       7,200      

Non-cash compensation

    17       —         953       516       —         404       1,469       404      

Integration and reorganization(a)

    —         —         —         752       —         1,752       856       2,006      

Restructuring(b)

    1,480       1,480       1,268       250       370       322       2,754       641      

Non-cash portion of post retirement benefits

    —         —         —         —         —         —         1,135       525      
                                                                           

Adjusted EBITDA

  $ 45,164     $ 50,663     $ 20,726     $ 29,993     $ 10,276     $ 10,188     $ 85,224     $ 16,169     $                $             
                                                                           

 

(a) Integration and reorganization includes compensation expense related to the acquisition of new executive management, recruiting expenses and consulting fees.

 

(b) Restructuring includes severance, forgiveness of employee debt related to prior executive management and management fees paid to the prior owner.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with this entire prospectus, including the “Risk Factors” section and our 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 Statements.”

Overview

We are one of the largest publishers of locally based print and online media in the United States as measured by number of publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which currently includes 423 community publications and more than 230 related websites, serves over 125,000 business advertisers and reaches approximately 9 million people on a weekly basis.

Our core products include:

 

  Ÿ   75 daily newspapers with total paid circulation of approximately 405,000;

 

  Ÿ   231 weekly newspapers (published up to three times per week) with total paid circulation of approximately 620,000 and total free circulation of approximately 430,000;

 

  Ÿ   117 shoppers (generally advertising-only publications) with total circulation of approximately 1.5 million; and

 

  Ÿ   over 230 locally focused websites, which extend our franchises onto the internet.

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. Over the last 12 months, we created over 90 niche publications.

We were incorporated in Delaware in 1997 for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company, a wholly-owned subsidiary of Hollinger International Inc., or its subsidiaries. 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, 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 was effective on June 6, 2005, thus making FIF III Liberty Holdings LLC our principal and controlling stockholder. Prior to the effectiveness of the Merger, affiliates of Leonard Green & Partners, L.P. controlled the Company. Pursuant to the terms of the Merger, each share of the Company’s common and preferred stock was exchanged for cash and all of the Company’s 11 5/8% Senior Debentures due 2013 were redeemed. The total value of the transaction was approximately $527 million.

As of June 30, 2006, Fortress beneficially owned approximately 96% of our outstanding common stock. Following the completion of this offering, Fortress will beneficially own approximately     % of our outstanding common stock, or     % if the underwriters’ over-allotment option is fully exercised.

Since 1998, we have acquired 249 daily and weekly newspapers and shoppers, including six dailies, 115 weeklies and 10 shoppers acquired in the Acquisitions, and launched numerous new products, including 10 weekly newspapers.

We generate revenues from advertising, circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is

 

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Table of Contents

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

Predecessor and Successor

In accordance with GAAP, we have separated our historical financial results for the Predecessor and the Successor. The separate presentation is required under GAAP in situations when there is a change in accounting basis, which occurred when purchase accounting was applied in connection with the Merger. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period-to-period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price. In addition, at the time of the Merger, we experienced changes in our business relationships as a result of our entry into new employment agreements with members of our management described under “Management,” the financing transactions and transactions with our stockholders described under “Certain Relationships and Related Transactions,” and the purchase of $9.5 million of leased equipment which was consummated simultaneously with the Merger.

We believe that this separate presentation may impede the ability of users of our financial information to understand our operating and cash flow performance. Consequently, in order to enhance an analysis of our operating results and cash flows, we have presented our operating results and cash flows on a combined basis for the full 12 month period ended December 31, 2005. This combined presentation for the 12 month period ended December 31, 2005 simply represents the mathematical addition of the results of operations for the Predecessor Period and the Successor Period. These combined results are not intended to represent what our operating results would have been had the Merger occurred at the beginning of the period. A reconciliation showing the mathematical combination of our operating results for such periods is included herein. These combined results are presented for illustrative purposes only and are not in accordance with GAAP.

Critical Accounting Policy Disclosure

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

Goodwill and Long-Lived Assets

We assess the potential impairment of goodwill and mastheads on an annual basis by using multiples of recent and projected revenues and Adjusted EBITDA for individual or strategic geographic clusters of properties to determine the fair value of the properties and deduct the fair value of assets other than goodwill and mastheads to arrive at the fair value of goodwill and mastheads. This amount is then compared to the carrying value of goodwill and mastheads to determine if any impairment has occurred. If the fair value is less than the carrying value, then we will consider whether a temporary or permanent impairment has occurred based on the specific facts and circumstances associated with the individual or strategic geographic clusters of properties. The multiples of revenue and Adjusted EBITDA used to determine fair value are based on our experience in acquiring and selling properties and multiples reflected in the purchase prices of recent sales transactions of publications similar to those we own.

 

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Table of Contents

We account for long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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. 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.

Derivative Instruments

We record all of our derivative instruments on our balance sheet at fair value pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Fair value is based on counterparty quotations. To the extent a derivative qualifies as a cash flow hedge under SFAS No. 133, unrealized changes in the fair value of the derivative are recognized in 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.

Tax Valuation Allowance

We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” 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.

Results of Operations

The following table summarizes our historical results of operations for the periods indicated. The financial data for the combined twelve-month period ended December 31, 2005 represents the mathematical addition of the pre-Merger results of operations of the Predecessor for the period from January 1, 2005 to June 5, 2005 and the results of operations of the Successor for the period from June 6, 2005 to December 31, 2005.

 

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Table of Contents

See “—Predecessor and Successor” above for a discussion of the use of financial information for the combined twelve-month period ended December 31, 2005.

 

    Year ended
December 31,
2003
    Year ended
December 31,
2004
   

Period from

January 1,

2005

to June 5,

2005

   

Period from
June 6, 2005

to
December 31,
2005

   

Non-GAAP

Combined
Year ended
December 31,
2005

   

Three months
ended
March 31,
2005

   

Three months
ended
March 31,
2006

 
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)           (Predecessor)     (Successor)  
    (in thousands)  

Revenues:

             

Advertising

  $ 139,258     $ 148,291     $ 63,172     $ 88,798     $ 151,970     $ 34,846     $ 36,459  

Circulation

    31,478       34,017       14,184       19,298       33,482       8,233       8,495  

Commercial printing and other

    11,645       17,776       8,134       11,415       19,549       4,869       5,021  
                                                       

Total revenues

    182,381       200,084       85,490       119,511       205,001       47,948       49,975  

Operating costs and expenses:

             

Operating costs

    86,484       97,198       40,007       61,001       101,008       24,336       25,789  

Selling, general, and administrative

    52,230       53,703       26,978       30,035       57,013       13,706       16,476  

Depreciation and amortization

    13,359       13,374       5,776       8,030       13,806       3,468       3,599  

Transaction costs related to Merger

    —         —         7,703       2,850       10,553       —         —    

Impairment of long-term assets

    —         1,500       —         —         —         —         —    

Gain (loss) on sale of assets

    (104 )     (30 )     —         40       40       —         (441 )
                                                       

Income from operations

    30,204       34,279       5,026       17,635       22,661       6,438       3,670  

Interest expense—debt

    32,433       32,917       13,232       11,760       24,992       8,648       5,176  

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         13,484       7,780       —    

Amortization of deferred financing costs

    1,810       1,826       643       67       710       546       31  

Loss on early extinguishment of debt

    —         —         5,525       —         5,525       5,525       —    

Unrealized gain on derivative instrument

    —         —         —         (10,807 )     (10,807 )     —         (2,605 )

Write-off of deferred financing costs

    161       —         —         —         —         —         —    

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —    
                                                       

Income (loss) from continuing operations before income taxes

    (19,341 )     (29,483 )     (27,858 )     16,615       (11,243 )     (16,061 )     1,068  

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       4,023       (3,098 )     486  
                                                       

Income (loss) from continuing operations

    (14,650 )     (30,711 )     (24,831 )     9,565       (15,266 )     (12,963 )     582  

Income from discontinued operations, net of income taxes

    486       4,626       —         —         —         —         —    
                                                       

Net income (loss)

    (14,164 )     (26,085 )     (24,831 )     9,565       (15,266 )     (12,963 )     582  

Dividends on mandatorily redeemable preferred stock

    (12,409 )     —         —         —         —         —         —    
                                                       

Net income (loss) available to common stockholders

  $ (26,573 )   $ (26,085 )   $ (24,831 )   $ 9,565     $ (15,266 )   $ (12,963 )   $ 582  
                                                       

Quarter Ended March 31, 2006 Compared To Quarter Ended March 31, 2005

Revenue.    Total revenue for the quarter ended March 31, 2006 increased by $2.1 million, or 4.2%, to $50.0 million from $47.9 million for the quarter ended March 31, 2005. The increase in total revenue was comprised of a $1.6 million, or 4.6%, increase in advertising revenue, a $0.3 million, or 3.2%, increase in circulation revenue and an increase in commercial printing and other revenue of $0.2 million, or 3.1%. The increase in advertising revenue was primarily due to revenue of $1.6 million generated by 18 publications that were acquired in five separate transactions during the period from June 6, 2005 to December 31, 2005, while advertising revenues remained relatively unchanged in our same property publications. The operating results of the publications acquired during 2005 have been

 

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included in the consolidated financial statements since their respective dates of acquisition. The increase in circulation revenue was primarily due to revenue of $0.3 million from the publications acquired in 2005, while circulation revenues remained relatively unchanged in our same property publications. The increase in commercial printing and other revenue was primarily due to revenue of $0.2 million from businesses acquired in 2005.

Operating Costs.    Operating costs for the quarter ended March 31, 2006 increased by $1.5 million, or 6.0%, to $25.8 million from $24.3 million for the quarter ended March 31, 2005. The increase in operating costs was primarily due to operating costs of $1.0 million associated with the publications acquired in 2005 and higher health insurance, outside service, delivery and newsprint costs of $0.1 million each.

Selling, General and Administrative.    Selling, general and administrative expenses for the quarter ended March 31, 2006 increased by $2.8 million, or 20.2%, to $16.5 million from $13.7 million for the quarter ended March 31, 2005. The increase in selling, general and administrative expenses was due primarily to selling, general and administrative expenses of $0.6 million associated with the newspaper businesses acquired in 2005, non-cash compensation related to restricted stock awards of $0.4 million and increases in bonus expense, consulting costs and professional fees of $2.0 million, $0.2 million and $0.1 million, respectively, partially offset by the elimination of management fees of $0.4 million incurred during the quarter ended March 31, 2005.

Depreciation and Amortization.    Depreciation and amortization expense for the quarter ended March 31, 2006 increased by $0.1 million to $3.6 million from $3.5 million for the quarter ended March 31, 2005. Depreciation and amortization increased primarily due to changes resulting from the revaluation of our fixed and intangible assets in connection with the Merger.

Loss on the Sale of Assets.    During the first quarter of 2006, we incurred a loss in the amount of $0.4 million on the disposal of certain publications, real estate and equipment.

Interest Expense—Debt and Dividends on Mandatorily Redeemable Preferred Stock.    Total interest expense for the quarter ended March 31, 2006 decreased by $11.8 million, or 69.3%, to $5.2 million from $17.0 million for the quarter ended March 31, 2005. The decrease in interest expense was due in part to the extinguishment of our senior subordinated notes and a portion of our senior discount notes and senior preferred stock with proceeds from our credit facility, entered into on February 28, 2005 with Wells Fargo Bank, as administrative agent and arranger, U.S. Bank National Association and CIT Lending Services Corporation as documentation agent (the “2005 Credit Facility”), which resulted in a lower cost of borrowing. In addition, we reduced our 2006 interest expense by paying off all of our remaining senior discount notes and preferred stock in connection with the Merger.

Loss on Early Extinguishment of Debt.    During the first quarter of 2005, we incurred a $5.5 million loss associated with paying off our third party senior subordinated notes and a portion of our senior discount notes and senior preferred stock, as well as the termination of a credit facility. These costs included premiums due on both the senior debt instruments and a write-off of deferred financing fees associated with these instruments.

Unrealized Gain on Derivative Instrument.    During the quarter ended March 31, 2006, we recorded an unrealized gain of $2.6 million related to our interest rate swap. In June 2005, we entered into an interest rate swap agreement in an effort to eliminate a significant portion of our exposure to fluctuations in the London Interbank Offered Rate, or LIBOR, which formed the basis for calculating interest cost on borrowings under our 2005 Credit Facility.

Income Tax Expense (Benefit).    Income tax changed from a benefit of $3.1 million for the quarter ended March 31, 2005 to an expense of $0.5 million for the quarter ended March 31, 2006. The

 

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change was primarily a result generating pretax income for the quarter ended March 31, 2006 as compared to a pretax loss for the period ended March 31, 2005. No cash taxes were paid during either period.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

The discussion of our results of operations that follows is based upon the combined twelve-month period ended December 31, 2005.

Revenue.    Total revenue for the year ended December 31, 2005 increased by $4.9 million, or 2.5%, to $205.0 million from $200.1 million for the year ended December 31, 2004. The increase in total revenue was comprised of a $3.7 million, or 2.5%, increase in advertising revenue and a $1.8 million, or 10.0%, increase in commercial printing and other revenue, partially offset by lower circulation revenues, which declined $0.5 million, or 1.6%. The increase in advertising revenue was primarily due to increases in our same property publications of $0.9 million and revenue of $2.8 million from the publications acquired in 2004 and 2005, including the acquisition on February 3, 2004 of daily newspapers in Corning, New York and Freeport, Illinois from Lee Enterprises, Inc. in exchange for our daily newspapers in Elko, Nevada and Burley, Idaho, as well as our weeklies in Haily, Idaho and Jerome, Idaho (the “Lee Exchange”) and our acquisition of 18 publications in five separate transactions during the period from June 6, 2005 to December 31, 2005. The decrease in circulation revenue was primarily due to decreases in our same property publications of $0.9 million, partially offset by increases in circulation revenues of $0.4 million from the publications acquired in 2004 and 2005. The increase in commercial printing and other revenue was primarily due to increases in commercial printing and other revenue from our existing operations of $1.3 million and revenues from the businesses acquired in 2004 and 2005 of $0.5 million.

Operating Costs.    Operating costs for the year ended December 31, 2005 increased by $3.8 million, or 3.9%, to $101.0 million from $97.2 million for the year ended December 31, 2004. The increase in operating costs was primarily due to operating costs of $1.8 million associated with the publications acquired in 2004 and 2005 and higher newsprint, outside service, health insurance and utility costs of $0.8 million, $0.6 million, $0.4 million and $0.2 million, respectively.

Selling, General and Administrative.    Selling, general and administrative expenses for the year ended December 31, 2005 increased by $3.3 million, or 6.2%, to $57.0 million from $53.7 million for the year ended December 31, 2004. The increase in selling, general and administrative expenses was due primarily to selling, general and administrative expenses of $1.2 million associated with the publications acquired in 2004 and 2005, higher health and business insurance costs of $1.0 million, higher bad debt expense of $0.6 million, non-cash compensation related to restricted stock awards of $0.5 million.

Depreciation and Amortization.    Depreciation and amortization expense for the year ended December 31, 2005 increased $0.4 million to $13.8 million from $13.4 million for the year ended December 31, 2004. Depreciation and amortization expense increased primarily due to the 2005 acquisitions and the changes resulting from revaluing our fixed and intangible assets in connection with the Merger.

Transaction Costs Related to Merger.    We incurred approximately $10.6 million in transaction costs related to the Merger in 2005. No such costs were incurred in 2004.

Impairment of Long-term Assets.    In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangibles” and SFAS No. 144, “Accounting for Impairment of Disposal of Long-Lived Assets,” we are required to annually test our long-term assets,

 

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including property, plant and equipment, as well as our definite and indefinite lived intangible assets, for impairment. Historically, we have performed this test in the fourth quarter. During the second quarter of 2005 and in connection with the Merger, we revalued our long-term assets, which resulted in a new basis of accounting for these assets. Given the timing of the 2005 revaluation, we have shifted our annual impairment testing from the fourth quarter to the second quarter. No impairment charges were recorded in 2005. In our 2004 assessment, we determined that an impairment situation existed at two of our reporting units. As a result, we recorded an impairment charge of $1.5 million in 2004.

Interest Expense—Debt and Dividends on Mandatorily Redeemable Preferred Stock.    Total interest expense for the year ended December 31, 2005 decreased by $24.6 million, or 38.5%, to $39.2 million from $63.8 million for the year ended December 31, 2004. The decrease in interest expense was due in part to our paying off all of our senior subordinated notes and a portion of our senior discount notes and senior preferred stock with proceeds from our 2005 Credit Facility, which resulted in a lower cost of borrowing. In addition, we reduced our 2005 interest expense as compared to our 2004 interest expense by paying off all of our outstanding senior debentures and preferred stock in connection with the Merger.

Loss on Early Extinguishment of Debt.    During the first quarter of 2005, we incurred a $5.5 million loss associated with paying off our third party senior subordinated notes and a portion of our senior discount notes and senior preferred stock, as well as the termination of a credit facility. The loss included premiums due on the senior debt and a write-off of deferred financing fees associated with these instruments.

Unrealized Gain on Derivative Instrument.    In June 2005, we entered into a third party interest rate swap to eliminate a significant portion of our exposure to fluctuations in LIBOR, which formed the basis for calculating interest cost on borrowings under our 2005 Credit Facility. The swap has a notional value of $300 million and fixed the interest rate on the 2005 Credit Facility at 4.135%. At December 31, 2005, the marked-to-market value of this instrument was $10.8 million. As a result, we recorded an asset on our balance sheet for this amount and a corresponding gain on our statement of operations.

Income Tax Expense (Benefit).    Income tax expense for the year ended December 31, 2005 was $4.0 million compared to income tax expense of $1.2 million for the year ended December 31, 2004. The increase of $2.8 million for the year ended December 31, 2005 was primarily due to an increase in deferred federal income tax expense related to nondeductible Merger costs recognized by us for the year ended December 31, 2005. No cash taxes were paid during either period.

Income from Discontinued Operations.    Income from discontinued operations was $4.6 million for the year ended December 31, 2004 due to the Lee Exchange on February 3, 2004, which resulted in a pre-tax gain of $7.7 million and an after-tax gain of $4.6 million.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenue.    Total revenue for the year ended December 31, 2004 increased by $17.7 million, or 9.7%, to $200.1 million from $182.4 million for the year ended December 31, 2003. The increase in total revenue was comprised of a $9.0 million, or 6.5%, increase in advertising revenue, a $2.5 million, or 8.1%, increase in circulation revenue and a $6.1 million, or 52.6%, increase in commercial printing and other revenue. The increase in advertising revenue was primarily due to increases in same property publications of $2.9 and revenue of $6.1 million from publications acquired in the Lee Exchange. The increase in circulation revenue was primarily due to increases in circulation revenue of $3.3 million associated with the publications acquired in the Lee Exchange, partially offset by

 

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decreases in circulation revenue of same property publications of $0.8 million. The increase in commercial printing and other revenue was primarily due to an increase in commercial printing from a print facility in the Chicago suburban market that was acquired in December 2003.

Operating Costs.    Operating costs for the year ended December 31, 2004 increased by $10.7 million, or 12.4%, to $97.2 million from $86.5 million for the year ended December 31, 2003. The increase in operating costs was primarily due to operating costs of $9.7 million from the publications acquired in the Lee Exchange and the print facility acquired in December 2003 and higher newsprint cost of $0.9 million.

Selling, General and Administrative.    Selling, general and administrative expenses for the year ended December 31, 2004 increased by $1.5 million, or 2.8%, to $53.7 million from $52.2 million for the year ended December 31, 2003. The increase in selling, general and administrative expenses of $1.5 million was due primarily to selling, general and administrative costs of $2.3 million from the publications acquired in the Lee Exchange and the print facility acquired in December 2003, partially offset by a reduction in labor-related costs of $0.8 million, resulting primarily from lower medical insurance expense.

Depreciation and Amortization.    Depreciation and amortization expense was $13.4 million for each of the years ended December 31, 2004 and December 31, 2003.

Interest Expense—Debt and Dividends on Mandatorily Redeemable Preferred Stock.    Total interest expense for the year ended December 31, 2004 increased by $16.3 million, or 34.4%, to $63.8 million from $47.4 million for the year ended December 31, 2003. The increase in interest expense was due primarily to the classification of $15.8 million of dividends on mandatorily redeemable preferred stock as additional interest expense during the year ended December 31, 2004, in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer and recognize associated dividends as interest expense.

Write-off of Deferred Financing Costs.    As of March 31, 2003, we had incurred $0.2 million in legal and bank fees associated with a proposed amendment to our then-current credit facility. On March 31, 2003, we wrote off these costs because we postponed this amendment.

Write-off of Deferred Offering Costs.    On June 3, 2002, we filed a registration statement with the Securities and Exchange Commission on Form S-2 with respect to a proposed initial public offering of common stock. As of December 31, 2003, we had incurred $1.9 million in legal and other professional fees associated with that offering that had been capitalized as deferred offering costs. On March 31, 2003, we wrote off these costs because we decided to postpone that offering.

Income Tax Expense (Benefit).    Income tax expense for the year ended December 31, 2004 was $1.2 million compared to an income tax benefit of $4.7 million for the year ended December 31, 2003. The increase of $5.9 million for the year ended December 31, 2004 was primarily due to an increase in deferred federal income tax expense recognized by us for the year ended December 31, 2004. No cash taxes were paid during either period.

Income from Discontinued Operations.    Income from discontinued operations was $4.6 million for the year ended December 31, 2004 compared to $0.5 million for the year ended December 31, 2003. The Lee Exchange on February 3, 2004 resulted in a pre-tax gain of $7.7 million and an after-tax gain of $4.6 million.

 

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Liquidity and Capital Resources

Our primary cash requirements are for working capital, borrowing obligations and capital expenditures. We have no material commitments for capital expenditures. We intend to continue to pursue our strategy of opportunistically acquiring local media businesses in contiguous and new markets. Our principal sources of funds have historically been, and will be, cash provided by operating activities and borrowings under our revolving credit facility.

GateHouse Media, Inc. has no operations of its own and accordingly has no independent means of generating revenue. As a holding company, GateHouse Media, Inc.’s internal sources of funds to meet its cash needs, including payment of expenses, are dividends and other permitted payments from its subsidiaries. Our 2006 Credit Facility imposes upon us certain financial and operating covenants, including, among others, requirements that we satisfy certain quarterly financial tests, including a maximum senior leverage ratio, a minimum fixed charge ratio, limitations on capital expenditures and restrictions on our ability to incur debt, pay dividends or take certain other corporate actions. Management believes that we have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next 12 months.

We anticipate that we may finance acquisitions through cash provided by operating activities, borrowings under our 2006 Credit Facility and other indebtedness, which would reduce our cash available for other purposes, including the repayment of indebtedness and payment of dividends.

The following table summarizes our historical cash flows. The cash flow data for the combined twelve months ended December 31, 2005 represents the mathematical addition of the pre-Merger cash flows of the Predecessor for the period from January 1, 2005 to June 5, 2005 and the cash flows of the Successor for the period from June 6, 2005 to December 31, 2005. The discussion of our historical cash flows that follows is based upon the combined twelve month period ended December 31, 2005.

See “—Predecessor and Successor” above for a discussion of the use of financial information for the combined twelve month period ended December 31, 2005.

 

     Year Ended
December 31,
2004
    Period from
January 1,
2005
to June 5,
2005
    Period from
June 6, 2005
to December 31,
2005
    Non-GAAP
Combined
Year Ended
December 31,
2005
    Three
Months
Ended
March 31,
2005
    Three
Months
Ended
March 31,
2006
 
     (Predecessor)     (Predecessor)     (Successor)           (Predecessor)     (Successor)  
                 (in thousands)              

Cash provided by (used in) continuing operating activities

  $ 21,447     $ (572 )   $ 9,315     $ 8,743     $ (4,221 )   $ 1,209  

Cash used in continuing investing activities

    (2,628 )     (1,095 )     (40,581 )     (41,676 )       (625 )     (102 )

Cash provided by (used in) continuing financing activities

    (18,038 )     (260 )     32,980       32,720       7,283       (3,178 )

Cash Flows from Continuing Operating Activities.    Net cash provided by operating activities for the quarter ended March 31, 2006 was $1.2 million compared with net cash used in operating activities of $4.2 million for the quarter ended March 31, 2005. The increase resulted primarily from the net loss of $13.0 million for the quarter ended March 31, 2005 as opposed to net income of $0.6 million for the quarter ended March 31, 2006, a reduction in interest paid of $7.7 million, partially offset by lower income from continuing operations before losses on the sale of assets and depreciation and amortization of $2.0 million.

 

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Net cash provided by operating activities for the year ended December 31, 2005 was $8.7 million compared with net cash provided by operating activities of $21.4 million for the year ended December 31, 2004. The decrease resulted primarily from transaction costs related to the Merger of $10.6 million and lower income from continuing operations before gains or losses on the sale of fixed assets, impairment of long-term assets, transaction costs related to the Merger and depreciation and amortization of $2.2 million.

Cash Flows from Continuing Investing Activities.    Net cash used in investing activities was $0.1 million for the quarter ended March 31, 2006 compared to net cash used in investing activities of $0.6 million for the quarter ended March 31, 2005. The decreased use of cash was primarily due to an increase in proceeds related to the exchange of publications and sale of other assets of $2.9 million, partially offset by an increase in capital expenditures of $2.3 million.

Capital expenditures were $0.5 million and $2.9 million for the quarters ended March 31, 2005 and 2006, respectively. Growth capital expenditures generally represent equipment and facility improvements to accommodate additional capacity, as well as the capital expenditures to reduce operating costs. We define maintenance capital expenditures as capital expenditures less growth capital expenditures. Growth capital expenditures were $0.0 and $2.2 million for the quarters ended March 31, 2005 and 2006, respectively.

Net cash used in investing activities was $41.7 million for the year ended December 31, 2005 compared to net cash used in investing activities of $2.6 million for the year ended December 31, 2004. The increased use of cash was primarily due to funds used in connection with the Merger to purchase the Company of $23.9 million, higher acquisition-related spending of $14.2 million and an increase in capital expenditures of $4.0 million, partially offset by an increase in proceeds related to the exchange of publications and sale of other assets of $1.4 million.

Capital expenditures were $3.7 million and $6.0 million for the years ended December 31, 2004 and 2005, respectively. Growth capital expenditures were $1.1 million and $3.6 million for the years ended December 31, 2004 and 2005, respectively.

Cash Flows from Continuing Financing Activities.    Net cash used in financing activities was $3.2 million for the quarter ended March 31, 2006 compared to net cash provided by financing activities of $7.3 million for the quarter ended March 31, 2005. Our financing activities for the quarter ended March 31, 2006 included repayments of our 2005 Credit Facility Term Loan B of $0.8 million and net borrowings on our 2005 Credit Facility of $2.4 million. Our financing activities for the quarter ended March 31, 2005 reflected net borrowings under our 2005 Credit Facility of $284.0 million, which were partially offset by the extinguishment of our senior subordinated notes of $182.8 million, senior discount notes of $20.2 million and senior preferred stock of $11.4 million. Additionally, for the quarter ended March 31, 2005, we paid $60.1 million to extinguish our then-existing credit facility and $2.3 million in costs associated with obtaining our 2005 Credit Facility.

Net cash provided by financing activities was $32.7 million for the year ended December 31, 2005 compared to net cash used in financing activities of $18.0 million for the year ended December 31, 2004. Our financing activities for the year ended December 31, 2005 primarily reflect net borrowings under our 2005 Credit Facility of $312.9 million and capital contributed during the Merger of $222.0 million, which were partially offset by the extinguishment of our senior subordinated notes of $182.8 million, third party senior discount notes of $20.2 million, third party senior preferred stock of $11.4 million and senior debentures of $90.3 million. Additionally, for the year ended December 31, 2005, we paid $60.1 million to extinguish our then-existing credit facility and $3.1 million in costs associated with our 2005 Credit Facility. Our financing activities for the year ended December 31, 2004 included net repayments under our then-existing credit facility of $18.0 million.

 

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Indebtedness

First Lien Credit Agreement.    Holdco, GateHouse Media Operating, Inc. (“Operating”) and certain of their subsidiaries are party to a first lien credit agreement, dated as of June 6, 2006, with a syndicate of financial institutions with Wachovia Bank, National Association as administrative agent. The first lien credit facility provides for a $570.0 million term loan facility that matures on December 6, 2013 and a revolving credit facility with a $40.0 million aggregate loan commitment amount available, including a $15.0 million sub-facility for letters of credit and a $10.0 million swingline facility, that matures on June 6, 2013. The first lien credit facility is secured by a first priority security interest in (i) all present and future capital stock or other membership, equity, ownership or profits interest of Operating and all of its direct and indirect domestic restricted subsidiaries, (ii) 66% of the voting stock (and 100% of the nonvoting stock) of all present and future first-tier foreign subsidiaries and (iii) substantially all of the tangible and intangible assets of Holdco, Operating and their present and future direct and indirect domestic restricted subsidiaries. In addition, the loans and other obligations of the borrowers under the first lien credit facility are guaranteed, subject to specified limitations, by Holdco, Operating and their present and future direct and indirect domestic restricted subsidiaries.

As of June 30, 2006, $570.0 million was outstanding under the term loan facility and $             million was outstanding under the revolving credit facility (without giving effect to $6.3 million of outstanding letters of credit on such date). Borrowings under the first lien credit facility bear interest, at the borrower’s option, equal to the LIBOR Rate for a LIBOR Rate Loan (as defined in the first lien credit facility), or the Alternate Base Rate for an Alternate Base Rate Loan (as defined in the first lien credit facility), plus an applicable margin. The applicable margin for LIBOR Rate term loans and Alternate Base Rate term loans is fixed at 2.25% and 1.25%, respectively. The applicable margin for revolving loans is adjusted quarterly based upon Holdco’s Total Leverage Ratio (as defined in the first lien credit facility) (i.e., the ratio of Holdco’s Consolidated Indebtedness (as defined in the first lien credit facility) on the last day of the preceding quarter to Consolidated EBITDA (as defined in the first lien credit facility) for the four fiscal quarters ending on the date of determination). The applicable margin ranges from 1.5% to 2.0%, in the case of LIBOR Rate Loans, and 0.5% to 1.0%, in the case of Alternate Base Rate Loans. The borrowers under the revolving credit facility also pay a quarterly commitment fee on the unused portion of the revolving credit facility ranging from 0.25% to 0.5% based on the same ratio of Total Leverage Ratio and a quarterly fee equal to the applicable margin for LIBOR Rate Loans on the aggregate amount of outstanding letters of credit.

No principal payments are due on the term loan facility or the revolving credit facility until the applicable maturity date. The borrowers are required to prepay borrowings under the term loan facility in an amount equal to 50% of Holdco’s Excess Cash Flow (as defined in the first lien credit facility) earned during the previous fiscal year, except that no prepayments are required if the Total Leverage Ratio is less than or equal to 6.0 to 1.0 at the end of any fiscal year. In addition, the borrowers are required to prepay borrowings under the term loan facility with certain asset disposition proceeds, cash insurance proceeds and condemnation or expropriation awards subject to specified reinvestment rights. The borrowers are also required to prepay borrowings with 50% of the net proceeds of certain equity issuances or 100% of the proceeds of certain debt issuances except that no prepayment is required if Holdco’s Total Leverage Ratio is less than 6.0 to 1.0. If the term loan facility has been paid in full, mandatory prepayments are applied to the repayment of borrowings under the swingline facility and revolving credit facility and the cash collateralization of letters of credit.

The first lien credit facility contains financial covenants that require Holdco to satisfy specified quarterly financial tests, consisting of a Total Leverage Ratio, an interest coverage ratio and a fixed charge coverage ratio. The first lien credit facility also contains affirmative and negative covenants customarily found in loan agreements for similar transactions, including restrictions on our ability to incur indebtedness, create liens on assets, engage in certain lines of business, engage in mergers or consolidations, dispose of assets, make investments or acquisitions; engage in transactions with

 

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affiliates, enter into sale leaseback transactions, enter into negative pledges or pay dividends or make other restricted payments (except that after the second lien credit facility has been paid in full and terminated, Holdco is permitted to pay quarterly dividends so long as, after giving effect to any such dividend payment, Holdco and its subsidiaries are in pro forma compliance with each of the financial covenants and the Total Leverage Ratio is less than 6.25 to 1.0). The first lien credit facility contains customary events of default, including defaults based on a failure to pay principal, reimbursement obligations, interest, fees or other obligations, subject to specified grace periods; a material inaccuracy of representations and warranties; breach of covenants; failure to pay other indebtedness and cross-defaults; a Change of Control (as defined in the first lien credit facility); events of bankruptcy and insolvency; material judgments; failure to meet certain requirements with respect to ERISA; and impairment of collateral.

Subject to the satisfaction of certain conditions and the willingness of lenders to extend credit, Operating may increase the revolving credit facility and/or the term loan facility by up to an aggregate of $250.0 million.

Second Lien Credit Agreement.    Holdco, Operating and certain of their subsidiaries are party to a secured bridge credit agreement, dated as of June 6, 2006, with a syndicate of financial institutions with Wachovia Bank, National Association as administrative agent. This second lien credit facility provides for a $152.0 million term facility that matures on June 6, 2014, subject to earlier maturity upon the occurrence of certain events. The second lien credit facility is secured by a second priority security interest in (i) all present and future capital stock or other membership, equity, ownership or profits interest of Operating and all of its direct and indirect domestic restricted subsidiaries, (ii) 66% of the voting stock (and 100% of the nonvoting stock) of all present and future first-tier foreign subsidiaries and (iii) substantially all of the tangible and intangible assets of Holdco, Operating and their present and future direct and indirect domestic restricted subsidiaries. In addition, the loans and other obligations of the borrowers under the second lien credit facility are guaranteed, subject to specified limitations, by Holdco, Operating and their present and future direct and indirect domestic restricted subsidiaries.

As of June 30, 2006, $152.0 million was outstanding under the second lien term facility. Borrowings under the second lien credit facility bear interest, at the borrower’s option, equal to the LIBOR Rate for a LIBOR Rate Loan (as defined in the second lien credit facility) or the Alternate Base Rate for an Alternate Base Rate Loan (as defined in the second lien credit facility) plus an applicable margin. The applicable margin for LIBOR Rate term loans and Alternate Base Rate term loans is fixed at 1.5% and 0.5%, respectively.

We intend to use a portion of the net proceeds of this offering to repay in full all borrowings under the second lien credit facility. Upon such repayment, the facility will be terminated.

Summary Disclosure About Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual cash obligations, including estimated interest payments where applicable, as of December 31, 2005:

 

     2006    2007    2008    2009    2010    Thereafter    Total
     (in thousands)

Term loan

   $ 23,442    $ 23,235    $ 23,084    $ 22,873    $ 22,616    $ 311,568    $ 426,818

Revolving credit facility

     571      571      571      571      571      8,592      11,447

Non-compete payments

     207      207      151      111      17      —        693

Operating lease obligations

     878      690      607      496      391      3,033      6,095
                                                

Total

   $ 25,098    $ 24,703    $ 24,413    $ 24,051    $ 23,595    $ 323,193    $ 445,053
                                                

 

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On June 6, 2006, in conjunction with consummation of the Acquisitions, we entered into the following new financial arrangements:

 

  Ÿ   a $610.0 million first lien credit facility, consisting of a $570.0 million term loan facility which matures in December 2013 and bears interest equal to LIBOR plus 225 basis points and a $40.0 million revolving credit facility which matures in June 2013 and bears interest at the Company’s option equal to LIBOR plus an applicable margin or the Alternate Base Rate, as defined in the agreement (8.25% as of June 30, 2006) plus an applicable margin. The applicable margin is determined quarterly based on the Company’s Total Leverage Ratio, as defined in the agreement and ranges from 50 to 200 basis points. Neither of these debt facilities require periodic principal repayment prior to maturity; and

 

  Ÿ   a $152.0 million second lien term loan facility which matures in June 2014 subject to earlier maturity upon the occurrence of certain events as defined in the agreement. This second lien term loan bears interest at the Company’s option equal to LIBOR plus 150 basis points.

Related-Party Transactions

For a discussion of these and other transactions with certain related parties, see “Certain Relationships and Related Transactions.”

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for transactions in which an enterprise exchanges its equity instruments for employee services. It also addresses transactions in which an enterprise incurs liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of those equity instruments in exchange for employee services. For public entities, the cost of employee services received in exchange for equity instruments, including employee stock options, is to be measured on the grant-date fair value of those instruments. The cost will be recognized as compensation expense over the service period, which would normally be the vesting period. SFAS No. 123R became effective on January 1, 2006 for us. We adopted SFAS No. 123R on January 1, 2006, and its adoption did not materially affect our results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces ABP Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires that a voluntary change in an accounting principle be applied retrospectively with all prior period financial statements presented using the new accounting principle. SFAS No. 154 also requires that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate and correction of errors in previously issued financial statements should be termed a restatement. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS No. 154 is not expected to have a material impact on our consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations,” which is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN No. 47 clarifies terminology within SFAS No. 143 and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. A conditional asset retirement is a legal obligation to perform an asset retirement activity in which the timing and method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 became effective for fiscal years ending after December 15, 2005. Adopting FIN No. 47 is not expected to have a material impact on our financial position, results of operations or cash flows.

 

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In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under FIN No. 48, 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. FIN No. 48 substantially changes the applicable accounting model and is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense. FIN No. 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. The new accounting model for uncertain tax positions is effective for annual periods beginning after December 15, 2006. Companies need to assess all material open positions in all tax jurisdictions as of the adoption date and determine the appropriate amount of tax benefits that are recognizable under FIN No. 48. Any difference between the amounts previously recognized and the benefit determined under the new guidance, including changes in accrued interest and penalties, has to be recorded on the date of adoption. For certain types of income tax uncertainties, existing generally accepted accounting principles provide specific guidance on the accounting for modifications of the recognized benefit. Any differences in recognized tax benefits on the date of adoption that are not subject to specific guidance would be an adjustment to retained earnings as of the beginning of the adoption period. We are currently evaluating the impact the adoption of FIN No. 48 will have on our financial statements.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flow. In the normal course of business, exposure to certain of these market risks is managed as described below.

Interest Rates

Our debt structure and interest rate risks are managed through the use of floating rate debt and interest rate swaps. Our primary exposure is to LIBOR. A 100 basis point change in LIBOR would change our income from continuing operations before income taxes on an annualized basis by approximately $(1.5) million, based on pro forma floating rate debt of $722.0 million outstanding at March 31, 2006, after consideration of the interest rate swaps described below.

On June 23, 2005, we executed an interest rate swap in the notional amount of $300 million with a forward starting date of July 1, 2005. The interest rate swap has a term of seven years. Under this swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 4.135% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to the one-month LIBOR. On May 10, 2006, we executed an additional interest rate swap in the notional amount of $270 million with a forward starting date of July 3, 2006. The interest rate swap has a term of five years. Under this swap, we pay an amount to the swap counterparty representing interest on a notional amount at a rate of 5.359% and receive an amount from the swap counterparty representing interest on the notional amount at a rate equal to the one- month LIBOR. These interest rate swaps effectively fix our interest rate on $570 million of our variable rate debt for the term of the swaps.

At                 , after consideration of the forward starting interest rate swaps described above, approximately $             million or         % of the remaining principal amount of our debt is subject to floating interest rates on a pro forma as adjusted basis.

 

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Commodities

Certain materials we use are subject to commodity price changes. We manage this risk through instruments such as purchase orders, membership in a buying consortium and continuing programs to mitigate the impact of cost increases through identification of sourcing and operating efficiencies. Primary commodity price exposures are newsprint, energy costs and, to a lesser extent, ink.

A $10 per metric ton newsprint price change would result in a corresponding annualized change in our income from continuing operations before income taxes of $650,000 based on pro forma as adjusted newsprint usage for the year ended December 31, 2005 of approximately 65,000 metric tons.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this prospectus, we define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.

Adjusted EBITDA

We define Adjusted EBITDA as follows:

Income (loss) from continuing operations before:

 

  Ÿ   income tax expense (benefit);

 

  Ÿ   depreciation and amortization;

 

  Ÿ   non-cash compensation related expenses; and

 

  Ÿ   other non-recurring items.

Management’s Use of Adjusted EBITDA.

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

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

Limitations of Adjusted EBITDA.

Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings or cash flows. Material limitations in making the

 

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adjustments to our earnings to calculate Adjusted EBITDA and using this non-GAAP financial measure as compared to GAAP net income (loss), include: the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of facilities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of income (loss) from continuing operations to Adjusted EBITDA, along with our consolidated financial statements included elsewhere in this prospectus. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this prospectus, may differ from and may not be comparable to similarly titled measures used by other companies.

 

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

 

    Year Ended December 31,    

Period from
January 1,
2005 to June 5,

2005

   

Period from
June 6, 2005 to
December 31,

2005

    Three Months Ended
March 31,
    Year Ended
December 31,
2005
    Three
Months
Ended
March 31,
2006
    Year Ended
December 31,
2005
  Three
Months
Ended
March 31,
2006
    2003     2004         2005     2006          
    (Predecessor)     (Predecessor)     (Predecessor)     (Successor)     (Predecessor)     (Successor)     (Pro forma)     (Pro
forma)
    (Pro forma,
as Adjusted)
  Pro forma,
as Adjusted)
    (in thousands)                      

Income (loss) from continuing operations

  $ (14,650 )   $ (30,711 )   $ (24,831 )   $ 9,565     $ (12,963 )   $ 582     $ (20,973 )   $ (6,270 )   $                $             

Income tax expense (benefit)

    (4,691 )     1,228       (3,027 )     7,050       (3,098 )     486       3,730       (1,884 )    

Write-off of deferred offering costs

    1,935       —         —         —         —         —         —         —        

Write-off of deferred financing costs

    161       —         —         —         —         —         —         —        

Unrealized gain on derivative instrument

    —         —         —         (10,807 )     —         (2,605 )     —         —        

Loss on early extinguishment of debt

    —         —         5,525       —         5,525       —         5,525       —        

Amortization of deferred financing costs

    1,810       1,826       643       67       546       31       762       190      

Interest expense—dividends on mandatorily redeemable preferred stock

    13,206       29,019       13,484       —         7,780       —         —         —        

Interest expense—debt

    32,433       32,917       13,232       11,760       8,648       5,176       49,396       12,921      

(Gain) loss on sale of assets

    104       30       —         (40 )     —         441       (96 )     437      

Impairment of long-term assets

    —         1,500       —         —         —         —         —         —        

Transaction costs related to Merger

    —         —         7,703       2,850       —         —         10,553       —        

Depreciation and amortization

    13,359       13,374       5,776       8,030       3,468       3,599       30,113       7,200      

Non-cash compensation

    17       —         953       516       —         404       1,469       404      

Integration and reorganization(a)

    —         —         —         752       —         1,752       856       2,006      

Restructuring(b)

    1,480       1,480       1,268       250       370       322       2,754       641      

Non-cash portion of post retirement benefits

    —         —         —         —         —         —         1,135       525      
                                                                           

Adjusted EBITDA

  $ 45,164     $ 50,663     $ 20,726     $ 29,993     $ 10,276     $ 10,188     $ 85,224     $ 16,169     $                $             
                                                                           

 

(a) Integration and reorganization includes compensation expense related to the acquisition of new executive management, recruiting expense and consulting fees.

 

(b) Restructuring includes severance, forgiveness of employee debt related to prior executive management fees paid to the prior owner.

 

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BUSINESS

General Overview

We are one of the largest publishers of locally based print and online media in the United States as measured by number of publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which currently includes 423 community publications and more than 230 related websites, serves over 125,000 business advertisers and reaches approximately 9 million people on a weekly basis.

Our core products include:

 

  Ÿ   75 daily newspapers with total paid circulation of approximately 405,000;

 

  Ÿ   231 weekly newspapers (published up to three times per week) with total paid circulation of approximately 620,000 and total free circulation of approximately 430,000;

 

  Ÿ   117 shoppers (generally advertising-only publications) with total circulation of approximately 1.5 million; and

 

  Ÿ   over 230 locally focused websites, which extend our franchises onto the internet.

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. Over the last 12 months, we created over 90 niche publications.

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

Over 70% of our daily newspapers have been published for more than 100 years and 93% have been published for more than 50 years. The longevity of our publications demonstrates the value and relevance of the local information that we provide and has created a strong foundation of reader loyalty and a recognized media brand name in each community we serve. Due to these factors, our publications have high audience penetration rates in our markets, thereby providing advertisers with superior access to local consumers.

We have a strong history of growth through acquisitions and new product launches. Since our inception, we have acquired 249 daily and weekly newspapers and shoppers and launched numerous new products, including 10 weekly newspapers. This strategy has been, and will continue to be, a critical component of our growth. We have demonstrated an ability to successfully integrate acquired publications and improve their performance through sound management, including revenue generating and direct cost saving initiatives. Given our scale, we see significant opportunities to continue our acquisition and integration strategy within the highly fragmented local media industry.

We operate in 285 markets across 17 states. A key element of our business strategy is geographic clustering of publications to realize operating efficiencies and provide consistent management. We share best practices across our organization, giving each publication the benefit of revenue producing and cost saving initiatives. We centralize functions such as ad composition, bookkeeping and production and give each publication in a cluster access to top quality production equipment, which enables us to cost-efficiently provide superior products and service to our customers. In addition, our size allows us to achieve economies of scale in the purchase of insurance, newsprint and other supplies. We believe that these advantages, together with the generally lower overhead costs associated with operating in small and midsize markets, allow us to generate high profit margins.

 

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Our advertising revenue tends to be stable and recurring because of our geographic diversity, with our revenues coming from markets across 17 states, the large number of products we publish and our fragmented, diversified local advertising customer base. Local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels in which to reach the local audience. We are also less reliant than large metropolitan newspapers upon classified advertising, particularly the recruiting, real estate and automotive categories, which are generally more sensitive to economic conditions.

Industry Overview

We operate in what is sometimes referred to as the “hyper-local” or community market within the media industry. Media companies that serve this segment provide highly focused local content and advertising that is generally unique to each market they serve and is not readily obtainable from other sources. Local publications include community newspapers, shoppers, traders, real estate guides, special interest magazines and directories. Due to the unique nature of their content, community publications compete to a limited extent for advertising customers with other forms of media, including: direct mail, directories, radio, television, outdoor advertising and the internet. We believe that local publications are the most effective medium for retail advertising, which emphasizes the price of goods, in contrast to radio and broadcast and cable television, which are generally used for image advertising. We estimate that the locally oriented segment of the entire U.S. advertising market generated revenue of approximately $100 billion in 2005.

Local media based in small and midsize communities is distinct from national and urban media delivered through outlets such as television, radio, metropolitan and national newspapers and the internet. Larger media outlets tend to offer broad based information to a geographically scattered audience. In contrast, locally oriented media outlets deliver a highly focused product that is often the only source of local information. Our segment of the media industry is also characterized by high barriers to entry, both economic and social. Small and midsize communities can generally only sustain one newspaper. Moreover, the brand value associated with long-term reader and advertiser loyalty, and the high start-up costs associated with developing and distributing content and selling advertisements, help to limit competition. Companies within the industry produce stable revenues and high margins as a result of these competitive dynamics and the value created for advertisers by hyper-local content and community relationships.

Industry Fragmentation

The U.S. community newspaper industry is large and highly fragmented. According to Dirks, Van Essen & Murray, there are more than 1,400 daily newspapers in the United States. More than 1,200, or approximately 85%, of these newspapers have daily circulation of less than 50,000, which we generally define as local or community newspapers.

 

Circulation

   Dailies    % of Total  

More than 100,000

   104    7.1 %

50,001 to 100,000

   109    7.5  

10,001 to 50,000

   615    42.2  

Less than 10,000

   629    43.2  
           

Total

   1,457    100.0 %

Total 50,000 and Under

   1,244    85.4 %

Source: Dirks, Van Essen & Murray.

 

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According to Dirks, Van Essen & Murray, there are only 12 companies that own more than 25 daily newspapers each and only four (including GateHouse) that own more than 50. Of the approximately 380 owners of daily newspapers in the United States, more than 350, or 93%, own less than 10 newspapers each. We believe this fragmentation provides significant consolidation opportunities in the community newspaper industry. We also believe that fragmentation and significant acquisition opportunities exist in complementary hyper-local businesses such as directories, traders, direct mail and locally focused websites.

Advertising Market

In 2005, the entire U.S. advertising market generated approximately $280 billion in revenue. We believe the locally oriented segment generated approximately $100 billion, or 36%, of this revenue.

U.S Advertising Expenditures by Media Category(1)

 

Media Category

  1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005
    (in millions)

Newspapers:

                     

Retail (Local)

  $ 18,099   $ 18,344   $ 19,242   $ 20,331   $ 20,907   $ 21,409   $ 20,679   $ 20,994   $ 21,341   $ 22,012   $ 22,187

Classified (Local)

    13,742     15,065     16,773     17,873     18,650     19,608     16,622     15,898     15,801     16,608     17,312
                                                                 

Total Newspapers (Local)

    31,841     33,409     36,015     38,204     39,557     41,017     37,301     36,892     37,142     38,620     39,499

National

    4,251     4,667     5,315     5,721     6,732     7,653     7,004     7,210     7,797     8,083     7,910
                                                                 

Total Newspapers

    36,092     38,076     41,330     43,925     46,289     48,670     44,305     44,102     44,939     46,703     47,409

Direct Mail

    32,866     34,509     36,890     39,620     41,403     44,591     44,725     46,067     48,370     52,191     55,218

Broadcast TV

    32,720     36,046     36,893     39,173     40,011     44,802     38,881     42,068     41,932     46,264     44,293

Cable TV

    5,108     6,438     7,237     10,340     12,570     15,455     15,736     16,297     18,814     21,527     23,654

Radio

    11,470     12,412     13,794     15,430     17,681     19,848     18,369     19,409     19,603     20,013     20,071

Magazines

    8,580     9,010     9,821     10,518     11,433     12,370     11,095     10,995     11,435     12,247     12,847

Yellow Pages

    10,176     10,731     11,423     12,003     12,825     13,524     14,384     14,584     14,906     15,486     15,970

Outdoor

    3,500     3,760     4,047     4,413     4,832     5,235     5,193     5,232     5,504     5,834     6,301

Business Papers

    3,559     3,808     4,109     4,232     4,274     4,915     4,468     3,976     4,004     4,072     4,170

Internet

    —       267     907     1,920     4,621     8,087     7,134     6,010     7,267     9,626     12,542

Miscellaneous(2)

    20,943     22,560     23,940     28,500     28,490     32,083     29,895     30,730     31,990     34,645     35,692

Total Local

    68,753     73,347     78,635     85,902     89,849     95,590     90,141     92,124     93,927     98,020     99,857

Total National

    96,261     104,270     111,756     124,172     134,580     153,990     144,044     147,346     154,837     170,589     178,310
                                                                 

Total

  $ 165,014   $ 177,617   $ 190,391   $ 210,074   $ 224,429   $ 249,580   $ 234,185   $ 239,470   $ 248,764   $ 268,608   $ 278,167

(1) Sources: Newspaper Association of America, Television Bureau of Advertising, Radio Advertising Bureau, Simba, Outdoor Advertising Association of America, Interactive Advertising Bureau and Company estimates.
(2) Media category includes weekly newspaper advertising, point of purchase advertising, free shoppers and other non-regularly measured local media.

The primary sources of advertising revenue for local publications are small businesses, corporations, government agencies and individuals who reside in the market that a publication serves. By combining paid circulation publications with total market coverage publications such as shoppers and other specialty publications (tailored to the specific attributes of a local community), local publications are able to reach nearly 100% of the households in a distribution area. As macroeconomic conditions in advertising change due to the internet and the wide array of available information sources, we have seen mass advertisers shift their focus toward targeted local advertising. Moreover, in addition to printed products, the majority of local publications have an online presence that further leverages the local brand and ensures higher penetration into a given market.

 

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The Internet

The time spent online each day by media consumers continues to grow rapidly and newspaper web sites offer a wide variety of content providing comprehensive, in-depth and up to the minute coverage of news and current events. The ability to generate, publish and archive more news and information than most other sources has allowed newspapers to produce some of the most visited sites on the internet.

Local publications are uniquely positioned to capitalize on their existing market franchise by publishing proprietary local content online. In addition, local online media now includes classifieds, directories of business information, local advertising, databases and most recently, audience-contributed content. This additional community-specific content will further extend and expand both the reach and the brand of the publications with readers and advertisers. According to industry sources, building a strong online business extends the core audience of a local publication by as much as 10% to 12%. Furthermore, the availability of a newspaper online increases readership among 25 to 34 year olds by an average of 19%. This extension of the core audience makes local online advertising an attractive complement for existing print advertisers while opening up new opportunities to attract local advertisers that have never advertised with local publications. National advertisers have recently expressed interest in reaching buyers on a hyper-local level and, although they typically are not significant advertisers in community publications, the internet offers them a powerful medium to reach targeted local audiences.

Circulation

Overall daily newspaper circulation, including national and urban newspapers, has declined at an average rate of 0.5% since 1996. Unlike daily newspapers, total circulation of weekly publications has increased at an average annual rate of 1.0% over the same period. The charts below presents industry circulation trends from 1996 through 2004.

 

LOGO    LOGO

Our Strengths

We believe some of our most significant strengths are:

High Quality Assets with Dominant Local Franchises.    Our publications benefit from a long history as a trusted voice in the communities we serve and a reputation for comprehensive and in-depth local content. This has resulted in strong reader loyalty which is highly valued by local advertisers. We continue to build on long-standing relationships with local advertisers and our in-depth knowledge of local markets. In addition, our markets are generally not large enough to support a second newspaper and our local news gathering infrastructures, sales networks and relationships would be time consuming and costly to replicate. As a result, we face limited competition in most of our markets.

 

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Superior Value Proposition for Our Advertisers.    Our publications provide a cost effective means for advertisers to reach the customers they covet due to our strong reader loyalty and high audience penetration rates. We offer advertisers several alternatives (dailies, weeklies, shoppers online and niche publications) to reach consumers and to tailor the nature and frequency of their marketing messages. The concentrated local focus of our distribution provides advertisers with a targeted audience with whom they can communicate directly, thereby maximizing the efficiency of their advertising spending. Our combined product offerings give local advertisers unparalleled access to this highly valued local audience.

Stable and Diversified Advertising Revenue Base.    Our advertising revenue tends to be stable and recurring for several reasons. First, we have a fragmented and diversified advertising customer base in our local markets. Over 125,000 individual businesses advertise in our publications, and our top 20 advertisers contributed less than 5% of our pro forma total revenue in 2005, with the largest advertiser contributing less than 1%. In addition, over 1.75 million classified advertisements were placed in our publications in 2005. Second, having operations in 285 markets across 17 states helps to limit our exposure to location-specific economic downturns, as there is no significant correlation between the performance of any two of our operating clusters. Third, the large number and diversity of our publications also contributes to the stability of our operations, with our largest publication, The Patriot Ledger, contributing only 8% of our pro forma total revenues in 2005. Finally, over 71% of our pro forma total advertising revenue in 2005 was derived from local advertising, which tends to be less volatile than national and major account advertising.

Scale Yields Higher Margins and Allows Us to Realize Operating Synergies.    Our size facilitates our clustering strategy, which allows us to realize operating efficiencies. We achieve higher operating margins than our publications could achieve on a stand-alone basis by leveraging our operations and implementing revenue initiatives across a broader local footprint in a geographic cluster. Our scale enables us to centralize our corporate and administrative operations and spread costs over a larger number of publications. We also benefit from economies of scale in the purchase of insurance, newsprint and other supplies and equipment.

Strong Financial Profile Generates Significant Cash Flow.    Our business generates significant recurring cash flow due to our stable revenue, high margins, low capital expenditure and working capital requirements and currently favorable tax position.

Strong Track Record of Acquiring and Integrating New Assets.    We have created a national platform for consolidating local publications and have demonstrated an ability to improve the performance of the publications we acquire through sound management, including revenue generating and direct cost saving initiatives. Since our inception, we have acquired 249 publications in 37 transactions that contributed an aggregate of 63% of our pro forma total revenue in 2005. Excluding the Acquisitions, we have invested over $190 million and integrated 118 publications in 35 transactions. By implementing revenue generating initiatives and leveraging the economies of scale inherent in our clustering strategy we increased trailing twelve-month Adjusted EBITDA at those publications from $18 million at the time of acquisition to $24 million in 2005.

Experienced Management Team.    Our senior management team is comprised of executives who have an average of over 20 years of experience in the media industry. Our executive officers have a successful track record of growing businesses organically and identifying and integrating acquisitions. In addition, we have developed strong publishers at individual newspapers who are established in their local communities and are responsible and accountable for the day-to-day performance of the business. Many of our current publishers have been with us since we were formed in 1997.

 

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Our Strategy

We seek to grow revenue, cash flow and dividends per share by leveraging our community-based franchises and relationships to increase our product offerings, penetration rates and market share in the communities we serve and by pursuing a disciplined approach to acquisitions. The key elements of our strategy are:

Maintain Our Dominance 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 in order to position our products as a “must read” within their markets.

Pursue a Disciplined and Accretive Acquisition Strategy in Existing and New Markets.    We seek to grow in existing and new markets through a disciplined and cash flow accretive acquisition strategy. The local media industry is highly fragmented and we believe we have a strong platform for creating additional shareholder value. We intend to pursue acquisitions of local marketing businesses including directories, traders and direct mail that are accretive to our cash flow. We continue to have a disciplined approach to acquisitions and are likely to pursue only acquisitions that are additive to our existing clusters, or are large enough to form the basis of a new cluster.

Leverage Benefits of Scale and Clustering to Increase Cash Flows and Margins.    We will continue to take advantage of geographic clustering to realize operating and economic efficiencies in areas such as labor, production, overhead, raw materials and distribution costs. We believe we will be able to expand our profit margins as we streamline and further centralize purchasing and administrative functions and integrate acquired properties.

Introduce New Products or Modify Our Products to Enhance the Value Proposition for Our Advertisers.    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 advertisers. These products are often specialty publications that address specific interests such as employment, healthcare, hobbies and real estate. In addition, we intend to capitalize upon our unique position in local markets to introduce other marketing oriented products such as directories, shoppers and other niche publications in both online and printed format in order to further enhance our value to advertisers.

Pursue a Content-Driven Internet Strategy.    We are well positioned to increase our online penetration and generate additional online revenues due to both our ability to deliver unique local content and our relationships with both readers and advertisers. We believe our local brands and unique local content make our sites a “must visit” destination for our local audiences. This presents an opportunity to increase our audience penetration rates and advertising market share in each of the communities we serve. Centralizing our technology and building a network of websites will allow us to aggregate classified advertisements and build online classified products in areas such as real estate, automotive and recruitment. We will also have the ability to sell traditional online advertising locally and nationally. Finally, we will generally be able to share content across our organization within this network. This gives each of our publications access to technology, online management expertise, content and advertisers that they could not obtain or afford if they were operating independently.

Increase Sales Force Productivity.    We aim to increase the productivity of our sales force and, in turn, advertising revenues. Our approach includes ongoing company-wide training of sales representatives and sales managers with training programs that focus on strengthening their ability to

 

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gather relevant demographic information, present to customers, effectively utilize time and close on sales calls. Our training will also include sharing “best practices” of our most successful account representatives. Finally, for managers, we will create a “train the trainer” program to enable our clusters to effectively propagate our training programs. We will regularly evaluate the performance of our sales representatives and sales management and implement contests and other incentive compensation programs. We will also regularly evaluate our advertising rates to ensure that we are maximizing revenue opportunities.

Products

Our product mix currently consists of four publication types: (i) daily newspapers, (ii) weekly newspapers, (iii) shoppers and (iv) niche publications:

 

Daily Newspapers

  

Weekly Newspapers

   Shoppers    Niche Publications
Paid   

Paid and free

   Paid and free    Paid and free
Distributed four to seven days per week    Distributed one to three days per week    Distributed weekly    Distributed weekly,
monthly or on
annual basis
Printed on newsprint, folded    Printed on newsprint, folded    Printed on newsprint,
folded or booklet
   Printed on newsprint or
glossy, folded,
booklet, magazine
or book
50% editorial (local news and coverage of community events, some national headlines) and 50% ads (including classifieds)    50% editorial (local news and coverage of community events, some national headlines for smaller markets which cannot support a daily newspaper) and 50% ads (including classifieds)    Almost 100% ads,
primarily classifieds,
display and inserts
   Niche content and
targeted ads (e.g.,
Chamber of
Commerce city
guides, tourism guides
and special
interest publications
e.g., seniors, golf, real
estate, calendars and
directories)
Revenue from advertisers, subscribers, rack / box sales   

Paid: Revenue from advertising, rack / box sales

 

Free: Advertising revenue only, provide 100% market coverage

   Paid: Revenue from
advertising, rack /
box sales

 

Free: Advertising
revenue only,
provide 100%
market coverage

   Paid: Revenue from
advertising, rack /
box sales

 

Free: Advertising
revenue only

Available online    Major publications available online    Major publications
available online
   Selectively available
online

 

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Overview of Operations

We operate in five geographic regions: Northeast, Western, Northern Midwest, Southern Midwest and Atlantic.

The following table sets forth information regarding our publications.

 

     Number of Publications    Circulation(1)

Operating Region

   Dailies    Weeklies    Shoppers    Paid    Free    Total Circulation

Northeast

   6    115    10    435,885    361,676    797,561

Western

   20    71    34    311,009    430,219    741,228

Northern Midwest

   19    13    28    102,070    447,591    549,661

Southern Midwest

   19    21    28    75,785    399,799    475,584

Atlantic

   11    11    17    100,568    245,372    345,940
                             

Total

   75    231    117    1,025,317    1,884,657    2,909,974

(1) Circulation statistics are estimated by management as of June 30, 2006, except that audited circulation statistics, if available, are utilized as of the audit date.

Northeast Region.    We are the largest community newspaper publisher in New England by number of publications, serving 160 communities in attractive markets across eastern Massachusetts. All of our current Northeast publications are located in the Boston Designated Market Area (“DMA”), including six daily and 115 weekly newspapers, 10 shoppers and numerous specialty publications serving a contiguous market area north, west and south of Boston, extending through Cape Cod. Our three largest daily newspapers are located in our Northeast region: The Patriot Ledger (founded in 1837 with circulation of 55,168), the Enterprise (founded in 1880 with circulation of 35,040) and the MetroWest Daily News (founded in 1887 with circulation of 22,882).

Many of the towns within our Northeast footprint were founded in the 1600s and our daily and weekly newspapers in the region have long been part of the fabric of these communities. In fact, our Northeast region has 33 daily and weekly newspapers that are over 100 years old.

Our publications serve some of the most demographically desirable communities in New England. The Boston DMA is the fifth largest market in the United States with 2.4 million households and 6.2 million people and ranks first nationally in concentration of colleges and universities. According to the Market Statistics’ Demographics USA Survey of Buying Power 2004 and other market surveys, with more than 1.6 million households in the region earning greater than $75,000, the Boston metropolitan market ranks third in effective buying power in the United States and first in retail sales per household. In addition, with daily newspaper penetration of approximately 62.3%, Boston ranks third among the 50 largest DMAs in terms of audience penetration rates.

The Boston DMA has a strong retail base and is home to a number of large regional malls including the South Shore Plaza, the largest retail shopping center in New England. Retail sales in the Boston market totaled $44.6 billion in 2004, making this concentrated area an important market for local and national advertisers alike.

Boston also is widely recognized as an employment center for leading growth industries such as technology, biotechnology, healthcare and higher education. Many of the region’s leading employers are located in the communities served by our Northeast region’s publications. Thus, residents can work and shop close to home, making the news, information and local advertising provided by our publications integral to their lives.

 

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The following table sets forth information regarding our publications and production facilities in the Northeast region:

 

     Number of Publications    Number of
Production
Facilities

State of Operations

   Dailies    Weeklies    Shoppers   

Massachusetts

   6    115    10    5

Western Region.    Our Western region encompasses Illinois, parts of Minnesota, California, Colorado, Arizona and Wisconsin and a total of 20 daily and 71 weekly newspapers and 34 shoppers. In addition to a geographic mix, we benefit from a diverse economic and employment base across the region.

We are one of the largest newspaper publishing companies in the state of Illinois with 16 daily and 50 weekly newspapers and 22 shoppers. The majority of our publications in Illinois are published in three main clusters that serve southern Illinois, west central Illinois and northwest suburban Chicago. Each of our 88 publications is published at one of the 12 press plants we operate across the state.

The southern Illinois cluster is anchored by the 25,000 paid circulation weekly, the SI Trader, and eight daily newspapers serving contiguous communities with a combined 22,126 daily circulation. The grouping of these publications, as well as the complementary weekly offerings, provides advertisers with the opportunity for total market coverage at cost effective rates. Located approximately 110 miles from St. Louis, Missouri, this cluster’s communities include two universities, multiple healthcare facilities, manufacturing and agricultural employers and the 119-store Central Mall in Marion, Illinois.

Our western Illinois cluster has grown from two dailies and two shoppers at our inception to 18 publications located in Aledo, Canton, Galesburg, Geneseo, Kewanee, Macomb, Monmouth and Pekin. This cluster includes five dailies, five weeklies and eight shoppers. This region is characterized by its colleges and universities such as Knox College, Bradley University and Western Illinois University and local employers such as Caterpillar, John Deere, Monsanto, Pioneer and Archer Daniels Midland. In addition, the Coast Guard and National Guard each maintain bases in the area. The proximity of the communities in this cluster allows for combination advertising sales in the area.

Our suburban Chicago cluster publishes 37 weekly newspapers in the affluent southern and western suburbs of Chicago. This group was built through a series of five acquisitions and the subsequent centralization of back-office functions. The Chicago cluster is home to a number of Fortune 500 companies, including Boeing, Kraft Foods, Walgreen, Sears and Motorola.

In April 2004, we acquired Independent Delivery Service (“IDS”) in the suburban Chicago cluster. IDS is a door-to-door distribution service that offers a cost effective method for large or small businesses to deliver their advertising messages. IDS specializes in door hangers, newspapers, product samples, flyers, community guides, advertising circulars, catalogs, phone directories and newsletters. IDS offers targeted delivery to over 2 million households per week in nine counties in our suburban Chicago cluster. Prior to the acquisition, we were an IDS customer, with over 3 million newspapers delivered annually. The acquisition enables us to control delivery in this cluster and cost-effectively launch new products.

The southwest Minnesota cluster, near Marshall and Mankato, was built through a 1999 acquisition of seven weeklies and four shoppers in the cities of Cottonwood, Granite Falls, Montevideo, Redwood Falls, St. James, Sleepy Eye and Wabasso. Following the initial acquisition, we acquired two additional weeklies and, in 2003, launched shopper publications in three markets. Each of the weekly publications serves an independent community with a population of less than 10,000 people who rely almost entirely on our publications for their local news. The printing for each of these publications has

 

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been consolidated to one print plant in northern Minnesota. Local employers include Schwan Food Company, Archer Daniels Midland and Southwest State University. The cluster includes numerous other colleges and universities, including Minnesota State College-Mankato, Gustavus Adolphus College and Rasmussen College. There is also a diverse mix of local retailers, including several automobile dealerships and supermarkets, national chains and mass merchants.

In Colorado, we operate a daily newspaper and two weekly newspapers in Telluride and the surrounding area and a daily newspaper along with an agricultural publication in LaJunta. As a high-end tourism destination, the Telluride market has an attractive demographic and growth profile.

Three of our weeklies in California are located in the Mt. Shasta area of northern California, where tourism is a major economic force. We also operate a daily in Yreka and a weekly newspaper in Gridley, which is currently experiencing significant growth due to migration from Sacramento. Our daily newspaper in Ridgecrest serves a growing community that includes the China Lake naval base.

The following table sets forth information regarding our publications and production facilities in the Western region:

 

     Number of Publications   

Number of

Production
Facilities

State of Operations

   Dailies    Weeklies    Shoppers   

Illinois

   16    50    22    12

Southern Minnesota

   0    7    4    1

California

   2    6    6    3

Colorado

   2    5    1    1

Arizona

   0    2    1    1

Wisconsin

   0    1    0    0
                   

Total

   20    71    34    18

Northern Midwest Region.    Our Northern Midwest region comprises 19 daily and 13 weekly newspapers and 28 shoppers spanning seven states: Michigan, parts of Minnesota, North Dakota, Iowa, Nebraska, Kansas and parts of Missouri. Each of our daily newspapers and five of our weeklies in the Northern Midwest Region serve communities located in a county seat. Our daily and weekly news products in this region average more than 100 years in continuous operation and our shopper publications are among the first ever published, with histories dating to the early 1960s.

The communities we serve in our Northern Midwest region are largely rural but also support educational institutions, government agencies (including prisons and military bases), tourism, veterinary medicine and ethanol manufacturing. The area is also strong in the automotive (including recreational vehicles), boat, home construction products and furniture manufacturing sectors.

The greatest concentration of circulation and market presence in our Northern Midwest region is in northern Missouri where we operate seven daily and one weekly newspaper and nine shoppers. We cover the 19,000 square mile area from Hannibal, on the state’s eastern border, to the western border and from Columbia in the south to the Iowa border in the north. Local employers include the University of Missouri and other colleges, local and federal governments, State Farm Insurance and 3M.

We also have a presence in southern Michigan where three of our dailies—Adrian, Coldwater and Sturgis—along with three weeklies and five shoppers blanket the south central portion of the state and into Indiana. The 15,300-circulation Adrian Daily Telegram is the flagship publication of the group. This area has several large employers, including Delphi, ConAgra, Tecumseh Products, Kellogg and Jackson State Prison, and a number of colleges and universities.

 

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Our Kansas City cluster includes seven publications (two daily and two weekly newspapers and three shoppers) located in the eastern Kansas cities of Leavenworth, Kansas City and Shawnee. The Leavenworth Times was one of our original daily newspapers and the balance of the cluster was acquired afterward. In addition, we launched our military publication, The Leavenworth Lamp, in Fort Leavenworth. The Kansas City cluster, with a population over 700,000, is home to several prominent companies, including Hallmark, H&R Block, Interstate Bakeries, and the University of Kansas.

We also have clusters in and around Grand Forks, North Dakota, (home to the Grand Forks Air Force Base and the University of North Dakota) and near Mason City, Iowa, where Cargill, ConAgra, Kraft, Winnebago and Fort Dodge Animal Health, a division of Wyeth, each maintain significant operations.

The following table sets forth information regarding our publications and production facilities in the Northern Midwest region:

 

     Number of Publications   

Number of

Production
Facilities

State of Operations

   Dailies    Weeklies    Shoppers   

Michigan

   6    4    8    5

Minnesota

   1    1    2    1

North Dakota

   1    0    1    1

Iowa

   1    5    4    1

Nebraska

   1    1    1    1

Kansas

   2    1    3    1

Northern Missouri

   7    1    9    5
                   

Total

   19    13    28    15

Southern Midwest Region.    Our Southern Midwest region comprises 19 daily and 21 weekly newspapers and 28 shoppers in parts of Missouri, Kansas, Arkansas and Louisiana.

Our southern Missouri operations are clustered around Lake of the Ozarks and Joplin. Located midway between Kansas City and St. Louis and approximately 90 miles from Springfield, Missouri, Lake of the Ozarks has benefited from significant retail expansion, including many new businesses that advertise in our publications, tourism and an influx of second home residents over the last several years. Our three daily and seven weekly newspapers and 10 shoppers that serve the Lake of the Ozarks area reach approximately 165,000 people.

The Joplin cluster is located in southwest Missouri and produces two daily and two weekly newspapers and three shoppers that serve a population of approximately 170,000. There are several colleges and universities in the area, a National Guard Fort and several large medical centers in addition to a diverse mix of retail businesses, including the 120-store Northpark Mall.

The Wichita cluster, with a population of approximately 600,000 people, consists of six dailies, three weeklies and six shoppers in the towns of Augusta, Derby, El Dorado, Pratt, Wellington and McPherson near Wichita, Kansas. The clustering of the small dailies in this area allows the group to sell advertisers a package providing access to multiple communities. Major aircraft manufacturers Boeing, Bombardier, Cessna and Raytheon have facilities nearby and McConnell Air Force Base is a key component of the local economy.

In Louisiana, we have an operating cluster in the southwestern part of the state, located between Lake Charles and Alexandria. This cluster consists of six publications located in the cities of Leesville, Sulpher, DeRidder and Vinton. A new press configuration has increased the quality of the Company’s products in the area and provides an opportunity for meaningful commercial print revenue. Local

 

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employers include major manufacturers such as Alcoa, Firestone, International Paper and Proctor & Gamble. We also expect the return of military personnel to the recently reopened Fort Polk base to drive revenue at our Guardian publication.

Our Baton Rouge cluster is a relatively new cluster developed through a series of acquisitions. The group consists of four weeklies and three shoppers in the southeastern Louisiana cities of Donaldsville, Gonzales, Pierre Part and Plaquemine. Numerous petrochemical companies such as BASF, Exxon Mobil and Dow Chemical, plus universities including Louisiana State, support the local economies.

The following table sets forth information regarding our publications and production facilities in the Southern Midwest region:

 

     Number of Publications    Number of
Production
Facilities

State of Operations

   Dailies    Weeklies    Shoppers   

Southern Missouri

   5    9    13    2

Kansas

   6    3    6    2

Louisiana

   4    5    5    3

Arkansas

   4    4    4    2
                   

Total

   19    21    28        9

Atlantic Region.    Our holdings in New York, Pennsylvania and West Virginia are anchored by two clusters, one in the area around Honesdale in northeastern Pennsylvania and the other in the area around Corning and Hornell in southwestern New York. Virtually all of our 11 dailies in the Atlantic Region date back more than 125 years.

Our Honesdale cluster, approximately 30 miles from Scranton, Pennsylvania, consists of six publications in the cities of Carbondale, Honesdale and Hawley, Pennsylvania, along with Liberty, New York, located just across the Delaware River to the east. The cluster was created from our daily and shopper operations in Honesdale and later supplemented by the acquisition of weeklies and shoppers in Carbondale and Liberty. Tourism is a resurgent growth industry in and around this cluster, highlighted by ongoing development in the Pocono Mountains, the Delaware River Valley and Lake Wallenpaupack, near Hawley, Pennsylvania. This area also enjoys a stable housing and job market, due in part to its proximity to the greater Scranton-Wilkes Barre metropolitan area. Local employers include General Dynamics, Blue Cross/Blue Shield, Commonwealth Telephone and various colleges and universities, medical centers and governmental agencies.

In southwestern New York, our operations are centered around four publications based in Steuben County. In Corning, The Leader, a recently acquired 12,000 circulation daily newspaper, dominates the eastern half of the county and shares its hometown namesake with Corning Incorporated. Due to Corning Incorporated’s presence, this has become a vibrant retail community, evidenced in part by the 130-store Arnot Mall at Big Flats. The Hornell Evening Tribune circulates daily throughout the western half of the county. Situated directly between these two dailies in the county seat of Bath is the 11,000 circulation Steuben Courier, a free-distribution weekly. The Hornell-Canisteo Penn-E-Saver, a standalone shopper, solidifies this flagship group.

We also have a strong presence in the print advertising markets in three other New York counties that surround Steuben. In Allegany County to the west, the Wellsville Daily Reporter and its shopper, the Allegany County Pennysaver, cover most households. In Livingston County to the north, the Dansville-Wayland Pennysaver, the Geneseeway Shopper and the Genesee County Express complement one another with combined circulation of over 23,000. In Yates County to the north and east, The Chronicle-Express and Chronicle Ad-Visor shopper distribute weekly to approximately 16,000 households centered around the county seat of Penn Yan.

 

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In nearby Chemung County, the 26,000 circulation Horseheads Shopper anchors our presence in this area and along with the Sayre Evening Times in Sayre, Pennsylvania. The majority of the southwestern New York cluster parallels future Interstate 86 across the central Southern Tier of New York State, which is benefiting from continued improvement and expansion under an omnibus federal highway appropriations bill. Moreover, the cluster has several colleges and universities nearby, including Cornell University, Ithaca College, Elmira College and Houghton College. In addition to the clustered publications, we have several strong standalone newspapers in the Atlantic Region with total circulation of approximately 135,000. Our standalone daily publications in Waynesboro, Pennsylvania and Herkimer, New York, are complemented by at least one other GateHouse publication nearby, allowing for printing synergies and cross-selling opportunities.

The following table sets forth information regarding our publications and production facilities in the Atlantic region:

 

     Number of Publications    Number of
Production
Facilities

State of Operations

   Dailies    Weeklies    Shoppers   

New York

   6    5    13    4

Pennsylvania

   4    4    2    3

West Virginia

   1    2    2    2
                   

Total

   11    11    17        9

Revenue

Our operations generate three primary types of revenue: (i) advertising, (ii) circulation (including single copy sales and home delivery subscriptions) and (iii) other (primarily commercial printing). In 2005, advertising, circulation and other revenue accounted for approximately 77%, 17% and 6%, respectively, of our pro forma total revenue. The contribution of advertising, circulation and other revenue to our total revenue in 2003, 2004 and 2005 and to pro forma total revenue in 2005 was as follows:

 

    Year ended December 31,  

Period from
January 1, 2005
to June 5

2005

 

Period from
June 6, 2005
to December 31,

2005

  Non-GAAP
Combined
Year ended
December 31,
2005
 

Year ended
December 31,

2005

  2003   2004        
    (Predecessor)   (Predecessor)   (Predecessor)   (Successor)       (Pro Forma)
    (in thousands)

Revenue:

           

Advertising

  $ 139,258   $ 148,291   $ 63,172   $ 88,798   $ 151,970   $ 295,645

Circulation

    31,478     34,017     14,184     19,298     33,482     66,085

Commercial printing and other

    11,645     17,776     8,134     11,415     19,549     22,750
                                   

Total revenue

  $ 182,381   $ 200,084   $ 85,490   $ 119,511   $ 205,001   $ 384,480

Advertising

Advertising revenue is the largest component of our revenue, accounting for approximately 76%, 74% and 74% of our total revenue in 2003, 2004 and 2005, respectively, and 77% of our pro forma total revenue in 2005. We categorize advertising as follows:

 

  Ÿ   Local Display—local retailers, local accounts at national retailers, grocers, department and furniture stores, auto dealers, niche shops, restaurants and other consumer related businesses.

 

  Ÿ   Local Classified—local employment, automotive, real estate and other advertising.

 

  Ÿ   National—national and major accounts such as wireless communications companies, airlines and hotels.

 

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We believe that our advertising revenue tends to be more stable than the advertising revenue of large metropolitan and national print media because we rely primarily on local rather than national advertising. We generally derive 95% of our advertising revenue from local advertising (both local display and local classified) and only 5% from national advertising. Local advertising tends to be less sensitive to economic cycles than national advertising as local businesses generally have fewer effective advertising channels through which to reach their customers. We are also less reliant than large metropolitan newspapers upon classified advertising, particularly the recruiting, real estate and automotive categories, which are generally more sensitive to economic conditions.

Our advertising rate structures vary among our publications and are a function of various factors, including local market conditions, competition, circulation, readership and demographics. Our corporate management works with our local newspaper management to approve advertising rates and a portion of our publishers’ compensation is based upon increases in advertising revenue. We share advertising concepts throughout our network of publishers and advertising managers, enabling them to utilize advertising products and sales strategies that are successful in other markets we serve.

Substantially all of our advertising revenue is derived from a diverse group of local retailers and local classified advertisers, resulting in very limited customer concentration. No single advertiser accounted for more than 1% of our pro forma total revenue in 2005 or our total revenue in 2003, 2004 or 2005, and our 20 largest advertisers accounted for less than 5% of our pro forma total revenue in 2005.

Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter is, historically, our weakest quarter of the year in terms of revenue. Correspondingly, our fourth fiscal quarter is, historically, our strongest quarter, because it includes heavy holiday season advertising. We expect that this seasonality will continue to affect our advertising revenue in future periods.

Circulation

Our circulation revenue is derived from home delivery sales to subscribers and single copy sales at retail stores and vending racks and boxes. We own 75 paid daily publications that range in circulation from approximately 2,000 to over 55,000 and 185 paid weekly publications that range in circulation from approximately 1,000 to 25,000. Circulation revenue accounted for approximately 17%, 17% and 16% of our total revenue in 2003, 2004 and 2005, respectively, and 17% of our pro forma total revenue in 2005.

Subscriptions are typically sold for three- to 12-month terms and often include promotions to extend the average subscription period. We implement marketing programs to increase readership through subscription and single copy sales, including Company-wide and local circulation contests, door-to-door sales and strategic alliances with local schools in the form of “Newspapers in Education” programs. In addition, since the adoption of the Telemarketing Sales Rule by the Federal Trade Commission in 2003, which created a “do not call” registry, we have increased our use of “EZ Pay” programs, door to door sales, kiosks, sampling programs, in-paper promotions and online promotions to increase our circulation.

We encourage subscriber use of EZ Pay, a monthly credit card charge and direct bank debit payment program, which has led to higher retention rates for subscribers. We also use an active stop-loss program for all expiring subscribers. Additionally, in order to improve our circulation revenue and circulation trends, we periodically review the need for quality enhancements, such as:

 

  Ÿ   Upgrading and expanding printing facilities and printing presses.

 

  Ÿ   Increasing the use of color and color photographs.

 

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  Ÿ   Improving graphic design, including complete redesigns.

 

  Ÿ   Developing creative and interactive promotional campaigns.

 

  Ÿ   Converting selected newspapers from afternoon to morning publications.

 

  Ÿ   Converting selected publications from free circulation to paid and vice versa.

Other

We provide commercial printing services to third parties on a competitive bid basis as a means to generate incremental revenue and utilize excess printing capacity. These customers consist primarily of other publishers that do not have their own printing presses and do not compete with our publications. We also print other commercial materials, including flyers, business cards and invitations. Other sources of revenue, including commercial printing, accounted for approximately 6%, 9% and 10% of our total revenue in 2003, 2004 and 2005, respectively, and 6% of our pro forma total revenue in 2005.

Printing and Distribution

As of June 30, 2006, we operated 56 print facilities. We own 54 of these facilities and lease the remaining two. Each of our print facilities produces eight publications on average and is generally located within 60 miles of the communities it serves. Our publications are generally fully paginated using image-setter technology, which allows for design flexibility and high quality reproduction of color graphics. By clustering our production resources, we are able to reduce the operating costs of our publications while increasing the quality of our small and midsize market publications that would typically not otherwise have access to high quality production facilities. We believe our superior production quality is critical to maintaining and enhancing our position as the leading provider of local news coverage in the markets we serve.

The distribution of our daily newspapers is typically outsourced to independent, locally based, third-party distributors that also distribute a majority of our weekly newspapers and non-newspaper publications. In addition, certain of our shopper and weekly publications are delivered via U.S. Postal Service.

Newsprint

We are a member of a newsprint-buying consortium which enables our local publishers to obtain favorable pricing by purchasing newsprint from local mills at reduced rates negotiated by the consortium. Since joining this consortium in March 2002, we have generally been able to purchase newsprint at $10 to $12 per metric ton below the market price. On August 1, 2006, we will be switching to a larger newsprint-buying consortium that will give us improved pricing and assurance of adequate supply versus our existing newsprint provider. We generally maintain a 30-day inventory of newsprint.

Historically, the market price of newsprint has been volatile, reaching a high of approximately $750 per metric ton in 1996 and a low of $410 per metric ton in 2002. The average market price of newsprint for 2005 was approximately $610 per metric ton.

In 2005, on a pro forma basis, we purchased approximately 65,000 metric tons of newsprint (including for commercial printing) and the cost of our newsprint consumption related to our publications totaled approximately $25.6 million. Our newsprint expense generally averages less than 10% of total revenue, which compares favorably to larger, metropolitan newspapers.

 

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Competition

Each of our publications competes for advertising revenue to varying degrees with direct mail, yellow pages, radio, outdoor advertising, broadcast and cable television, magazines, local, regional and national newspapers, shoppers and other print and online media sources. However, barriers to entry are high in our markets due to our position as the preeminent source for local news and information therein, because our markets are generally not large enough to support a second newspaper and because our local news gathering infrastructures, sales networks and relationships would be time consuming and costly to replicate.

We provide our readers with community specific content, which is generally not available from other media sources. Our direct and focused coverage of the market and our cost effective advertising rates relative to more broadly circulated metropolitan newspaper allow us to tailor an approach for our advertisers. As a result, our publications generally capture a large share of local advertising in the markets they serve.

Management and Employees

The seven members of our executive management team have an average of approximately 23 years of relevant industry experience and a long history of identifying, acquiring and improving the operations of acquired publications. Our executive management team has managed community newspapers in various economic cycles. We also have a seasoned team of managers at the local level, where our 105 publishers have an average of approximately 20 years of industry experience.

As of June 30, 2006, we had approximately 4,100 full time employees, consisting of hourly and salaried employees. We employ union personnel at four of our 423 core publications (315 full-time equivalent employees). Accordingly, approximately 92% of our workforce is non-unionized. We believe that relations with our employees are generally good and we have had no previous work stoppages at any of our publications.

Properties

As of June 30, 2006, we operated 56 print facilities across the United States. We own 54 of these facilities and lease the remaining two for terms ranging from one to five years. Our facilities range in size from approximately 1,000 to 55,000 square feet. Our executive offices are located in Fairport, New York, where we lease approximately 15,000 square feet under a lease terminating in June 2014. We do not believe any individual property is material to our financial condition or results of operations.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth information concerning our directors and executive officers, including their ages as of June 30, 2006:

 

Name

   Age   

Position

Wesley R. Edens

   44    Director (Chairman)

Michael E. Reed

   40    Chief Executive Officer

Mark R. Thompson

   44    Chief Financial Officer

Scott T. Champion

   46    Co-President, Co-Chief Operating Officer

Randall W. Cope

   45    Co-President, Co-Chief Operating Officer

Gene A. Hall

   54    Executive Vice President

Kelly M. Luvison

   46    Executive Vice President

Polly G. Sack

   46    General Counsel

William B. Doniger

   40    Director

Randal A. Nardone

   51    Director

Wesley R. Edens is the Chairman of our board of directors and has served in this capacity since June 2005. Mr. Edens has been a Principal and the Chairman of the Management Committee of Fortress Investment Group LLC since co-founding the firm in May 1998 through which he manages investments in various asset-related investment vehicles and serves on the board of two registered investment companies, Fortress Registered Investment Trust and Fortress Investment Trust II. He is the Chairman of the board of directors and Chief Executive Officer of Newcastle Investment Corp., an affiliate of Fortress listed on the New York Stock Exchange. He is also Chairman of the board of directors of Brookdale Senior Living Inc., a senior living company listed on the New York Stock Exchange, since its inception in November 2005 and chairman of the board of directors of Global Signal Inc., a New York Stock Exchange listed company, since its reorganization in October 2002 and was Chief Executive Officer of Global Signal, Inc. from February 2004 to April 2006. Since its inception in 2003, he has also served as a director and the Chief Executive Officer of Eurocastle Investment Limited, an affiliate of Fortress which is currently listed on the Amsterdam Euronext Exchange and Chairman of the board of directors of Mapeley Limited, which has been listed on the London Stock Exchange since June 2005.

Michael E. Reed became our Chief Executive Officer in February 2006. He was formerly the President and Chief Executive Officer of Community Newspaper Holdings, Inc. (“CNHI”) and had served in that capacity since 1999. Mr. Reed served as CNHI’s Chief Financial Officer from 1997 to 1999. Prior to that, he worked for Park Communications, Inc., a multimedia company, located in Ithaca, New York. Mr. Reed currently serves on the Board of Directors for the Associated Press and he is also the Chairman of the Audit Committee for the Associated Press. He also serves on the board of directors for the Newspaper Association of America and the board of directors for Inland Newspaper Association. Mr. Reed is currently a member of the Board of Visitors of the University of Alabama’s College of Communication and Information Sciences and is a member of the Grady College Journalism School’s Board of Advisors.

Mark R. Thompson became our Chief Financial Officer in May 2006. He was formerly Chief Financial Officer of eToys Direct, Inc., an internet retailer and distributor of toys and gifts, from 2005 to 2006. From 1999 to 2005, Mr. Thompson served as Vice President and Senior Vice President—Finance and IT with Crown Media Holdings, Inc., a public cable programming company with more than 100 million customers. Prior to that, Mr. Thompson was the Controller of Hallmark Cards North America from 1995 to 1999. From 1992 to 1995, Mr. Thompson served as the Corporate Controller of Crown Cable, a cable multiple system operator. From 1990 to 1992, Mr. Thompson served in various

 

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positions at Hallmark Cards, Inc. in corporate financial reporting and internal audit. From 1986 to 1990 Mr. Thompson was a CPA with the accounting firm KPMG. Mr. Thompson holds master’s and bachelor’s degrees in accounting.

Scott T. Champion is our Co-President and Co-Chief Operating Officer responsible for our Western Region. He served as Regional Executive Vice President from 1999 until he was named our Co-President and Co-Chief Operating Officer in June 2005. He was also a director from January 2000 until June 2005. In 1998, he served as our Senior Vice President. Prior to 1998, he served as Senior Vice President, regional manager and district manager of American Publishing Company (“APC”) and had been employed at APC since 1988. Prior to his employment at APC, Mr. Champion served as the publisher of a group of privately owned publications. Mr. Champion has more than 25 years of experience in the newspaper industry.

Randall W. Cope is our Co-President and Co-Chief Operating Officer responsible for our Southern Midwest Region. Mr. Cope held the position of Executive Vice President from April 2002 until he was named our Co-President and Co-Chief Operating Officer in June 2005. Mr. Cope served as Vice President from December 1998 until he was named our Executive Vice President in April 2002. Mr. Cope also oversees our Specialty Publications Division and national classified advertising network. From 1995 to 1998, Mr. Cope was regional manager and publisher of the Northwest Arkansas Times in Fayetteville, Arkansas, which was owned by APC. Mr. Cope has over 20 years of experience covering all areas of newspaper operations.

Gene A. Hall is an Executive Vice President and has primary responsibility for our Northern Midwest Region. He was appointed our Senior Vice President in January 1998. Prior to his employment with us, he served as a Senior Vice President of APC from 1992 to 1998. Prior to 1992, he served as a regional manager and had been employed at APC since 1988. Prior to his employment at APC, Mr. Hall was the owner and publisher of the Charles City Press, Six County Shopper and The Extra in Charles City, Iowa, which we currently own. Mr. Hall has more than 36 years of experience in the newspaper industry.

Kelly M. Luvison is an Executive Vice President and has primary responsibility for our Atlantic Region. Mr. Luvison served as a regional manager for us since January 1998, was appointed a Vice President in January 2000 and Executive Vice President in April 2002. Prior to January 1998, Mr. Luvison was a regional manager for APC. Since 1996, Mr. Luvison has been publisher of The Evening Tribune in Hornell, New York, a newspaper we currently own, in addition to his duties as a regional manager and Vice President.

Polly G. Sack became our General Counsel in May 2006. She was formerly Senior Vice President and Director of Mergers and Acquisitions of IMG Worldwide, Inc. (“IMG”), a global sports, media and entertainment company, and had served in that capacity since 2001. Ms. Sack also served as IMG’s associate counsel and a vice president from 1992 to 2001. Prior to that, she worked in private practice for a major international law firm. Ms. Sack holds bachelor’s degrees in civil engineering and mathematics and a master’s degree in civil engineering, in addition to a law degree.

William B. Doniger became a director and our Vice President in June 2005. Mr. Doniger became the Vice Chairman of Brookdale Senior Living Inc., which is listed on the New York Stock Exchange, in August 2005. He is a managing director of Fortress Investment Group LLC and oversees United States acquisitions. He joined Fortress in May 1998, prior to which he worked at UBS and, from January 1996 through December 1997, at BlackRock Financial Management, Inc. Prior to that, Mr. Doniger was in the structured finance group of Thacher Proffitt & Wood. Mr. Doniger received an A.B. in History from Princeton University and a J.D. from American University.

Randal A. Nardone has been a director since June 2005. Mr. Nardone is a member of the Management Committee of Fortress Investment Group LLC and has been Chief Operating Officer of

 

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Fortress Investment Group LLC since co-founding the firm in May 1998. Mr. Nardone was previously a Managing Director of Union Bank of Switzerland from May 1997 to May 1998. Prior to joining Union Bank of Switzerland in 1997, Mr. Nardone was a principal of BlackRock Financial Management, Inc. Prior to joining BlackRock, Mr. Nardone was a partner and a member of the executive committee at the law firm of Thacher Proffitt & Wood. Mr. Nardone received a B.A. in English and Biology from University of Connecticut and a J.D. from Boston University School of Law.

Term of Directors and Composition of Board of Directors

Upon the closing of the offering, our board of directors will consist of              directors. In accordance with the terms of our amended and restated certificate of incorporation, our board of directors will be divided into three staggered classes of directors of the same or nearly the same number. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. As a result, a portion of our board of directors will be elected each year. The division of the three classes and their respective election dates are as follows:

 

  Ÿ   the Class I directors’ term will expire at the annual meeting of stockholders to be held in 2007 (our Class I directors are                     );

 

  Ÿ   the Class II directors’ term will expire at the annual meeting of stockholders to be held in 2008 (our Class II directors are                     ); and

 

  Ÿ   the Class III directors’ term will expire at the annual meeting of stockholders to be held in 2009 (our Class III directors are                     ).

Our amended and restated certificate of incorporation authorizes a board of directors consisting of at least             , but no more than             , members, with the number of directors to be fixed from time to time by a resolution of the majority of our board of directors (or by a duly adopted amendment to our certificate of incorporation). Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

Term of Executive Officers

Each officer serves at the discretion of our board of directors and holds office until his successor is elected and qualified or until his earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board may establish other committees from time to time to facilitate the management of GateHouse.

Audit Committee.    Our audit committee oversees a broad range of issues surrounding our accounting and financial reporting processes and audits of our financial statements. Our audit committee (i) assists our board in monitoring the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditor’s qualifications and independence and the performance of our internal audit function and independent auditors; (ii) assumes direct responsibility for the appointment, compensation, retention and oversight of the work of any independent registered public accounting firm engaged for the purpose of performing any audit, review or attest services and for dealing directly with any such accounting firm; (iii) provides a medium for consideration of matters relating to any audit issues; and (iv) prepares the audit committee report that

 

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the SEC rules require be included in our annual proxy statement or annual report on Form 10-K. The members of our audit committee are             ,              and             .              will be our audit committee financial expert under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act. Each member of our audit committee is “independent” as defined under the Exchange Act and New York Stock Exchange rules.

Compensation Committee.    Our compensation committee reviews and recommends policy relating to compensation and benefits of our officers and employees, including reviewing and approving corporate goals and objectives relevant to compensation of the Chief Executive Officer and other senior officers, evaluating the performance of these officers in light of those goals and objectives and setting compensation of these officers based on such evaluations. The compensation committee also produces a report on executive officer compensation as required by the SEC to be included in our annual proxy statement or annual report on Form 10-K. The compensation committee reviews and evaluates, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter. The members of our compensation committee are             ,              and             , each of whom is “independent” as defined under New York Stock Exchange rules.

Nominating and Corporate Governance Committee.    The members of our nominating and corporate governance committee are             ,              and             , each of whom is “independent” as defined under New York Stock Exchange rules. The nominating and corporate governance committee will oversee and assist our board of directors in identifying, reviewing and recommending nominees for election as directors; advise our board of directors with respect to board composition, procedures and committees; recommend directors to serve on each committee; oversee the evaluation of our board of directors and our management; and develop, review and recommend corporate governance guidelines.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or compensation committee.

Director Compensation

We will pay an annual director’s fee to independent directors equal to $            , payable semi-annually. In addition, an annual fee of $             will be paid to the chairs of each of the audit and compensation committees of our board of directors, which fee will also be paid semi-annually. Affiliated directors, however, will not be separately compensated by us. Fees to independent directors may be paid by issuance of common stock, based on the value of such common stock at the date of issuance, rather than in cash, provided that any such issuance does not prevent such director from being determined to be independent and such stock is granted pursuant to a stockholder-approved plan or the issuance is otherwise exempt from any applicable stock exchange listing requirement. All members of our board of directors will be reimbursed for reasonable expenses and expenses incurred in attending meetings of our board of directors.

            ,              and              will each be granted a number of shares of restricted common stock on the date immediately following the consummation of the offering, or as soon as practicable thereafter, equal in value to $             , based on the fair market value of our shares on the date of grant. These restricted shares will become vested in three equal portions on the last day of each of our fiscal years 2007, 2008 and 2009, provided the director is still serving as of the applicable vesting date. The independent directors holding these shares of restricted stock (whether or not such shares are vested) will be entitled to any dividends that become payable on such shares during the restricted period so long as such directors continue to serve us as directors as of the applicable record dates.

 

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Except as otherwise provided by the plan administrator of the GateHouse Media, Inc. Omnibus Stock Incentive Plan, on the first business day after our annual meeting of stockholders and each such annual meeting thereafter during the term of the GateHouse Media, Inc. Omnibus Stock Incentive Plan, each of our independent directors who is serving following such annual meeting will automatically be granted under the GateHouse Media, Inc. Omnibus Stock Incentive Plan a number of unrestricted shares of our common stock having a fair market value of $15,000 as of the date of grant; however, those of our independent directors who are granted the restricted common stock described above upon the consummation of our initial public offering will not be eligible to receive these automatic annual grants.

Compensation of Executive Officers

The following table sets forth the cash and non-cash compensation paid or incurred on our behalf to our chief executive officer and each of the four other most highly compensated executive officers who earned more than $100,000 in salary and bonus during 2005 (each a named executive officer and, collectively, the named executive officers):

Summary Compensation Table

 

    Annual Compensation        

Name and Position

  Fiscal
Year
  Salary($)   Bonus($)   Other Annual
Compensation
($)
    Restricted
Stock
Award(s)
($)(2)
    All Other
Compensation
($)(3)
 

Kenneth Serota,

Former Chief Executive

Officer(1)

  2005   230,769   —     —       —       2,569,534 (4)
  2004   500,000   450,000   —       —       6,652  
  2003   485,300   150,000   —       —       6,614  

Randall W. Cope,

Co-President, Co-Chief

Operating Officer

  2005   200,000   100,000   155 (9)   900,000 (2)   215,469 (5)
  2004   191,346   105,240   8,654 (9)   —       5,900  
  2003   149,039   64,518   —       —       5,850  

Scott T. Champion,

Co-President, Co-Chief

Operating Officer

  2005   202,769   100,000   994 (9)   1,500,000 (2)   148,238 (6)
  2004   204,615   119,000   1,385 (9)   —       6,030  
  2003   153,846   50,000   —       —       5,968  

Gene A. Hall,

Executive Vice President

  2005   164,840   53,475   —       1,500,000 (2)   131,778 (7)
  2004   142,500   57,500   —       —       6,688  
  2003   140,192   23,400   —       —       6,590  

Kelly M. Luvison,

Executive Vice President

  2005   144,808   49,065   —       135,000 (2)   61,908 (8)
  2004   140,000   45,000   —       —       5,816  
  2003   125,000   —     —       —       5,808  

(1) Separated from the Company as of May 6, 2005, as described in “—Separation and Consulting Agreement.”
(2) Aggregate restricted stock holdings as of December 31, 2005 totaled 4,425 shares of our common stock. These shares had an aggregate value of $4,425,000. Restricted stock holdings are subject to a five-year vesting schedule, with one-third of the shares vesting on each of the third, fourth and fifth anniversary of the June 6, 2005 grant date. The holder will be entitled to receive dividends on such restricted shares (whether or not such restricted shares are vested) to the extent dividends are declared and paid on our common stock generally.
(3) All Other Compensation figures include a contribution by us of $5,500 under the Liberty Group Publishing, Inc. Executive Benefit Plan.
(4) Includes $1,000,000 sale bonus, $500,000 termination bonus, loan forgiveness of $634,781 ($597,610 principal amount plus accrued interest) and accrued payments of $291,666 for consulting services, all paid and/or granted in connection with our acquisition by Fortress. See “—Separation and Consulting Agreement.” Also includes $42,239 in deferred compensation, $80,740 pursuant to a non-qualified plan and $20,107 of other compensation.
(5) Includes $166,190 sale bonus paid and loan forgiveness of $43,311 granted in connection with our acquisition by Fortress.
(6) Includes $50,000 sale bonus paid and loan forgiveness of $92,090 granted in connection with our acquisition by Fortress.
(7) Includes $33,000 sale bonus paid and loan forgiveness of $92,090 granted in connection with our acquisition by Fortress.
(8) Includes $33,000 sale bonus paid and loan forgiveness of $23,022 granted in connection with our acquisition by Fortress.
(9) Additional vacation/holiday/sick pay.

 

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Aggregate Option Exercises and Year-End Option Values

Our named executive officers did not hold any options as of December 31, 2005.

Stock Option Grants

We did not grant any stock options to our named executive officers during 2005 or during the first six months of 2006.

Employment Agreements

We entered into employment agreements with Scott T. Champion and Randall W. Cope on May 9, 2005 and with Michae